item 14 exhibits financial statement schedules reports form 8k list documents filed part report 1 financial statements financial statements registrant set forth item 8 report form 10k 2 financial statement schedules schedule number description page number ix shortterm borrowings 24 3 exhibits 31 restated certificate incorporation filed exhibit 31 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 32 bylaws filed exhibit 32 annual report baker hughes incorporated form 10k year ended september 30 1992 incorporated herein reference 33 certificate designation series one junior participating preferred stock filed exhibit 33 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 34 amended certificate designation series one junior participating preferred stock filed exhibit 34 annual report baker hughes incorporated form 10k year ended september 30 1992 incorporated herein reference 35 certificate designation series preferred stock baker hughes incorporated filed exhibit 36 annual report baker hughes incorporated form 10k year ended september 30 1989 incorporated herein reference 36 certificate designation series j preferred stock baker hughes incorporated filed exhibit 37 annual report baker hughes incorporated form 10k year ended september 30 1989 incorporated herein reference 37 certificate designation series k preferred stock baker hughes incorporated filed exhibit 38 annual report baker hughes incorporated form 10k year ended september 30 1989 incorporated herein reference 38 certificate designation series l preferred stock baker hughes incorporated filed exhibit 38 annual report baker hughes incorporated form 10k year ended september 30 1990 incorporated herein reference 39 certificate designation 300 convertible preferred stock filed exhibit 21 form 8k baker hughes incorporated february 11 1992 incorporated herein reference 41 rights holders companys longterm debt company longterm debt instrument regard securities authorized thereunder equal exceed 10 total assets company subsidiaries consolidated basis company agrees furnish copy longterm debt instruments commission upon request 42 stockholder rights agreement dated march 23 1988 baker hughes incorporated morgan shareholder services trust company rights agent filed exhibit 42 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 101 employment agreement baker hughes incorporated james woods dated december 7 1994 102 executive severance agreement baker hughes incorporated eric l mattson dated may 22 1991 filed exhibit 102 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 103 employment agreement baker hughes incorporated max l lukens dated december 7 1994 104 executive severance agreement baker hughes incorporated franklin myers dated may 22 1991 filed exhibit 104 annual report baker hughes incorporated form 10k year ended september 30 1991 incorporated herein reference 105 executive severance agreement baker hughes incorporated gs finley dated may 22 1991 filed exhibit 105 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 106 executive severance agreement baker hughes incorporated p rice dated may 22 1991 filed exhibit 106 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 107 amended restated 1991 employee stock bonus plan baker hughes incorporated filed exhibit 105 annual report baker hughes incorporated form 10k year ended september 30 1991 incorporated herein reference 108 restated 1987 stock option plan baker hughes incorporated amended october 24 1990 filed exhibit 107 annual report baker hughes incorporated form 10k year ended september 30 1991 incorporated herein reference 109 1987 convertible debenture plan baker hughes incorporated amended october 24 1990 filed exhibit 109 annual report baker hughes incorporated form 10k year ended september 30 1991 incorporated herein reference 1010 baker hughes incorporated supplemental retirement plan filed exhibit 1010 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 1011 executive severance policy filed exhibit 1011 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 1012 1993 stock option plan filed exhibit 1012 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 1013 1993 employee stock bonus plan filed exhibit 1013 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 1014 1993 employee annual incentive compensation plan filed exhibit 1014 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 1015 director compensation deferral plan filed exhibit 1015 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 1016 1995 employee annual incentive compensation plan subject stockholder approval 1017 1995 stock award plan subject stockholder approval 1018 form credit agreement dated september 1 1994 among baker hughes incorporated eighteen banks 1019 warrant agreement dated march 15 1990 baker hughes incorporated first chicago trust company new york filed exhibit 1015 annual report baker hughes incorporated form 10k year ended september 30 1990 incorporated herein reference 1020 purchase agreement dated december 31 1991 sonat inc baker hughes incorporated filed exhibit 21 form 8k baker hughes incorporated february 11 1992 incorporated herein reference 13 portions 1994 annual report stockholders 21 subsidiaries registrant 23 opinion consent deloitte touche included page 23 annual report form 10k 27 financial data schedule sec purposes b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 7th day december 1994 baker hughes incorporated james woods james woods president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated independent auditors report baker hughes incorporated audited consolidated financial statements baker hughes incorporated subsidiaries september 30 1994 1993 three years period ended september 30 1994 issued report thereon dated november 16 1994 financial statements report included 1994 annual report stockholders incorporated herein reference audits also included financial statement schedule baker hughes incorporated subsidiaries listed item 14 financial statement schedule responsibility companys management responsibility express opinion based audits opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein deloitte touche llp houston texas november 16 1994 independent auditors consent baker hughes incorporated consent incorporation reference posteffective amendment nos 1 2 3 form s8 registration statement 3311074 form s4 post effective amendment 1 registration statement 3316094 form s4 posteffective amendment nos 1 2 registration statement 3314803 form s8 registration statement 3334935 form s3 registration statement 3339445 form s8 registration statement 3361304 form s3 amendment 1 registration statement 3361304 form s3 registration statement 3352195 form s8 reports dated november 16 1994 appearing incorporated reference 1994 annual report form 10k baker hughes incorporated year ended september 30 1994 deloitte touche llp houston texas december 15 1994 baker hughes incorporated schedule ix shortterm borrowings 1 maximum amount outstanding period determined basis amounts outstanding month end 2 average amount outstanding period weighted average interest rate period computed basis quarterly balances 3 represents borrowings uncommitted credit facilities outside us portion denominated currencies us dollar 4 represents borrowings chilean pesositem 14 exhibits financial statement schedules reports form 8k list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules financial statement schedules omitted absence conditions required material information required reported included consolidated financial statements notes thereto 3 exhibits 31 restated certificate incorporation filed exhibit 31 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 32 bylaws filed exhibit 32 annual report baker hughes incorporated form 10k year ended september 30 1992 incorporated herein reference 33 certificate designation series one junior participating preferred stock filed exhibit 33 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 34 amended certificate designation series one junior participating preferred stock filed exhibit 34 annual report baker hughes incorporated form 10k year ended september 30 1992 incorporated herein reference 35 certificate designation series j preferred stock baker hughes incorporated 36 certificate designation series k preferred stock baker hughes incorporated 37 certificate designation series l preferred stock baker hughes incorporated filed exhibit 38 annual report baker hughes incorporated form 10k year ended september 30 1990 incorporated herein reference 41 rights holders companys longterm debt company longterm debt instrument regard securities authorized thereunder equal exceed 10 total assets company subsidiaries consolidated basis company agrees furnish copy longterm debt instruments commission upon request 42 stockholder rights agreement dated march 23 1988 baker hughes incorporated morgan shareholder services trust company rights agent filed exhibit 42 annual report baker hughes incorporated form 10k year september 30 1993 incorporated herein reference 43 restated certificate incorporation filed exhibit 31 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 44 bylaws filed exhibit 32 annual report baker hughes incorporated form 10k year ended september 30 1992 incorporated herein reference 45 certificate designation series one junior participating preferred stock filed exhibit 33 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 46 amended certificate designation series one junior participating preferred stock filed exhibit 34 annual report baker hughes incorporated form 10k year ended september 30 1992 incorporated herein reference 47 certificate designation series j preferred stock baker hughes incorporated herein reference exhibit 35 annual report baker hughes incorporated form 10k year ended september 30 1995 48 certificate designation series k preferred stock baker hughes incorporated herein reference exhibit 36 annual report baker hughes incorporated form 10k year ended september 30 1995 49 certificate designation series l preferred stock baker hughes incorporated filed exhibit 38 annual report baker hughes incorporated form 10k year ended september 30 1990 incorporated herein reference 101 employment agreement baker hughes incorporated james woods dated december 7 1994 filed exhibit 101 annual report baker hughes incorporated form 10k year ended september 30 1994 incorporated herein reference 102 executive severance agreement baker hughes incorporated eric l mattson dated may 22 1991 filed exhibit 102 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 103 employment agreement baker hughes incorporated max l lukens dated december 7 1994 filed exhibit 103 annual report baker hughes incorporated form 10k year ended september 30 1994 incorporated herein reference 104 executive severance agreement baker hughes incorporated gs finley dated may 22 1991 filed exhibit 105 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 105 amended restated 1991 employee stock bonus plan baker hughes incorporated filed exhibit 105 annual report baker hughes incorporated form 10k year ended september 30 1991 incorporated herein reference 106 restated 1987 stock option plan baker hughes incorporated amended october 24 1990 filed exhibit 107 annual report baker hughes incorporated form 10k year ended september 30 1991 incorporated herein reference 107 1987 convertible debenture plan baker hughes incorporated amended october 24 1990 filed exhibit 109 annual report baker hughes incorporated form 10k year ended september 30 1991 incorporated herein reference 108 baker hughes incorporated supplemental retirement plan filed exhibit 1010 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 109 executive severance policy filed exhibit 1011 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 1010 1993 stock option plan filed exhibit 1012 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 1011 1993 employee stock bonus plan filed exhibit 1013 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 1012 director compensation deferral plan filed exhibit 1015 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 1013 1995 employee annual incentive compensation plan filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1994 incorporated herein reference 1014 1995 stock award plan filed exhibit 1017 annual report baker hughes incorporated form 10k year ended september 30 1994 incorporated herein reference 1015 form credit agreement dated september 1 1994 among baker hughes incorporated eighteen banks filed exhibit 1018 annual report baker hughes incorporated form 10k year ended september 30 1994 incorporated herein reference 1016 warrant agreement dated march 15 1990 baker hughes incorporated first chicago trust company new york filed exhibit 1015 annual report baker hughes incorporated form 10k year ended september 30 1990 incorporated herein reference 111 statement computation earnings per common share 131 portions 1995 annual report stockholders 211 subsidiaries registrant 231 consent deloitte touche llp 271 financial data schedule securities exchange commission purposes b reports form 8k form 8k filed june 21 1995 regarding repurchase baker hughes incorporated 4000000 shares convertible preferred stock previously issued sonat inc connection acquisition teleco oilfield services inc baker hughes incorporated sonat inc financial statements filed signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized 14th day december 1995 baker hughes incorporated james woods james woods chief executive officer pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated signature title date james woods chairman board december 14 1995 chief executive james woods officer principal executive officer e l mattson senior vice president december 14 1995 chief financial e l mattson officer principal financial officer james e braun controller principal december 14 1995 accounting officer james e braun lester alberthal jr director december 14 1995 lester alberthal jr gordon anderson director december 14 1995 gordon anderson victor g beghini director december 14 1995 victor g beghini jack blanton director december 14 1995 jack blanton harry conger director december 14 1995 harry conger eunice filer director december 14 1995 eunice filter joe b foster director december 14 1995 joe b foster richard kinder director december 14 1995 richard kinder john f maher director december 14 1995 john f maher director december 1995 dana g mead donald c trauscht director december 14 1995 donald c trauschtitem 14 exhibits financial statement schedules reports form 8k list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules financial statement schedules omitted absence conditions required material information required reported included consolidated financial statements notes thereto 3 exhibits 31 restated certificate incorporation filed exhibit 31 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 32 bylaws filed exhibit 32 annual report baker hughes incorporated form 10k year ended september 30 1992 incorporated herein reference 33 certificate designation series l preferred stock baker hughes incorporated 41 rights holders companys longterm debt company longterm debt instrument regard securities authorized thereunder equal exceed 10 total assets company subsidiaries consolidated basis company agrees furnish copy longterm debt instruments sec upon request 42 restated certificate incorporation filed exhibit 31 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 43 bylaws filed exhibit 32 annual report baker hughes incorporated form 10k year ended september 30 1992 incorporated herein reference 44 certificate designation series l preferred stock baker hughes incorporated 101 employment agreement baker hughes incorporated james woods dated december 7 1994 filed exhibit 101 annual report baker hughes incorporated form 10k year ended september 30 1994 incorporated herein reference 102 executive severance agreement baker hughes incorporated eric l mattson dated may 22 1991 filed exhibit 102 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 103 employment agreement baker hughes incorporated max l lukens dated december 7 1994 filed exhibit 103 annual report baker hughes incorporated form 10k year ended september 30 1994 incorporated herein reference 104 executive severance agreement baker hughes incorporated g finley dated may 22 1991 filed exhibit 105 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 105 amended restated 1991 employee stock bonus plan baker hughes incorporated filed exhibit 105 annual report baker hughes incorporated form 10k year ended september 30 1991 incorporated herein reference 106 restated 1987 stock option plan baker hughes incorporated amended october 24 1990 filed exhibit 107 annual report baker hughes incorporated form 10k year ended september 30 1991 incorporated herein reference 107 1987 convertible debenture plan baker hughes incorporated amended october 24 1990 filed exhibit 109 annual report baker hughes incorporated form 10k year ended september 30 1991 incorporated herein reference 108 baker hughes incorporated supplemental retirement plan filed exhibit 1010 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 109 executive severance policy filed exhibit 1011 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 1010 1993 stock option plan filed exhibit 1012 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 1011 1993 employee stock bonus plan filed exhibit 1013 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 1012 director compensation deferral plan filed exhibit 1015 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 1013 1995 employee annual incentive compensation plan filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1994 incorporated herein reference 1014 1995 stock award plan filed exhibit 1017 annual report baker hughes incorporated form 10k year ended september 30 1994 incorporated herein reference 1015 form credit agreement dated september 1 1994 among baker hughes incorporated eighteen banks filed exhibit 1018 annual report baker hughes incorporated form 10k year ended september 30 1994 incorporated herein reference 1016 form nonqualified stock option agreement directors 1017 form nonqualified stock option agreement employees 1018 form incentive stock option agreement employees 111 statement computation earnings per common share 131 portions 1996 annual report stockholders 211 subsidiaries registrant 231 consent deloitte touche llp 271 financial data schedule sec purposes b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized 10th day december 1996 baker hughes incorporated max l lukens max l lukens chief executive officer pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated signature title date max l lukens president chief executive december 10 1996 officer max l lukens e l mattson senior vice president december 10 1996 chief financial officer e l mattson principal financial officer james e braun controller principal december 10 1996 accounting officer james e braun james woods chairman board december 10 1996 james woods lester alberthal jr director december 10 1996 lester alberthal jr victor g beghini director december 10 1996 victor g beghini jack blanton director december 10 1996 jack blanton harry conger director december 10 1996 harry conger eunice filter director december 10 1996 eunice filter joe b foster director december 10 1996 joe b foster richard kinder director december 10 1996 richard kinder john f maher director december 10 1996 john f maher james f mccall director december 10 1996 james f mccall director december 1996 dana g mead donald c trauscht director december 10 1996 donald c trauschtitem 14 exhibits financial statement schedules reports form 8k list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules financial statement schedules omitted absence conditions required material information required reported included consolidated financial statements notes thereto 3 exhibits 31 restated certificate incorporation filed exhibit 31 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 32 bylaws 33 certificate designation series l preferred stock baker hughes incorporated filed exhibit 33 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 41 rights holders companys longterm debt company longterm debt instrument regard securities authorized thereunder equal exceed 10 total assets company subsidiaries consolidated basis company agrees furnish copy longterm debt instruments sec upon request 42 restated certificate incorporation filed exhibit 31 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 43 bylaws filed exhibit 32 hereto 44 certificate designation series l preferred stock baker hughes incorporated filed exhibit 44 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 101 employment agreement baker hughes incorporated max l lukens dated december 7 1994 filed exhibit 103 annual report baker hughes incorporated form 10k year ended september 30 1994 incorporated herein reference 102 severance agreement baker hughes incorporated david h barr dated july 23 1997 103 severance agreement baker hughes incorporated glen bassett dated july 23 1997 104 severance agreement baker hughes incorporated joseph f brady dated july 23 1997 105 severance agreement baker hughes incorporated matthew g dick dated july 23 1997 106 severance agreement baker hughes incorporated g stephen finley dated july 23 1997 107 severance agreement baker hughes incorporated r patrick herbert dated july 23 1997 108 severance agreement baker hughes incorporated edwin c howell dated july 23 1997 109 severance agreement baker hughes incorporated max l lukens dated july 23 1997 1010 severance agreement baker hughes incorporated eric l mattson dated july 23 1997 1011 severance agreement baker hughes incorporated lawrence odonnell iii dated july 23 1997 1012 severance agreement baker hughes incorporated timothy j probert dated july 23 1997 1013 severance agreement baker hughes incorporated andrew j szescila dated july 23 1997 1014 severance agreement baker hughes incorporated jay p trahan dated july 23 1997 1015 amended restated 1991 employee stock bonus plan baker hughes incorporated 1016 amendment 19971 amended restated 1991 employee stock bonus plan 1017 restated 1987 stock option plan baker hughes incorporated amended october 24 1990 1018 1987 convertible debenture plan baker hughes incorporated amended october 24 1990 1019 baker hughes incorporated supplemental retirement plan filed exhibit 1010 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 1020 amendment 19971 baker hughes incorporated supplemental retirement plan 1021 executive severance policy filed exhibit 1011 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 1022 1993 stock option plan filed exhibit 1012 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 1023 amendment 19971 1993 stock option plan 1024 1993 employee stock bonus plan filed exhibit 1013 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 1025 amendment 19971 1993 employee stock bonus plan 1026 director compensation deferral plan filed exhibit 1015 annual report baker hughes incorporated form 10k year ended september 30 1993 incorporated herein reference 1027 1995 employee annual incentive compensation plan filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1994 incorporated herein reference 1028 amendment 19971 1995 employee annual incentive compensation plan 1029 1995 stock award plan filed exhibit 1017 annual report baker hughes incorporated form 10k year ended september 30 1994 incorporated herein reference 1030 amendment 19971 1995 stock award plan 1031 long term incentive plan 1032 form credit agreement dated september 1 1994 among baker hughes incorporated eighteen banks filed exhibit 1018 annual report baker hughes incorporated form 10k year ended september 30 1994 incorporated herein reference 1033 form nonqualified stock option agreement directors filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 1034 form nonqualified stock option agreement employees filed exhibit 1017 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 1035 form incentive stock option agreement employees filed exhibit 1018 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 1036 agreement plan merger among baker hughes incorporated baker hughes missouri inc baker hughes delaware inc petrolite corporation wm barnickel company dated february 25 1997 filed exhibit 21 form 8k dated march 5 1997 incorporated herein reference 111 statement computation earnings per common share 131 portions 1997 annual report stockholders 211 subsidiaries registrant 231 consent deloitte touche llp 271 financial data schedule sec purposes b reports form 8k report form 8k filed july 17 1997 amended form 8ka dated august 11 1997 reporting company consummated transactions contemplated agreement plan merger dated february 25 1997 providing acquisition petrolite corporation wm barnickel company signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized 8th day december 1997 baker hughes incorporated max l lukens max l lukens chief executive officer pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated index exhibitsitem 14 exhibits financial statement schedules reports form 8k list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules financial statement schedules omitted absence conditions required material information required reported included consolidated financial statements notes thereto 3 exhibits 31 restated certificate incorporation 32 bylaws 33 certificate designation series l preferred stock baker hughes incorporated filed exhibit 33 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 41 rights holders companys longterm debt company longterm debt instrument regard securities authorized thereunder equal exceed 10 total assets company subsidiaries consolidated basis company agrees furnish copy longterm debt instruments sec upon request 42 restated certificate incorporation filed exhibit 31 hereto 43 bylaws filed exhibit 32 hereto 44 certificate designation series l preferred stock baker hughes incorporated filed exhibit 44 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 101 employment agreement baker hughes incorporated max l lukens dated january 1 1998 102 severance agreement baker hughes incorporated g stephen finley dated july 23 1997 filed exhibit 106 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 103 severance agreement baker hughes incorporated max l lukens dated july 23 1997 filed exhibit 109 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 104 severance agreement baker hughes incorporated eric l mattson dated july 23 1997 filed exhibit 1010 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 105 severance agreement baker hughes incorporated lawrence odonnell iii dated july 23 1997 filed exhibit 1011 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 106 severance agreement baker hughes incorporated andrew j szescila dated july 23 1997 filed exhibit 1013 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 107 form amendment 1 severance agreement baker hughes incorporated g stephen finley max l lukens eric l mattson lawrence odonnell iii andrew j szescila effective november 11 1998 108 severance agreement baker hughes incorporated thomas r bates jr dated january 27 1999 109 amended restated 1991 employee stock bonus plan baker hughes incorporated filed exhibit 1015 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1010 amendment 19971 amended restated 1991 employee stock bonus plan filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1011 amendment 19991 amended restated 1991 employee stock bonus plan 1012 restated 1987 stock option plan baker hughes incorporated amended october 24 1990 filed exhibit 1017 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1013 1987 convertible debenture plan baker hughes incorporated amended october 24 1990 filed exhibit 1018 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1014 baker hughes incorporated supplemental retirement plan 1015 amendment 19971 baker hughes incorporated supplemental retirement plan filed exhibit 1020 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1016 amendment 19991 baker hughes incorporated supplemental retirement plan 1017 executive severance policy 1018 1993 stock option plan 1019 amendment 19971 1993 stock option plan filed exhibit 1023 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1020 amendment 19991 1993 stock option plan 1021 1993 employee stock bonus plan 1022 amendment 19971 1993 employee stock bonus plan filed exhibit 1025 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1023 amendment 19991 1993 employee stock bonus plan 1024 amended restated director compensation deferral plan 1025 1995 employee annual incentive compensation plan filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1994 incorporated herein reference 1026 amendment 19971 1995 employee annual incentive compensation plan filed exhibit 1025 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1027 amendment 19991 1995 employee annual incentive compensation plan 1028 1995 stock award plan filed exhibit 1017 annual report baker hughes incorporated form 10k year ended september 30 1994 incorporated herein reference 1029 amendment 19971 1995 stock award plan filed exhibit 1027 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1030 amendment 19991 1995 stock award plan 1031 long term incentive plan filed exhibit 1031 annual report baker hughes incorporated form 10k year ended september 30 1997 1032 amendment 19991 long term incentive plan 1033 1998 employee stock option plan 1034 amendment 19991 1998 employee stock option plan 1035 form credit agreement dated october 1 1998 among baker hughes incorporated fourteen banks 750000000 aggregate banks 1036 form credit agreement dated october 1 1998 among baker hughes incorporated fourteen banks 250000000 aggregate banks 1037 form nonqualified stock option agreement executive officers effective october 1 1998 1038 form nonqualified stock option agreement employees effective october 1 1998 1039 form nonqualified stock option agreement executive officers effective october 1 1998 1040 form incentive stock option agreement executive officers effective october 1 1998 1041 form nonqualified stock option agreement directors effective october 25 1995 filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 1042 form nonqualified stock option agreement employees effective october 25 1995 filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 1043 form incentive stock option agreement employees effective october 25 1995 filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 1044 agreement plan merger among baker hughes incorporated baker hughes missouri inc baker hughes delaware inc petrolite corporation wm barnickel company dated february 25 1997 filed exhibit 21 form 8k dated march 5 1997 incorporated herein reference 1045 agreement plan merger among baker hughes incorporated baker hughes delaware inc western atlas inc dated may 10 1998 filed exhibit 21 form 8k dated may 20 1998 incorporated herein reference 1046 distribution indemnity agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1018 western atlas incs form 10q quarter ended september 30 1997 incorporated herein reference 1047 tax sharing agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1019 western atlas incs form 10q quarter ended september 30 1997 incorporated herein reference 1048 intellectual property agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1020 western atlas incs form 10q quarter ended september 30 1997 incorporated herein reference 1049 employee benefits agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1021 western atlas incs form 10q quarter ended september 30 1997 incorporated herein reference 1050 corporate executive loan program 131 portions 1998 annual report stockholders 211 subsidiaries registrant 231 consent deloitte touche llp 271 financial data schedule sec purposes b reports form 8k report form 8k dated december 18 1998 filed commission december 21 1998 reporting company restated financial statements account using pooling interests method business combinations reflecting audited transition period related companys change fiscal year signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized 17th day march 1999 baker hughes incorporated max l lukens max l lukens chief executive officer pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated index exhibitsitem 14 exhibits financial statement schedules reports form 8k list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules schedule ii valuation qualifying accounts 3 exhibits 31 restated certificate incorporation filed exhibit 31 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 32 bylaws 33 certificate amendment restated certificate incorporation filed exhibit 42 baker hughes incorporated registration statement form s3 dated september 27 1999 incorporated herein reference 34 certificate designation series l preferred stock baker hughes incorporated filed exhibit 33 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 41 rights holders companys longterm debt company longterm debt instrument regard securities authorized thereunder equal exceed 10 total assets company subsidiaries consolidated basis company agrees furnish copy longterm debt instruments sec upon request 42 restated certificate incorporation filed exhibit 31 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 43 bylaws filed exhibit 32 hereto 44 certificate amendment restated certificate incorporation filed exhibit 42 baker hughes incorporated registration statement form s3 dated september 27 1999 incorporated herein reference 45 certificate designation series l preferred stock baker hughes incorporated filed exhibit 33 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 46 indenture dated may 15 1994 western atlas inc bank new york trustee providing issuance securities series 101 severance agreement baker hughes incorporated g stephen finley dated july 23 1997 filed exhibit 106 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 102 severance agreement baker hughes incorporated andrew j szescila dated july 23 1997 filed exhibit 1013 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 103 form amendment 1 severance agreement baker hughes incorporated g stephen finley andrew j szescila effective november 11 1998 filed exhibit 107 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 104 amended restated 1991 employee stock bonus plan baker hughes incorporated filed exhibit 1015 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 105 amendment 19971 amended restated 1991 employee stock bonus plan filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 106 amendment 19991 amended restated 1991 employee stock bonus plan filed exhibit 1011 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 107 restated 1987 stock option plan baker hughes incorporated amended october 24 1990 filed exhibit 1017 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 108 1987 convertible debenture plan baker hughes incorporated amended october 24 1990 filed exhibit 1018 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 109 baker hughes incorporated supplemental retirement plan filed exhibit 1014 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1010 amendment 19971 baker hughes incorporated supplemental retirement plan filed exhibit 1020 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1011 amendment 19991 baker hughes incorporated supplemental retirement plan filed exhibit 1016 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1012 executive severance policy 1013 1993 stock option plan filed exhibit 1018 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1014 amendment 19971 1993 stock option plan filed exhibit 1023 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1015 amendment 19991 1993 stock option plan filed exhibit 1020 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1016 1993 employee stock bonus plan filed exhibit 1021 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1017 amendment 19971 1993 employee stock bonus plan filed exhibit 1025 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1018 amendment 19991 1993 employee stock bonus plan filed exhibit 1023 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1019 amended restated director compensation deferral plan filed exhibit 1024 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1020 1995 employee annual incentive compensation plan 1021 amendment 19971 1995 employee annual incentive compensation plan filed exhibit 1025 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1022 amendment 19991 1995 employee annual incentive compensation plan filed exhibit 1027 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1023 long term incentive plan filed exhibit 1031 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1024 amendment 19991 long term incentive plan filed exhibit 1032 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1025 1998 employee stock option plan filed exhibit 1033 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1026 amendment 19991 1998 employee stock option plan filed exhibit 1034 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1027 form credit agreement dated october 1 1998 among baker hughes incorporated fourteen banks 750000000 aggregate banks filed exhibit 1035 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1028 form credit agreement dated october 1 1998 among baker hughes incorporated fourteen banks 250000000 aggregate banks filed exhibit 1036 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1029 form first amendment credit agreement dated september 29 1999 among baker hughes incorporated fourteen banks 250000000 aggregate banks 1030 form nonqualified stock option agreement employees effective february 3 2000 1031 form nonqualified stock option agreement employees effective january 26 2000 1032 form nonqualified stock option agreement executive officers effective october 1 1998 filed exhibit 1037 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1033 form nonqualified stock option agreement employees effective october 1 1998 filed exhibit 1038 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1034 form nonqualified stock option agreement executive officers effective october 1 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1035 form incentive stock option agreement executive officers effective october 1 1998 filed exhibit 1040 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1036 form nonqualified stock option agreement directors effective october 25 1995 filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 1037 form nonqualified stock option agreement employees effective october 25 1995 filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 1038 form incentive stock option agreement employees effective october 25 1995 filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 1039 agreement plan merger among baker hughes incorporated baker hughes missouri inc baker hughes delaware inc petrolite corporation wm barnickel company dated february 25 1997 filed exhibit 21 form 8k dated march 5 1997 incorporated herein reference 1040 agreement plan merger among baker hughes incorporated baker hughes delaware inc western atlas inc dated may 10 1998 filed exhibit 21 form 8k dated may 20 1998 incorporated herein reference 1041 tax sharing agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1019 western atlas incs form 10q quarter ended september 30 1997 incorporated herein reference 1042 employee benefits agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1021 western atlas incs form 10q quarter ended september 30 1997 incorporated herein reference 1043 corporate executive loan program filed exhibit 1050 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 211 subsidiaries registrant 231 consent deloitte touche llp 271 financial data schedule sec purposes b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized 16th day march 2000 baker hughes incorporated joe b foster joe b foster chief executive officer pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated baker hughes incorporated schedule ii valuation qualifying accounts index exhibitsitem 14 exhibits financial statement schedules reports form 8k list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules schedule ii valuation qualifying accounts 3 exhibits 31 restated certificate incorporation filed exhibit 31 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 32 bylaws filed exhibit 32 annual report baker hughes incorporated form 10k year ended december 31 1999 incorporated herein reference 33 certificate amendment restated certificate incorporation filed exhibit 42 baker hughes incorporated registration statement form s3 dated september 27 1999 incorporated herein reference 41 rights holders companys longterm debt company longterm debt instrument regard securities authorized thereunder equal exceed 10 total assets company subsidiaries consolidated basis company agrees furnish copy longterm debt instruments sec upon request 42 restated certificate incorporation filed exhibit 31 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 43 bylaws filed exhibit 32 annual report baker hughes incorporated form 10k year ended december 31 1999 incorporated herein reference 44 certificate amendment restated certificate incorporation filed exhibit 42 baker hughes incorporated registration statement form s3 dated september 27 1999 incorporated herein reference 45 indenture dated may 15 1994 western atlas inc bank new york trustee providing issuance securities series filed exhibit 46 annual report baker hughes incorporated form 10k year ended december 31 1999 incorporated herein reference 101 employment agreement baker hughes incorporated michael e wiley dated july 17 2000 filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended june 30 2000 incorporated herein reference 102 severance agreement baker hughes incorporated michael e wiley dated july 17 2000 filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended june 30 2000 incorporated herein reference 103 severance agreement baker hughes incorporated g stephen finley dated july 23 1997 filed exhibit 106 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 104 severance agreement baker hughes incorporated andrew j szescila dated july 23 1997 filed exhibit 1013 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 105 form amendment 1 severance agreement baker hughes incorporated g stephen finley andrew j szescila effective november 11 1998 filed exhibit 107 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 106 severance agreement baker hughes incorporated alan r crain jr dated october 25 2000 107 severance agreement baker hughes incorporated greg nakanishi dated november 1 2000 108 agreement regarding restricted stock award issued michael e wiley august 15 2000 amount 150000 shares company common stock 109 agreement regarding supplemental restricted stock award issued michael e wiley august 15 2000 amount 83000 shares company common stock 1010 amended restated 1991 employee stock bonus plan baker hughes incorporated filed exhibit 1015 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1011 amendment 19971 amended restated 1991 employee stock bonus plan filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1012 amendment 19991 amended restated 1991 employee stock bonus plan filed exhibit 1011 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1013 restated 1987 stock option plan baker hughes incorporated amended october 24 1990 filed exhibit 1017 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1014 baker hughes incorporated supplemental retirement plan filed exhibit 1014 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1015 amendment 19971 baker hughes incorporated supplemental retirement plan filed exhibit 1020 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1016 amendment 19991 baker hughes incorporated supplemental retirement plan filed exhibit 1016 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1017 executive severance policy filed exhibit 1012 annual report baker hughes incorporated form 10k year ended december 31 1999 incorporated herein reference 1018 1993 stock option plan filed exhibit 1018 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1019 amendment 19971 1993 stock option plan filed exhibit 1023 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1020 amendment 19991 1993 stock option plan filed exhibit 1020 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1021 1993 employee stock bonus plan filed exhibit 1021 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1022 amendment 19971 1993 employee stock bonus plan filed exhibit 1025 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1023 amendment 19991 1993 employee stock bonus plan filed exhibit 1023 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1024 amended restated director compensation deferral plan filed exhibit 1024 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1025 1995 employee annual incentive compensation plan filed exhibit 1020 annual report baker hughes incorporated form 10k year ended december 31 1999 incorporated herein reference 1026 amendment 19971 1995 employee annual incentive compensation plan filed exhibit 1025 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1027 amendment 19991 1995 employee annual incentive compensation plan filed exhibit 1027 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1028 long term incentive plan filed exhibit 1031 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1029 amendment 19991 long term incentive plan filed exhibit 1032 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1030 1998 employee stock option plan filed exhibit 1033 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1031 amendment 19991 1998 employee stock option plan filed exhibit 1034 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1032 form credit agreement dated october 1 1998 among baker hughes incorporated fourteen banks 750000000 aggregate banks filed exhibit 1035 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1033 form credit agreement dated october 1 1998 among baker hughes incorporated fourteen banks 250000000 aggregate banks filed exhibit 1036 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1034 form first amendment credit agreement dated september 29 1999 among baker hughes incorporated fourteen banks 250000000 aggregate banks filed exhibit 1029 annual report baker hughes incorporated form 10k year ended december 31 1999 incorporated herein reference 1035 form second amendment credit agreement dated september 25 2000 among baker hughes incorporated fourteen banks 250000000 aggregate banks 1036 form stock option agreement executives effective january 26 2000 1037 form stock option agreement executive officers effective october 1 1998 1038 form nonqualified stock option agreement employees effective october 1 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1039 form nonqualified stock option agreement directors effective october 25 1998 1040 form nonqualified stock option agreement directors effective october 25 1995 filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 1041 form nonqualified stock option agreement employees effective october 25 1995 filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 1042 form incentive stock option agreement employees effective october 25 1995 filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 1043 agreement regarding restricted stock award issued alan r crain jr october 25 2000 amount 7500 shares company common stock 1044 agreement regarding restricted stock award issued greg nakaniski november 1 2000 amount 5000 shares company common stock 1045 agreement regarding restricted stock award issued andrew j szescila january 24 2001 amount 25000 shares company common stock 1046 agreement plan merger among baker hughes incorporated baker hughes missouri inc baker hughes delaware inc petrolite corporation wm barnickel company dated february 25 1997 filed exhibit 21 form 8k dated march 5 1997 incorporated herein reference 1047 agreement plan merger among baker hughes incorporated baker hughes delaware inc western atlas inc dated may 10 1998 filed exhibit 21 form 8k dated may 20 1998 incorporated herein reference 1048 tax sharing agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1019 western atlas incs form 10q quarter ended september 30 1997 incorporated herein reference 1049 employee benefits agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1021 western atlas incs form 10q quarter ended september 30 1997 incorporated herein reference 1050 master formation agreement among company schlumberger limited certain wholly owned subsidiaries schlumberger limited dated september 6 2000 filed exhibit 21 form 8k dated september 7 2000 incorporated herein reference 1051 shareholders agreement among schlumberger limited baker hughes incorporated parties listed signature pages thereto dated november 30 2000 filed exhibit 101 form 8k dated november 30 2000 incorproated herein reference 1052 corporate executive loan program filed exhibit 1050 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 211 subsidiaries registrant 231 consent deloitte touche llp b reports form 8k report form 8k filed december 14 2000 amended form 8ka dated february 12 2001 reporting company consummated transactions contemplated master formation agreement dated september 6 2000 among company schlumberger limited certain whollyowned subsidiaries schlumberger limited signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized 12th day march 2001 baker hughes incorporated smichael e wiley michael e wiley chairman board president chief executive officer pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated baker hughes incorporated schedule ii valuation qualifying accounts exhibit index exhibit description 31 restated certificate incorporation filed exhibit 31 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 32 bylaws filed exhibit 32 annual report baker hughes incorporated form 10k year ended december 31 1999 incorporated herein reference 33 certificate amendment restated certificate incorporation filed exhibit 42 baker hughes incorporated registration statement form s3 dated september 27 1999 incorporated herein reference 41 rights holders companys longterm debt company longterm debt instrument regard securities authorized thereunder equal exceed 10 total assets company subsidiaries consolidated basis company agrees furnish copy longterm debt instruments sec upon request 42 restated certificate incorporation filed exhibit 31 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 43 bylaws filed exhibit 32 annual report baker hughes incorporated form 10k year ended december 31 1999 incorporated herein reference 44 certificate amendment restated certificate incorporation filed exhibit 42 baker hughes incorporated registration statement form s3 dated september 27 1999 incorporated herein reference 45 indenture dated may 15 1994 western atlas inc bank new york trustee providing issuance securities series filed exhibit 46 annual report baker hughes incorporated form 10k year ended december 31 1999 incorporated herein reference 101 employment agreement baker hughes incorporated michael e wiley dated july 17 2000 filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended june 30 2000 incorporated herein reference 102 severance agreement baker hughes incorporated michael e wiley dated july 17 2000 filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended june 30 2000 incorporated herein reference 103 severance agreement baker hughes incorporated g stephen finley dated july 23 1997 filed exhibit 106 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 104 severance agreement baker hughes incorporated andrew j szescila dated july 23 1997 filed exhibit 1013 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 105 form amendment 1 severance agreement baker hughes incorporated g stephen finley andrew j szescila effective november 11 1998 filed exhibit 107 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 106 severance agreement baker hughes incorporated alan r crain jr dated october 25 2000 107 severance agreement baker hughes incorporated greg nakanishi dated november 1 2000 108 agreement regarding restricted stock award issued michael e wiley august 15 2000 amount 150000 shares company common stock exhibit description 109 agreement regarding supplemental restricted stock award issued michael e wiley august 15 2000 amount 83000 shares company common stock 1010 amended restated 1991 employee stock bonus plan baker hughes incorporated filed exhibit 1015 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1011 amendment 19971 amended restated 1991 employee stock bonus plan filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1012 amendment 19991 amended restated 1991 employee stock bonus plan filed exhibit 1011 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1013 restated 1987 stock option plan baker hughes incorporated amended october 24 1990 filed exhibit 1017 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1014 baker hughes incorporated supplemental retirement plan filed exhibit 1014 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1015 amendment 19971 baker hughes incorporated supplemental retirement plan filed exhibit 1020 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1016 amendment 19991 baker hughes incorporated supplemental retirement plan filed exhibit 1016 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1017 executive severance policy filed exhibit 1012 annual report baker hughes incorporated form 10k year ended december 31 1999 incorporated herein reference 1018 1993 stock option plan filed exhibit 1018 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1019 amendment 19971 1993 stock option plan filed exhibit 1023 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1020 amendment 19991 1993 stock option plan filed exhibit 1020 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1021 1993 employee stock bonus plan filed exhibit 1021 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1022 amendment 19971 1993 employee stock bonus plan filed exhibit 1025 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1023 amendment 19991 1993 employee stock bonus plan filed exhibit 1023 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1024 amended restated director compensation deferral plan filed exhibit 1024 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1025 1995 employee annual incentive compensation plan filed exhibit 1020 annual report baker hughes incorporated form 10k year ended december 31 1999 incorporated herein reference exhibit description 1026 amendment 19971 1995 employee annual incentive compensation plan filed exhibit 1025 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1027 amendment 19991 1995 employee annual incentive compensation plan filed exhibit 1027 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1028 long term incentive plan filed exhibit 1031 annual report baker hughes incorporated form 10k year ended september 30 1997 incorporated herein reference 1029 amendment 19991 long term incentive plan filed exhibit 1032 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1030 1998 employee stock option plan filed exhibit 1033 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1031 amendment 19991 1998 employee stock option plan filed exhibit 1034 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1032 form credit agreement dated october 1 1998 among baker hughes incorporated fourteen banks 750000000 aggregate banks filed exhibit 1035 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1033 form credit agreement dated october 1 1998 among baker hughes incorporated fourteen banks 250000000 aggregate banks filed exhibit 1036 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1034 form first amendment credit agreement dated september 29 1999 among baker hughes incorporated fourteen banks 250000000 aggregate banks filed exhibit 1029 annual report baker hughes incorporated form 10k year ended december 31 1999 incorporated herein reference 1035 form second amendment credit agreement dated september 25 2000 among baker hughes incorporated fourteen banks 250000000 aggregate banks 1036 form stock option agreement executives effective january 26 2000 1037 form stock option agreement executive officers effective october 1 1998 1038 form nonqualified stock option agreement employees effective october 1 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 1039 form nonqualified stock option agreement directors effective october 25 1998 1040 form nonqualified stock option agreement directors effective october 25 1995 filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 1041 form nonqualified stock option agreement employees effective october 25 1995 filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference 1042 form incentive stock option agreement employees effective october 25 1995 filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1996 incorporated herein reference exhibit description 1043 agreement regarding restricted stock award issued alan r crain jr october 25 2000 amount 7500 shares company common stock 1044 agreement regarding restricted stock award issued greg nakaniski november 1 2000 amount 5000 shares company common stock 1045 agreement regarding restricted stock award issued andrew j szescila january 24 2001 amount 25000 shares company common stock 1046 agreement plan merger among baker hughes incorporated baker hughes missouri inc baker hughes delaware inc petrolite corporation wm barnickel company dated february 25 1997 filed exhibit 21 form 8k dated march 5 1997 incorporated herein reference 1047 agreement plan merger among baker hughes incorporated baker hughes delaware inc western atlas inc dated may 10 1998 filed exhibit 21 form 8k dated may 20 1998 incorporated herein reference 1048 tax sharing agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1019 western atlas incs form 10q quarter ended september 30 1997 incorporated herein reference 1049 employee benefits agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1021 western atlas incs form 10q quarter ended september 30 1997 incorporated herein reference 1050 master formation agreement among company schlumberger limited certain wholly owned subsidiaries schlumberger limited dated september 6 2000 filed exhibit 21 form 8k dated september 7 2000 incorporated herein reference 1051 shareholders agreement among schlumberger limited baker hughes incorporated parties listed signature pages thereto dated november 30 2000 filed exhibit 101 form 8k dated november 30 2000 incorproated herein reference 1052 corporate executive loan program filed exhibit 1050 annual report baker hughes incorporated form 10k year ended december 31 1998 incorporated herein reference 211 subsidiaries registrant 231 consent deloitte touche llpitem 14 exhibits financial statement schedules reports form 8k list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules schedule ii valuation qualifying accounts 3 exhibits exhibit identified filed part report exhibits designated filed exhibit annual report form 10k exhibits previously filed indicated incorporated reference 31 restated certificate incorporation filed exhibit 31 annual report baker hughes incorporated form 10k year ended december 31 1998 32 bylaws baker hughes incorporated restated january 30 2002 33 certificate amendment restated certificate incorporation filed exhibit 42 baker hughes incorporated registration statement form s3 dated september 27 1999 41 rights holders companys longterm debt company longterm debt instrument regard securities authorized thereunder equal exceed 10 total assets company subsidiaries consolidated basis company agrees furnish copy longterm debt instruments sec upon request 42 restated certificate incorporation filed exhibit 31 annual report baker hughes incorporated form 10k year ended december 31 1998 43 bylaws baker hughes incorporated restated january 30 2002 filed exhibit 32 form 10k 44 certificate amendment restated certificate incorporation filed exhibit 42 baker hughes incorporated registration statement form s3 dated september 27 1999 45 indenture dated may 15 1994 western atlas inc bank new york trustee providing issuance securities series filed exhibit 46 annual report baker hughes incorporated form 10k year ended december 31 1999 101 employment agreement baker hughes incorporated michael e wiley dated july 17 2000 filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended june 30 2000 102 severance agreement baker hughes incorporated michael e wiley dated july 17 2000 filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended june 30 2000 103 severance agreement baker hughes incorporated g stephen finley dated july 23 1997 filed exhibit 106 annual report baker hughes incorporated form 10k year ended september 30 1997 104 severance agreement baker hughes incorporated andrew j szescila dated july 23 1997 filed exhibit 1013 annual report baker hughes incorporated form 10k year ended september 30 1997 105 form amendment 1 severance agreement baker hughes incorporated g stephen finley andrew j szescila effective november 11 1998 filed exhibit 107 annual report baker hughes incorporated form 10k year ended december 31 1998 106 severance agreement baker hughes incorporated alan r crain jr dated october 25 2000 filed exhibit 106 annual report baker hughes incorporated form 10k year ended december 31 2000 107 severance agreement baker hughes incorporated greg nakanishi dated november 1 2000 filed exhibit 107 annual report baker hughes incorporated form 10k year ended december 31 2000 108 agreement regarding restricted stock award issued michael e wiley august 15 2000 amount 150000 shares company common stock filed exhibit 108 annual report baker hughes incorporated form 10k year ended december 31 2000 109 agreement regarding supplemental restricted stock award issued michael e wiley august 15 2000 amount 83000 shares company common stock filed exhibit 109 annual report baker hughes incorporated form 10k year ended december 31 2000 1010 amended restated 1991 employee stock bonus plan baker hughes incorporated filed exhibit 1015 annual report baker hughes incorporated form 10k year ended september 30 1997 amended amendment 19971 amended restated 1991 employee stock bonus plan filed exhibit 1016 annual report baker hughes incorporated form 10k year ended september 30 1997 amended amendment 19991 amended restated 1991 employee stock bonus plan filed exhibit 1011 annual report baker hughes incorporated form 10k year ended december 31 1998 1011 restated 1987 stock option plan baker hughes incorporated amended october 24 1990 filed exhibit 1017 annual report baker hughes incorporated form 10k year ended september 30 1997 1012 baker hughes incorporated supplemental retirement plan filed exhibit 1014 annual report baker hughes incorporated form 10k year ended september 30 1997 amended amendment 19971 baker hughes incorporated supplemental retirement plan filed exhibit 1020 annual report baker hughes incorporated form 10k year ended september 30 1997 amended amendment 19991 baker hughes incorporated supplemental retirement plan filed exhibit 1016 annual report baker hughes incorporated form 10k year ended december 31 1998 1013 executive severance policy filed exhibit 1012 annual report baker hughes incorporated form 10k year ended december 31 1999 1014 1993 stock option plan filed exhibit 1018 annual report baker hughes incorporated form 10k year ended december 31 1998 amended amendment 19971 1993 stock option plan filed exhibit 1023 annual report baker hughes incorporated form 10k year ended september 30 1997 amended amendment 19991 1993 stock option plan filed exhibit 1020 annual report baker hughes incorporated form 10k year ended december 31 1998 1015 1993 employee stock bonus plan filed exhibit 1021 annual report baker hughes incorporated form 10k year ended december 31 1998 amended amendment 19971 1993 employee stock bonus plan filed exhibit 1025 annual report baker hughes incorporated form 10k year ended september 30 1997 amended amendment 19991 1993 employee stock bonus plan filed exhibit 1023 annual report baker hughes incorporated form 10k year ended december 31 1998 1016 amended restated director compensation deferral plan filed exhibit 1024 annual report baker hughes incorporated form 10k year ended december 31 1998 1017 1995 employee annual incentive compensation plan filed exhibit 1020 annual report baker hughes incorporated form 10k year ended december 31 1999 amended amendment 19971 1995 employee annual incentive compensation plan filed exhibit 1025 annual report baker hughes incorporated form 10k year ended september 30 1997 amended amendment 19991 1995 employee annual incentive compensation plan filed exhibit 1027 annual report baker hughes incorporated form 10k year ended december 31 1998 1018 long term incentive plan filed exhibit 1031 annual report baker hughes incorporated form 10k year ended september 30 1997 amended amendment 19991 long term incentive plan filed exhibit 1032 annual report baker hughes incorporated form 10k year ended december 31 1998 1019 1998 employee stock option plan filed exhibit 1033 annual report baker hughes incorporated form 10k year ended december 31 1998 amended amendment 19991 1998 employee stock option plan filed exhibit 1034 annual report baker hughes incorporated form 10k year ended december 31 1998 1020 form credit agreement dated october 1 1998 among baker hughes incorporated fourteen banks 750000000 aggregate banks filed exhibit 1035 annual report baker hughes incorporated form 10k year ended december 31 1998 1021 form credit agreement dated october 1 1998 among baker hughes incorporated fourteen banks 250000000 aggregate banks filed exhibit 1036 annual report baker hughes incorporated form 10k year ended december 31 1998 amended form first amendment credit agreement dated september 29 1999 among baker hughes incorporated fourteen banks 250000000 aggregate banks filed exhibit 1029 annual report baker hughes incorporated form 10k year ended december 31 1999 amended form second amendment credit agreement dated september 25 2000 among baker hughes incorporated fourteen banks 250000000 aggregate banks filed exhibit 1035 annual report baker hughes incorporated form 10k year ended december 31 2000 1022 form stock option agreement executives effective january 26 2000 filed exhibit 1036 annual report baker hughes incorporated form 10k year ended december 31 2000 1023 form stock option agreement executive officers effective october 1 1998 filed exhibit 1037 annual report baker hughes incorporated form 10k year ended december 31 2000 1024 form nonqualified stock option agreement employees effective october 1 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 1998 1025 form nonqualified stock option agreement directors effective october 25 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 2000 1026 form nonqualified stock option agreement directors effective october 25 1995 1027 form nonqualified stock option agreement employees effective october 25 1995 1028 form incentive stock option agreement employees effective october 25 1995 1029 agreement regarding restricted stock award issued alan r crain jr october 25 2000 amount 7500 shares company common stock filed exhibit 1043 annual report baker hughes incorporated form 10k year ended december 31 2000 1030 agreement regarding restricted stock award issued greg nakanishi november 1 2000 amount 5000 shares company common stock filed exhibit 1044 annual report baker hughes incorporated form 10k year ended december 31 2000 1031 agreement regarding restricted stock award issued andrew j szescila january 24 2001 amount 25000 shares company common stock filed exhibit 1045 annual report baker hughes incorporated form 10k year ended december 31 2000 1032 agreement plan merger among baker hughes incorporated baker hughes delaware inc western atlas inc dated may 10 1998 filed exhibit 21 form 8k dated may 20 1998 1033 tax sharing agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1019 western atlas incs form 10q quarter ended september 30 1997 1034 employee benefits agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1021 western atlas incs form 10q quarter ended september 30 1997 1035 master formation agreement among company schlumberger limited certain wholly owned subsidiaries schlumberger limited dated september 6 2000 filed exhibit 21 form 8k dated september 7 2000 1036 shareholders agreement among schlumberger limited baker hughes incorporated parties listed signature pages thereto dated november 30 2000 filed exhibit 101 form 8k dated november 30 2000 1037 corporate executive loan program filed exhibit 1050 annual report baker hughes incorporated form 10k year ended december 31 1998 1038 amendment 1 employment agreement effective april 25 2001 baker hughes incorporated michael e wiley amendment 2 employment agreement effective december 5 2001 baker hughes incorporated michael e wiley amendment 3 employment agreement effective december 5 2001 baker hughes incorporated michael e wiley 1039 severance agreement dated july 23 1997 baker hughes incorporated edwin c howell amended amendment 1 severance agreement effective november 11 1998 1040 severance agreement dated december 3 1997 baker hughes incorporated douglas j wall amended amendment 1 severance agreement effective november 11 1998 1041 form baker hughes incorporated nonqualified stock option agreement executive officers dated january 24 2001 1042 form severance agreement dated march 1 2001 baker hughes incorporated certain executives executed james r clark dated march 1 2001 william p faubel dated may 29 2001 1043 form baker hughes incorporated nonqualified stock option agreement employees dated january 30 2002 1044 form baker hughes incorporated incentive stock option agreement employees dated january 30 2002 1045 form stock matching agreement executed march 1 2001 baker hughes incorporated james roderick clark amended amendment 1 stock matching agreement amendment effective march 6 2002 211 subsidiaries registrant 231 consent deloitte touche llp b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized 6th day march 2002 baker hughes incorporated michael e wiley michael e wiley chairman board president chief executive officer pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated baker hughes incorporated schedule ii valuation qualifying accounts index exhibitsitem 14 controls procedures within 90 days prior filing annual report form 10k company evaluated effectiveness design operation disclosure controls procedures pursuant rule 13a14 securities exchange act 1934 amended exchange act evaluation carried supervision participation companys management including principal executive officer principal financial officer based evaluation officers concluded design operation companys disclosure controls procedures effective significant changes companys internal controls factors could significantly affect internal controls subsequent date evaluation significant deficiencies material weaknesses internal controls identified evaluation consequence corrective action required taken disclosure controls procedures companys controls procedures designed ensure information required disclosed company reports company files submits exchange act annual report recorded processed summarized reported within time periods specified secs rules forms disclosure controls procedures include without limitation controls procedures designed ensure information required disclosed company reports company files exchange act accumulated communicated companys management including principal executive officer principal financial officer appropriate allow timely decisions regarding required disclosure part iv item 15item 14 principal accounting fees services information concerning principal accounting fees services set forth section entitled “fees paid deloitte touche llp” proxy statement section incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accounting fees services set forth section entitled “fees paid deloitte touche llp” proxy statement section incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accounting fees services set forth section entitled “fees paid deloitte touche llp” proxy statement section incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accounting fees services set forth section entitled “fees paid deloitte touche llp” proxy statement section incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accounting fees services set forth section entitled “fees paid deloitte touche llp” proxy statement section incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accounting fees services set forth section entitled “fees paid deloitte touche llp” proxy statement section incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accountant fees services set forth section entitled “fees paid deloitte touche llp” proxy statement section incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accountant fees services set forth section entitled “fees paid deloitte touche llp” proxy statement section incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accountant fees services set forth section entitled “fees paid deloitte touche llp” proxy statement section incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accountant fees services set forth section entitled “fees paid deloitte touche llp” proxy statement section incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accountant fees services set forth section entitled “fees paid deloitte touche llp” proxy statement section incorporated herein reference part iv item 15item 14 principal accounting fees services july 3 2017 audit committee approved engagement kpmg llp company’s independent registered public accountant audit financial statements company consolidated subsidiaries period beginning july 3 2017 ending december 31 2017 engagement effective july 28 2017 deloitte independent auditor audited baker hughes incorporated’s financial statements fiscal years ended december 31 2016 2015 subsequent interim period january 1 2017 july 3 2017 result consummation transactions july 3 2017 treated “reverse acquisition” accounting purposes historical financial statements accounting acquirer ge og became historical financial statements company periods ending july 3 2017 kpmg spa independent auditing firm audited ge og’s financial statements fiscal years ended december 31 2016 2015 2014 audit committee subsequently determined dismiss kpmg spa independent registered public accounting firm ge og subsequent filing company’s quarterly report form 10q quarter ended june 30 2017 deloitte kpmg llp kpmg spa severally billed bill company subsidiaries aggregate fees set forth respective tables services provided fiscal years 2017 2016 amounts include fees paid company professional services rendered audit company’s annual financial statements review quarterly financial statements audit services related effectiveness company’s internal control financial reporting ii assurance related services reasonably related performance audit review company’s financial statements iii professional services rendered tax compliance tax advice tax planning bhge llc 2017 form 10k 96 table shows aggregate fees paid deloitte professional services related fiscal years 2017 2016 table shows aggregate fees paid kpmg llp professional services related fiscal years 2017 2016 table shows aggregate fees paid kpmg spa professional services related fiscal years 2017 2016 audit fees include fees related audit company’s annual financial statements including fees related statutory audit requirements subsidiaries foreign countries review quarterly financial statements audit services related effectiveness company’s internal control financial reporting auditrelated fees primarily audit services directly related company’s annual financial statements example audits related possible divestitures reorganization activities assistance connection various registration statements debt offerings proxy statements similar matters tax fees primarily preparation income payroll value added various miscellaneous tax returns certain countries company operates company also incurs local country tax advisory services countries examples kinds services assistance audits local country tax authorities acquisition disposition advice consultation regarding changes legislation rulings advice tax effect structuring operational matters addition services fees deloitte kpmg llp provide audit services various companysponsored benefit plans fees incurred paid respective plans fees paid deloitte kpmg llp services totaled approximately 02 million 00 million 2017 respectively 04 million deloitte 2016 bhge llc 2017 form 10k 97 preapproval policies procedures audit committee sole authority responsibility select evaluate compensate oversee work registered public accounting firm engaged purpose preparing issuing audit report performing audit review attest services company including resolution disagreements management auditor regarding financial reporting independent auditor registered public accounting firm reports directly committee audit committee also sole authority approve audit engagement fees terms committee chair committee must preapprove audit nonaudit service provided company’s independent auditor services related fees described “audit fees” “auditrelated fees” “tax fees” “all other” approved pursuant section 202 sarbanesoxley act audit committee bhge llc 2017 form 10k 98 part iv item 15item 14 principal accounting fees services audit committee appointed kpmg llp company’s independent registered public accountant audit financial statements company consolidated subsidiaries fiscal year ending december 31 2018 interim period july 3 2017 december 31 2017 result consummation transactions july 3 2017 treated “reverse acquisition” accounting purposes historical financial statements accounting acquirer ge og became historical financial statements company periods ending july 3 2017 deloitte independent auditor audited baker hughes incorporateds financial statements prior transactions kpmg spa independent auditor audited ge og’s financial statements prior transactions kpmg llp kpmg spa deloitte severally billed bill company subsidiaries aggregate fees set forth respective tables services provided fiscal years 2018 2017 amounts include fees paid company professional services rendered audit company’s annual financial statements review quarterly financial statements audit services related effectiveness company’s internal control financial reporting ii assurance related services reasonably related performance audit review company’s financial statements iii professional services rendered tax compliance tax advice tax planning table shows aggregate fees paid kpmg llp professional services related fiscal years 2018 2017 bhge llc 2018 form 10k 100 table shows aggregate fees paid kpmg spa professional services related fiscal years 2018 2017 table shows aggregate fees paid deloitte professional services related fiscal years 2018 2017 audit fees include fees related audit company’s annual financial statements including fees related statutory audit requirements subsidiaries foreign countries review quarterly financial statements audit services related effectiveness company’s internal control financial reporting auditrelated fees primarily audit services directly related company’s annual financial statements example audits related possible divestitures reorganization activities assistance connection various registration statements debt offerings proxy statements similar matters tax fees primarily preparation income payroll value added various miscellaneous tax returns certain countries company operates company also incurs local country tax advisory services countries examples kinds services assistance audits local country tax authorities acquisition disposition advice consultation regarding changes legislation rulings advice tax effect structuring operational matters preapproval policies procedures audit committee sole authority responsibility select evaluate compensate oversee work registered public accounting firm engaged purpose preparing issuing audit report performing audit review attest services company including resolution disagreements management auditor regarding financial reporting independent auditor registered public accounting firm reports directly committee audit committee also sole authority approve audit engagement fees terms committee chair committee must preapprove audit nonaudit service provided company’s independent auditor services related fees described “audit fees” “auditrelated fees” “tax fees” “all other” approved pursuant section 202 sarbanesoxley act audit committee bhge llc 2018 form 10k 101 part iv item 15item 14 principal accounting fees services audit committee appointed kpmg llp company’s independent registered public accountant audit financial statements company consolidated subsidiaries fiscal years ending december 31 2019 2018 kpmg llp billed bill company subsidiaries aggregate fees set forth respective tables services provided fiscal years 2019 2018 amounts include fees paid company professional services rendered audit company’s annual financial statements review quarterly financial statements audit services related effectiveness company’s internal control financial reporting ii assurance related services reasonably related performance audit review company’s financial statements iii professional services rendered tax compliance tax advice tax planning table shows aggregate fees paid kpmg llp professional services related fiscal years 2019 2018 audit fees include fees related audit company’s annual financial statements including fees related statutory audit requirements subsidiaries foreign countries review quarterly financial statements audit services related effectiveness company’s internal control financial reporting auditrelated fees primarily audit services directly related company’s annual financial statements example audits related possible divestitures reorganization activities assistance connection various registration statements debt offerings proxy statements similar matters tax fees primarily preparation income payroll value added various miscellaneous tax returns certain countries company operates company also incurs local country tax advisory services countries examples kinds services assistance audits local country tax authorities acquisition disposition advice consultation regarding changes legislation rulings advice tax effect structuring operational matters bhge llc 2019 form 10k 94 preapproval policies procedures audit committee sole authority responsibility select evaluate compensate oversee work registered public accounting firm engaged purpose preparing issuing audit report performing audit review attest services company including resolution disagreements management auditor regarding financial reporting independent auditor registered public accounting firm reports directly committee audit committee also sole authority approve audit engagement fees terms committee chair committee must preapprove audit nonaudit service provided company’s independent auditor services related fees described “audit fees” “auditrelated fees” “tax fees” “all other” approved pursuant section 202 sarbanesoxley act audit committee bhge llc 2019 form 10k 95 part iv item 15item 14 principal accounting fees services audit committee appointed kpmg llp company’s independent registered public accountant audit financial statements company consolidated subsidiaries fiscal years ending december 31 2020 2019 kpmg llp billed bill company subsidiaries aggregate fees set forth respective tables services provided fiscal years 2020 2019 amounts include fees paid company professional services rendered audit company’s annual financial statements review quarterly financial statements audit services related effectiveness company’s internal control financial reporting ii assurance related services reasonably related performance audit review company’s financial statements iii professional services rendered tax compliance tax advice tax planning table shows aggregate fees paid kpmg llp professional services related fiscal years 2020 2019 audit fees include fees related audit company’s annual financial statements including fees related statutory audit requirements subsidiaries foreign countries review quarterly financial statements audit services related effectiveness company’s internal control financial reporting auditrelated fees primarily audit services directly related company’s annual financial statements example audits related possible divestitures reorganization activities assistance connection various registration statements debt offerings proxy statements similar matters tax fees primarily preparation income payroll value added various miscellaneous tax returns certain countries company operates company also incurs local country tax advisory services countries examples kinds services assistance audits local country tax baker hughes holdings llc 2020 form 10k 88 authorities acquisition disposition advice consultation regarding changes legislation rulings advice tax effect structuring operational matters preapproval policies procedures audit committee sole authority responsibility select evaluate compensate oversee work registered public accounting firm engaged purpose preparing issuing audit report performing audit review attest services company including resolution disagreements management auditor regarding financial reporting independent auditor registered public accounting firm reports directly committee audit committee also sole authority approve audit engagement fees terms committee chair committee must preapprove audit nonaudit service provided company’s independent auditor services related fees described “audit fees” “auditrelated fees” “tax fees” “all other” approved pursuant section 202 sarbanesoxley act audit committee baker hughes holdings llc 2020 form 10k 89 part iv item 15item 14 principal accounting fees services information concerning principal accounting fees services set forth section entitled “fees paid deloitte touche llp” proxy statement section incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accounting fees services set forth section entitled “fees paid deloitte touche llp” proxy statement section incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accountant fees services set forth section entitled fees paid deloitte touche llp proxy statement section incorporated herein reference part iv item 15 item 7 managements discussion analysis financial condition results operations information set forth caption managements discussion analysis financial condition results operations pages 19 25 1994 annual report stockholders incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations information set forth caption managements discussion analysis financial condition results operations 1995 annual report stockholders incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations information set forth caption managements discussion analysis financial condition results operations 1996 annual report stockholders incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations information set forth caption managements discussion analysis financial condition results operations 1997 annual report stockholders mda incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operations information set forth caption managements discussion analysis financial condition results operations 1998 annual report stockholders mda incorporated herein reference item 7a quantitative qualitative disclosures market risk information set forth subcaption quantitative qualitative market risk disclosures mda incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations mda read conjunction consolidated financial statements company years ended december 31 1999 1998 three months ended december 31 1997 year ended september 30 1997 related notes consolidated financial statements contained item 8 herein forwardlooking statements mda includes forwardlooking statements within meaning section 27a securities act 1933 amended section 21e securities exchange act 1934 amended forwardlooking statement words anticipate believe expect plan intend estimate project forecasts could may similar expressions intended identify forwardlooking statements baker hughes expectations business outlook customer spending oil gas prices business environment company industry general expectations regarding matters assurance given actual results may differ materially forwardlooking statements herein reasons including effects competition level petroleum industry exploration production expenditures world economic conditions prices demand crude oil natural gas drilling activity weather legislative environment united states countries opec policy conflict middle east major petroleum producing consuming regions development technology lowers overall finding development costs condition capital equity markets see business environment detailed discussion certain factors baker hughes incorporated managements discussion analysis financial condition results operations continued baker hughes expectations regarding level capital expenditures capital expenditures project renaissance described investing activities forecasts regarding matters addition factors described previous paragraph business environment forecasts may substantially different actual results affected following factors accuracy companys estimates regarding spending requirements regulatory legal contractual impediments spending reduction measures occurrence unanticipated acquisition research development opportunities changes companys strategic direction need replace unanticipated losses capital assets factors listed item 1 businessenvironmental matters change yearend august 27 1998 board directors company approved change fiscal year end company september 30 december 31 effective calendar year beginning january 1 1998 threemonth transition period october 1 1997 december 31 1997 transition period precedes start 1998 fiscal year 1997 refers year ended september 30 transition period refers three months ended december 31 1997 1998 1999 refer respective years ended december 31 restatement december 1999 based internal review company became aware several accounting misstatements one operating divisions baker hughes inteq subsequent analysis determined misstatements amounted 310 million net taxes result company restated previously issued consolidated financial statements reflect adjustments required correct misstatements adjustments relate uncollectible accounts receivable inventory shortages recognition inventory pricing adjustments impairment various current longlived assets recognition certain previously unrecorded liabilities including trade accounts payable employee compensation benefits payable although amounts attributable several inteq division locations 242 million net tax related inteqs venezuela operations amounts pertaining locations venezuela one location accounted 27 million tax basis result analysis amounts company determined specific years affected applicable amounts net tax follows result companys 1998 transition period 1997 1996 1995 financial statements restated amounts previously reported principal effects adjustments accompanying financial statements set forth note 19 notes consolidated financial statements item 8 herein management believes misstatements primarily result noncompliance companys accounting operating procedures noncompliance isolated primarily inteqs operations venezuela company process reviewing administrative accounting operational policies procedures foreign units compliance therewith identify potential areas revisions may warranted extent changes current procedures warranted implemented quickly practicable discontinued operations february 16 2000 companys board directors approved principle plan sell companys baker process division manufactures sells process equipment separating solids liquids filtration sedimentation centrifugation flotation processes accordingly companys consolidated financial statements related notes thereto restated present operations baker process separately accounted segment discontinued operations discussion see note 3 notes consolidated financial statements item 8 herein october 31 1997 western atlas distributed shares unova inc unova wholly owned industrial automation systems subsidiary stock dividend shareholders spinoff operations unova transition period 1997 classified discontinued operations companys consolidated financial statements periods prior spinoff cash debt related net interest expense allocated based capital needs unovas operations merger august 10 1998 baker hughes completed merger western atlas merger accounted pooling interests accordingly prior period consolidated financial statements baker hughes restated include results operations financial position cash flows western atlas certain amounts reclassified conform reporting practices baker hughes western atlas business environment oilfield operations consist eight divisions baker atlas baker hughes inteq baker oil tools baker petrolite centrilift ep solutions hughes christensen western geophysical companies manufacture sell equipment provide related services used exploring developing producing hydrocarbon reserves addition ep solutions explores produces oil natural gas business environment company corresponding operating results significantly affected level industry capital expenditures exploration production oil gas reserves expenditures influenced strongly oil company expectations supply demand crude oil natural gas products energy price environment results supply demand imbalances expenditures influenced fundamental change customer base customers approaches toward relationships suppliers largest customers consolidated using global size market power seek economies scale pricing concessions key factors currently influencing worldwide crude oil gas market production restraint degree opec nations large producing countries willing able restrict production exports crude oil global economic growth particular japan china south korea developing areas asia correlation energy demand economic growth strong oil gas storage inventories relative historic levels technological progress design application new products allow oil gas companies drill fewer wells drill complete produce wells faster lower cost maturity resource base known hydrocarbon reserves maturing provinces north sea us canada latin america pace new investment access capital reinvestment available cash flow existing emerging markets price volatility impact widely fluctuating commodity prices stability market subsequent impact customer spending baker hughes incorporated managements discussion analysis financial condition results operations continued oil gas prices crude oil natural gas prices baker hughes rotary rig count summarized tables averages periods indicated followed companys outlook reading companys outlook set forth caution advised factors described forwardlooking statements business environment could negatively impact companys expectations oil demand oil gas prices drilling activity crude oil prices rebounded strongly record lows experienced 1998 prices averaged 1937 year ranging low 1168bbl february year 2736bbl november oil prices increased due sustained adherence production cut agreements opec nonopec countries coupled resurgence worldwide demand growth led recovery asian markets return colder winter weather resulting decrease global oil inventories particularly north america provided increased stability market stronger price support us natural gas prices strengthened 1999 compared prior year averaging 219mcf ranging low 158mcf march high 294mcf october increase due part apparent reduction available gas supply brought sustained slow gas directed drilling us experienced january 1998 june 1999 impact lower supply coupled return colder winter weather reduced natural gas storage inventories historically seasonable levels rotary rig count company engaged oilfield service industry providing products services used exploring developing producing oil gas reservoirs drilling workover rigs active consume products services produced oilfield service industry active rig count acts leading indicator consumption products services used drilling completing producing processing hydrocarbons rig count trends governed exploration development spending oil gas companies turn influenced current future price expectations oil natural gas rig counts therefore reflect relative strength stability energy prices extreme volatility experienced 1999 oil gas prices created uncertain business environment companys customers consequently customer expenditures explore produce oil gas declined decreasing number active drilling workover rigs reducing need companys products services resulted decreased revenues reductions increases rig count may significant impact revenues depending prevailing market conditions often lag increases decreases oil gas prices changes rig count additional lag changes rig count impact companys revenues outlook oil prices expected remain strong first half 2000 expected moderate throughout balance year opec production cuts agreed 1999 expire additional oil supply becomes available market prices benchmark west texas intermediate oil expected trade range 20 25bbl end 2000 u natural gas prices expected remain strong throughout 2000 averaging 220 260 per mcf lower storage levels increased demand reduced supply pressure market coming injection season response improved energy prices customer spending expected strengthen 2000 current estimates indicating increased global spending oil gas industry approximately 10 1999 levels north american spending expected continue increase throughout year natural gas oil drivers increased drilling production activity outside north america customer spending expected remain depressed first quarter gradual improvement thereafter acquisitions significant acquisitions made 1999 addition acquisitions discussed company made several acquisitions expand technology base increase presence key geographic areas 1998 transition period 1997 none acquisitions individually aggregate material companys consolidated financial statements april 1998 company acquired outstanding stock wedge dialog inc wedge 2185 million cash wedge specializes casedhole logging pipe recovery services also april 1998 company acquired 3d geophysical inc 3d 1175 million cash 3d supplier primarily landbased seismic data acquisition services purchase method accounting used record acquisitions operating results acquisitions included consolidated statement operations respective acquisition dates july 1997 company completed acquisition petrolite corporation petrolite company issued 193 million shares common stock aggregate value 7302 million additionally company assumed petrolites outstanding vested unvested employee stock options fair market value 210 million resulting total consideration 7512 million company recorded unusual charge 345 million related combination petrolite baker performance chemicals companys existing oilfield industrial chemicals operations forming baker petrolite leading provider oilfield chemicals major oilfield markets also july 1997 company acquired drilex international inc drilex provider products services used directional horizontal drilling workover oil gas wells 27 million shares companys common stock acquisition drilex combined operations inteq provided company increased presence us land directional horizontal drilling market connection acquisition drilex company recorded unusual charge 71 million related transaction onetime costs results continuing operations revenues 1999 totaled 45467 million compared 58206 million 1998 decrease 219 decrease due continued depressed activity levels started second half 1998 continued throughout 1999 although oil gas prices improved 1999 average rig counts fell 198 north america 22 outside north america compared 1998 substantially areas world experienced revenue declines 1999 compared 1998 approximately 58 companys 1999 revenues derived sources outside north america 1999 revenues production oil gas wells increased 1998 certain projects previously development stage began production 1999 oil gas revenues 1999 1998 682 million 59 million respectively baker hughes incorporated managements discussion analysis financial condition results operations continued revenues 1998 58206 million increase 174 1997 revenues 49579 million increase due various acquisitions made company 1998 latter part 1997 offset activity level declines rig counts 1998 fell 129 north america 61 outside north america compared 1997 activity declines brought significant drop price oil natural gas second half 1998 resultant decrease customer spending approximately 61 companys revenues derived activities outside north america 1998 1997 quarterly revenues peaked june 1998 quarter 15324 million declined 2251 million 147 13073 million december 1998 quarter impact companys business dramatic north america land based activity venezuela excluding acquisitions western geophysical division reported revenue increases second half 1998 benefited strong licensing sales multiclient seismic data customer spending less impacted fluctuations oil prices revenues three months ended december 31 1997 14490 million increase 201 revenues three months ended december 31 1996 12067 million revenue improvement resulted higher activity levels worldwide rig count increased 147 three months ended december 31 1997 compared three months ended december 31 1996 gross margin gross margins 1999 1998 transition period 1997 191 185 270 212 respectively gross margins 1999 1998 adversely impacted significant activity declines resulting pricing pressure companys products services addition discussed unusual nonrecurring charges 1999 1998 nonrecurring charges recorded costs revenue totaled 721 million 2866 million respectively conversely higher gross margin percentages transition period 1997 result primarily higher incremental gross profit increasing revenues changes revenue mix continued emphasis productivity cost improvements selling general administrative selling general administrative sga expense percent consolidated revenues 1999 1998 transition period 1997 144 134 136 94 respectively despite significant cost reduction efforts 1998 1999 sga decline percentage revenue due several factors discussed unusual nonrecurring charges 1999 credits totaling 203 million 1998 charges totaling 687 million recorded sga addition increased spending project renaissance year 2000 computer issue preparations period fact sga expenses generally fixed nature also contributed higher percentages 1998 1999 significantly higher activity revenue levels 1997 resulted lower sga expenses percentage revenue period merger related costs connection merger 1998 company recorded merger related costs 2175 million cash portion charge 1593 million noncash portion 582 million costs included cash portion transaction costs including banking legal printing fees employee related costs consisting payments made certain officers western atlas severance benefits paid terminated employees whose responsibilities deemed redundant integration costs including changing legal registrations terminating joint venture result merger changing signs logos noncash portion charges related triggering change control rights contained certain western atlas baker hughes employee stock option plans charge record writeoff carrying value product line discontinued result merger 1999 company reviewed balances accruals cash merger charges determined 16 million remaining balances accruals would utilized amount included fourth quarter adjustment merger related costs cash spent december 31 1999 1429 million company expects 148 million accrual december 31 1999 20 million spent june 2000 24 million spent threeyear period remaining accrual spent remaining life related contractual obligations unusual nonrecurring charges result continuing low activity levels predominantly companys seismic products services company recorded charges fourth quarter 1999 totaling 1228 million summarized employee groups terminated executive marketing field service support personnel approximately 200 terminated december 31 1999 amount accrued severance based upon positions eliminated companys written severance policy include portion employees salary severance dates based upon current estimates company estimates accrued severance december 31 1999 paid 2000 employees leave company accrued 360 million related expected costs settle contractual obligations based upon managements decision reduce abandon certain operations based terms applicable agreements costs consist primarily cost terminating leases certain marine vessels taken service removed fleet impairment property includes writeoff writedown certain assets utilized companys seismic business assets scrapped otherwise disposed consist 317 million land marine recording equipment 16 million data processing equipment 196 million marine vessels sold otherwise abandoned writedown amounts generally determined use internal appraisal techniques assess estimated realizable value realized upon disposal annualized basis effect eliminating depreciation assets written approximately 194 million 1999 company realized nonrecurring gains totaling 548 million company sold two large excess real estate properties realized net gains totaling 395 million company received net proceeds 681 million addition company sold certain assets related previous divestiture joint venture realized net gain 153 million 1999 company reviewed remaining balances accruals cash charges made 74 million adjustments reflect current estimates remaining expenditures adjustments included reversals previously recorded accruals utilized adjustments related primarily severance accruals lease obligations addition accruals related certain terminated lease obligations revisions made increase previously recorded amounts based current information estimates expected cash flows related leases items reflected following captions consolidated statement operations baker hughes incorporated managements discussion analysis financial condition results operations continued company experienced high growth levels products services 1994 second quarter 1998 third fourth quarters 1998 company experienced decline demand products services result significant decrease price oil natural gas decline customer demand materialized quickly previous high growth rates result sharp decline demand adjust lower level activity company assessed overall operations recorded charges 5519 million summarized table set forth reconciliation charges cash noncash tables following captions consolidated statement operations amount accrued severance based upon companys written severance policy positions eliminated accrued severance include portion employees salaries severance dates based upon current severance dates company expects accrued severance remaining december 31 1999 substantially paid 2000 company accrued 298 million combine operations consolidate facilities accrual includes costs settle leases idled facilities based upon lease agreements shutdown oil gas operations certain countries based upon managements decision abandon operations terminate rig contract based upon terms agreement collocation costs based upon estimated exit costs approved plans accrual include portion costs actual abandonment facilities ceasing operations remaining accrual 59 million related abandoned leases spent according lease terms impairment inventory rental tool assets 1602 million impacted virtually operating divisions due advances technology obsoleted certain product lines well decline market demand resulted excess supply certain products product lines affected completion products drilling evaluation systems tools tricone diamond drill bits much obsolete excess inventory scrapped written completely remaining assets written estimated value based companys inventory rental tool obsolescence policy third quarter 1998 company recorded 832 million writedown petroalliance services company limited pas former consolidated joint venture operating former soviet union fourth quarter 1997 price oil began decline connection deteriorating political economic conditions russia adversely affected pas business russia also adversely affected pas business areas former soviet union closely aligned russian economy pas suffered significant operating losses second third fourth quarters 1998 revenues approximately 500 million net operating loss approximately 110 million included companys consolidated statement operations due continued deterioration economy russia former soviet union countries pas continued losses prospect situation would likely continue companys interest pas written reason company desired dispose interest business writedown joint venture based upon companys estimated value assets ultimately received consideration sale pas investment november 1998 company received consideration sale pas seismic vessel seismic welllogging assets certain pas assets kazakhstan turkmenistan certain customer receivables 330 million note purchasers writedown included 107 million equipment 220 million goodwill 505 million net current assets impairment property assets 757 million includes 181 million writedown reduce carrying value portion companys drilling equipment 126 million writeoff obsolete solid oilfilled streamer sections used seismic vessels 149 million writedown surplus welllogging equipment 95 million writeoff prepaid royalties abandoned product line 206 million assets written fair market value writedown assets determined based internally developed valuations using variety methods 693 million charge taken third quarter 1998 related companys oil gas properties charge consisted 258 million related properties united states 77 million related properties argentina resulted depressed oil gas prices reduced future exploration capital expenditures remaining 358 million resulted writeoff unproven reserves foreign jurisdictions management company plans reduce amount future exploration capital writeoff intangible assets 178 million includes 27 million capitalized software costs product lines abandoned result recent acquisitions 53 million capitalized development costs software systems replaced companys implementation sap r3 98 million goodwill associated discontinued business subsidiary held sale writedown real estate held sale 170 million specific property charge reduces carrying value propertys appraised value 107 million charge writeoff investments joint ventures russia indonesia also includes loss sale tracor europa discontinued subsidiary baker hughes incorporated managements discussion analysis financial condition results operations continued 1997 company recorded unusual charges 511 million included charges connection acquisitions petrolite drilex 345 million 71 million respectively combine acquired operations company additional 95 million charge recorded result decision discontinue low margin oilfield product line latin america sell tracor europa subsidiary computer peripherals operation resulted writedown investment tracor europa net realizable value cash provisions unusual charge totaled 185 million company spent 55 million 1997 16 million transition period substantially remaining 114 million 1998 expenditures relate specific plans clearly defined actions funded operations available credit facilities acquired inprocess research development acquisition petrolite 1997 accounted purchase accordingly purchase price allocated assets acquired liabilities assumed based estimated fair market values date acquisition management company responsible estimating fair value purchased inprocess research development accordance generally accepted accounting principles 1180 million allocated inprocess research development recorded charge consolidated statement operations acquisition date technological feasibility projects inprocess established alternative future use date 26 individual research development projects development time acquisition classified inprocess research development total 1260 million allocated petrolites existing technology original estimated useful life 30 years technology used primarily energyrelated industries embedded various products petrolite designed inhibit corrosion scale formation aid oil water separation process enhance performance use chemical additives process industry products development valued using discounted cash flow analysis 14 discount factor cash flows projected 20 year period included additional research development capital expenditures required complete projects gross margins used products generally consistent products sold company 14 discount factor used considered time value money inflation risk inherent projects development aggregate remaining completion costs products projected exceed 72 million completion periods varying 90 days two years december 31 1999 seventeen products generated commercial sales five product sales trial basis four determined viable products 1999 revenues products totaled approximately 76 million risks associated projects may prevent becoming viable products generate revenues risks include limited successful development underlying technology ability economically produce product commercial quantities addition factors described forwardlooking statements business environment create uncertainty demand products utilizing yet developed technology exist interest expense interest expense 1999 increased 163 million compared 1998 interest expense 1998 increased 547 million compared 1997 increases due higher debt levels funded acquisitions capital expenditures working capital unrealized gain trading securities company currently holds equity securities tuboscope inc 1999 company announced intention sell holdings tuboscope inc reclassified available sale securities trading securities result decision company recognized unrealized gain 315 million pretax fourth quarter 1999 income taxes effective income tax rates merger related costs spinoff related costs unusual nonrecurring charges 347 354 378 353 periods ended december 31 1999 december 31 1998 december 31 1997 september 30 1997 respectively 1999 effective income tax rate lower 1998 rate due primarily lower taxes international operations settlement audit companys 1994 1995 us consolidated income tax returns internal revenue service result settlement company recognized tax benefit reversal deferred income taxes previously provided 181 million quarter ended june 30 1999 significant portion merger related costs unusual nonrecurring charges recorded 1998 deductible tax purposes jurisdiction addition company operated certain jurisdictions assess tax deemed profit turnover basis result company provided 247 million income taxes net loss continuing operations 2562 million 1998 capital resources liquidity operating activities net cash inflows operating activities continuing operations 5413 million 7942 million 1379 million 7104 million 1999 1998 transition period 1997 respectively reduction cash flow 1998 1999 due lower net income including noncash portion nonrecurring items payments accruals merger nonrecurring related items 730 million decreases accounts payable accrued liabilities caused lower business levels offset reductions receivables inventory resulting activity declines additional management focus increase operating cash flow 1997 1998 resulted increasing business levels period investing activities net cash outflows investing activities continuing operations 4819 million 1999 16586 million 1998 3178 million transition period 9700 million 1997 property additions 1999 decreased significantly prior year levels company responded depressed market conditions products services company currently expects 2000 capital expenditures approximately 6000 million excluding acquisitions funds provided operations outstanding lines credit expected adequate meet future capital expenditure requirements property additions 1998 increased company added capacity meet increased market demand due increase acquisition multiclient seismic data proceeds disposal assets generated 1519 million 1999 1000 million 1998 205 million transition period 617 million 1997 company obtained 687 million cash two stock acquisitions petrolite corporation drilex occurred 1997 july 1997 company sold marketable securities obtained wm barnickel company association petrolite acquisition 485 million 1998 company used shortterm borrowings purchase various businesses including wedge 2184 million net cash acquired 3d 1175 million western rock bit 314 million transition period company used shortterm borrowings purchase various businesses including oilfield dynamics inc 342 million 1997 company used existing cash hand shortterm borrowings purchase various businesses including environmental technology division deutz ag 522 million net cash acquired june 1997 quarter company began multiyear initiative designed redesign certain business processes develop implement enterprise wide software system initiative named project renaissance utilize sap r3 software platform across whole company expected cost excess 300 million four year period 1929 million spent december 31 1999 words expected expects intended identify forwardlooking statements investing activities see forwardlooking statements business environment description risk factors related forwardlooking statements financing activities net cash inflows outflows financing activities continuing operations 631 million 8386 million 1737 million 4623 million 1999 1998 transition period 1997 respectively baker hughes incorporated managements discussion analysis financial condition results operations continued total debt outstanding december 31 1999 28141 million compared 27707 million december 31 1998 17826 million september 30 1997 increase debt primarily due increased borrowings commercial paper revolving credit facilities funded acquisitions capital expenditures working capital needs debt equity ratio 092 december 31 1999 compared 088 december 31 1998 cash dividends 1999 increased due increase number shares common stock outstanding result merger december 31 1999 company 15129 million credit facilities commercial banks 10000 million committed facilities subject normal banking terms conditions significantly restrict companys activities january 14 1999 company issued 400 million 6875 notes due january 2029 325 million 625 notes due january 2009 200 million 60 notes due february 2009 100 million 58 notes due february 2003 effective interest rates 708 638 611 604 respectively net proceeds 10107 million used repay 1500 million 7625 notes due february 1999 commercial paper shortterm borrowings accounting standards derivative hedge accounting june 1998 financial accounting standards board issued statement financial accounting standards sfas 133 accounting derivative instruments hedging activities sfas 133 establishes accounting reporting standards derivative instruments hedging activities require entity recognize derivatives asset liability measured fair value depending intended use derivative changes fair value reported period change either component earnings component comprehensive income sfas 133 amended effective quarters fiscal years beginning june 15 2000 retroactive application periods prior adoption allowed company adopt standard first quarter 2001 company quantified impact adoption sfas 133 consolidated financial statements year 2000 issue many computer hardware software products engineered internal calendars dateprocessing logic capable accommodating dates december 31 1999 cases problem due hardware software application storing year twodigit field applications year 2000 y2k problem exists year 2000 appear 00 current applications could interpret year 1900 date 2000 error may exist years later 2000 application cannot distinguish century date represents problems potential negatively affecting companys business application systems manufacturing engineering process control systems products sold customers equipment used providing services facilities equipment information technology infrastructure additionally y2k issues impacting suppliers customers could indirect negative impact company experience y2k problems result change year 1999 2000 opinion companys management materially adversely affected consolidated financial condition company approximately 100 full time equivalent employees ftes involved effort address y2k issues company estimates associated annual cost approximately 70 million generally ftes fulltime employees devoted portion schedule y2k effort addition payroll payrollrelated costs baker hughes spent approximately 415 million december 31 1999 addressing y2k issues company funded expenditures cash generated operating activities existing credit facilities euro conversion single european currency euro introduced january 1 1999 time conversion rates old legacy currencies euro set 11 participating member countries however legacy currencies countries continue used legal tender january 1 2002 thereafter legacy currencies canceled euro bills coins used 11 participating countries companys products services essentially priced reference us dollardenominated prices company believe subject significant increase pricing transparency due introduction euro companys customers may require billing two currencies companys financial computer systems modified replaced handle eurodenominated transactions company cases need apply methodology whereby legacy currencies first converted euros according legally prescribed fixed exchange ratio customer requires converted euros second national currency company believe conversion materially affect contracts companys contracts either bids response requests tenders purchase orders contracts either priced purchase sales orders short term nature longer term contracts sufficiently flexible permit pricing multiple currencies euro conversion period longer pricing features contracts thus permitting pricing conversion euro new orders issued true companys contracts vendors june 1997 quarter company began multiyear initiative designed develop implement enterprisewide software system initiative named project renaissance utilize sap r3 software platform across entire company expected cost excess 300 million fouryear period sap r3 programmed process euros companys accounting financial operational functions company expects implementation system address euro issues areas company engaged implementation operational purposes solely address euro issues company separately determined cost converting systems use euro conversion costs embedded cost project renaissance susceptible separate quantification company scheduled implementation sap r3 major european operations prior january 1 2002 company may make certain modifications legacy computer systems replace address certain euro conversion issues pending full implementation sap r3 company presently assessing conversion modifications costs connection internal reorganization structure companys subsidiaries cash management procedures company instituted new cash management system company believes able process transactions euros company presently interest rate currency swaps denominated euro legacy currencies company appointed coordinators address euro conversion issues france germany italy netherlands denmark norway united kingdom major centers companys european operations could affected euro conversion company continues assess impact euro operations financial accounting operational systems company presently anticipate transition euro significant impact results operations financial position cash flows word anticipate intended identify forwardlooking statement euro conversion companys anticipation regarding lack significance euro introduction companys operations forecast regarding matter forecast may substantially different actual results affected factors following unforeseen difficulties remediating specific computer systems accommodate euro due complexity hardware software inability third parties adequately address euro systems issues including vendors contractors financial institutions us foreign governments customers delay completion phase companys remediation computer system accommodate euro necessary begin later phase discovery greater number hardware software systems technologies material euro issues company presently anticipates lack alternatives company previously believed existed item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations mda read conjunction consolidated financial statements company years ended december 31 2000 1999 1998 related notes consolidated financial statements contained item 8 herein forwardlooking statements mda includes forwardlooking statements within meaning section 27a securities act 1933 amended section 21e securities exchange act 1934 amended forwardlooking statement words anticipate believe expect plan intend estimate project forecasts could may similar expressions negative thereof intended identify forwardlooking statements baker hughes expectations business outlook customer spending oil gas prices business environment company industry general forecasts regarding matters forecasts may substantially different actual results affected following factors effect competition level petroleum industry exploration production expenditures drilling rig oil gas industry manpower equipment availability companys ability implement effect price increases products services companys ability control costs availability sufficient manufacturing capacity sub contracting capacity forecasted costs meet companys revenue goals ability company introduce new technology forecasted schedule forecasted cost ability companys competitors capture market share world economic conditions price demand crude oil natural gas drilling activity weather legislative environment united states countries opec policy conflict middle east major petroleumproducing consuming regions development technology lowers overall finding development costs condition capital equity markets timing foregoing see business environment detailed discussion certain factors baker hughes expectations regarding level capital expenditures capital expenditures project renaissance described investing activities forecasts regarding matters addition factors described previous paragraph business environment forecasts may substantially different actual results affected following factors accuracy companys estimates regarding spending requirements regulatory legal contractual impediments spending reduction measures occurrence unanticipated acquisition research development opportunities changes companys strategic direction need replace unanticipated losses capital assets factors listed item 1 businessenvironmental matters basis presentation february 2000 companys board directors approved plan principle sell baker process division separately accounted segment accordingly companys consolidated financial statements related notes thereto year ended december 31 1999 segment accounted discontinued operation periods presented therein february 2001 company able divest baker process division entire business unit terms found acceptable accordance generally accepted accounting principles company reclassified consolidated financial statements related notes herein periods presented baker process discontinued operation future marketing efforts focus individual product lines companys intent dispose interest baker process product lines present intent respect matter companys intent could change future depending relative value product line value viability offer third party respect proposed transaction regarding product line business environment company currently seven divisions separate management teams infrastructures offer different products services divisions aggregated two reportable segments oilfield process oilfield segment currently consists six divisions baker atlas baker hughes inteq baker oil tools baker petrolite centrilift hughes christensen manufacture sell equipment provide related services used exploring developing producing hydrocarbon reserves oilfield segment also includes companys interest oil gas property nigeria process segment consists one division baker process manufactures sells process equipment separating solids liquids filtration sedimentation centrifugation flotation processes business environment companys oilfield segment corresponding operating results significantly affected level industry capital expenditures exploration production oil gas reserves expenditures influenced strongly oil company expectations supply demand crude oil natural gas products energy price environment results supply demand imbalances additionally companys largest customers consolidated using global size market power seek economies scale pricing concessions key factors currently influencing worldwide crude oil gas market production control degree opec nations large producing countries willing able restrict production exports crude oil global economic growth particularly japan china south korea developing areas asia correlation energy demand economic growth strong oil gas storage inventories relative historic levels technological progress design application new products allow oil gas companies drill fewer wells drill complete produce wells faster lower cost maturity resource base known hydrocarbon reserves maturing provinces north sea us canada latin america pace new investment access capital reinvestment available cash flow existing emerging markets price volatility impact widely fluctuating commodity prices stability market subsequent impact customer spending weather impact variations temperatures compared normal weather patterns related effect demand oil natural gas oil gas prices generally customer expectations prospects oil gas sales customer expenditures explore produce oil gas rise fall corresponding changes prices oil gas accordingly changes expenditures normally result increased decreased demand companys products services crude oil natural gas prices summarized table averages daily closing prices three years ended december 31 2000 reading companys outlook set forth caution advised factors described forwardlooking statements business environment could negatively impact companys expectations oil demand oil gas prices drilling activity oil prices averaged 3037 per barrel year ranging low 2390 per barrel high 3721 per barrel oil prices increased due resurgence worldwide demand led recovery asian markets coupled lower production levels nonopec countries resulting decrease global oil inventories particularly north america provided stronger price support increased stability market us natural gas prices increased 2000 compared 1999 averaging 430mmbtu ranging low 214mmbtu high 1050mmbtu increase due reduction available gas supply brought sustained slow gas directed drilling us experienced january 1998 june 1999 price increase sustained concerns natural gas industry would short supply winter 20002001 rotary rig count company engaged oilfield service industry providing products services used exploring developing producing oil gas reservoirs drilling workover rigs active consume products services produced oilfield service industry active rig count acts leading indicator consumption products services used drilling completing producing processing hydrocarbons rig count trends governed exploration development spending oil gas companies turn influenced current future price expectations oil natural gas rig counts therefore reflect relative strength stability energy prices companys rotary rig counts summarized table averages three years ended december 31 2000 based weekly rig counts us canada monthly rig counts areas outlook reading companys outlook set forth caution advised factors described forward looking statements business environment could negatively impact companys expectations oil demand oil gas prices drilling activity oil balance 2001 oil prices expected influenced worldwide economic growth changes nonopec oil supply weather opecs willingness ability control production achieve price targets possible scenarios include combination colderthannormal winter insufficient supply aggressive production restraint opec could result oil prices exceeding 30 per barrel first half 2001 extended period high oil prices could contribute global economic slowdown second half 2001 could result reduced demand prices could fall 20 per barrel end 2001 opec willing able control production adjust production meet price targets oil prices could moderate 28 32 per barrel winter 20002001 trade 25 27 per barrel balance 2001 opec unwilling unable decrease production 2001 prices could moderate 28 32 per barrel winter 20002001 trade 22 25 per barrel throughout balance 2001 particularly nonopec production increases significantly natural gas u natural gas prices expected remain strong throughout 2001 averaging 400mmbtu 800mmbtu continued low storage levels increased demand reduced supply throughout winter 20002001 2001 injection season winter 20012002 customer spending based upon companys discussions major customers customer spending directed developing north american natural gas expected increase 1015 2001 compared 2000 likely limited availability drilling rigs crews oilfield services north america outside north america customer spending directed developing oil supplies expected increase 1520 primarily outside north america venture formation november 30 2000 company schlumberger limited netherlands antilles corporation schlumberger certain wholly owned subsidiaries schlumberger created venture transferring seismic fleets data processing assets exclusive nonexclusive multiclient surveys assets companys western geophysical division schlumbergers gecoprakla venture operates name western geco conjunction transaction company received 4934 million cash schlumberger exchange transfer portion companys ownership western geco company contributed 150 million working capital western geco company recognize gain loss resulting initial formation venture due companys material continued involvement operations western geco addition soon practicable november 30 2004 company schlumberger make cash trueup payment party based formula comparing ratio net present value sales revenue partys contributed multiclient seismic libraries four year period ending november 30 2004 ratio net book value libraries november 30 2000 maximum payment either party required make result adjustment 1000 million summarized financial information western geophysical included companys consolidated financial statements follows years ended december 31 millions 1 financial information eleven months ended november 30 2000 effective close date transaction 2 includes unusual items corporate allocations excluding interest results operations revenues 2000 increased 60 52338 million compared 49365 million 1999 increase reflects increased drilling activity evidenced 313 increase average worldwide rig count increased oil natural gas prices improved pricing companys products services offset ongoing weakness seismic market excluding revenues companys seismic division western geophysical revenues increased 130 2000 compared 1999 approximately 556 companys 2000 revenues derived sources outside north america revenues production crude oil increased 1321 million 2000 682 million 1999 revenues 1999 totaled 49365 million compared 63106 million 1998 decrease 218 decrease due continued depressed activity levels started second half 1998 continued throughout 1999 although oil gas prices improved 1999 average worldwide rig count fell 207 compared 1998 substantially areas world experienced revenue declines 1999 compared 1998 approximately 573 companys 1999 revenues derived sources outside north america revenues production crude oil increased 59 million 1998 682 million 1999 certain projects previously development stage began production revenues 1998 63106 million increase 181 1997 revenues 53436 million increase due various acquisitions made company 1998 latter part 1997 offset activity level declines average worldwide rig count 1998 fell 183 compared 1997 activity declines brought significant drop price oil natural gas second half 1998 resultant decrease customer spending impact companys business dramatic north america land based activity venezuela approximately 611 companys 1998 revenues derived activities outside north america gross margin gross margins 2000 1999 1998 234 188 186 respectively discussed unusual charges 1999 1998 company recorded unusual charges cost revenues 721 million 3050 million respectively excluding charges gross margins 1999 1998 202 234 respectively improvement gross margin 2000 compared 1999 result pricing improvements companys products services primarily north america significantly higher production levels related pricing oil production continued cost management measures throughout company higher utilization companys assets including rental tool fleets manufacturing capacity gross margin 1999 compared 1998 adversely impacted significant activity declines resulting pricing pressure companys products services selling general administrative selling general administrative sga expense percentage revenues 2000 1999 1998 145 150 139 respectively discussed unusual charges 1999 1998 company recorded unusual credit 203 million unusual charge 687 million sga expense respectively excluding unusual items sga expense percentage revenues 1999 1998 154 128 respectively decrease sga expenses percentage revenues 2000 compared 1999 primarily due higher revenue base increased net foreign exchange gains offset increases incentive compensation expenses increase sga expense percentage revenues 1999 compared 1998 primarily due increased spending project renaissance year 2000 computer issue preparations lower revenue base fact sga expenses generally fixed nature merger related costs august 1998 company completed merger western atlas inc western atlas connection merger company recorded merger related costs 2191 million cash portion charge 1609 million consisted transaction costs including banking legal printing fees employee related costs consisting payments made certain officers western atlas severance benefits paid terminated employees whose responsibilities deemed redundant integration costs including changing legal registrations terminating joint venture result merger changing signs logos december 31 2000 1487 million cash spent net reductions 17 million made reflect current estimates remaining expenditures remaining balance 105 million primarily relates retirement benefits certain employees paid accordance terms agreements lives covered employees noncash portion charge 582 million consisted charges related triggering change control rights contained certain western atlas baker hughes employee stock option plans charges record writeoff carrying value product line discontinued result merger unusual charges october 2000 companys board directors approved companys plan substantially exit oil gas exploration business connection decision fourth quarter company recorded unusual charges totaling 1050 million cash portion charge 133 million consisted severance costs approximately 50 employees contractual obligations company paid 06 million accrued severance 2000 based current estimates company expects 107 million accrued severance contractual obligations paid 2001 charge also consisted losses sale oil gas exploration properties china gabon gulf mexico 755 million noncash portion charge 162 million writeoff remaining undeveloped oil gas exploration properties company intends retain interest oil gas property nigeria third quarter 2000 company reached cost recovery threshold operating agreement operator reduce future pretax earnings company approximately 12 million per quarter current commodity pricing production levels companys intent maintain interest nigerian oil gas project present intent respect matter companys intent hold divest project could change future depending relative value project value viability offer third party respect proposed transaction regarding project company also recorded noncash unusual charge 60 million employee related obligations resulting western geco formation company recorded unusual credits 414 million related net reductions unusual charge accruals prior years 285 million pretax gains 129 million sale various product lines within oilfield process segments result continuing low activity levels predominantly companys seismic products services company recorded charges fourth quarter 1999 1228 million cash portion charge 507 million consisted severance benefits expected costs settle contractual obligations terminate leases certain marine vessels cash charges december 31 2000 activities completed related accruals fully utilized cash payments adjustments noncash portion charge 721 million related writeoff writedown certain assets utilized companys seismic business 1999 company realized unusual gains totaling 548 million company sold two large excess real estate properties realized net gains totaling 395 million company received net proceeds 681 million addition company sold certain assets related previous divestiture joint venture realized net gain 153 million 1999 company reviewed remaining balances accruals cash charges recorded 1998 prior years made 114 million net reductions reflect current estimates remaining expenditures net reductions included reversals previously recorded accruals utilized related primarily severance accruals lease obligations addition accruals related certain terminated lease obligations revisions made increase previously recorded amounts based current information estimates expected cash flows related leases items reflected following captions consolidated statement operations year ended december 31 1999 millions 1998 result sharp decline demand companys products services adjust lower level activity company assessed overall operations recorded charges 5895 million cash portion charge 1345 million consisted severance benefits paid approximately 5300 employees charges combine operations consolidate facilities environmental reserves cash costs including litigation reserves december 31 2000 1185 million cash spent 93 million net reductions made accruals reflect current estimates remaining expenditures remaining balance december 31 2000 67 million primarily relates abandoned leases 37 million spent according lease terms 30 million contractual obligations anticipated legal settlements noncash portion charge 4550 million consisted impairment charge 1732 million related inventory rental tools 832 million writedown former consolidated joint venture charge 1186 million related writeoff writedown certain assets 693 million ceiling test charge companys oil gas properties 170 million writedown real estate held sale items reflected following captions consolidated statement operations year ended december 31 1998 millions interest expense interest expense 2000 totaled 1733 million increase 63 million compared interest expense 1670 million 1999 increase interest expense primarily due higher average interest rates companys shortterm debt approximate average interest rate shortterm debt 63 2000 compared 52 1999 interest expense 1999 increased 180 million compared 1998 interest expense 1490 million interest expense 1998 increased 576 million compared 1997 increases due higher debt levels needed fund acquisitions capital expenditures working capital needs gain trading securities fourth quarter 1999 company announced intention sell holdings tuboscope inc known varco international inc varco reclassified available sale securities trading securities result decision company recognized pretax gain 315 million fourth quarter 1999 2000 company disposed holdings recorded additional pretax gains 141 million income taxes effective income tax rates merger related costs unusual items 335 372 356 years ended december 31 2000 1999 1998 respectively rates vary primarily due fluctuations taxes international operations 2000 company provided 94 million foreign additional us taxes result repatriation proceeds formation western geco venture december 2000 formation venture also reduces expected amount foreign source income use foreign tax credit carryover therefore company provided 356 million additional us taxes respect future repatriation earnings necessary utilize foreign tax credit carryover capital resources liquidity operating activities net cash inflows operating activities 5635 million 5432 million 8099 million 2000 1999 1998 respectively slight increase cash flow 1999 2000 relates higher net income reduction cash flow 1998 1999 due lower net income including noncash portion unusual items payments accruals merger unusual related items 730 million decreases accounts payable accrued liabilities caused lower business levels offset reductions receivables inventory resulting activity declines additional management focus investing activities net cash outflows investing activities 3135 million 4862 million 16758 million 2000 1999 1998 respectively expenditures capital assets multiclient seismic data totaled 5992 million 6404 million 13182 million 2000 1999 1998 respectively property additions 2000 1999 substantially less 1998 company responded depressed market conditions products services company currently expects 2001 capital expenditures 3000 million 3600 million excluding acquisitions funds provided operations outstanding lines credit expected adequate meet future capital expenditure requirements proceeds disposal assets generated 1713 million 2000 1542 million 1999 1000 million 1998 proceeds sale various product lines sale companys varco holdings generated 417 million 727 million respectively 2000 1998 company used shortterm borrowings purchase various businesses including wedge dialog inc 2185 million 3d geophysical inc 1175 million several smaller acquisitions aggregate purchase price 1216 million 1997 company began multiyear initiative redesign certain business processes develop implement enterprisewide software system initiative named project renaissance utilizes sap r3 software platform across significant operations company expected cost excess 300 million four year period 2603 million spent december 31 2000 words expected expects intended identify forwardlooking statements investing activities see forwardlooking statements business environment description risk factors related forwardlooking statements financing activities net cash outflows inflows financing activities 2232 million 586 million 8386 million 2000 1999 1998 respectively 2000 commercial paper shortterm borrowings reduced 7531 million primarily due cash flow operations 1177 million proceeds saleleaseback transaction 4934 million proceeds sale portion companys interest western geco result net payments total debt outstanding decreased 28186 million december 31 1999 20629 million december 31 2000 debt equity ratio 068 december 31 2000 compared 092 december 31 1999 company borrowed 10107 million public debt market proceeds used repay commercial paper shortterm borrowings 8160 million well 1500 million longterm debt result net payments borrowings long term debt total debt outstanding increased 27707 million december 31 1998 28186 million december 31 1999 december 31 2000 company 12285 million credit facilities commercial banks 7505 million committed facilities subject normal banking terms conditions significantly restrict companys activities accounting standards derivative hedge accounting june 1998 financial accounting standards board issued statement 133 accounting derivative instruments hedging activities sfas 133 company adopted sfas 133 effective january 1 2001 sfas 133 establishes accounting reporting standards derivative instruments hedging activities require entity recognize derivatives asset liability measured fair value depending intended use derivative changes fair value reported period change either component earnings component comprehensive income based companys derivative positions december 31 2000 company report gain cumulative effect adoption 09 million net tax gain accumulated comprehensive income 12 million net tax january 1 2001 euro conversion single european currency euro introduced january 1 1999 time conversion rates old legacy currencies euro set participating member countries however legacy currencies countries continue used legal tender january 1 2002 thereafter legacy currencies canceled euro bills coins used 12 participating countries companys products services essentially priced reference us dollar result company believe subject significant increase pricing transparency due introduction euro companys customers may require billing two currencies companys financial computer systems modified replaced handle eurodenominated transactions company cases need apply methodology whereby legacy currencies first converted euros according legally prescribed fixed exchange ratio customer requires converted euros second national currency company believe conversion materially affect contracts companys contracts either bids response requests tenders purchase orders shortterm nature longer term contracts sufficiently flexible permit pricing multiple currencies euro conversion period longer pricing features contracts thus permitting pricing conversion euro new orders issued true companys contracts vendors 1997 company began multiyear initiative designed develop implement enterprisewide software system initiative named project renaissance utilizes sap r3 software platform across significant operations company sap r3 programmed process euros companys accounting financial operational functions company expects implementation system address euro issues areas company engaged implementation operational purposes solely address euro issues company separately determined cost converting systems use euro conversion costs embedded cost project renaissance susceptible separate quantification company scheduled implementation sap r3 major european operations prior january 1 2002 alternatively company may make certain modifications legacy computer systems replace address certain euro conversion issues pending full implementation sap r3 company began converting certain legacy currency based financial records euro beginning january 2001 significant records expected converted september 30 2001 company continues assess impact euro operations financial accounting operational systems company presently anticipate transition euro significant impact results operations financial position cash flows words anticipate may expects intended identify forwardlooking statement euro conversion companys anticipation regarding lack significance euro introduction companys operations forecast regarding matter forecast may substantially different actual results affected factors following unforeseen difficulties remediating specific computer systems accommodate euro due complexity hardware software failure company implement sap r3 another euro compliant computer system geographic location prices euros inability third parties adequately address euro systems issues including vendors contractors financial institutions us foreign governments customers delay completion phase companys remediation computer system accommodate euro necessary begin later phase discovery greater number hardware software systems technologies material euro issues company presently anticipates lack alternatives company previously believed existed item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations mda read conjunction consolidated financial statements company years ended december 31 2001 2000 1999 related notes consolidated financial statements contained item 8 herein forwardlooking statements mda certain statements notes consolidated financial statements include forwardlooking statements within meaning section 27a securities act 1933 amended section 21e securities exchange act 1934 amended forwardlooking statement words anticipate believe expect plan intend estimate project forecasts could may similar expressions negative thereof intended identify forwardlooking statements baker hughes expectations business outlook customer spending oil gas prices business environment company industry general forecasts regarding matters forecasts may substantially different actual results affected following factors effect competition level petroleum industry exploration production expenditures drilling rig oil gas industry manpower equipment availability companys ability implement effect price increases products services companys ability control costs availability sufficient manufacturing capacity subcontracting capacity forecasted costs meet companys revenue goals ability company introduce new technology forecasted schedule forecasted cost ability companys competitors capture market share world economic conditions price demand crude oil natural gas drilling activity weather legislative environment united states countries organization petroleum exporting countries opec policy war extended period conflict involving united states middle east major petroleumproducing consuming regions acts war terrorism development technology lowers overall finding development costs condition capital equity markets timing foregoing see business environment detailed discussion certain factors baker hughes expectations regarding level capital expenditures described liquidity capital resources forecasts regarding matters addition factors described previous paragraph business environment forecasts may substantially different actual results affected following factors accuracy companys estimates regarding spending requirements regulatory legal contractual impediments spending reduction measures occurrence unanticipated acquisition research development opportunities changes companys strategic direction need replace unanticipated losses capital assets factors listed item 1 businessenvironmental matters business environment company eight operating divisions separate management teams infrastructure offer different products services divisions aggregated two reportable segments oilfield process oilfield segment consists six operating divisions baker atlas baker hughes inteq baker oil tools baker petrolite centrilift hughes christensen manufacture sell equipment provide related services used exploring developing producing hydrocarbon reserves oilfield segment also includes companys interest oil gas property nigeria investment western geco 2001 revenues oilfield segment accounted 941 total revenues process segment consists two operating divisions eimco process equipment bird machine manufacture sell process equipment separating solids liquids filtration sedimentation centrifugation flotation processes business environment companys oilfield segment corresponding operating results significantly affected level energy industry capital expenditures exploration production oil gas reserves expenditures influenced strongly oil company expectations supply demand crude oil natural gas products energy price environment results supply demand imbalances key factors currently influencing worldwide crude oil gas markets production control degree opec nations large producing countries mexico norway russia willing able control production exports crude oil reduce supply support targeted oil price meeting market share objectives global economic growth particularly impact us western european economies economic activity japan china south korea developing areas asia correlation energy demand economic growth strong international energy agency forecasted february 2001 worldwide oil demand growth approximately 05 compared 20 averaged 10 years ending december 2000 2001 us economy went recession expected continue 2002 important factor global economic growth 2002 timing strength us economic recovery oil gas storage inventories relative historic levels inventory levels offer measure balance supply demand north american natural gas inventories beginning november 2001 start 20012002 winter withdrawal season record high levels continued high inventories without increase demand indicate market amply supplied technological progress design application new products allow oil gas companies drill fewer wells drill complete produce wells faster lower cost maturity resource base known hydrocarbon reserves north sea us canada latin america pace new investment access capital reinvestment available cash flow existing emerging markets price volatility impact widely fluctuating commodity prices stability market subsequent impact customer spending possible supply disruptions key oil exporting countries including limited iraq saudi arabia middle eastern countries due political instability military activity weather impact variations temperatures compared normal weather patterns related effect demand oil natural gas oil gas prices generally customers expectations prospects oil gas sales customers expenditures explore produce oil gas rise fall corresponding changes prices oil gas accordingly changes expenditures normally result increased decreased demand companys products services oilfield segment crude oil natural gas prices summarized table averages daily closing prices periods indicated oil prices averaged 2596bbl 2001 ranging low 1745bbl high 3219bbl slower economic growth higher opec production levels contributed increase inventories moderation oil prices oil prices course year fell levels opecs selfdeclared targeted price zone first half 2001 levels opecs targeted price zone second half year november 2001 opec abandoned defense targeted price zone sought cooperation certain nonopec countries particularly russia norway mexico jointly reduce production effort reduce inventories support prices 2001 natural gas prices averaged 396mmbtu 430mmbtu average price 2000 prices ranged high 1020mmbtu january low 174mmbtu november decline natural gas prices driven decrease demand natural gas due slowing us economic growth offset partially increased demand fuel switching back natural gas modest increase production also contributed decline prices beginning 20012002 withdrawal season inventories record high levels following record storage injections summer 2001 mild weather us recession continued moderate demand allowed yearoveryear storage surpluses grow remainder 2001 resulting softer prices rig counts company engaged oilfield service industry providing products services used exploring developing producing oil gas reservoirs drilling workover rigs active consume products services produced oilfield service industry rig counts act leading indicator consumption products services used drilling completing producing processing hydrocarbons rig count trends governed exploration development spending oil gas companies turn influenced current future price expectations oil natural gas rig counts therefore reflect relative strength stability energy prices companys rig counts summarized table averages periods indicated based weekly rig counts us canada monthly rig counts areas industry outlook caution advised factors described forward looking statements business environment could negatively impact companys expectations oil demand oil gas prices drilling activity oil prices expected average 18bbl 22bbl 2002 sustained oil prices range outlook prices likely remain range expected support companys forecast customer spending oil prices particularly susceptible changes oil supply oil demand growth 2002 compared 2001 expected lowest yeartoyear growth decade prices could fall 13bbl 15bbl midyear resulting lower forecasted spending one following occurs opec unwilling unable control production russia major nonopec producers unwilling unable restrain production us economic recovery delayed late 2002 2003 prices could rise 23bbl 25bbl one following occur us worldwide economic recovery occurs sooner stronger forecasted opec key nonopec oilexporting countries particularly russia constrain oil production supply disruption occurs resulting political military action key oil exporting region north america natural gas us natural gas prices expected average 225mmbtu 275mmbtu 2002 prices expected average 190mmbtu 220mmbtu first half 2002 yearoveryear inventory surpluses weak demand continue influence prices result lower natural gas prices period spending companys customers directed developing natural gas supplies therefore drilling activity expected remain soft second half year impact growing us economy production declines resulting lower spending second half 2001 first half 2002 expected result tighter supplydemand balance market result prices could exceed 300mmbtu year end prices could trade lower weather milder normal economic recovery delayed production levels maintained despite lower drilling activity prices could trade higher weather extreme normal economic recovery occurs sooner stronger expected production levels fall expected result lower drilling activity customer spending based upon companys discussions major customers review published industry surveys reports companys outlook oil gas prices described anticipated customer spending trends follows north america spending north america primarily towards developing natural gas supplies expected 15 20 2002 compared 2001 outside north america customer spending primarily directed developing oil supplies expected flat 5 2002 compared 2001 total spending expected 5 7 2002 compared 2001 drilling activity based upon companys outlooks oil natural gas prices customer spending described companys outlook drilling activity measured baker hughes rig count follows north american rig count expected decline 15 20 2002 compared 2001 drilling activity outside north america expected increase 3 5 2002 compared 2001 company outlook trends described relating declining rig counts decreased customer spending low oil gas prices began late 2001 continued develop 2002 result company expects 2002 strong 2001 revenues expected decline approximately 5 7 compared 2001 related declines operating results recent changes currency laws economic events argentina expected negatively impact company changes mandated law may prevent company able fully recover outstanding receivables customers losses expected result devaluation argentine peso addition uncertain economic environment argentina likely negatively impact exploration production spending plans companys customers argentina 2002 beyond thus reducing demand companys products company responding situation number ways including negotiating customers acceptable payment terms outstanding receivables increasing use us dollar based invoicing us dollar equivalent pricing invoicing adjusting pricing contracts reflect changes argentinas currency shipping products argentina directly outside country payment made offshore us dollar equivalent currency although company provided best estimate uncollectible receivables december 31 2001 uncertain time ultimate resolution matters impact company however company estimates potential losses related devaluation uncollectible receivables could 5 million 10 million 2001 revenues argentina less 3 companys total revenue accordingly impact companys total revenues 2002 expected significant historically venezuelan economy experienced high inflation weakening currency recently venezuela experienced additional political economic uncertainties including large fluctuations exchange rates us dollar creates additional uncertainties business environment market companys products services company continues closely monitor economic situation venezuela taking appropriate actions minimize exposure risks critical accounting policies company defined critical accounting policy one important portrayal companys financial condition results operations requires management company make difficult subjective complex judgments estimates assumptions future events effects cannot perceived certainty company bases estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments estimates may change new events occur experience acquired additional information obtained companys operating environment changes company believes following critical accounting polices used preparation companys consolidated financial statements well significant judgments uncertainties affecting application policies revenue recognition inherent companys revenue recognition policy determination collectibility requires company use estimates exercise judgment company routinely monitors customers payment history current credit worthiness determine collectibility reasonably assured requires company make frequent judgments estimates order determine appropriate amount allowances needed doubtful accounts company records provisions doubtful accounts becomes evident customer able make required payments either contractual due dates future adverse changes financial condition companys customers could require additional allowances doubtful accounts inventory company records inventory lower cost market company regularly reviews inventory quantities hand records provisions excess obsolete inventory based primarily estimated forecast product demand market conditions production requirements technological developments significant unanticipated changes companys forecasts could require additional provisions excess obsolete inventory impairment longlived assets longlived assets include property plant equipment goodwill intangibles assets comprise significant amount companys total assets company makes judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets periodically reviewed impairment whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires company make longterm forecasts future revenues costs related assets subject review forecasts require assumptions demand companys products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period income taxes company uses liability method reporting income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered valuation allowance reduce deferred tax assets established likely portion deferred tax assets realized company considered future taxable income ongoing prudent feasible tax planning strategies assessing need valuation allowance guarantee company able realize deferred tax assets company operates many legal forms 70 countries result company subject many domestic foreign tax jurisdictions many tax agreements treaties among various taxing authorities determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events changes tax laws regulations agreements treaties foreign currency exchange restrictions companys level operations profitability taxing jurisdiction could impact upon amount income taxes company provides given year western geco november 30 2000 company schlumberger certain wholly owned subsidiaries schlumberger created venture transferring seismic fleets data processing assets exclusive nonexclusive multiclient surveys assets companys western geophysical division schlumbergers gecoprakla business unit venture operates name western geco conjunction transaction company received 4934 million cash schlumberger exchange transfer portion companys ownership western geco company also contributed 150 million working capital western geco company recognize gain loss resulting initial formation venture due companys material continued involvement operations western geco addition soon practicable november 30 2004 company schlumberger make cash trueup payment party based formula comparing ratio net present value sales revenue partys contributed multiclient seismic libraries fouryear period ending november 30 2004 ratio net book value libraries november 30 2000 maximum payment either party required make result adjustment 1000 million summarized financial information western geophysical included companys consolidated financial statements follows years ended december 31 millions 1 financial information eleven months ended november 30 2000 effective close date transaction 2 includes unusual items corporate allocations excluding interest results operations revenues 2001 53822 million increase 28 compared 2000 excluding revenues western geophysical revenues increased 193 compared 2000 oilfield revenues excluding western geophysical 50634 million increase 209 compared 2000 oilfield revenues north america account 446 total oilfield revenues increased 282 compared 2000 increase reflects increased drilling activity area evidenced 185 increase north american rig count improved pricing companys products services outside north america oilfield revenues increased 157 compared 2000 increase reflects improvement international drilling activity particularly north sea latin america middle east revenues crude oil production companys interest nigerian property decreased 589 million 2001 1321 million 2000 primarily due decrease price oil result company reaching cost recovery threshold operating agreement revenues 2000 52338 million increase 60 compared 1999 increase reflects increased drilling activity evidenced 313 increase average worldwide rig count increased oil natural gas prices improved pricing companys products services offset ongoing weakness seismic market approximately 556 companys 2000 revenues derived sources outside north america revenues production crude oil nigerian property increased 1321 million 2000 682 million 1999 due higher crude oil prices increased productions gross margin gross margin 288 234 188 2001 2000 1999 respectively discussed unusual charges 1999 company recorded unusual charges cost revenues 721 million excluding charges western geophysical gross margin 2000 1999 253 210 respectively increases gross margin 2001 2000 primarily result pricing improvements companys products services primarily north america continued cost management measures throughout company higher utilization companys assets selling general administrative selling general administrative sga expenses 2001 8186 million increase 78 compared 2000 sga expenses percentage revenues increased 152 2001 145 2000 increases primarily due increased costs support higher revenue level increased employee incentive costs decreased foreign exchange gains sga expenses 2000 7596 million increase 24 compared 1999 discussed unusual charges 1999 company recorded unusual credit 203 million sga expenses excluding unusual credit sga expenses decreased 04 2000 compared 1999 sga expenses percentage revenues decreased 154 1999 145 2000 decreases primarily related increased foreign exchange gains partially offset increases employee incentive costs unusual charges 2001 company recorded unusual charges 92 million company accrued cash charges 60 million consisted severance approximately 100 employees due restructuring german operations bird machine division process segment company paid 11 million accrued severance 2001 based current estimates company expects remainder accrued severance paid 2002 employees leave company noncash portion charge 32 million 22 million related ceiling test writedown companys oil gas property nigeria company recorded unusual credits 76 million included 42 million related reduction unusual charge accrual originally recorded 2000 gain 34 million disposition interest joint venture october 2000 companys board directors approved companys plan substantially exit oil gas exploration business company sold interests china gulf mexico gabon oil gas properties recorded loss 755 million sale properties company also wrote remaining undeveloped oil gas exploration properties resulting loss 162 million company accrued cash charges 133 million severance costs approximately 50 employees contractual obligations company paid 26 million accrued severance 2001 based current estimates company expects remainder accrued severance paid 2002 employees leave company 2001 company paid 24 million accrued contractual obligations reduced accrual 42 million reflect current estimates remaining expenditures remaining contractual obligations paid company settles various counterparties company retained interest oil gas property nigeria companys intent hold divest project could change future depending relative value project value viability offer third party respect proposed transaction regarding project company also recorded noncash unusual charge 60 million employee related obligations resulting western geco formation company recorded unusual credits 414 million related net reductions unusual charge accruals prior years 285 million gains 129 million sale various product lines within oilfield process segments result continuing low activity levels predominantly companys seismic products services company recorded charges fourth quarter 1999 1228 million cash portion charges 507 million consisted severance benefits expected costs settle contractual obligations terminate leases certain marine vessels cash charges december 31 2000 activities completed related accruals fully utilized cash payments adjustments noncash portion charges 721 million related writeoff writedown certain assets utilized companys seismic business 1999 company realized unusual gains totaling 548 million company sold two large excess real estate properties 681 million realized net gains totaling 395 million addition company sold certain assets related previous divestiture joint venture realized net gain 153 million 1999 company reviewed remaining balances accruals cash charges recorded 1998 prior years made net reductions 114 million reflect current estimates remaining expenditures net reductions included reversals previously recorded accruals utilized related primarily severance accruals lease obligations addition accruals related certain terminated lease obligations revisions made increase previously recorded amounts based current information estimates expected cash flows related leases unusual items described reflected following captions consolidated statement operations year ended december 31 1999 millions equity income loss affiliates equity income loss affiliates relates companys share income loss affiliates accounted using equity method accounting increase 2001 compared 2000 primarily due inclusion full year companys 30 share net income western geco venture formed november 2000 included equity income loss affiliates 2001 2000 103 million related writeoff certain assets associated western geco 95 million restructuring integration charges associated western geco respectively interest expense interest expense 2001 decreased 469 million compared 2000 decrease primarily due lower debt levels coupled lower average interest rates shortterm debt commercial paper average shortterm debt commercial paper 2001 2597 million compared 9290 million 2000 approximate average interest rate shortterm debt commercial paper 40 2001 compared 63 2000 interest expense 2000 increased 63 million compared 1999 increase primarily due higher average interest rates companys shortterm debt commercial paper average shortterm debt commercial paper 2000 9290 million compared 9620 million 1999 approximate average interest rate shortterm debt commercial paper 63 2000 compared 52 1999 interest income interest income primarily relates income earned cash equivalents interest income 2001 increased 74 million compared 2000 primarily due 54 million interest income recognized settlement internal revenue service irs related examination certain 1994 1997 preacquisition tax returns related refund claims western atlas gain trading securities fourth quarter 1999 company announced intention sell holdings tuboscope inc known varco international inc varco reclassified holdings availableforsale securities trading securities result decision company recognized pretax gain 315 million fourth quarter 1999 2000 company disposed holdings recorded additional pretax gains 141 million income taxes companys effective tax rates differ statutory income tax rate 35 due different tax rates international operations nondeductibility certain goodwill amortization incremental taxes due western geco irs settlements 2001 additional taxes 148 million western geco venture arose due unbenefitted foreign losses due taxes assessed jurisdictions deemed profit basis addition 235 million benefit recognized result settlement irs examination certain 1994 1997 preacquisition tax returns related refund claims western atlas 2000 company provided 94 million foreign additional us taxes result repatriation proceeds formation western geco venture formation venture also reduced expected amount foreign source income use companys foreign tax credit carryover therefore company provided 356 million additional us taxes respect future repatriation earnings necessary utilize foreign tax credit carryover 1999 company recognized tax benefit 181 million reversal previously deferred taxes settling irs examination 1994 1995 tax years liquidity capital resources companys capital requirements principally related working capital needs payment dividends capital expenditures requirements met combination bank debt internally generated funds 2001 net cash inflows operating activities totaled 7208 million increase 1573 million compared 2000 increase primarily due increased profitability improved balance sheet management net cash inflows 2000 increased 203 million compared 1999 slight increase related higher net income partially offset increases working capital expenditures capital assets multiclient seismic data totaled 3190 million 5992 million 6404 million 2001 2000 1999 respectively excluding western geophysical expenditures capital assets 3190 million 2896 million 3209 million 2001 2000 1999 respectively majority expenditures rental tools costs associated implementation sap r3 company generates proceeds disposal sale assets either normal course business nonrecurring asset sales 2001 company generated total proceeds 777 million included nonrecurring asset sales 74 million related sale product line disposition companys interest joint venture 2000 company generated total proceeds 2130 million nonrecurring asset sales totaled 1245 million included sales product lines sale companys interests china gulf mexico gabon oil gas properties sale real estate held sale 1999 company generated total proceeds 1542 million included nonrecurring asset sales 681 million related sale two large excess real estate properties 2001 company redeemed outstanding liquid yield options notes redemption price 78613 per 1000 principal amount total 3018 million redemption funded issuance commercial paper connection early extinguishment debt company recorded extraordinary loss 23 million 15 million tax company expects redemption significant impact interest expense future periods 2001 commercial paper shortterm borrowings reduced 730 million primarily due cash flow operations 2000 commercial paper shortterm borrowings reduced 6694 million primarily due cash flow operations 1177 million proceeds saleleaseback transaction 4934 million proceeds formation western geco 1999 company borrowed 10107 million public debt market proceeds used repay commercial paper shortterm borrowings 8160 million well 1500 million longterm debt total debt outstanding december 31 2001 16946 million decrease 3683 million compared december 31 2000 debt repaid using cash flow operations proceeds disposal sale assets proceeds issuance common stock debt equity ratio 051 december 31 2001 compared 068 december 31 2000 companys longterm objective maintain debt equity ratio 040 060 december 31 2001 company 12899 million credit facilities commercial banks 8005 million committed direct borrowings facilities years ended december 31 2001 2000 however extent company outstanding commercial paper available borrowings committed credit facilities reduced december 31 2001 2000 company 950 million 2150 million respectively commercial paper outstanding program weighted average interest rate 20 65 respectively committed facilities mature september 2003 credit facilities renewed company would pursue borrowing alternatives cash flow operations expected principal source liquidity 2002 company believes cash flow operations combined existing credit facilities provide company sufficient capital resources liquidity manage operations meet debt obligations fund projected capital expenditures company currently expects 2002 capital expenditures 3000 million 3400 million excluding acquisitions expenditures expected used primarily normal recurring items necessary support growth company provisions companys debt lease agreements would accelerate repayment require collateral material changes terms due reduction companys debt ratings stock price normal operating leases company offbalance sheet financing arrangements securitization agreements liquidity trust vehicles special purpose entities company materially exposed financing liquidity market credit risk could arise company engaged financing arrangements words expected expects intended identify forwardlooking statements liquidity capital resources see forwardlooking statements business environment description risk factors related forwardlooking statements following tables summarize companys contractual cash obligations commercial commitments december 31 2001 millions related party transactions company investments affiliates accounted using equity method accounting significant affiliates western geco conjunction formation western geco company transferred venture lease seismic vessel company sole guarantor lease obligation however schlumberger indemnified company 70 total lease obligation december 31 2001 remaining commitment lease 964 million lease expires 2002 soon practicable november 30 2004 company schlumberger make cash trueup payment party based formula comparing ratio net present value sales revenue partys contributed multiclient seismic libraries fouryear period ending november 30 2004 ratio net book value libraries november 30 2000 maximum payment either party required make result adjustment 1000 million november 2000 company entered agreement western geco whereby western geco subleased facility company period ten years current market rates 2001 company received 59 million rental income western geco related lease december 31 2001 2000 net accounts receivable affiliates totaled 335 million 114 million respectively significant related party transactions accounting standards january 1 2001 company adopted statement financial accounting standards sfas 133 accounting derivative instruments hedging activities amended sfas nos 137 138 sfas 133 establishes accounting reporting standards derivative instruments hedging activities require entity recognize derivatives asset liability measured fair value depending intended use derivative effectiveness changes fair value reported period change either component earnings component accumulated comprehensive loss adoption sfas 133 january 1 2001 resulted gain 08 million net tax recorded cumulative effect accounting change consolidated statement operations gain 12 million net tax recorded accumulated comprehensive loss 2001 12 million gain reclassified earnings upon maturity contracts june 2001 financial accounting standards board fasb issued sfas 141 business combinations sfas 141 requires business combinations initiated june 30 2001 accounted purchase method addresses initial recognition measurement goodwill intangible assets acquired business combination business combinations accounted pooling interests method prior june 30 2001 changed adoption sfas 141 company impact consolidated financial statements company june 2001 fasb issued sfas 142 goodwill intangible assets sfas 142 addresses initial recognition measurement intangible assets acquired business combination accounting goodwill intangible assets subsequent acquisition sfas 142 provides intangible assets finite useful lives amortized goodwill intangible assets indefinite lives amortized rather tested least annually impairment sfas 142 requires transitional impairment test performed within six months adoption transitional impairment loss recognized cumulative effect change accounting principle company adopt sfas 142 effective january 1 2002 cessation amortization expense related goodwill associated equity method investments guidelines sfas 142 result reduction approximately 525 million annual amortization expense 2002 company completed analysis impact adoption sfas 142 relates possible impairment goodwill june 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 addresses financial accounting reporting obligations associated retirement longlived assets associated asset retirement costs sfas 143 requires fair value liability associated asset retirement recognized period incurred reasonable estimate fair value made associated retirement costs capitalized part carrying amount longlived asset subsequently depreciated life asset company completed analysis impact adoption sfas 143 consolidated financial statements company adopt sfas 143 fiscal year beginning january 1 2003 august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets sfas 144 addresses financial accounting reporting impairment disposal longlived assets sfas 144 replaces sfas 121 accounting impairment longlived assets longlived assets disposed sfas 144 provides updated guidance concerning recognition measurement impairment loss certain types longlived assets modifies accounting reporting discontinued operations sfas 144 expected materially change methods used company measure impairment losses longlived assets may result future dispositions reported discontinued operations greater extent currently permitted company adopt sfas 144 fiscal year beginning january 1 2002 euro conversion single european currency euro introduced january 1 1999 time conversion rates old legacy currencies euro set participating member countries legacy currencies countries used legal tender december 31 2001 used short transition period subsequent december 31 2001 thereafter legacy currencies canceled euro bills coins used participating countries prior december 31 2001 company converted legacy currency based financial records euro addition company reviewed existing contracts agreements customers vendors assess potential impact converting euro company experience problems issues converting financial records systems euro opinion management materially adversely affected consolidated financial condition company addition due nature companys business relates customers vendors expect significant problems related euro arise subsequent december 31 2001 could materially adversely affect financial condition company word expect intended identify forwardlooking statement euro conversion companys anticipation regarding lack significance euro introduction companys operations forecast regarding matter forecast may substantially different actual results affected factors following failure company implement sap r3 another euro compliant computer system unforeseen difficulties updating computer systems accommodate euro new geographic location prices euros newly acquired entity inability third parties adequately address euro systems issues including vendors contractors financial institutions us foreign governments customers lack alternatives available company item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations mda read conjunction consolidated financial statements company years ended december 31 2002 2001 2000 related notes consolidated financial statements contained item 8 herein forwardlooking statements mda certain statements notes consolidated financial statements include forwardlooking statements within meaning section 27a securities act 1933 amended section 21e securities exchange act 1934 amended forwardlooking statement words anticipate believe expect plan intend estimate project forecasts could may suggest likely similar expressions negative thereof intended identify forwardlooking statements baker hughes expectations regarding business outlook customer spending oil gas prices business environment company industry general forecasts regarding matters forecasts may substantially different actual results affected following risk factors level petroleum industry exploration production expenditures drilling rig oil gas industry manpower equipment availability companys ability implement effect price increases products services companys ability control costs availability sufficient manufacturing capacity subcontracting capacity forecasted costs meet companys revenue goals ability company introduce new technology forecasted schedule forecasted cost ability companys competitors capture market share companys ability retain increase market share companys completion proposed west africa disposition world economic conditions price demand crude oil natural gas drilling activity weather conditions affect demand energy severe weather conditions affect exploration production activities legislative regulatory environment us countries company operates organization petroleum exporting countries opec policy adherence opec nations opec production quotas war extended period international conflict involving us middle east major petroleumproducing consuming regions acts war terrorism civil unrest incountry security concerns company operates development technology baker hughes competitors lowers overall finding development costs new laws regulations could significant impact future operations conduct businesses result financial deterioration bankruptcies large us entities laborrelated actions including strikes slowdowns facility occupations condition capital equity markets general adverse foreign exchange fluctuations adverse changes capital markets international locations company operates timing foregoing see business environment detailed discussion certain risk factors baker hughes expectations regarding level capital expenditures described liquidity capital resources forecasts regarding matters addition factors described previous paragraph business environment forecasts may substantially different actual results affected following factors accuracy companys estimates regarding spending requirements regulatory legal contractual impediments spending reduction measures occurrence unanticipated acquisition research development opportunities changes companys strategic direction need replace unanticipated losses capital assets business environment company currently seven operating divisions separate management teams engaged oilfield services continuous process industries divisions aggregated two reportable segments oilfield process oilfield segment consists six operating divisions baker atlas baker oil tools baker petrolite centrilift hughes christensen inteq manufacture sell products provide services used oil gas exploration industry including drilling formation evaluation completion production oil gas wells oilfield segment also includes companys investment westerngeco venture year ended december 31 2002 revenues oilfield segment accounted 976 total revenues process segment consists one operating division bird machine companys investment petreco venture bird machine manufactures sells broad range continuous batch centrifuges specialty filters separating dewatering classifying process waste streams business environment companys oilfield segment corresponding operating results significantly affected level energy industry capital expenditures exploration production ep oil gas reserves expenditures influenced strongly expectations supply demand crude oil natural gas products energy price environment company business approximately 70 countries according transparency internationals annual corruption perceptions index cpi survey high degree corruption perceived exist many countries example company business onehalf 30 countries worst scores transparency internationals cpi survey 2002 company devotes significant resources development maintenance enforcement business code conduct policy foreign corrupt practices act fcpa policy internal control processes procedures well compliance related policies notwithstanding devotion resources part consequence thereof company time discovers receives information alleging potential violations fcpa companys policies processes procedures company conducts internal investigations potential violations company anticipates devotion significant resources compliance related issues including necessity internal investigations continue aspect business number countries oil gas exploration development production take place company requested conduct operations key risk factors currently influencing worldwide crude oil gas markets production control degree individual opec nations large oil gas producing countries including limited mexico norway russia willing able control production exports crude oil decrease increase supply support targeted oil price meeting market share objectives key measures production control include actual production levels compared target quota production levels oil price compared targeted oil price changes countrys market share global economic growth particularly impact us western european economies economic activity japan china south korea developing areas asia correlation energy demand economic growth strong important factor global economic growth 2003 strength timing us economic recovery key measures include us global economic activity global energy demand forecasts future demand governments private organizations oil gas storage inventory levels measure balance supply demand key measure us natural gas inventories storage level reported weekly us department energy compared historic levels key measures oil inventories include us inventory levels reported us department energy american petroleum institute worldwide estimates reported international energy agency compared historic levels ability produce natural gas amount natural gas produced function number new wells drilled completed connected pipelines well rate reservoir depletion production existing wells advanced technologies horizontal drilling result improved total recovery also result rapid production decline technological progress design application new products allow oil gas companies drill fewer wells drill complete produce wells faster recover hydrocarbons lower cost also key overall levels research engineering spending pace new technology introduced commercially accepted customers maturity resource base known hydrocarbon reserves north sea us canada latin america pace new investment access capital reinvestment available cash flow existing emerging markets key measures access capital include cash flow interest rates analysis oil gas company leverage equity offering activity access capital particularly important smaller independent oil gas companies energy prices price volatility impact widely fluctuating commodity prices stability market subsequent impact customer spending sustained higher energy prices impediment economic growth current energy prices important contributors positive cash flow ep companies expectations future prices important determining future ep spending possible supply disruptions key oil exporting countries including limited iraq saudi arabia middle eastern countries venezuela due political instability military activity addition adverse weather hurricanes could impact production facilities causing supply disruptions weather impact variations temperatures compared normal weather patterns related effect demand oil natural gas key measure impact weather energy demand populationweighted heating cooling degree days reported us department energy forecasts warmer normal cooler normal temperatures oil gas prices generally customers expectations prospects oil gas sales customers expenditures explore produce oil gas rise fall corresponding changes prices oil gas accordingly changes expenditures normally result increased decreased demand companys products services oilfield segment west texas intermediate wti crude oil natural gas prices summarized table averages daily closing prices periods indicated wti crude oil prices averaged 2617bbl 2002 rising low 1797bbl january high 3272bbl december production cuts opec nonopec producers late 2001 carried beginning 2002 averted substantial price decline driven rising inventories early year course year however oil prices rose historical relationship prices inventories would suggest appropriate driven primarily concerns possible supply disruption resulting military campaign iraq war premium fluctuated range estimated 2bbl 6bbl first three quarters 2002 fourth quarter prices softened briefly concerns market would oversupplied due rising opec production rates strengthening december renewed supply concerns amidst general strike venezuela ongoing uncertainty regarding possibility military conflict iraq 2002 natural gas prices averaged 337mmbtu lower 2001 average 396mmbtu prices generally rose course 2002 similar oil prices low 198mmbtu january prices rose high 529mmbtu december rise natural gas prices course year driven primarily tightening supply year gas storage surplus continued decline december 2001 peak first week november 2002 marked start withdrawal season five weeks earlier 2001 well first time storage levels showed year deficit since may 2001 tightening gas market driven primarily accelerating declines gas production north american drilling activity 2002 trended downward well 2001 levels rig counts company engaged oilfield service industry providing products services used exploring developing producing oil gas reservoirs drilling workover rigs active consume many products services provided oilfield service industry rig counts act leading indicator consumption products services used drilling completing producing processing hydrocarbons rig count trends governed exploration development spending oil gas companies turn influenced current future price expectations oil natural gas rig counts therefore generally reflect relative strength stability energy prices company providing rig counts public since 1944 company gathers relevant data field service personnel worldwide routinely visit various rigs operating areas data compiled distributed various wire services trade associations published companys website rig counts compiled weekly us canada monthly international workover rigs north american rigs counted active well drilled started drilling completed day count taken international rig counted active monthly basis drilling operations must comprise least 15 days month published international rig counts include rigs drilling russia china information extremely difficult obtain companys rig counts summarized table averages periods indicated industry outlook caution advised factors described forward looking statements business environment could negatively impact companys expectations oil gas demand oil gas prices drilling activity oil balance oil supply oil demand tight 2003 begins ongoing turmoil venezuela disrupted supplies resulted extremely low oil inventory levels us opec decided increase production offset loss approximately 2 million barrels per day venezuelan production however crude oil middle east generally takes one month arrive us due longer transit times complicating situation uncertainty associated possibility timing military action middle east additional disruptions supply result oil prices expected average 30bbl 35bbl first quarter 2003 prices could trade much broader range depending nature duration outcome potential military action iraq duration resolution strike venezuela willingness ability opec nations key nations manage production levels stabilize prices pace worldwide economic activity north america natural gas 2003 prices expected trade 350mmbtu 450mmbtu natural gas could trade top range 2003 weather colder expected us economy particularly industrial sector exhibits growth continued levels customer spending result natural gas production declines prices could move bottom range us economic recovery delayed weaker expected weather milder expected customer spending based upon companys discussions major customers review published industry reports companys outlook oil gas prices described anticipated customer spending trends follows north america spending north america primarily towards developing natural gas supplies expected increase approximately 10 15 2003 compared 2002 outside north america customer spending primarily directed developing oil supplies expected flat 5 2003 compared 2002 total spending expected 4 6 2003 compared 2002 drilling activity based upon companys outlooks oil natural gas prices customer spending described companys outlook drilling activity measured baker hughes rig count follows north american rig count expected increase approximately 8 10 2003 compared 2002 us rig count expected rise throughout year end year approximately 950 1100 rigs drilling activity outside north america excluding venezuela expected remain steady 2003 expected increase much 3 5 compared 2002 company outlook company expects 2003 stronger 2002 revenues expected increase approximately 4 6 compared 2002 related improvements operating results primarily second half year activity expected improve second half 2003 result increased drilling activity us primarily due relatively higher commodity prices activity outside us also expected increase result relatively high crude oil prices company expects first quarter 2003 activity compared fourth quarter 2002 due impact reduced business activity levels venezuela reduced export sales downward pricing pressures companys products services december 2 2002 pdvsa national oil company venezuela initiated strike intended force venezuelan president hugo chavez resign office call new elections strike effectively shut activity venezuelan energy industry led general strike severe impact venezuelan economy end december 2002 exploration development activity less 25 prestrike levels nature timing resolution uncertain even quick resolution crisis expected take several months activity levels venezuela return normal company implemented cost reduction effort venezuela reduced new investments capital country strike significantly impacted companys venezuelan operations expected lingering impact resolved activity returns prestrike levels revenues venezuela years ended december 31 2002 2001 2000 totaled 1437 million 2327 million 2774 million respectively december 31 2002 2001 net property venezuela totaled 266 million 374 million respectively argentina weakening peso related economic issues materially impact companys business 2002 impact however include devaluation losses delays losses associated collecting outstanding accounts receivable reduced demand companys products services although economic environment stabilized end 2002 could additional losses additional currency devaluations companys customers encounter additional financial difficulty thereby impacting ability pay amounts due company addition economic environment argentina likely continue negatively impact exploration production spending plans companys customers 2003 company responded situation number ways including renegotiating customers acceptable payment terms increasing use us dollar based invoicing us dollar equivalent pricing invoicing adjusting pricing contracts reflect changes argentinas currency shipping products argentina directly outside country payment made offshore us dollars equivalent currency december 31 2002 net property argentina totaled 94 million revenues argentina year ended december 31 2002 totaled 697 million aspects usiraqi conflict war terrorism likely impact 2003 results currently expectations military activity potential supply disruptions resulted war premium crude oil strong cash flows customers military action take place resolved quickly resulting increase oil production iraq oil prices could fall significantly however military action resolved quickly resulting extended supply disruptions oil prices could sustained higher prices company cannot predict extent impact events may company critical accounting policies companys discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states america companys significant accounting policies described notes consolidated financial statements preparation consolidated financial statements requires management make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosures contingent assets liabilities company bases estimates judgments historical experience various assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained companys operating environment changes company defined critical accounting policy one important understanding companys financial condition results operations requires management company make difficult subjective complex judgments estimates company believes following critical accounting polices used preparation companys consolidated financial statements well significant judgments uncertainties affecting application policies revenue recognition inherent companys revenue recognition policy determination collectibility amounts due customers requires company use estimates exercise judgment company routinely monitors customers payment history current credit worthiness determine collectibility reasonably assured requires company make frequent judgments estimates order determine appropriate period recognize sale customer amount valuation allowances required doubtful accounts company records provisions doubtful accounts becomes evident customer able make required payments either contractual due dates future changes financial condition companys customers either adverse positive could impact amount timing additional provisions doubtful accounts may required inventories companys inventory significant component current assets stated lower cost market company regularly reviews inventory quantities hand records provisions excess obsolete inventory based primarily estimated forecast product demand market conditions production requirements technological developments significant unanticipated changes companys forecasts items either adverse positive could impact amount timing additional provisions excess obsolete inventory may required impairment longlived assets longlived assets include property goodwill intangible assets certain assets comprise significant amount companys total assets company makes judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets periodically reviewed impairment whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires company make longterm forecasts future revenues costs related assets subject review forecasts require assumptions demand companys products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period income taxes company uses liability method determining income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered valuation allowances established reduce deferred tax assets likely portion deferred tax assets realized company considered estimated future taxable income ongoing prudent feasible tax planning strategies assessing need valuation allowances changes estimates assumptions could require company adjust valuation allowances deferred tax assets company operates 70 countries many legal forms result company subject numerous domestic foreign tax jurisdictions tax agreements treaties among various taxing authorities companys operations different jurisdictions taxed various bases income taxes deemed profits generally determined using percentage revenues rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events changes tax laws regulations agreements treaties foreign currency exchange restrictions companys level operations profitability taxing jurisdiction could impact upon amount income taxes company provides given year companys subsidiaries tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts company believes assessments may occasionally based erroneous even arbitrary interpretations local tax law situations company provides amounts company believes ultimately result proceedings westerngeco november 30 2000 company schlumberger certain wholly owned subsidiaries schlumberger created venture transferring seismic fleets data processing assets exclusive nonexclusive multiclient surveys assets companys western geophysical division schlumbergers gecoprakla business unit venture operates name westerngeco company schlumberger 30 70 venture respectively company accounts investment using equity method accounting conjunction transaction company received 4934 million cash schlumberger exchange transfer portion companys ownership westerngeco company also contributed 150 million working capital westerngeco company recognize gain loss resulting initial formation venture due companys material continued involvement operations westerngeco addition soon practicable november 30 2004 company schlumberger make cash trueup payment party based formula comparing ratio net present value sales revenue partys contributed multiclient seismic libraries fouryear period ending november 30 2004 ratio net book value libraries november 30 2000 maximum payment either party required make result adjustment 1000 million event future sales contributed libraries continue relative percentages incurred december 31 2002 payment made either party expected significant payment received paid company recorded adjustment carrying value investment westerngeco summarized financial information western geophysical eleven months ended november 30 2000 effective date close included companys consolidated financial statements follows year ended december 31 millions 1 includes restructuring charges corporate allocations excluding interest discontinued operations november 2002 company sold eimco process equipment eimco division process segment received total proceeds 489 million 49 million held escrow pending completion final adjustments purchase price december 2002 company entered exclusive negotiations sale companys interest oil producing operations west africa received 100 million deposit sale subject execution definitive sale agreement expected close first quarter 2003 accordance generally accepted accounting principles company reclassified consolidated financial statements prior periods present operations discontinued summarized financial information discontinued operations follows years ended december 31 millions results operations company engaged primarily oilfield service industry accounted 976 973 968 total revenues 2002 2001 2000 respectively result discussion regarding consolidated results operations primarily focused companys oilfield segment revenues 2002 50204 million decrease 23 compared 2001 oilfield revenues 49015 million decrease 20 compared 2001 oilfield revenues north america accounted 401 total oilfield revenues decreased 129 compared 2001 decrease reflects lower activity us land offshore operations canada evidenced 270 decrease north american rig count inclement weather gulf mexico including tropical storm isidore hurricane lili also contributed decline outside north america oilfield revenues increased 69 compared 2001 increase reflects improvement international drilling activity particularly middle east asia pacific partially offset weaker revenues latin america due political economic environments argentina venezuela impact labor strike norway revenues 2001 51396 million increase 40 compared 2000 oilfield revenues 50019 million increase 45 compared 2000 oilfield revenues north america accounted 451 total oilfield revenues increased 44 compared 2000 increase reflects increased drilling activity area evidenced 185 increase north american rig count improved pricing companys products services outside north america oilfield revenues increased 47 compared 2000 increase reflects improvement international drilling activity particularly north sea latin america middle east gross margin gross margin 278 289 213 2002 2001 2000 respectively decrease gross margin 2002 compared 2001 result companys current strategy significantly reduce work force match current activity levels pricing pressures change geographic product mix sale companys products services increase gross margin 2001 compared 2000 primarily result pricing improvements companys products services primarily north america higher utilization companys assets continued cost management measures throughout company selling general administrative selling general administrative sga expenses 2002 8406 million increase 75 compared 2001 sga expenses percentage revenues 2002 2001 167 152 respectively increases primarily due impact weakening us dollar resulting foreign exchange losses increased depreciation cost associated substantially completed implementation sap r3 enterprisewide accounting business application software system companys current strategy significantly reduce work force match current market activity levels sga expenses 2001 7817 million increase 84 compared 2000 sga expenses percentage consolidated revenues 2001 2000 152 146 respectively increases primarily due increased costs support higher revenue level increased employee incentive costs decreased foreign exchange gains restructuring charges restructuring charges comprised following years ended december 31 millions german operations bird machine 2001 company initiated restructuring german operations bird machine division process segment restructuring consisted downsizing german operations full manufacturing facility assembly repair facility result company recorded charge 60 million relating severance approximately 100 employees company terminated 67 employees paid 41 million accrued severance remaining accrual 19 million reversed second quarter 2002 due unanticipated voluntary terminations favorable separation payments originally estimated oil gas exploration business october 2000 companys board directors approved companys plan substantially exit oil gas exploration business companys oil gas exploration business included various small producing working interests undeveloped properties around world working interest west africa accounted substantially companys revenue oil gas operations interest reflected discontinued operation company determined future capital requirements company willing commit business consistent longterm plans result company recorded restructuring charges 295 million consisting 55 million severance 78 million costs settle contractual obligations 162 million loss writeoff companys undeveloped exploration properties certain foreign jurisdictions severance charges approximately 50 employees 24 employees terminated december 31 2002 company paid 26 million accrued severance 2002 based current estimates company expects remainder accrued severance paid 2003 employees leave company included costs settle contractual obligations 45 million minimum amount companys share project costs relating companys interest oil gas property colombia unsuccessful attempts negotiate settlement joint venture partner company decided abandon involvement project subsequently 2001 third party approached company agreed assume remaining obligations exchange companys interest project accordingly company reversed 42 million related obligation company paid 27 million accrued contractual obligations 2002 remaining contractual obligations paid company settles various counterparties westerngeco formation 2000 company recorded expense 60 million connection restructuring seismic operations formation westerngeco consisted compensation cost 30 million stock options retained certain employees became employees westerngeco 30 million vacation costs accrued part agreement companys venture partner compensation cost options measured using intrinsic value method seismic operations october 1999 company recorded restructuring charge 1150 million related downsizing seismic operations ensuing six months seismic industry continued deteriorate resulting consolidations industry may 2000 company announced formation westerngeco result venture formation original restructuring plan modified resulted 176 million reversal original charge reversal included 75 million retention venture approximately 400 employees identified termination lower expected moving derigging costs certain marine vessels reversal also included 90 million related companys successful negotiation favorable terms related final termination 10 marine vessel leases may june 2000 reversals 2000 also included 109 million primarily related 40 million recovery receivable written restructuring charge 1998 42 million favorable settlements related litigation originally accrued restructuring charges 1998 1997 gain loss disposal assets 2001 company recognized gain 34 million disposition interest joint venture within oilfield segment received net proceeds 60 million transaction company also recognized loss 10 million sale product line within oilfield segment 2000 conjunction companys plan substantially exit oil gas exploration business company sold interests china gulf mexico gabon oil gas properties recorded loss 755 million sale properties net proceeds sales 534 million used repay outstanding indebtedness addition company recognized gains 76 million sale various product lines within oilfield segment equity income loss affiliates equity income loss affiliates relates companys share income loss affiliates accounted using equity method accounting included equity income loss affiliates year ended december 31 2001 2000 79 million 19 million respectively related amortization goodwill associated equity method investments conjunction adoption statement financial accounting standards sfas 142 goodwill intangible assets company discontinued amortization goodwill associated equity method investments effective january 1 2002 equity income loss affiliates 2002 697 million decrease 1155 million compared 2001 companys significant equity method investment 30 interest westerngeco operating results westerngeco adversely affected continuing overall weakness seismic industry result weakness westerngeco recorded restructuring charge 3007 million impairment multiclient library reductions workforce closing landbased seismic operations us lower 48 states canada reducing marine seismic fleet companys portion charge 902 million recorded equity income loss affiliates equity income loss affiliates 2001 458 million increase 504 million compared 2000 increase equity income loss affiliates 2001 compared 2000 primarily due inclusion full year companys share net income westerngeco offset 103 million charge related writeoff certain assets associated westerngeco interest expense interest expense 2002 decreased 152 million compared 2001 decrease primarily due lower total debt levels resulting cash flow operations coupled lower average interest rates companys shortterm debt commercial paper interest rate swaps approximate weighted average interest rate shortterm debt commercial paper 18 2002 compared 40 2001 interest expense 2001 decreased 535 million compared 2000 decrease primarily due lower total debt levels coupled lower average interest rates shortterm debt commercial paper average shortterm debt commercial paper 2001 2597 million compared 9290 million 2000 approximate average interest rate shortterm debt commercial paper 40 2001 compared 63 2000 interest income interest income primarily relates income earned cash equivalents except 2001 interest income also included 54 million settlement internal revenue service irs related examination certain 1994 1997 preacquisition tax returns related refund claims western atlas inc western atlas income taxes companys effective tax rates differ statutory income tax rate 35 due lower effective rates international operations offset higher taxes within westerngeco venture 2002 company recognized incremental effect 402 million additional taxes attributable portion operations westerngeco amount 282 million related companys portion restructuring charge tax benefit remaining 120 million arose operations venture due venture taxed certain foreign jurisdictions based deemed profit basis percentage revenues rather profit ii unbenefitted foreign losses venture operating losses certain foreign jurisdictions current tax benefit deferred tax asset recorded due uncertainty realization 2001 2000 amount additional taxes resulting operations venture 148 million 22 million respectively also 2002 current year benefit 144 million recognized result settlement irs examination related companys september 30 1996 september 30 1998 tax years 2001 benefit 235 million recognized result settlement irs examination certain 1994 1997 preacquisition tax returns related refund claims western atlas 2000 company provided 94 million foreign additional us taxes result repatriation proceeds formation westerngeco venture formation venture also reduced expected amount foreign source income use companys foreign tax credit carryover therefore company provided 356 million additional us taxes respect future repatriation earnings necessary utilize foreign tax credit carryover companys subsidiaries tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts company believes assessments may occasionally based erroneous even arbitrary interpretations local tax law company received tax assessments various taxing authorities currently varying stages appeals litigation regarding matters company believes substantial defenses questions raised pursue legal remedies unfavorable outcome result company provided amounts believes ultimately result proceedings cumulative effect accounting change january 1 2001 company adopted sfas 133 accounting derivative instruments hedging activities amended sfas nos 137 138 collectively referred sfas 133 sfas 133 establishes accounting reporting standards derivative instruments hedging activities require entity recognize derivatives asset liability measured fair value depending intended use derivative effectiveness changes fair value reported period change either component earnings component accumulated comprehensive loss adoption sfas 133 january 1 2001 resulted gain 08 million net tax recorded cumulative effect accounting change consolidated statement operations gain 12 million net tax recorded accumulated comprehensive loss 2001 12 million gain reclassified earnings upon maturity contracts january 1 2002 company adopted sfas 142 goodwill intangible assets sfas 142 addresses initial recognition measurement intangible assets acquired business combination accounting goodwill intangible assets subsequent acquisition sfas 142 provides intangible assets finite useful lives amortized tested potential impairment whenever events circumstances indicate carrying amounts may recoverable goodwill including goodwill associated equity method investments intangible assets indefinite lives amortized tested impairment annually frequently circumstances indicate impairment may exist adoption sfas 142 required company perform transitional test goodwill reporting units january 1 2002 companys reporting units based organizational reporting structure corporate assets liabilities allocated reporting units extent related operations reporting units valuations reporting units performed independent third party goodwill operating divisions companys process segment determined impaired using combination market value discounted cash flows approach estimate fair value accordingly company recognized transitional impairment loss 425 million net tax 204 million transitional impairment loss recorded first quarter 2002 cumulative effect accounting change consolidated statement operations liquidity capital resources companys capital requirements principally related working capital needs payment dividends capital expenditures requirements primarily met internally generated funds 2002 net cash inflows operating activities continuing operations totaled 5904 million decrease 250 million compared 2001 decrease primarily due reduced profitability net cash inflows operating activities continuing operations 2001 increased 1007 million compared 2000 increase primarily related higher net income expenditures capital assets totaled 3167 million 3035 million 5979 million 2002 2001 2000 respectively majority expenditures machinery equipment rental tools expenditures capital assets 2000 included 1995 million multiclient seismic data related companys previously owned seismic division western geophysical company receives proceeds disposal assets either normal course business example reimbursement customers rental tools recoverable damaged drilling nonrecurring asset sales transactions infrequent significant amount unusual nature large excess real estate sales 2002 company received 777 million proceeds disposal assets significant nonrecurring asset sales 2002 2001 company received total proceeds 777 million included nonrecurring asset sales 74 million related sale product line disposition companys interest joint venture 2000 company received total proceeds 2130 million nonrecurring asset sales totaled 1245 million included sales product lines sale companys interests china gulf mexico gabon oil gas properties sale real estate held sale 2002 companys oilfield segment made three small acquisitions aggregate cash purchase price 397 million net cash acquired result acquisitions company recorded approximately 284 million goodwill purchase prices allocated based fair values acquisitions may subject change based final determination purchase price allocations addition 2002 company invested 165 million luna energy llc luna energy venture formed develop manufacture commercialize sell market distribute downhole fiber optic sensors oil gas exploration production transportation refining applications company 40 ownership interest luna energy accounts investment using equity method accounting 2002 company sold eimco division 489 million company received 440 million remainder sales price held escrow pending completion final adjustments purchase price 2002 companys board directors authorized company repurchase 2750 million common stock december 31 2002 company repurchased 18 million shares average price 2752 per share total 491 million upon repurchase shares retired company authorization remaining repurchase 2259 million common stock company two interest rate swap agreements designated qualified fair value hedging instruments 2002 company terminated two agreements received payments totaling 158 million upon cancellation deferred gains 48 million 110 million agreements amortized reduction interest expense remaining lives underlying debt securities mature june 2004 january 2009 respectively 2001 company redeemed outstanding liquid yield options notes redemption price 78613 per 1000 principal amount total 3018 million redemption funded issuance commercial paper connection early extinguishment debt company recorded extraordinary loss 23 million 15 million tax 2002 2001 commercial paper shortterm borrowings reduced 1637 million 679 million respectively primarily due cash flow operations 2000 commercial paper shortterm borrowings reduced 7531 million primarily due 1177 million proceeds saleleaseback transaction 4934 million proceeds formation westerngeco total debt outstanding december 31 2002 15478 million decrease 1468 million compared december 31 2001 debt repaid primarily using cash flow operations debt equity ratio 046 december 31 2002 compared 051 december 31 2001 companys longterm objective maintain debt equity ratio 040 060 december 31 2002 company 9662 million credit facilities commercial banks 5940 million committed facilities expire september 2003 56 million october 2003 538 million direct borrowings facilities years ended december 31 2002 2001 however extent company outstanding commercial paper available borrowings committed credit facilities reduced december 31 2002 company outstanding commercial paper december 31 2001 company 950 million commercial paper outstanding program weighted average interest rate 20 cash flow continuing operations expected principal source liquidity 2003 company believes cash flow continuing operations combined existing credit facilities provide company sufficient capital resources liquidity manage operations meet debt obligations fund projected capital expenditures company currently expects 2003 capital expenditures 3300 million 3500 million excluding acquisitions expenditures expected used primarily normal recurring items necessary support growth operations company incurred reduction debt ratings stock price provisions companys debt lease agreements would accelerate repayment require collateral require material changes terms normal operating leases company offbalance sheet financing arrangements securitization agreements liquidity trust vehicles special purpose entities company materially exposed financing liquidity market credit risk could arise company engaged financing arrangements words believes may expected expects intended identify forwardlooking statements liquidity capital resources see forwardlooking statements business environment description risk factors related forwardlooking statements following table summarizes companys contractual obligations december 31 2002 millions normal course business customers vendors others company contingently liable performance letters credit bank issued guarantees totaling approximately 1935 million december 31 2002 addition december 31 2002 company guaranteed debt obligations third parties totaling 1263 million includes 927 million described related party transactions related party transactions conjunction formation westerngeco company transferred venture lease seismic vessel company sole guarantor lease obligation however schlumberger indemnified company 70 total lease obligation december 31 2002 remaining commitment lease 927 million lease expires 2003 option renew additional year soon practicable november 30 2004 company schlumberger make cash trueup payment party based formula comparing ratio net present value sales revenue partys contributed multiclient seismic libraries fouryear period ending november 30 2004 ratio net book value libraries november 30 2000 maximum payment either party required make result adjustment 1000 million event future sales contributed libraries continue relative percentages incurred december 31 2002 payment made either party expected significant payment received paid company recorded adjustment carrying value investment westerngeco november 2000 company entered agreement westerngeco whereby westerngeco subleased facility company period ten years current market rates 2002 2001 company recorded 52 million 59 million respectively rental income westerngeco related lease december 31 2002 2001 net accounts receivable affiliates totaled 161 million 335 million respectively significant related party transactions accounting standards adopted 2003 june 2001 financial accounting standards board fasb issued sfas 143 accounting asset retirement obligations sfas 143 addresses financial accounting reporting obligations associated retirement longlived assets associated asset retirement costs sfas 143 requires fair value liability associated asset retirement recognized period incurred reasonable estimate fair value made associated retirement costs capitalized part carrying amount longlived asset subsequently depreciated life asset company adopt sfas 143 fiscal year beginning january 1 2003 company fully completed analysis impact adoption sfas 143 expect adoption significant impact companys financial position results operations july 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 requires companies recognize costs associated exit disposal activities incurred rather date commitment exit disposal plan provisions sfas 146 apply exit disposal activities initiated company december 31 2002 november 2002 fasb issued fasb interpretation 45 fin 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 elaborates required disclosures guarantor financial statements obligations certain guarantees issued requires guarantor recognize inception certain guarantees liability fair value obligation undertaken issuing guarantee company reviewing provisions fin 45 relating initial recognition measurement guarantor liabilities effective qualifying guarantees entered modified december 31 2002 expect adoption material impact consolidated financial statements company adopted new disclosure requirements fiscal year ended december 31 2002 december 2002 fasb issued sfas 148 stockbased compensation transition disclosure amended sfas 123 accounting stockbased compensation provide alternative methods transition voluntary change fair value based method accounting stockbased compensation addition sfas 148 amends disclosure requirements sfas 123 require revised disclosure annual interim financial statements method accounting stockbased compensation effect method used reported results company adopted new disclosure requirements fiscal year ended december 31 2002 item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations “mda” read conjunction consolidated financial statements company years ended december 31 2003 2002 2001 related notes consolidated financial statements contained item 8 herein executive summary engaged oilfield services industry operate six divisions baker atlas baker oil tools baker petrolite centrilift hughes christensen inteq aggregate refer oilfield segment manufacture sell products provide services used oil natural gas industry including drilling formation evaluation completion production oil natural gas wells operations 80 countries around world headquarters houston texas previously operated process segment manufactured sold process equipment separating solids liquids 2003 signed definitive agreement sale bird machine “bird” remaining division segment reclassified operating results bird discontinued operations longer operate segment products services sold highly competitive markets revenues earnings affected changes competitive prices fluctuations level activity major markets general economic conditions foreign exchange fluctuations governmental regulation compete oil natural gas industry’s largest diversified oilfield services providers well many small companies believe principal competitive factors industry product service quality availability reliability health safety environmental standards technical proficiency price consider key business drivers include rig count oil natural gas production levels current expected future energy prices 2003 reported revenues 52928 million 80 increase compared 2002 income continuing operations 2003 1801 million compared 2296 million 2002 included income continuing operations 2003 charges net tax 1059 million related share westerngeco restructuring charge 453 million related impairment investment westerngeco included income continuing operations 2002 charge net tax 868 million related share westerngeco restructuring charge increase revenue achieved despite cautious investment customers shifting markets strong competition even though oil natural gas prices relatively high 2003 oil natural gas companies invested cautiously conflict middle east ongoing concerns economy worldwide basis average rig count 2003 increased 169 compared average rig count 2002 increase came land rigs drilling natural gas north america drilling activity gulf mexico north sea historically among strongest markets declined 2003 deepwater operators reevaluated projects large diversified oil natural gas companies north sea gulf mexico focused new opportunities resource areas believe critical success factors include sufficient financial liquidity resources fund various requirements business managing overall global manufacturing capacity ensure proper production levels ensuring workforce asset levels place line business needs maximizing efficiencies manufacturing service delivery processes identifying evaluating implementing profit improvement strategies introducing new technology flawless execution well site delivering unmatched value customers overall cost management 2004 begins remain focused cost management introduction new products created longterm strategy aimed creating value stockholders throughout business cycle growing business faster achieving superior margins compared major competitors share common high performance culture aligning execute longterm strategy six divisions continue provide bestinclass technology serving traditional markets new ones delivering unmatched value customers maximizing returns stockholders business environment business environment corresponding operating results significantly affected level energy industry spending exploration production oil natural gas reserves indicator spending rig count drilling workover rigs active many products services provided oilfield services industry required products services used drilling workover phases well oil natural gas wells completed actual production hydrocarbons spending oil natural gas companies turn influenced strongly expectations supply demand oil natural gas products current expected prices oil natural gas rig counts therefore generally reflect relative strength stability energy prices rig counts providing rig counts public since 1944 gather relevant data field service personnel obtain necessary data routine visits various rigs customers contractors outside sources data compiled distributed various wire services trade associations published website rig counts compiled weekly us canada monthly international us workover rigs published international rig counts include rigs drilling certain countries russia onshore china information extremely difficult obtain north american rigs counted active day count taken well drilled started drilling completed well anticipated sufficient depth potential customer drill bits international areas rigs counted active drilling operations taken place least 15 days month well reached target depth rigs transit one location another rigging drilling less 15 days month used nondrilling activities including production testing completion workover significant consumers oilfield products services included rig count active international areas better data available weekly daily average active rigs taken rig counts summarized table averages periods indicated us land canadian rig counts increased 289 262 respectively 2003 compared 2002 due increase drilling natural gas us offshore rig count decreased 44 2003 compared 2002 primarily related reduced level spending major diversified oil natural gas companies redirected portion spending towards larger international projects outside north america rig counts increased 52 2003 compared 2002 rig count latin america increased 140 spending mexican national oil company pemex drove rig count increases mexico offsetting strikerelated decreases attributed venezuelan national oil company pdvsa north sea rig count 2003 decreased 115 compared 2002 following 71 decrease 2002 compared 2001 primarily driven decline drilling activity uk sector major diversified oil natural gas companies redirected spending towards larger international projects especially russia caspian activity middle east continued rise steadily 50 increase 2003 rig count following 123 increase 2002 compared 2001 rig counts africa declined 69 2003 compared 2002 primarily result political disruptions nigeria project delays parts west africa rig activity asia pacific region 35 2003 compared 2002 primarily due activity increases india oil natural gas prices generally changes current price expected future prices oil natural gas drive customers’ expectations prospects oil natural gas sales expenditures explore produce oil natural gas accordingly changes expenditures normally result increased decreased demand products services oil bloomberg west texas intermediate wti cushing crude oil spot price natural gas bloomberg henry hub natural gas spot price prices summarized table averages daily closing prices periods indicated oil prices averaged 3106bbl 2003 highest annual average decade oil prices rose high 3783bbl early march due low inventories seasonally colder normal weather disruption venezuelan production general strike concerns potential significant supply disruptions result military operations middle east oil prices fell low 2524bbl late april significant supply disruptions occur market reacted possibility rapid expected recovery iraqi oil production oil prices increased remained 30bbl 32bbl balance year excluding september concern rose quicker anticipated recovery iraqi production fourth quarter 2003 early 2004 oil prices dropped 27bbl organization petroleum exporting countries “opec” reacted surprise 09 million barrels per day quota cut late september sustained oil prices 30bbl 32bbl end 2003 early 2004 oil prices averaging 32bbl 38bbl due colder normal weather low inventories improving chinese us economic growth expectations february 2004 opec surprised market 10 million barrels per day quota cut pledged reduce current level production excess agreed quotas another 15 million barrels per day 2003 natural gas prices averaged 549mmbtu highest level two decades early 2003 natural gas traded 500mmbtu 650mmbtu except two week period late february 2003 prices spiked 1938mmbtu natural gas storage levels beginning injection season runs april november record low levels high summer natural gas prices resulted reduced industrial demand allowed storage levels increase natural gas prices remained 5mmbtu early july 2003 became apparent storage injections summer 2003 could approach record levels storage would likely full beginning winter withdrawal season prices weakened remainder injection season low 399mmbtu late october natural gas prices increased remainder 2003 trading 5mmbtu 7mmbtu early 2004 key risk factors business focused providing products services worldwide oil natural gas industry therefore risk factors centered factors impact markets oil natural gas key risk factors currently influencing worldwide oil natural gas markets could impact outlook discussed • production control degree individual opec nations large oil natural gas producing countries including limited mexico norway russia willing able control production exports oil decrease increase supply support targeted oil price meeting market share objectives key measures production control include actual production levels compared target quota production levels oil price compared targeted oil price changes country’s market share • global economic growth particularly impact us western european economies economic activity japan china south korea developing areas asia correlation economic growth energy demand strong strength us economy economic growth developing asia particularly china important 2004 key measures include us international economic output global energy demand forecasts future demand governments private organizations • oil natural gas storage inventory levels measure balance supply demand key measure us natural gas inventories storage level reported weekly us department energy compared historic levels key measures oil inventories include us inventory levels reported us department energy american petroleum institute worldwide estimates reported international energy agency • ability produce natural gas amount natural gas produced function number new wells drilled completed connected pipelines well rate production resulting depletion existing wells advanced technologies horizontal drilling improve total recovery also result rapid production decline key measures include government private surveys natural gas production company reported production estimates reservoir depletion rates drilling completion activity • technological progress design application new products allow oil natural gas companies drill fewer wells drill complete produce wells faster recover hydrocarbons andor lower costs key measures also include overall level research engineering spending oilfield services companies pace new technology introduced commercially accepted customers • maturity resource base growing necessity increased levels investment activity support production area longer developed key measures include changes undeveloped hydrocarbon reserves mature areas like north sea us canada latin america • pace new investment amount oil natural gas companies choose invest emerging markets impact spending areas already established presence • access capital ability oil natural gas companies access funds necessary carry exploration production “ep” plans access capital particularly important smaller independent oil natural gas companies key measures access capital include cash flow interest rates analysis oil natural gas company leverage equity offering activity • energy prices price volatility impact widely fluctuating commodity prices stability market subsequent impact customer spending current energy prices important contributors positive cash flow ep companies expectations future prices price volatility generally important determining future ep spending higher commodity prices generally lead higher levels ep spending sustained high energy prices impediment economic growth • impact energy prices price volatility demand hydrocarbons shortterm price changes result companies switching economic sources fuel prompting temporary curtailment demand longterm price changes lead permanent changes demand results oilfield services industry cyclical nature key indicators include hydrocarbon prices btu equivalent basis indicators hydrocarbon demand electricity generation industrial production • access prospects ability oil natural gas companies develop economically attractive projects based expectations future energy prices required investments resulting returns access prospects may limited host governments allow access reserves another oil natural gas company owns rights develop prospect • supply disruptions loss production andor delay activity key oil exporting countries including limited iraq saudi arabia middle eastern countries nigeria venezuela due political instability civil unrest labor issues military activity addition adverse weather hurricanes could impact production facilities causing supply disruptions • weather impact variations temperatures compared normal weather patterns related effect demand oil natural gas key measure impact weather energy demand populationweighted heating cooling degree days reported us department energy forecasts warmer normal cooler normal temperatures • government regulations costs incurred oil natural gas companies conform comply government regulations including environmental regulations may limit quantity oil natural gas may economically produced industry outlook caution advised factors described “forward looking statements” “business environment” could negatively impact expectation oil natural gas demand oil natural gas prices drilling activity oil inventories crude oil products record low levels 2004 began supporting oil prices 32bbl 38bbl oil prices expected decline throughout 2004 average 26bbl 34bbl factors could support prices upper end range include stronger expected worldwide economic growth especially china us potential supply disruptions middle east africa venezuela slower growth russian exports due export capacity bottlenecks opec’s desire ability maintain higher price target stabilize purchasing power factors could result oil prices lower end range include slower expected economic growth us china sooner expected increases iraqi production growth increased production opec members algeria libya nigeria challenging persian gulf members opec act swing producers natural gas 2004 prices expected trade 4mmbtu 7mmbtu natural gas could trade top range weather colder normal us economy particularly industrial sector exhibits greater expected growth continued levels customer spending sufficient support growth natural gas production prices could move bottom range us economic recovery weaker expected weather milder expected summer natural gas prices expected trade level necessary curtail price sensitive demand allow storage refill customer spending based upon discussions major customers review published industry reports outlook oil natural gas prices described anticipated customer spending trends follows drilling activity based upon outlook oil natural gas prices customer spending described outlook drilling activity measured baker hughes rig count follows company outlook expect 2004 stronger year 2003 revenues increasing 5 7 outlook 2004 took account factors described herein 2003 2002 2001 revenues outside north america 576 599 551 total revenues respectively 2004 expect revenues outside north america continue trend 55 60 total revenues growth revenues mirror growth customer spending assumptions regarding overall growth customer spending assume strong economic growth us china opec discipline resulting oil price exceeding 26bbl assumptions regarding customer spending north america assume strong economic growth us natural gas prices exceeding 4mmbtu north america expect revenues increase 7 9 2004 compared 2003 majority increase occurring second half 2004 expect spending land based projects continue increase 2004 following trend evident 2003 also expect offshore spending gulf mexico flat 2004 compared 2003 normal weatherdriven seasonal decline us canadian spending first half year result sequentially softer revenues first second quarters 2004 outside north america expect revenues increase 5 7 2004 compared 2003 continuing multiyear trend modest growth customer spending large projects national oil companies reflect established seasonality trends resulting softer revenues first half year stronger revenues second half addition customer spending affected weatherrelated reductions north sea first second quarters 2004 middle east latin america caspian regions russia expected demonstrate average spending increases resulting increased revenue growth revenues north sea may average expectations spending revenue growth could decrease prices fall 26bbl oil 4mmbtu natural gas disruptions key oil natural gas production markets venezuela nigeria prior years profitability negatively affected share westerngeco’s operating results adversely affected continued weakness seismic industry expect operating results westerngeco improve 2004 compared prior years however based trend operating losses weakness seismic industry prior years uncertainty regarding future operating results westerngeco information regarding westerngeco’s profitability 2004 based information westerngeco provided us information accurate forecasts profitability could impacted either positively negatively based forecasts believe earnings per share 2004 continuing operations range 120 135 anticipate material changes prices charge products significant price increases significantly better expected results westerngeco could cause earnings per share reach upper end range conversely significant price decreases significantly worse expected results westerngeco could result earnings per share bottom range ability improve pricing dependent demand products services competitors strategies managing capacity commercial introduction new technology important factor realizing price improvement without pricing discipline throughout industry whole meaningful improvements prices likely realized additionally significant changes drilling activity outside expectations could impact operating results positively negatively business approximately 80 countries including onehalf 34 countries worst scores transparency international’s corruption perception index “cpi” survey 2003 devote significant resources development maintenance enforcement business code conduct policy foreign corrupt practices act “fcpa” policy internal control processes procedures compliance related policies notwithstanding devotion resources part consequence thereof time discover receive information alleging potential violations fcpa policies processes procedures conduct internal investigations potential violations take appropriate action depending upon outcome investigation anticipate devotion significant resources compliance related issues including necessity internal investigations continue aspect business number countries oil natural gas exploration development production take place requested conduct operations order provide products services countries may future utilize joint ventures sell products distributors otherwise modify business approach order improve ability conduct business accordance business code conduct critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states america significant accounting policies described notes consolidated financial statements certain respects application significant accounting policies preparation consolidated financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosures contingent assets liabilities base estimates judgments historical experience assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained business environment operate changes defined critical accounting policy estimate one important portrayal financial condition results operations requires us make difficult subjective complex judgments estimates matters uncertain believe following critical accounting policies used preparation consolidated financial statements well significant estimates judgments uncertainties affecting application policies discussed development selection critical accounting policies estimates auditethics committee board directors auditethics committee reviewed disclosure presented allowance doubtful accounts determination collectibility amounts due customers requires us use estimates make judgments regarding future events trends including monitoring customers’ payment history current credit worthiness determine collectibility reasonably assured well consideration overall business climate customers operate inherently uncertainties require us make frequent judgments estimates regarding customers’ ability pay amounts due us order determine appropriate amount valuation allowances required doubtful accounts provisions doubtful accounts recorded becomes evident customer able make required payments either contractual due dates future last five years reserves doubtful accounts percentage total accounts receivable reserves ranged 52 71 december 31 2003 2002 reserves doubtful accounts totaled 628 million 52 672 million 57 total accounts receivable reserves respectively believe reserve doubtful accounts adequate cover anticipated losses current conditions however uncertainties regarding changes financial condition customers either adverse positive could impact amount timing additional provisions doubtful accounts may required one percentage point change reserve would pretax impact approximately 121 million 2003 inventory reserves inventory significant component current assets stated lower cost market requires us record provisions maintain reserves excess obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments estimates forecasts inherently include uncertainties require us make judgments regarding potential outcomes last five years inventory reserves percentage total inventories reserves ranged 182 196 december 31 2003 2002 inventory reserves totaled 2325 million 185 2359 million 191 gross inventory respectively believe reserves adequate cover anticipated losses current conditions however significant unanticipated changes estimates forecasts either adverse positive could impact amount timing additional provisions excess obsolete inventory may required one percentage point change reserve would pre tax impact approximately 126 million 2003 impairment longlived assets longlived assets include property goodwill intangible assets investments affiliates certain assets comprise significant amount total assets make judgments estimates conjunction accounting assets including depreciation amortization methods useful lives additionally carrying values assets reviewed impairment periodically least annually goodwill whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make judgments regarding longterm forecasts future revenues costs related assets subject review turn forecasts uncertain require assumptions demand products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period given nature evaluations application specific assets specific times possible reasonably quantify impact changes assumptions however based upon evaluation current business climate operate currently anticipate significant asset impairment losses necessary income taxes liability method used determining income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered valuation allowances established reduce deferred tax assets likely portion deferred tax assets realized determining need valuation allowances considered made judgments estimates regarding estimated future taxable income ongoing prudent feasible tax planning strategies estimates judgments include degree uncertainty changes estimates assumptions could require us adjust valuation allowances deferred tax assets historically changes valuation allowances caused major changes business cycle certain countries changes local country law ultimate realization deferred tax assets depends generation sufficient taxable income applicable taxing jurisdictions operate 80 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenues rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability taxing jurisdiction could impact amount income taxes provide given year tax filings subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings believe possible reasonably estimate potential impact changes assumptions estimates identified resulting change tax liability dependent numerous factors cannot reasonably estimated include among others amount nature additional taxes potentially asserted local tax authorities willingness local tax authorities negotiate fair settlement administrative process impartiality local courts sheer number countries business potential changes tax paid one country either produce fail produce offsetting tax change countries experience estimates assumptions used provide future tax assessments proven appropriate however past experience guide potential exists however limited tax resulting resolution current potential future tax controversies may differ materially amount accrued discontinued operations third quarter 2003 board directors approved management initiated plan sell bird last remaining division former process segment october 2003 signed definitive agreement sale bird recorded charges totaling 374 million net tax 109 million consisted loss 135 million writedown bird fair value 62 million severance warranty accruals loss 177 million related recognition cumulative foreign currency translation adjustments earnings sale closed january 2004 received 56 million proceeds subject adjustment pending final completion purchase price retained certain accounts receivable inventories assets december 2002 entered exclusive negotiations sale interest oil producing operations west africa 320 million proceeds transaction effective january 1 2003 resulted gain sale 41 million net tax benefit 02 million recorded first quarter 2003 received 100 million deposit 2002 remaining 220 million april 2003 november 2002 sold eimco process equipment “eimco” division former process segment recorded loss disposal 223 million net tax 12 million consisted loss 23 million writedown fair value loss 200 million related recognition cumulative foreign currency translation adjustments earnings received total proceeds 489 million 49 million held escrow pending completion final adjustments purchase price 2003 purchase price adjustments completed resulting release escrow balance 29 million returned buyer 20 million received us 2003 also recorded additional loss sale due purchase price adjustments 25 million net tax 13 million reclassified consolidated financial statements prior periods presented reflect operations discontinued see note 2 notes consolidated financial statements item 8 herein additional information regarding discontinued operations results operations discussions relating significant line items based available information represent analysis significant changes events impact comparability reported amounts appropriate identified specific events changes affect comparability trends possible practical quantified impact items table details certain consolidated statement operations data percentage revenues 2003 2002 2001 respectively revenues 2003 52928 million increase 80 compared 2002 reflecting 169 increase rig counts rig counts act leading indicator revenues rigs active many products services required products services used drilling operations subsequently completion wells also production hydrocarbons revenues north america accounted 424 total revenues increased 140 compared 2002 increase reflects increased drilling activity us canada evidenced 248 increase north american rig count revenues outside north america accounted 576 total revenues increased 39 compared 2002 increase reflects improvement international drilling activity evidenced 52 increase rig counts outside north america primarily latin america middle east partially offset decreased drilling activity north sea africa 2003 pricing significant contributor revenue growth deterioration prices certain product lines inteq division partially offset pricing improvement realized product lines revenues 2002 49017 million decrease 27 compared 2001 revenues north america accounted 401 total revenues decreased 129 compared 2001 decrease reflects lower activity us land offshore operations canada evidenced 270 decrease north american rig count inclement weather gulf mexico including tropical storm isidore hurricane lili also contributed decline revenues outside north america accounted 599 total revenues increased 56 compared 2001 increase reflects improvement drilling activity particularly middle east asia pacific partially offset weaker revenues latin america due political economic environments argentina venezuela impact labor strike norway cost revenues cost revenues 2003 38549 million increase 94 compared 2002 cost revenues percentage revenues 728 719 2003 2002 respectively increase cost revenues percentage revenues primarily related inteq division 2003 inteq experienced highest revenue growth divisions however margins deteriorated impacted increased downward pricing trends increased repairs maintenance “rm” costs newly developed downhole rental tools nonrecurring costs anticipate margins inteq improve 2004 result stabilized pricing environment improved cost control measures addition corrective action taken related increased rm costs anticipate result lower rm costs 2004 change geographic product mix sale products services also contributed increase cost revenues percentage revenues 2003 revenue increases came predominantly north america margins revenues generated north america typically lower margins generated outside north america cost revenues 2002 35252 million decrease 11 compared 2001 cost revenues percentage revenues 719 708 2002 2001 respectively increase cost revenues percentage revenues result strategy significantly reduce work force match reduced activity levels change geographic product mix sale products services selling general administrative selling general administrative “sga” expenses 2003 8301 million increase 186 million 23 compared 2002 increase primarily due 89 million increase net costs related corporate activities increase approximately 170 million costs related self insurance programs expected recur future offset improvement impact foreign exchange activity 187 million 2004 anticipate corporate costs continue trend upward primarily due compliance related expenditures sga expenses 2002 8115 million increase 564 million 75 compared 2001 increase primarily due impact weakening us dollar resulting increased foreign exchange losses 148 million increased depreciation cost associated substantially completed implementation sap r3 enterprisewide accounting business application software system 152 million strategy significantly reduce work force match current market activity levels reversals restructuring charge october 2000 board directors approved plan substantially exit oil natural gas exploration business recorded restructuring charges 295 million consisting 55 million severance 78 million costs settle contractual obligations 162 million loss writeoff undeveloped exploration properties certain foreign jurisdictions severance charges approximately 50 employees terminated december 31 2003 accrued severance paid december 31 2003 included costs settle contractual obligations 11 million related oil natural gas property angola property sold 2003 reversed liability related contractual obligation also included costs settle contractual obligations 45 million minimum amount share project costs relating interest oil natural gas property colombia unsuccessful attempts negotiate settlement joint venture partner decided abandon involvement project subsequently 2001 third party agreed assume remaining obligations exchange interest project accordingly reversed 42 million related obligation contractual obligations associated plan paid december 31 2003 impairment investment affiliate result continuing weakness seismic industry evaluated carrying value investment westerngeco recorded impairment loss 453 million 2003 writedown investment fair value fair value determined using combination market value discounted cash flows approach assisted determination fair value independent third party although anticipated declines fair value investment westerngeco would result additional impairments cannot predict additional impairments investment westerngeco necessary future environment seismic industry continues uncertain equity income loss affiliates equity income loss affiliates relates share income loss affiliates accounted using equity method accounting significant equity method investment 30 interest westerngeco 2003 operating results westerngeco continued adversely affected continuing weakness seismic industry result weakness westerngeco recorded certain impairment restructuring charges 4520 million impairment multiclient seismic library rationalization marine seismic fleet portion charges 1357 million recorded equity income loss affiliates equity income loss affiliates decreased 1155 million 2002 compared 2001 decrease primarily related 3007 million restructuring charge recorded westerngeco impairment multiclient library reductions workforce closing landbased seismic operations us lower 48 states canada reducing marine seismic fleet portion charge 902 million recorded equity income loss affiliates operating results westerngeco expected improve 2004 however based trend operating losses weakness seismic industry prior years uncertainty regarding future operating performance westerngeco included equity income loss affiliates 2001 79 million related amortization goodwill associated equity method investments conjunction adoption statement financial accounting standards “sfas” 142 goodwill intangible assets discontinued amortization goodwill associated equity method investments effective january 1 2002 interest expense interest expense 2003 decreased 80 million compared 2002 due lower total debt levels lower weighted average interest rates commercial paper money market borrowings increased amortization deferred gains related terminated interest rate swap agreements total debt levels decreased 634 million primarily due repayment 1000 million longterm debt february 2003 approximate weighted average interest rate commercial paper money market borrowings 12 2003 compared 18 2002 amortization deferred gains related terminated interest rate swap agreements reduced interest expense 99 million 2003 compared 60 million 2002 interest expense 2002 decreased 152 million compared 2001 due lower total debt levels resulting cash flows operations coupled lower weighted average interest rates shortterm debt commercial paper interest rate swaps approximate weighted average interest rate shortterm debt commercial paper 18 2002 compared 40 2001 income taxes effective tax rates differ statutory income tax rate 35 due state income taxes differing rates tax international operations higher taxes within westerngeco venture 2003 recognized incremental effect 363 million additional taxes attributable portion operations westerngeco amount 159 million related reduction carrying value equity investment westerngeco tax benefit remaining 204 million arose operations venture due venture taxed certain foreign jurisdictions based deemed profit basis percentage revenues rather profits ii unbenefitted foreign losses venture operating losses impairment restructuring charges certain foreign jurisdictions current tax benefit deferred tax asset recorded due uncertainty realization 2002 2001 amount additional taxes resulting operations venture 402 million 148 million respectively 2003 current year benefit 33 million recognized result various refund claims filed us 2002 144 million benefit recognized result settlement irs examination related september 30 1996 september 30 1998 tax years 2001 benefit 235 million recognized result settlement irs examination certain 1994 1997 preacquisition tax returns related refund claims western atlas inc tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law received tax assessments various taxing authorities currently varying stages appeals litigation regarding matters provided amounts believe ultimately result proceedings believe substantial defenses questions raised pursue legal remedies unfavorable outcome result however resolution matters involves uncertainties assurances outcomes favorable cumulative effect accounting change january 1 2003 adopted sfas 143 accounting asset retirement obligations sfas 143 addresses financial accounting reporting obligations associated retirement longlived assets sfas 143 requires fair value liability associated asset retirement obligation “aro” recognized period incurred reasonable estimate made liability aro revised subsequent period due passage time changes estimates associated retirement costs capitalized part carrying amount longlived asset subsequently depreciated estimated useful life asset adoption sfas 143 2003 resulted charge 56 million net tax 28 million recorded cumulative effect accounting change consolidated statement operations conjunction adoption recorded aro liabilities 114 million primarily anticipated costs obligations associated future disposal power source units certain divisions refurbishment costs associated certain leased facilities europe fleet leased railcars tanks january 1 2002 adopted sfas 142 goodwill intangible assets adoption sfas 142 required us cease amortizing goodwill perform transitional test goodwill reporting units january 1 2002 reporting units based organizational reporting structure corporate assets liabilities allocated reporting units extent related operations reporting units valuations reporting units performed independent third party goodwill eimco bird operating divisions former process segment determined impaired using combination market value discounted cash flows approach estimate fair value accordingly recognized transitional impairment losses 425 million net tax 204 million 2002 cumulative effect accounting change consolidated statement operations liquidity capital resources objective appropriately financing business maintain adequate financial resources access additional liquidity last three years cash flows operations principal source funding anticipate trend continue 2004 also 5000 million threeyear committed revolving credit facility would provide ample source backup liquidity would available event unanticipated significant demand cash flow could funded operations shortterm borrowings capital planning process focused utilizing cash flows generated operations ways enhance value company 2003 used cash mix activities including working capital needs payment dividends repayment debt repurchase common stock capital expenditures 2004 expect trend continue anticipate additional material demands commitments events would require significant outlays cash flows cash flows provided used continuing operations type activity follows years ended december 31 cash flow statements companies international operations local currency functional exclude effects changes foreign currency exchange rates occur given year considered noncash changes reflected certain accounts cash flow statements may reflect changes corresponding accounts consolidated balance sheets 2003 2002 2001 changes foreign currency exchange rates significant resulted corresponding changes foreign currency translation adjustment account 2003 revised capital expenditure reporting procedures certain rental tools engineering prototype tools previously amounts items reported transfers inventory property plant equipment however reported capital expenditures addition depreciation related certain tools previously included total depreciation amortization expense included caption consolidated statements cash flows years ended december 31 2002 2001 reclassified give effect change impact consolidated statements operations consolidated balance sheets periods presented operating activities cash flows operating activities relatively consistent last three years expect trend continue 2004 attribute stability cash flow successful management working capital consistent levels income continuing operations adjusted noncash items cash flows operating activities continuing operations increased 322 million 2003 compared 2002 primary reason increase improved operating performance attributable increased revenues addition working capital decreased effect increasing cash flows operating activities underlying drivers changes working capital follows • increase accounts receivable 2003 used 154 million cash due increases revenue offset reduction days sales outstanding defined average number days accounts receivable outstanding approximately two days • decrease inventory 2003 provided 215 million cash increased focus improving utilization inventory hand • increase accounts payable accrued compensation accrued liabilities provided 318 million cash due increased activity increased employee compensation accruals better management accounts payable increased accruals self insurance programs changes partially offset 598 million income tax payments 2003 compared 2002 pension contributions 2003 approximately 280 million increase approximately 190 million compared prior year due formation new us pension plan 2002 2004 expect pension contributions increase 350 million 400 million cash flows operating activities continuing operations decreased 243 million 2002 compared 2001 primarily due decreased operating performance attributable decreased revenues addition working capital increased effect decreasing cash flows operating activities underlying drivers changes working capital follows investing activities principal recurring investing activity funding capital expenditures improve productivity operations expenditures capital assets totaled 4052 million 3564 million 3260 million 2003 2002 2001 respectively increase capital expenditures 2003 compared 2002 due expenditures necessary support growth operations majority expenditures machinery equipment rental tools made two acquisitions 2003 aggregate purchase price 169 million 95 million paid cash result acquisitions recorded approximately 39 million goodwill 96 million intangible assets december 31 2003 purchase prices allocated based fair values acquisitions may subject change based final determination purchase price allocation addition 2003 invested 381 million affiliates 301 million related company’s 50 interest quantx wellbore instrumentation venture engaged permanent inwell monitoring market 2002 made three acquisitions aggregate cash purchase price 397 million net cash acquired result acquisitions recorded approximately 284 million goodwill addition 2002 invested 165 million luna energy llc “luna energy” venture formed develop manufacture commercialize sell market distribute downhole fiber optic sensors oil natural gas exploration production transportation refining applications 40 ownership interest luna energy account investment using equity method accounting 2003 completed sale interest oil producing property west africa 320 million proceeds received deposit 100 million 2002 remaining 220 million 2003 2002 also disposed eimco division 489 million proceeds received 440 million proceeds 2002 remainder sales price held escrow pending completion final adjustments purchase price 2003 purchase price adjustments completed resulting release escrow balance received 20 million 29 million returned buyer proceeds disposal assets 668 million 777 million 776 million 2003 2002 2001 respectively disposals relate machinery rental tools equipment longer used operations sold throughout year january 2004 completed sale bird received 56 million proceeds subject adjustment pending final completion purchase price addition february 2004 completed sale minority interest petreco international received proceeds 358 million 74 million held escrow pending outcome potential indemnification obligations pursuant sales agreement believe transaction material financial condition results operations financing activities net borrowings commercial paper shortterm debt 45 million 2003 compared net repayments 1637 million 679 million 2002 2001 respectively also repaid 1000 million 58 notes due february 2003 repayment funded cash hand cash flow operations issuance commercial paper total debt outstanding december 31 2003 14844 million decrease 634 million compared december 31 2002 total debt total capitalization defined total debt plus stockholders’ equity ratio 031 december 31 2003 2002 different times 2003 entered three separate interest rate swap agreements notional amount 3250 million associated 625 notes due january 2009 agreements designated qualified fair value hedging instruments due outlook interest rates terminated three agreements received payments totaling 269 million three agreements terminated prior entering new agreement deferred gains amortized reduction interest expense remaining life underlying debt security matures january 2009 2002 terminated two interest rate swap agreements entered prior years agreements designated qualified fair value hedging instruments upon termination received proceeds totaling 158 million deferred gains 48 million 110 million amortized reduction interest expense remaining lives underlying debt securities mature june 2004 january 2009 respectively received proceeds 618 million 383 million 501 million issuance common stock 2003 2002 2001 respectively exercise stock options issuance stock employee stock purchase plan 2002 authorized board directors repurchase 2750 million common stock 2003 repurchased 63 million shares average price 2878 per share total 1814 million 2002 repurchased 18 million shares average price 2752 per share total 491 million upon repurchase shares retired paid dividends 1543 million 1549 million 1544 million 2003 2002 2001 respectively available credit facilities december 31 2003 9302 million credit facilities commercial banks 5000 million threeyear committed revolving credit facility “facility” expires july 2006 facility contains certain covenants among things require maintenance funded indebtedness total capitalization ratio defined formula per facility less equal 050 limit amount subsidiary indebtedness restrict sale significant assets defined 10 total consolidated assets december 31 2003 compliance facility covenants including funded indebtedness total capitalization ratio 030 direct borrowings facility year ended december 31 2003 however extent outstanding commercial paper ability borrow facility reduced december 31 2003 outstanding commercial paper market conditions change revenues significantly reduced operating costs could controlled cash flows liquidity could reduced additionally could cause rating agencies lower credit rating ratings triggers facility would accelerate maturity borrowings facility however downgrade credit ratings could increase cost borrowings facility also downgrade credit ratings could limit preclude ability issue commercial paper occur would seek alternative sources funding including borrowing facility cash requirements believe operating cash flows combined shortterm borrowings needed provide us sufficient capital resources liquidity manage operations meet contractual obligations fund capital expenditures repurchase common stock support development shortterm longterm operating strategies currently expect 2004 capital expenditures 3200 million 3400 million excluding acquisitions expenditures expected used primarily normal recurring items necessary support growth business operations 2004 repay 1000 million 8 notes due may 2004 2500 million 7875 notes due june 2004 repayments expected funded one following cash flows operations available cash hand commercial paper borrowings 2004 also expect make interest payments approximately 850 million 950 million based current expectations debt levels 2004 authorization remaining repurchase 445 million common stock may continue repurchase common stock 2004 depending price common stock liquidity considerations anticipate paying dividends 046 per share common stock 2004 however board directors free change dividend policy time 2004 estimate contribute approximately 350 million 400 million pension plans make benefit payments related postretirement welfare plans approximately 140 million anticipate making income tax payments approximately 1500 million 1800 million 2004 believe material trends demands commitments events uncertainties would reasonably likely material impact financial condition liquidity previously discussed currently information would create reasonable likelihood reported levels revenues cash flows operations 2003 indicative expect future following table summarizes aggregate contractual cash obligations december 31 2003 millions 1 amounts represent expected cash payments longterm debt include unamortized discounts deferred issuance costs deferred gains terminated interest rate swap agreements 2 purchase obligations include agreements purchase goods services enforceable legally binding specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations exclude agreements cancelable anytime without penalty 3 amounts represent longterm liabilities reflected consolidated balance sheet timing amount payment streams known amounts include payments certain environmental remediation liabilities payments deferred compensation payouts acquisition agreements payments certain asset retirement obligations amounts include payments pension contributions payments various postretirement welfare plans postemployment benefit plans amounts determined beyond 2004 offbalance sheet arrangements normal course business customers vendors others contingently liable performance letters credit bank issued guarantees totaled approximately 2849 million december 31 2003 addition december 31 2003 guaranteed debt obligations third parties totaling 341 million including 150 million relating petreco guarantee terminated conjunction sale petreco february 2004 normal operating leases offbalance sheet financing arrangements securitization agreements liquidity trust vehicles synthetic leases special purpose entities materially exposed financing liquidity market credit risk could arise engaged financing arrangements new accounting standards effective january 1 2003 adopted sfas 143 accounting asset retirement obligations sfas 143 addresses financial accounting reporting obligations associated retirement longlived assets sfas 143 requires fair value liability associated asset retirement obligation “aro” recognized period incurred reasonable estimate fair value made liability aro revised subsequent period due passage time changes estimates associated retirement costs capitalized part carrying amount longlived asset subsequently depreciated life asset adoption sfas 143 2003 resulted charge 56 million net tax 28 million recorded cumulative effect accounting change consolidated statement operations conjunction adoption recorded aro liabilities 114 million primarily anticipated costs obligations associated future disposal power source units certain divisions refurbishment costs associated certain leased facilities europe fleet leased railcars tanks november 2002 financial accounting standards board “fasb” issued fasb interpretation 45 “fin 45” guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 requires disclosures guarantor financial statements obligations certain guarantees issued requires guarantor recognize inception certain guarantees liability fair value obligation undertaken issuing guarantee adoption provisions fin 45 relating initial recognition measurement guarantor liabilities effective qualifying guarantees entered modified december 31 2002 impact consolidated financial statements adopted new disclosure requirements 2002 january 2003 fasb issued fasb interpretation 46 “fin 46” consolidation variable interest entities entity subject consolidation rules fin 46 referred variable interest entity “vie” entity’s equity investors lack characteristics controlling financial interest sufficient equity risk entity finance operations without additional financial support december 2003 fasb issued modifications fin 46 “fin 46r” resulting multiple effective dates based nature well creation date vie completing evaluation provisions original fin 46 fin 46r expect adoption impact consolidated financial statements april 2003 fasb issued sfas 149 amendment statement 133 derivative instruments hedging activities amends clarifies accounting derivative instruments including certain derivative instruments embedded contracts hedging activities sfas 133 sfas 149 effective contracts entered modified june 30 2003 exceptions hedging relationships designated june 30 2003 adoption sfas 149 july 1 2003 impact consolidated financial statements may 2003 fasb issued sfas 150 accounting certain financial instruments characteristics liabilities equity modifies accounting certain financial instruments sfas 150 requires financial instruments classified liabilities applies immediately financial instruments entered modified may 31 2003 otherwise effective beginning first interim period beginning june 15 2003 adoption sfas 150 july 1 2003 impact consolidated financial statements december 2003 fasb revised sfas 132 employers’ disclosures pensions postretirement benefits new sfas 132 requires additional disclosures assets obligations cash flows net periodic benefit cost defined benefit pension plans defined benefit postretirement plans certain disclosures required 2004 adopted disclosure requirements effective 2003 january 2004 fasb issued fasb staff position fas 1061 “fsp 1061” accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 provides temporary guidance concerning recently enacted medicare prescription drug improvement modernization act 2003 “act” sfas 106 employers’ accounting postretirement benefits pensions requires presently enacted changes laws take effect future periods taken account measuring current period postretirement benefit cost accumulated projected benefit obligation “apbo” fsp 1061 allows companies sponsor affected postretirement benefit plans elect defer recognizing effects act postretirement benefit expense apbo pursuant sfas 106 elected defer accounting effects act 2004 related party transactions conjunction formation westerngeco november 2000 entered agreement schlumberger whereby cash trueup payment made either parties venture based formula comparing ratio net present value sales revenue party’s contributed multiclient seismic libraries fouryear period ending november 30 2004 ratio net book value libraries november 30 2000 maximum payment either party required make result adjustment 1000 million event future sales contributed libraries continue relative percentages incurred december 31 2003 currently estimate schlumberger make payment us range 50 million 100 million payment received us recorded adjustment carrying value investment westerngeco november 2000 also entered agreement westerngeco whereby westerngeco subleased facility us period ten years current market rates 2003 2002 received payments 50 million 55 million respectively westerngeco related lease conjunction formation westerngeco transferred lease seismic vessel venture sole guarantor lease obligation 2003 lease guarantee terminated result purchase seismic vessel westerngeco december 31 2003 2002 net accounts receivable affiliates totaled 07 million 161 million respectively significant related party transactions forwardlooking statements mda certain statements notes consolidated financial statements include forwardlooking statements within meaning section 27a securities act 1933 amended section 21e securities exchange act 1934 amended “forwardlooking statement” words “anticipate” “believe” “ensure” “expect” “if” “intend” “estimate” “project” “forecasts” “outlook” “aim” “will” “could” “should” “would” “may” “likely” similar expressions negative thereof intended identify forwardlooking statements expectations regarding business outlook customer spending oil natural gas prices business environment industry general forecasts regarding matters forecasts may substantially different actual results affected following risk factors level petroleum industry exploration production expenditures drilling rig oil natural gas industry manpower equipment availability ability implement effect price increases products services ability control costs availability sufficient raw materials manufacturing capacity subcontracting capacity forecasted costs meet revenue goals effect competition particularly ability introduce new technology forecasted schedule forecasted costs ability competitors capture market share ability retain increase market share potential impairment longlived assets world economic conditions price demand crude oil natural gas drilling activity seasonal weather conditions affect demand energy severe weather conditions hurricanes affect exploration production activities legislative regulatory environment us countries operate outcome government internal investigations legal proceedings opec policy adherence opec nations production quotas war military action extended period international conflict particularly involving us middle east major petroleumproducing consuming regions future acts war armed conflicts terrorist activities civil unrest incountry security concerns operate expropriation development technology us competitors lowers overall finding development costs new laws regulations could significant impact future operations conduct businesses laborrelated actions including strikes slowdowns facility occupations condition capital equity markets general adverse foreign exchange fluctuations adverse changes capital markets international locations operate timing foregoing see “key risk factors” detailed discussion certain risk factors expectations regarding level capital expenditures described “liquidity capital resources” forecasts regarding matters addition factors described previous paragraph “business environment” “item 1 businessenvironmental matters” forecasts may substantially different actual results affected following factors accuracy estimates regarding spending requirements regulatory legal contractual impediments spending reduction measures occurrence unanticipated acquisition research development opportunities changes strategic direction need replace unanticipated losses capital assets item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations “mda” read conjunction consolidated financial statements “item 8 financial statements supplementary data” contained herein executive summary leading provider drilling formation evaluation completion production products services worldwide oil natural gas industry compete one three largest diversified oilfield services companies early 2005 organized productline focused divisions two separate segments drilling evaluation segment completion production segment segments aligned product line based types products services provided customers business characteristics divisions business cycles activity businesses drilling evaluation segment closely correlated rig counts therefore prone cyclicality drilling activity increases decreases activity businesses completion production segment dependent production volumes therefore less cyclical drilling evaluation segment also 30 equity interest westerngeco seismic venture schlumberger limited “schlumberger” accordingly report results three segments drilling evaluation completion production westerngeco • drilling evaluation segment consists baker hughes drilling fluids drilling fluids hughes christensen oilfield drill bits inteq conventional rotary directional drilling measurementwhiledrilling loggingwhiledrilling baker atlas wireline formation evaluation wireline completion services drilling evaluation segment provides products services used drill oil natural gas wells • completion production segment consists baker oil tools workover fishing completion equipment baker petrolite oilfield specialty chemicals centrilift electric submersible pumps progressing cavity pumps completion production segment also includes production optimization business unit permanent downhole monitoring completion production segment provides equipment services used completion phase productive life oil natural gas wells • westerngeco segment consists equity interest westerngeco also 2005 organized business operations divisions around four primary geographic regions north america latin america middle eastasia pacific europe africa russia caspian region council comprised regional vice presidents division well representatives various functions human resources legal marketing health safety environmental regional vice presidents report directly division president structure placed management closer customer improving customer relationships allowing us react quickly local market conditions needs headquarters houston texas significant manufacturing operations various countries including limited united states texas oklahoma louisiana scotland aberdeen east kilbride germany celle northern ireland belfast venezuela maracaibo operate 90 countries around world employ approximately 29100 employees onehalf work outside us revenue 2005 72 billion approximately 36 came providing products services oil natural gas companies operating us 2005 baker hughes worldwide rig count continued increase oil natural gas companies around world recognized need build productive capacity meet growing demand hydrocarbons offset depletion existing developed reserves oil natural gas prices historic highs 2005 reflecting continued strong demand relatively low excess productive capacity disruptions supply due hurricanes gulf mexico reported revenues 71855 million 2005 182 increase compared 2004 approximating 148 increase worldwide average rig count 2005 compared 2004 addition growth revenues increased activity revenues impacted pricing improvements changes market share certain product lines net income 2005 8784 million 662 increase compared 5286 million 2004 customers products services include supermajor major integrated oil natural gas companies independent oil natural gas companies stateowned national oil companies “nocs” ability compete oilfield services market dependent ability differentiate product service offerings technology service price paid value deliver primary driver business customers’ capital operating expenditures dedicated exploring drilling developing producing oil natural gas business cyclical dependent upon customers’ forecasts future oil natural gas prices future economic growth hydrocarbon demand estimates future oil natural gas production 2005 customers’ spending directed worldwide oil north american oil natural gas projects increased compared 2004 increase spending driven multiyear requirement find develop produce hydrocarbons meet growth demand offset production declines increase inventory levels rebuild productive capacity additionally increase supported historically high oil natural gas prices customers’ spending oil gas projects expected continue grow 2006 critical success factors business embodied longterm strategy call strategic framework strategy includes development maintenance high performance culture founded core values product line focused organization focus bestinclass opportunities maintaining financial flexibility financial discipline execution strategies product development commercialization manufacturing quality service quality ongoing effort develop maintain high performance culture starts core values integrity teamwork performance learning employ succession planning efforts develop leaders across businesses embody core values represent diversity customer base hire train employees around world ensure welltrained workforce place support business plans focus bestinclass opportunities starts product line focused organization structure believe product line focused divisions develop technologies deliver bestinclass value customers enterprise also focused markets believe provide bestinclass opportunities growth management team identified markets immediate focus including middle east russia caspian region nocs focus financial flexibility financial discipline backbone effort deliver differential growth superior margins earning acceptable return investments throughout business cycle investments given priority funded depending ability provide riskadjusted returns excess cost capital effort obtain best price products services begins approach capital discipline past years invested growth business repaid debt paid dividends repurchased stock expect maintain flexibility undertake activities future last element strategic framework focuses ability identify develop commercialize new products services lead differential growth superior margins business effort extends every phase operations including continuous improvement programs manufacturing facilities field operations support goal flawless execution well site execution 2006 business plan ability meet 2006 financial objectives dependent number factors include limited ability recruit train retain skilled diverse workforce necessary meet business needs realize price increases commensurate value provide customers excess increase raw material labor costs expand business areas growing rapidly customers whose spending expected increase substantially nocs areas market share opportunities middle east russia caspian region manage increasing raw material component costs especially steel alloys copper carbide chemicals electronic components continue make ongoing improvements productivity manufacturing organization full discussion risk factors forwardlooking statements please see “risk factors related worldwide oil natural gas industry” “risk factors related business” item 1a risk factors “forwardlooking statements” section item 6 contained herein business environment business environment corresponding operating results significantly affected level energy industry spending exploration production “ep” oil natural gas reserves indicator spending rig count drilling workover rigs active many products services provided oilfield services industry required products services used drilling workover phases completion oil natural gas wells actual production hydrocarbons ep spending oil natural gas companies turn influenced strongly expectations supply demand oil natural gas products current expected prices oil natural gas rig counts therefore generally reflect relative strength stability energy prices rig counts providing rig counts public since 1944 gather relevant data field service personnel obtain necessary data routine visits various rigs customers contractors outside sources data compiled distributed various wire services trade associations published website rig counts compiled weekly us canada monthly international us workover rigs published international rig counts include rigs drilling certain locations russia onshore china countries information extremely difficult obtain local resources make accurate count rigs us counted active day count taken well drilled started drilling completed well anticipated sufficient depth may change time may vary region expected potential consumer drill bits general rigs counted active well started reached target depth even extensive delays due weather reasons well started completed rig expected resume work two weeks less rig counted active weather delay rigs typically counted active rig lost damaged drilling operations expected suspended two weeks rigs canada counted active data obtained canadian association oilwell drillers contractors indicates drilling operations occurred week able verify information international areas rigs counted active drilling operations taken place least 15 days month active international areas better data available weekly daily average active rigs taken international areas poor availability data rig counts estimated quoted third party data rig count include rigs transit one location another rigging used nondrilling activities including production testing completion workover opinion deemed potential user drill bits rig counts summarized table averages periods indicated us land inland waters rig count increased 178 2005 compared 2004 due increase drilling natural gas us offshore rig count decreased 41 2005 compared 2004 reflecting activity disruptions caused hurricanes gulf mexico third quarter 2005 canadian rig count increased 247 due increase drilling natural gas outside north america rig count increased 86 2005 compared 2004 rig count latin america increased 90 2005 compared 2004 driven primarily activity increases venezuela colombia argentina north sea rig count increased 103 2005 compared 2004 rig count africa increased 20 2005 compared 2004 activity middle east continued rise steadily 74 increase rig count 2005 compared 2004 driven primarily activity increases saudi arabia qatar sudan yemen rig count asia pacific region 142 2005 compared 2004 primarily due activity increases india indonesia offshore china thailand oil natural gas prices generally changes current price expected future prices oil natural gas drive customers’ expectations prospects oil natural gas sales expenditures explore produce oil natural gas accordingly changes expenditures normally result increased decreased demand products services oil bloomberg west texas intermediate wti cushing crude oil spot price natural gas bloomberg henry hub natural gas spot price prices summarized table averages daily closing prices periods indicated oil prices averaged historic high 5659bbl 2005 prices increased low 40sbbl january 2005 high almost 70bbl late september 2005 moderating ending year low 60sbbl midaugust end september oil prices traded 60bbl 70bbl primarily due disruptive impact hurricanes gulf mexico worldwide demand hydrocarbons driven strong worldwide economic growth particularly strong china developing asia worldwide excess productive capacity lowest level 30 years disruptions potential disruptions oil supply resulted volatile oil prices throughout year 2005 natural gas prices averaged historic high 866mmbtu throughout first seven months 2005 tight balance supply demand supported prices 550mmbtu 8mmbtu last five months 2005 natural gas extremely volatile trading 9mmbtu 15mmbtu due supply disruptions caused gulf mexico hurricanes supported high oil prices worldwide oil natural gas industry outlook section read conjunction factors described “risk factors related worldwide oil natural gas industry” “risk factors related business” item 1a risk factors “forwardlooking statements” section item 6 contained herein factors could impact either positively negatively expectation oil natural gas demand oil natural gas prices drilling activity oil average oil prices 2006 expected 55bbl 75bbl strong worldwide economic growth lack excess productive capacity expected support prices within range growth oil demand expected increase 2006 compared 2005 worldwide economic growth particular economic growth china expected continue grow 2006 beginning december 2005 international energy agency estimated excess productive capacity less 3 demand threequarters excess capacity saudi arabia iraq ongoing lack excess productive capacity leave energy markets susceptible price volatility organization petroleum exporting countries “opec” unlikely able rapidly increase production significant disruptions threat disruptions oil supplies factors could lead prices lower end range include limited 1 significant slowing worldwide economic growth particularly economic growth china 2 increases russian oil exports 3 significant disruption demand 4 factors result excess productive capacity higher oil inventory levels decreased demand factors could lead prices higher end range include limited 1 rapid planned expansion worldwide economy particularly economy china 2 significant slowing exports russia inability key exporting countries produce additional crude 3 factors result excess productive capacity remaining low levels factors could lead disruptions threat disruptions oil supply volatility oil prices include limited 1 terrorist attacks targeting oil production saudi arabia key producers 2 labor strikes key oil producing areas nigeria 3 potential military actions middle east 4 adverse weather conditions especially gulf mexico potential events cause volatility mitigated degree opec particular saudi arabia able increase excess productive capacity well capability markets refine market products refined crude oil natural gas natural gas prices 2006 expected remain volatile averaging 6mmbtu 15mmbtu significant factor markets pace recovery production natural gas gulf mexico following disruptions hurricanes gulf mexico 2005 natural gas prices could trade top beyond top range 1 storage levels relatively low beginning withdrawal season 2 winter weather colder normal summer weather warmer normal 3 experience slower expected restoration hurricane damaged production facilities 4 us economy particularly industrial sector exhibits greater expected growth continued levels oilfield customer spending sufficient support production growth required meet growth natural gas demand natural gas prices could move bottom range 1 storage levels relatively high beginning injection season 2 us economic growth weaker expected 3 weather milder expected customer spending based upon discussions major customers review published industry reports outlook oil natural gas prices described anticipated customer spending trends follows drilling activity based upon outlook oil natural gas prices customer spending described outlook drilling activity measured baker hughes rig count follows risk factors related worldwide oil natural gas industry discussion risk factors cautions regarding forwardlooking statements see “risk factors related worldwide oil natural gas industry” item 1a risk factors “forwardlooking statements” section item 6 contained herein risk factors discussed intended inclusive business outlook section read conjunction factors described “risk factors related business” “risk factors related worldwide oil natural gas industry” “forwardlooking statements” sections contained herein factors could impact either positively negatively expectation oil natural gas demand oil natural gas prices drilling activity outlook 2006 took account factors described herein revenues 2006 expected increase approximately 19 21 line expected increase customer spending expect growth revenues primarily due increased activity pricing improvement assumptions regarding overall growth customer spending assume strong economic growth us china resulting average oil price exceeding 50bbl assumptions regarding customer spending north america assume strong economic growth us natural gas prices exceeding average 8mmbtu north america expect revenues increase approximately 21 23 2006 compared 2005 expect spending landbased projects continue increase 2006 driven demand natural gas following trend evident 2005 also expect offshore spending gulf mexico increase modestly 2006 compared 2005 normal weatherdriven seasonal decline us canadian spending first half year result sequentially softer revenues first second quarters 2006 2005 2004 2003 revenues outside north america 576 585 579 total revenues respectively 2006 expect revenues outside north america continue 55 60 total revenues expect revenues increase approximately 18 21 2006 compared 2005 continuing multiyear trend growth customer spending large projects nocs expected reflect established seasonality trends resulting softer revenues first half year stronger revenues second half addition customer spending affected weatherrelated reductions north sea first second quarters 2006 middle east africa latin america regions expected grow modestly 2006 compared 2005 expectations spending revenue growth could decrease disruptions key oil natural gas production markets venezuela nigeria 2005 westerngeco contributed 967 million equity income affiliates compared 345 million equity income affiliates 2004 expect trend improving operating results westerngeco continue throughout 2006 information regarding westerngeco’s profitability 2006 based information westerngeco provided us information accurate forecasts profitability could impacted either positively negatively based forecasts believe net income per diluted share 2006 range 340 360 includes impact expensing stock option awards stock issued employee stock purchase plan 180 million 200 million net tax significant price increases lower expected raw material labor costs higher planned activity significantly better expected results westerngeco could cause earnings per share reach upper end range conversely less expected price increases higher expected raw material labor costs lower expected productivity significantly worse expected results westerngeco could result earnings per share bottom range ability improve pricing dependent demand products services competitors strategies managing capacity commercial introduction new technology important factor realizing pricing improvement without pricing discipline throughout industry whole meaningful improvements prices likely realized additionally significant changes drilling activity outside expectations could impact operating results positively negatively business approximately 90 countries including onehalf 35 countries lowest scores indicates high levels corruption transparency international’s corruption perception index “cpi” survey 2005 devote significant resources development maintenance enforcement business code conduct policy foreign corrupt practices act “fcpa” policy internal control processes procedures compliance related policies notwithstanding devotion resources part consequence thereof time discover receive information alleging potential violations laws regulations including fcpa policies processes procedures conduct internal investigations potential violations take appropriate action depending upon outcome investigation addition us government agencies authorities conducting investigations allegations potential violations laws anticipate devotion significant resources compliance related issues including necessity investigations continue aspect business number countries oil natural gas exploration development production take place requested conduct operations compliance related issues could limit ability business countries order provide products services countries may future utilize ventures third parties sell products distributors otherwise modify business approach order improve ability conduct business accordance laws regulations business code conduct third quarter 2005 independent foreign subsidiaries initiated process prohibit business activity directly indirectly involves facilitates transactions iran sudan governments including governmentcontrolled companies operating outside countries implementation process substantially complete end 2006 expected material impact consolidated financial statements risk factors related business discussion risk factors cautions regarding forwardlooking statements see “risk factors related business” item 1a risk factors “forwardlooking statements” section contained herein list risk factors intended inclusive critical accounting estimates preparation consolidated financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosures contingent assets liabilities base estimates judgments historical experience assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained business environment operate changes defined critical accounting estimate one important portrayal either financial condition results operations requires us make difficult subjective complex judgments estimates matters uncertain discussed development selection critical accounting estimates auditethics committee board directors auditethics committee reviewed disclosure presented past three fiscal years made material changes methodology used establish critical accounting estimates discussed believe following critical accounting estimates used preparation consolidated financial statements addition items within consolidated financial statements require estimation deemed critical defined allowance doubtful accounts determination collectibility amounts due customers requires us use estimates make judgments regarding future events trends including monitoring customers’ payment history current credit worthiness determine collectibility reasonably assured well consideration overall business climate customers operate inherently uncertainties require us make frequent judgments estimates regarding customers’ ability pay amounts due us order determine appropriate amount valuation allowances required doubtful accounts provisions doubtful accounts recorded becomes evident customer make required payments either contractual due dates future december 31 2005 2004 allowance doubtful accounts totaled 514 million 30 502 million 36 total gross accounts receivable respectively believe allowance doubtful accounts adequate cover potential bad debt losses current conditions however uncertainties regarding changes financial condition customers either adverse positive could impact amount timing additional provisions doubtful accounts may required five percent change allowance doubtful accounts would pretax impact approximately 26 million 2005 inventory reserves inventory significant component current assets stated lower cost market requires us record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments estimates forecasts inherently include uncertainties require us make judgments regarding potential outcomes december 31 2005 2004 inventory reserves totaled 2013 million 152 2200 million 177 gross inventory respectively believe reserves adequate properly value potential excess slow moving obsolete inventory current conditions significant unanticipated changes estimates forecasts either adverse positive could impact amount timing additional provisions excess obsolete inventory may required five percent change inventory reserve balance would pretax impact approximately 101 million 2005 impairment longlived assets longlived assets include property goodwill intangible assets investments affiliates certain assets comprise significant amount total assets review carrying values assets impairment periodically least annually goodwill whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make judgments regarding longterm forecasts future revenues costs related assets subject review turn forecasts uncertain require assumptions demand products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period given nature evaluations application specific assets specific times possible reasonably quantify impact changes assumptions however based upon evaluation current business climate operate currently anticipate significant asset impairment losses necessary foreseeable future income taxes liability method used determining income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered valuation allowances established reduce deferred tax assets likely portion deferred tax assets realized determining need valuation allowances considered made judgments estimates regarding estimated future taxable income ongoing prudent feasible tax planning strategies estimates judgments include degree uncertainty changes estimates assumptions could require us adjust valuation allowances deferred tax assets historically changes valuation allowances caused major changes business cycle certain countries changes local country law ultimate realization deferred tax assets depends generation sufficient taxable income applicable taxing jurisdictions operate 90 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenues rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability taxing jurisdiction could impact amount income taxes provide given year tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings resulting change tax liability dependent numerous factors difficult estimate include among others amount nature additional taxes potentially asserted local tax authorities willingness local tax authorities negotiate fair settlement administrative process impartiality local courts sheer number countries business potential changes tax paid one country either produce fail produce offsetting tax change countries experience estimates assumptions used provide future tax assessments proven appropriate however past experience guide potential exists however limited tax resulting resolution current potential future tax controversies may differ materially amount accrued although provided taxes believe ultimately payable result assessments aggregate assessments approximately 341 million excess taxes provided consolidated financial statements addition aforementioned assessments received various taxing authorities provide taxes certain situations assessments received situations consider probable taxes ultimately payable exceed amounts reflected filed tax returns accordingly taxes provided situations guidance statement financial accounting standards “sfas” 5 accounting contingencies future events changes facts tax law judicial decisions regarding existing law favorable audit outcome may later indicate assertion additional taxes longer probable circumstance possible taxes previously provided would released pensions postretirement benefit obligations pensions postretirement benefit obligations related plan expenses calculated using actuarial models methods involves use two critical assumptions discount rate expected rate return assets important elements determining plan expenses measuring plan assets liabilities evaluate critical assumptions least annually although considered less critical assumptions used determining benefit obligations plan expenses demographic factors like retirement age mortality turnover also evaluated periodically updated reflect actual expected experience discount rate enables us state expected future cash flows present value measurement date lower discount rate increases present value benefit obligations increases plan expenses used discount rate 600 2005 625 2004 675 2003 determine plan expenses 50 basis point reduction discount rate would increased plan expenses 2005 34 million determine expected rate return plan assets consider current expected asset allocations well historical expected returns various categories plan assets lower rate return increases plan expenses assumed rates return plan investments 850 2005 2004 2003 50 basis point reduction expected rate return assets principal plans would increased plan expenses 2005 29 million discontinued operations fourth quarter 2005 management initiated board directors approved plan sell baker supply products division “spd” product line group within completion production segment spd distributes basic supplies products small tools drilling industry january 2006 signed nonbinding letter intent sale spd sale expected close first quarter 2006 spd revenues 325 million year ended december 31 2005 transaction subject negotiation execution definitive sale agreement well various conditions including satisfactory due diligence review spd’s business assurance transaction consummated september 2004 completed sale baker hughes mining tools “bhmt” product line group within drilling evaluation segment manufactured rotary drill bits used mining industry 315 million recorded gain sale 02 million net tax 36 million consisted gain disposal 68 million offset loss 66 million related recognition cumulative foreign currency translation adjustments earnings october 2003 signed definitive agreement sale bird machine “bird” remaining division former process segment recorded charges totaling 374 million net tax 109 million consisted loss 135 million writedown bird fair value 62 million severance warranty accruals loss 177 million related recognition cumulative foreign currency translation adjustments earnings january 2004 completed sale bird recorded additional loss sale 05 million tax benefit received 56 million proceeds subject postclosing adjustments purchase price retained certain accounts receivable inventories assets second quarter 2004 made net payment 68 million buyer settlement final purchase price adjustments result changes value assets sold liabilities assumed buyer date initial sales price negotiated closing sale december 2002 entered exclusive negotiations sale interest oil producing operations west africa received 100 million deposit transaction effective january 1 2003 resulted gain sale 41 million net tax benefit 02 million received remaining 220 million proceeds april 2003 purchase price adjustments related sale eimco process equipment “eimco” completed resulting release escrow balance received 20 million 29 million returned buyer recorded additional loss sale eimco 25 million net tax 13 million reclassified consolidated financial statements prior periods presented reflect operations discontinued see note 2 notes consolidated financial statements item 8 herein additional information regarding discontinued operations results operations discussions relating significant line items consolidated statements operations based available information represent analysis significant changes events impact comparability reported amounts appropriate identified specific events changes affect comparability trends possible practical quantified impact items discussions based consolidated financial results individual segments contribute disproportionately revenues profitability cash requirements table details certain consolidated statement operations data percentage revenues 2005 2004 2003 respectively dollar amounts millions revenues 2005 increased 182 compared 2004 primarily due increases activity evidenced 148 increase worldwide rig count pricing improvements four six percent increases market share selected product lines geographic areas increases partially offset impact hurricanes gulf mexico revenues north america accounted 424 total revenues increased 209 2005 compared 2004 despite unfavorable impact us offshore revenues approximately 680 million hurricanerelated disruptions increase reflects increased activity us evidenced 180 increase north american rig count activity dominated landbased gasdirected drilling revenues outside north america accounted 576 total revenues increased 163 2005 compared 2004 increase reflects improvement international drilling activity evidenced 86 increase rig count outside north america particularly latin america middle east asia pacific coupled price increases certain markets product lines revenues 2004 increased 162 compared 2003 reflecting 101 increase worldwide rig count revenues north america accounted 415 total revenues increased 144 compared 2003 increase reflects increased drilling activity us canada evidenced 109 increase north american rig count 248 million related intellectual property license fees expected recur magnitude future revenues outside north america accounted 585 total revenues increased 175 compared 2003 increase reflects improvement international drilling activity evidenced 86 increase rig count outside north america primarily latin america asia pacific partially offset decreased drilling activity north sea africa 2004 revenue growth primarily due increases activity lesser extent pricing improvements cost revenues cost revenues 2005 increased 136 compared 2004 cost revenues percentage revenues 688 716 2005 2004 respectively decrease cost revenues percentage revenue primarily result overall price increases four six percent high utilization rental tool fleet personnel increases partially offset higher raw material costs employee compensation expenses cost revenues 2004 increased 143 compared 2003 cost revenues percentage revenues 716 728 2004 2003 respectively decrease cost revenues percentage revenues primarily related limited pricing improvement certain markets product lines improved cost control measures including lower repair maintenance costs inteq division partially offset increased material costs higher employee compensation expense change geographic product mix sale products services also contributed decrease cost revenues percentage revenues 2004 revenue increases came predominantly outside north america margins revenues generated outside north america typically higher margins generated north america selling general administrative selling general administrative “sga” expenses increased 107 2005 compared 2004 increase corresponds increased activity resulted primarily higher marketing employee compensation expenses sga expenses 2004 increased 106 compared 2003 increase primarily due higher marketing administrative expenses result increased activity including higher employee compensation expense increased costs related continued focus compliance including legal investigations increased staffing legal compliance audit groups increase also due implementation programs procedures result requirements sarbanesoxley act 2002 reversal restructuring charge 2000 board directors approved plan substantially exit oil natural gas exploration business recorded restructuring charge 295 million included restructuring charge 11 million contractual obligation related oil natural gas property angola property subsequently sold 2003 reversed liability related contractual obligation accordingly impairment investment affiliate 2003 result continued weakness seismic industry evaluated carrying value investment westerngeco recorded impairment loss 453 million writedown investment fair value fair value determined using combination market capitalization discounted cash flow approach assisted determination fair value third party although anticipated declines fair value investment westerngeco would result additional impairments equity income loss affiliates equity income affiliates increased 638 million 2005 compared 2004 increase almost entirely due increase equity income westerngeco significant equity method investment westerngeco’s revenue profitability continued improve result ongoing favorable market conditions seismic industry equity income affiliates 363 million 2004 compared equity loss affiliates 21 million 2003 excludes 1357 million related portion restructuring impairment charge taken westerngeco third quarter 2003 operating results westerngeco continued adversely affected weakness seismic industry result weakness westerngeco recorded certain impairment restructuring charges 4520 million impairment multiclient seismic library rationalization marine seismic fleet interest expense interest income interest expense decreased 113 million 2005 compared 2004 decrease primarily due lower total debt levels partially offset impact interest rate swap agreement place april 2004 june 2005 lower total debt levels result repayment 3500 million longterm debt second quarter 2004 interest income 2005 increased 112 million 2004 due significantly higher cash balances shortterm investments year resulting primarily higher cash flows operations interest expense 2004 decreased 195 million compared 2003 primarily due lower total debt levels effect interest rate swap agreement entered april 2004 lower total debt levels result repayment 3500 million longterm debt second quarter 2004 decreased interest expense 160 million 2004 compared 2003 additionally favorable impact interest rate swap agreement decreased interest expense 41 million 2004 compared 2003 income taxes effective tax rates differ us statutory income tax rate 35 due state income taxes differing rates tax international operations higher taxes within westerngeco venture additionally 2005 reflected 106 million reduction tax expense attributable recognition deferred tax asset associated supplemental retirement plan “srp” 2003 recognized incremental effect 363 million additional taxes attributable portion operations westerngeco amount 159 million related reduction carrying value equity investment westerngeco tax benefit remaining 204 million arose operations venture due venture taxed certain foreign jurisdictions based deemed profit basis percentage revenues rather profits ii unbenefitted foreign losses venture operating losses impairment restructuring charges certain foreign jurisdictions current tax benefit deferred tax asset recorded due uncertainty realization 2005 2003 benefits 43 million 33 million respectively recognized result various refund claims filed us tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law received tax assessments various taxing authorities currently varying stages appeals andor litigation regarding matters provided amounts believe ultimately result proceedings believe substantial defenses questions raised pursue legal remedies unfavorable outcome result however resolution matters involves uncertainties assurances outcomes favorable cumulative effect accounting change december 31 2005 adopted financial accounting standards board “fasb” interpretation 47 “fin 47” conditional asset retirement obligations fin 47 clarifies term “conditional asset retirement obligation” used sfas 143 accounting asset retirement obligations refers legal obligation perform asset retirement activity timing andor method settlement conditional future event may within control entity adoption fin 47 resulted charge 09 million net tax 05 million recorded cumulative effect accounting change consolidated statement operations conjunction adoption recorded conditional asset retirement obligations 16 million fair value costs associated special handling asbestos related materials certain facilities also certain facilities contain asbestos related materials liability recognized fair value cannot reasonably estimated believe indeterminate settlement dates obligations range time would settle obligations unknown cannot estimated therefore sufficient information exist apply expected present value technique january 1 2003 adopted sfas 143 accounting asset retirement obligations sfas 143 requires fair value liability associated asset retirement obligation “aro” recognized period incurred reasonable estimate made liability aro revised subsequent period due passage time changes estimates associated retirement costs capitalized part carrying amount longlived asset subsequently depreciated estimated useful life asset adoption sfas 143 2003 resulted charge 56 million net tax 28 million recorded cumulative effect accounting change consolidated statement operations conjunction adoption recorded aro liabilities 114 million primarily anticipated costs obligations associated future disposal power source units certain divisions refurbishment costs associated certain leased facilities europe fleet leased railcars tanks liquidity capital resources objective financing business maintain adequate financial resources access additional liquidity 2005 cash flows operations proceeds issuance common stock resulting exercise stock options principal sources funding anticipate cash flows operations sufficient fund liquidity needs 2006 also 5000 million committed revolving credit facility provides backup liquidity event unanticipated significant demand cash flows could funded operations capital planning process focused utilizing cash flows generated operations ways enhance value company 2005 used cash variety activities including working capital needs payment dividends repurchase common stock repayments borrowings capital expenditures cash flows cash flows provided used continuing operations type activity follows years ended december 31 millions statements cash flows entities international operations local currency functional exclude effects changes foreign currency exchange rates occur given year noncash changes result changes reflected certain accounts consolidated statements cash flows may reflect changes corresponding accounts consolidated balance sheets operating activities cash flows operating activities steadily increasing last three years expect trend continue 2006 attribute increases cash flow increasing levels income continuing operations adjusted noncash items cash flows operating activities continuing operations increased 1678 million 2005 compared 2004 increase primarily due increase income continuing operations 3491 million partially offset change net operating assets liabilities used 1806 million cash flows 2005 compared 2004 underlying drivers changes operating assets liabilities follows contributions defined benefit pension plans 2005 approximately 480 million decrease approximately 620 million compared 2004 due higher funding excess minimum requirements 2004 cash flows operating activities continuing operations increased 1328 million 2004 compared 2003 increase primarily due increased operating performance attributable increased revenues addition changes net operating assets liabilities provided 111 million less cash flows 2004 compared 2003 underlying drivers changes operating assets liabilities follows contributions defined benefit pension plans 2004 approximately 1100 million increase approximately 820 million compared 2003 due decision improve funded status certain pension plans provide us increased flexibility future funding pension plans investing activities principal recurring investing activity funding capital expenditures ensure appropriate levels types rental tools place generate revenues operations expenditures capital assets totaled 4783 million 3482 million 4039 million 2005 2004 2003 respectively majority expenditures rental tools machinery equipment including wireline tools equipment 2005 paid 468 million acquisitions businesses net cash acquired december purchased zeroth technology limited “zertech” developer expandable metal sealing element 203 million november paid 255 million net cash acquired 17 million remaining 50 interest quantx wellbore instrumentation “quantx” venture entered 2003 engaged permanent inwell monitoring market 2005 also made smaller acquisitions aggregate purchase price 10 million 2005 purchased 770 million auction rate securities highly liquid variablerate debt securities underlying security longterm maturity interest rate reset dutch auctions typically held every 7 28 35 days creating shortterm liquidity shortterm investments classified availableforsale recorded cost approximates market value proceeds disposal assets 901 million 1069 million 668 million 2005 2004 2003 respectively disposals relate rental tools lostinhole well machinery rental tools equipment longer used operations sold throughout year included proceeds 2004 122 million related sale certain real estate properties held sale 2005 received distributions 300 million westerngeco recorded reduction carrying value investment also received 133 million schlumberger related westerngeco trueup payment 130 million recorded reduction carrying value investment 03 million interest income may 2005 received 37 million release portion amount held escrow related sale petreco international remainder expected released us first quarter 2006 subject indemnity obligations sales agreement 2004 paid 66 million acquisition businesses net cash acquired purchased remaining 60 interest luna energy llc “luna” venture entered 2002 10 million also paid 56 million settlement final purchase price related acquisition completed prior year invested additional 71 million certain investments affiliates 2003 made two acquisitions aggregate purchase price 169 million 95 million paid cash addition 2003 invested 381 million affiliates 301 million related 50 interest quantx 2004 received 587 million net proceeds sale businesses interest affiliate january completed sale bird received 56 million proceeds subject postclosing adjustments purchase price june 2004 made net payment 68 million buyer bird settlement final purchase price adjustments february 2004 completed sale minority interest petreco international venture entered 2001 received proceeds 358 million 74 million placed escrow pending outcome potential indemnification obligations pursuant sales agreement september also completed sale bhmt received proceeds 315 million 2003 received 240 million net proceeds sale businesses april completed sale interest oil producing property west africa received remaining 220 million proceeds also completed purchase price adjustments related sale eimco division received 20 million release escrow balance routinely evaluate potential acquisitions businesses third parties may enhance current operations expand operations new markets product lines may also time sell business operations considered part core business financing activities net repayments borrowings commercial paper shortterm debt 711 million 355 million 112 million 2005 2004 2003 respectively 2004 repaid 1000 million 80 notes due may 2004 2500 million 7875 notes due june 2004 2003 repaid 1000 million 58 notes due february 2003 repayments funded cash hand cash flows operations issuance commercial paper total debt outstanding december 31 2005 10879 million decrease 744 million compared december 31 2004 total debt total capitalization defined total debt plus stockholders’ equity ratio 019 december 31 2005 023 december 31 2004 april 2004 entered interest rate swap agreement notional amount 3250 million associated 625 notes due january 2009 interest rate swap agreement designated qualified fair value hedging instrument due outlook interest rates terminated interest rate swap agreement june 2005 required us make payment 55 million amount deferred amortized increase interest expense remaining life underlying debt security different times 2003 entered three separate interest rate swap agreements notional amount 3250 million associated 625 notes due january 2009 agreements designated qualified fair value hedging instruments due outlook interest rates terminated three agreements received payments totaling 269 million three agreements terminated prior entering new agreement deferred gains amortized reduction interest expense remaining life underlying debt security received proceeds 2281 million 1159 million 618 million 2005 2004 2003 respectively issuance common stock exercise stock options employee stock purchase plan october 27 2005 board directors authorized us repurchase 4555 million common stock addition balance 445 million remaining board directors’ september 2002 authorization resulting authorization repurchase total 5000 million common stock november 3 2005 entered stock purchase plan agent purchase shares common stock complies requirements rule 10b51 promulgated securities exchange act 1934 term november plan run november 7 2005 april 30 2006 unless earlier terminated february 22 2006 entered another plan term run february 23 2006 april 30 2006 unless earlier terminated term agent use best efforts repurchase fixed dollar value common stock trading day subject applicable trading rules cumulative amount purchased november plan equals 2500 million february plan equals 1500 million inclusive commissions fees paid us agent related repurchases shares repurchased agent prevailing market prices subject limitations provided us open market transactions intended comply rule 10b18 exchange act agent may terminate plans however shares repurchased time cost shares exceeds amount specified us agent fourth quarter 2005 repurchased 17 million shares common stock average price 5817 per share total 985 million 2003 repurchased 63 million shares average price 2878 per share total 1814 million upon repurchase shares retired paid dividends 1611 million 1536 million 1543 million 2005 2004 2003 respectively beginning fourth quarter 2005 authorized board directors increased quarterly dividend 013 per share compared 0115 per share paid prior quarters available credit facilities december 31 2005 9556 million credit facilities commercial banks 5000 million committed revolving credit facility “facility” expires july 2010 facility provides three oneyear extensions subject approval acceptance lenders among conditions addition facility contains provision allow increase facility amount additional 5000 million subject approval acceptance lenders among conditions facility contains certain covenants among things require maintenance funded indebtedness total capitalization ratio defined formula per facility less equal 060 restrict certain merger transactions sale substantially assets company significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations facility may accelerated events default include payment defaults lenders facility covenant defaults customary defaults december 31 2005 compliance facility covenants direct borrowings facility year ended december 31 2005 however extent outstanding commercial paper ability borrow facility reduced december 31 2005 outstanding commercial paper market conditions change revenues significantly reduced operating costs increase cash flows liquidity could reduced additionally could cause rating agencies lower credit rating ratings triggers facility would accelerate maturity borrowings facility however downgrade credit ratings could increase cost borrowings facility could also limit preclude ability issue commercial paper occur would seek alternative sources funding including borrowing facility believe credit ratings relationships major commercial investment banks would allow us obtain interim financing existing credit facilities currently unforeseen significant needs growth opportunities also believe interim financings could funded subsequent issuances longterm debt equity necessary cash requirements 2006 believe operating cash flows provide us sufficient capital resources liquidity manage working capital needs meet contractual obligations fund capital expenditures pay dividends repurchase common stock support development shortterm longterm operating strategies currently expect 2006 capital expenditures 7500 million 7800 million excluding acquisitions expenditures expected used primarily normal recurring items necessary support growth business operations 2006 expect make interest payments 720 million 770 million based current expectations debt levels 2006 also expect make income tax payments 4900 million 5300 million 2006 december 31 2005 authorization remaining repurchase 4015 million common stock may repurchase common stock depending market conditions applicable legal requirements liquidity considerations anticipate paying dividends 1700 million 1800 million 2006 however board directors change dividend policy anytime 2006 estimate contribute 180 million 230 million defined benefit pension plans make benefit payments related postretirement welfare plans 150 million 170 million also estimate contribute 850 million 950 million defined contribution plans believe material trends demands commitments events uncertainties would reasonably likely material impact financial condition liquidity previously discussed currently information would create reasonable likelihood reported levels revenues cash flows operations 2005 indicative expect future contractual obligations table set forth contractual cash obligations december 31 2005 figures include table based estimates assumptions obligations including duration anticipated actions third parties factors contractual cash obligations actually pay future periods may vary reflected table estimates assumptions subjective 1 amounts represent expected cash payments total debt include unamortized discounts deferred issuance costs net deferred gains terminated interest rate swap agreements 2 amounts represent expected cash payments interest fixed rate longterm debt 3 enter operating leases normal course business lease agreements provide us option renew lease future operating lease payments would change exercised renewal options entered additional operating lease agreements 4 purchase obligations include agreements purchase goods services enforceable legally binding specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations exclude agreements cancelable anytime without penalty 5 amounts represent longterm liabilities including current portion reflected consolidated balance sheet timing amount payment streams known amounts include payments certain environmental remediation liabilities payments deferred compensation payouts acquisition agreements payments certain asset retirement obligations amounts include payments pension contributions payments various postretirement welfare benefit plans postemployment benefit plans payments deferred taxes tax liabilities offbalance sheet arrangements normal course business customers vendors others entered offbalance sheet arrangements letters credit bank issued guarantees totaled approximately 3198 million december 31 2005 addition december 31 2005 guaranteed debt obligations third parties maximum potential exposure 14 million none offbalance sheet arrangements either likely material effect current future financial condition results operations liquidity capital resources normal operating leases offbalance sheet financing arrangements securitization agreements liquidity trust vehicles synthetic leases special purpose entities materially exposed financing liquidity market credit risk could arise engaged financing arrangements new accounting standards november 2004 fasb issued sfas 151 inventory costs amendment arb 43 chapter 4 amends guidance arb 43 clarify accounting abnormal amounts idle facility expense freight handling costs wasted material sfas 151 requires items recognized current period charges addition sfas 151 requires allocation fixed production overheads inventory based normal capacity production facilities sfas 151 effective inventory costs incurred fiscal years beginning june 15 2005 adopted sfas 151 january 1 2006 material effect consolidated financial statements december 2004 fasb issued revised sfas 123 sharebased payment “sfas 123r” sfas 123r revision sfas 123 supersedes apb 25 sfas 123r requires entity measure cost employee services received exchange award equity instruments based grantdate fair value award cost recognized period employee required provide service exchange award sfas 123r also requires entity initially measure cost employee services rendered exchange award liability instruments current fair value fair value award remeasured subsequently reporting date settlement date changes fair value required service period recognized compensation cost period accordance guidance issued sec delayed effective date sfas 123r adopted sfas 123r january 1 2006 using modified prospective method whereby recognize expense previously granted unvested awards remaining service period award new awards granted adoption date expensed estimated service period based current estimates expect impact 2006 adoption sfas 123r additional expense 180 million 200 million net tax continuing evaluate various option pricing models required assumptions estimates used determining fair value awards made 2006 addition estimated number awards granted 2006 final amount determined result actual amount recorded expense 2006 may different estimated amount estimated amount may indicative expense may incur future years december 2004 fasb issued fasb staff position 1091 “fsp 1091” application fasb statement 109 “accounting income taxes” “sfas 109” tax deduction qualified production activities provided american jobs creation act 2004 provides guidance american jobs creation act 2004 “act” act provides tax deduction income qualified domestic production activities fsp 1091 provides treatment deduction special deduction described sfas 109 deduction effect existing deferred tax assets liabilities impact deduction reported period deduction claimed us tax return adopted fsp 1091 january 1 2005 material impact 2005 effective tax rate expect deduction material impact effective tax rate future years december 2004 fasb issued fasb staff position 1092 “fsp 1092” accounting disclosure guidance foreign repatriation provision within american jobs creation act 2004 provides guidance sfas 109 respect recording potential impact repatriation provisions act company’s income tax expense deferred tax liability fsp 1092 states company allowed time beyond financial reporting period enactment evaluate effect act plan reinvestment repatriation foreign earnings purposes applying sfas 109 decided elect repatriate foreign earnings provisions act accordingly consolidated financial statements reflect provision taxes related election march 2005 fasb issued fasb interpretation 47 “fin 47” accounting conditional asset retirement obligations fin 47 clarifies term “conditional asset retirement obligation” used sfas 143 accounting asset retirement obligations refers legal obligation perform asset retirement activity timing andor method settlement conditional future event may within control entity adopted fin 47 december 31 2005 resulted charge 09 million net tax 05 million recorded cumulative effect accounting change consolidated statement operations conjunction adoption recorded conditional asset retirement obligations 16 million fair value costs associated certain conditional asset retirement obligations may 2005 fasb issued sfas 154 accounting changes error corrections sfas 154 replaces accounting principles board opinion 20 “apb 20” accounting changes sfas 3 reporting accounting changes interim financial statements changes requirements accounting reporting change accounting principle sfas 154 requires retrospective application changes accounting principle prior periods’ financial statements unless impracticable determine either periodspecific effects cumulative effect change sfas 154 effective accounting changes corrections errors made fiscal years beginning december 15 2005 adopted sfas 154 january 1 2006 related party transactions conjunction formation westerngeco november 2000 entered agreement schlumberger whereby cash trueup payment made either parties based formula comparing ratio net present value sales revenue party’s contributed multiclient seismic data libraries fouryear period ending november 30 2004 ratio net book value libraries november 30 2000 maximum payment either party would required make result adjustment 1000 million august 2005 received 133 million schlumberger related trueup payment recorded 130 million reduction carrying value investment westerngeco 03 million interest income tax effect 33 million related payment included provision income taxes year ended december 31 2005 november 2000 also entered agreement westerngeco whereby westerngeco subleased facility us period ten years current market rates 2005 2004 2003 received payments 65 million 55 million 50 million respectively westerngeco related lease 2005 received distributions 300 million westerngeco recorded reductions carrying value investment effective december 1 2005 either party westerngeco master formation agreement may offer sell entire interest venture party cash purchase price per percentage interest specified offer notice offer sell accepted offering party obligated purchase party obligated sell entire interest price per percentage interest price specified offer notice december 31 2005 2004 net accounts receivable payable unconsolidated affiliates totaled 04 million 11 million respectively significant related party transactions forwardlooking statements mda certain statements notes consolidated financial statements include forwardlooking statements within meaning section 27a securities act 1933 amended section 21e securities exchange act 1934 amended “forwardlooking statement” words “anticipate” “believe” “ensure” “expect” “if” “intend” “estimate” “project” “forecasts” “predict” “outlook” “aim” “will” “could” “should” “would” “may” “likely” similar expressions negative thereof intended identify forwardlooking statements forwardlooking statements based assumptions believe reasonable may prove accurate statements include potential impact future transactions acquisition disposition merger joint venture transaction could occur undertake obligation publicly update revise forwardlooking statement expectations regarding business outlook including changes revenue pricing capital spending profitability strategies operations impact common stock repurchases oil natural gas market conditions market share contract terms costs availability resources economic regulatory conditions environmental matters forecasts regarding matters forwardlooking information subject risks uncertainties could cause actual results differ materially results expected although possible identify factors risks uncertainties include risk factors timing risk factors identified “risk factors related worldwide oil natural gas industry” “risk factors related business” sections contained item 1a risk factors set forth time filings securities exchange commission “sec” documents available web site sec’s electronic data gathering analysis retrieval system “edgar” httpwwwsecgov item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations “mda” read conjunction consolidated financial statements “item 8 financial statements supplementary data” contained herein executive summary leading provider drilling formation evaluation completion production products services worldwide oil natural gas industry report results two segments drilling evaluation completion production aligned product line based upon types products services provided customers upon business characteristics divisions business cycles collectively refer results two segments oilfield operations • drilling evaluation segment consists baker hughes drilling fluids drilling fluids hughes christensen oilfield drill bits inteq drilling measurementwhiledrilling loggingwhiledrilling baker atlas wireline formation evaluation wireline completion services divisions drilling evaluation segment provides products services used drill evaluate oil natural gas wells • completion production segment consists baker oil tools workover fishing completion equipment baker petrolite oilfield specialty chemicals centrilift electrical submersible pumps progressing cavity pumps divisions completion production segment also includes productionquest production optimization permanent monitoring business unit completion production segment provides equipment services used completion phase productive life oil natural gas wells previously reported third segment westerngeco consisted 30 interest westerngeco seismic venture jointly owned schlumberger april 28 2006 sold 30 interest westerngeco schlumberger 24 billion recorded pretax gain 17435 million 10352 million aftertax business operations divisions organized around four primary geographic regions north america latin america middle east asia pacific europe africa russia caspian region council comprised regional vice presidents division well representatives various functions human resources legal including compliance marketing finance treasury health safety environmental regional vice presidents report directly division president structure placed management closer customer facilitating stronger customer relationships allowing us react quickly local market conditions needs operate 90 countries around world corporate headquarters houston texas significant manufacturing operations various countries including limited united states texas oklahoma louisiana united kingdom scotland northern ireland germany celle south america venezuela argentina december 31 2007 approximately 35800 employees 1200 employees december 31 2006 approximately 57 employees work outside united states 2007 financial results reported revenues 104282 million 2007 155 increase compared 2006 exceeding 23 increase worldwide average rig count 2007 compared 2006 2007 rig count continued increase outside north america oil natural gas companies around world recognized need build productive capacity meet growing demand hydrocarbons offset depletion existing developed reserves north american rig count flat 2007 compared 2006 primarily due weak market conditions canada offshore us offset growth us land market oil prices historic highs 2007 reflecting continued strong demand relatively low spare productive capacity well weaker us dollar addition growth revenues increased activity revenues impacted changes market share certain product lines lesser extent pricing improvements net income 2007 15139 million compared 24190 million 2006 included 10352 million aftertax gain sale interest westerngeco details oilfield operations revenue region dollar amounts millions 1 united states canada 2 mexico central america south america 3 europe africa russia caspian area excluding egypt 4 middle east asia pacific including egypt customers products services include supermajor major integrated oil natural gas companies independent oil natural gas companies stateowned national oil companies “nocs” ability compete oilfield services market dependent ability differentiate product service offerings technology service price paid value deliver primary driver business customers’ capital operating expenditures dedicated exploring drilling developing producing oil natural gas business cyclical dependent upon customers’ forecasts future oil natural gas prices future economic growth hydrocarbon demand estimates future oil natural gas production 2007 customers’ spending directed worldwide oil north american natural gas projects increased compared 2006 increase spending driven multiyear requirement find develop produce hydrocarbons meet growth demand offset production declines increase inventory levels increase spare productive capacity additionally increase supported historically high oil natural gas prices business environment business environment corresponding operating results significantly affected level energy industry spending exploration development production oil natural gas reserves spending oil natural gas exploration production companies dependent upon forecasts regarding expected future supply future demand oil natural gas products estimates riskadjusted costs find develop produce reserves changes oil natural gas exploration production spending normally result increased decreased demand products services reflected rig count measures oil natural gas prices generally changes current price expected future price oil natural gas drive customers’ expectations prospects oil natural gas sales expenditures explore produce oil natural gas accordingly changes expenditures normally result increased decreased demand products services oil bloomberg west texas intermediate wti cushing crude oil spot price natural gas bloomberg henry hub natural gas spot price prices summarized table averages daily closing prices periods indicated oil prices averaged nominal historic high 7223bbl year 2007 year 2007 began oil prices declining yearly low 5048bbl midjanuary throughout balance year oil prices continued increase due concerns weak inventory levels limited worldwide excess productive capacity concerns demand growth would outpace production growth weakening us dollar relative currencies also contributed higher price oil prices reached yearly high 9888bbl midnovember 2007 natural gas prices averaged 696mmbtu year 2007 year 2007 began record levels natural gas storage gas prices low 5mmbtu range however cold weather midjanuary early february resulted higher anticipated withdrawals gas storage placed upward pressure gas prices increased yearly high 907mmbtu early february 2007 natural gas inventory continued build throughout year gas prices came pressure hitting low 529mmbtu early september prices recovered late september expectations cooler weather ended year 7mmbtu rig counts providing rig counts public since 1944 gather relevant data field service personnel obtain necessary data routine visits various rigs customers contractors outside sources data compiled distributed various wire services trade associations published website rig counts compiled weekly us canada monthly international us workover rigs published international rig counts include rigs drilling certain locations russia caspian onshore china information cannot readily obtained rigs us counted active day count taken well drilled started drilling completed well anticipated sufficient depth may change time may vary region potential consumer drill bits rigs canada counted active data obtained canadian association oilwell drillers contractors indicates drilling operations occurred week able verify information international areas rigs counted active drilling operations taken place least 15 days month active international areas better data available weekly daily average active rigs taken international areas poor availability data rig counts estimated third party data rig count include rigs transit one location another rigging used nondrilling activities including production testing completion workover significant consumers drill bits rig counts summarized table averages periods indicated us land inland waters rig count increased 87 2007 compared 2006 due increased natural gas drilling activity us offshore rig count decreased 189 2007 compared 2006 reflecting ongoing migration rigs gulf mexico attractive markets weatherrelated disruptions canadian rig count decreased 272 2006 levels due lower activity resulting lessfavorable economics natural gas producers outside north america rig count increased 85 2007 compared 2006 rig count latin america increased 96 2007 compared 2006 driven primarily activity increases colombia brazil mexico north sea rig count slightly 2007 compared 2006 rig count africa increased 138 2007 compared 2006 activity 2007 middle east increased 113 compared 2006 driven primarily activity increases saudi arabia egypt oman rig count asia pacific region 57 2007 compared 2006 modest increases multiple countries across region results operations discussions relating significant line items consolidated statements operations based available information represent analysis significant changes events impact comparability reported amounts appropriate identified specific events changes affect comparability trends possible practical quantified impact items discussions based consolidated financial results individual segments contribute disproportionately revenues profitability cash requirements addition discussions revenues cost revenues combined basis business drivers individual components product sales service rentals similar fourth quarter 2007 began classifying certain expenses cost sales cost services rentals previously classified selling general administrative expenses change result internal review improve management reporting reclassified expenses relate selling field service costs closely related operating activities addition renamed selling general administrative expenses statement operations marketing general administrative expenses accurately describe costs included therein impact reclassifications increase cost sales 3661 million 3186 million 2762 million years ended december 31 2007 2006 2005 respectively increase cost services rentals 1239 million 1143 million 1047 million years ended december 31 2007 2006 2005 respectively decrease marketing general administrative expense 4900 million 4329 million 3809 million years ended december 31 2007 2006 2005 respectively reclassifications impact total costs expenses changes offset one another prior periods reclassified conform new presentation table details certain consolidated statement operations data percentage revenues 2007 2006 2005 dollar amounts millions revenues 2007 increased 155 compared 2006 primarily due increases activity certain geographic areas lesser extent improvement price revenues north america accounted 418 total revenues increased 90 2007 compared 2006 revenues us land operations increased 154 compared rig count increased 87 reflects continued increase gasdirected horizontal drilling revenue us offshore market increased 29 compared rig count decreased 189 increases offset 86 decline canadian revenue rig count declined 272 revenues outside north america accounted 582 total revenues increased 207 2007 compared 2006 increase reflects improvement international drilling activity evidenced 85 increase rig count outside north america particularly latin america africa middle east asia pacific region coupled improvements certain markets product lines price increases revenues 2006 increased 256 compared 2005 primarily due increases activity evidenced 132 increase worldwide rig count pricing improvements seven nine percent increases market share selected product lines geographic areas revenues north america accounted 443 total revenues increased 312 2006 compared 2005 increase reflects continued broad based increase drilling activity us evidenced 153 increase north american rig count activity dominated landbased gasdirected drilling revenues outside north america accounted 557 total revenues increased 215 2006 compared 2005 increase reflects improvement international drilling activity 2006 evidenced 87 increase rig count outside north america particularly middle east africa north sea coupled price increases certain markets product lines cost revenues cost revenues 2007 increased 165 compared 2006 cost revenues percentage revenues 656 651 2007 2006 respectively increase cost revenues percentage consolidated revenues primarily due change geographic product mix sale products services increasing competitive conditions pricing pressures particularly north america addition higher raw material costs employee compensation costs contributed increase effective january 1 2007 increased depreciable lives certain assets baker atlas division resulting reduction cost services rentals 2007 approximately 23 million cost revenues 2006 increased 170 compared 2005 cost revenues percentage revenues 651 699 2006 2005 respectively decrease cost revenues percentage consolidated revenues primarily result overall average price increases seven nine percent continued high utilization rental tool fleet personnel change geographic product mix sale products services also contributed decrease cost revenues percentage revenues increase partially offset higher raw material costs employee compensation costs addition factors fourth quarter 2006 revised accounting procedures related certain inventory baker atlas division resulting one time reduction cost services rentals 2006 212 million research engineering research engineering expenses increased 98 2007 compared 2006 131 2006 compared 2005 increase years reflects commitment developing commercializing new technologies well investing core product offerings 2007 opened first phase center technology innovation houston texas facility focuses research development completion production systems harsh environments second phase scheduled completion 2008 marketing general administrative marketing general administrative expenses increased 63 2007 compared 2006 increase corresponds increased activity resulted primarily higher employee related costs including compensation training benefits higher marketing expenses result increased activity increase legal tax compliance related expenses marketing general administrative expenses increased 396 2006 compared 2005 increase corresponds increased activity resulted primarily higher marketing employee compensation costs including stockbased compensation increased due adoption statement financial accounting standard 123r shared based payment using modified prospective application method increase also results financial charge 461 million recorded fourth quarter 2006 connection settlement negotiations sec doj equity income affiliates equity income affiliates decreased 592 million 2007 compared 2006 397 million 2006 compared 2005 decreases equity income affiliates due sale 30 interest westerngeco april 28 2006 gain sale interest affiliate april 28 2006 sold 30 interest westerngeco schlumberger 24 billion cash recorded pretax gain 17435 million 10352 million aftertax interest expense interest dividend income interest expense decreased 28 million 2007 compared 2006 34 million 2006 compared 2005 decreases primarily due slightly lower average total debt levels interest dividend income 2007 decreased 237 million 2006 primarily due lower average cash shortterm investment balances 2007 result share repurchase programs interest dividend income 2006 increased 495 million 2005 primarily due interest dividends earned invested cash received sale interest westerngeco income taxes effective tax rate 2007 329 lower us statutory income tax rate 35 due lower rates tax certain international operations offset state income taxes effective tax rate 2006 358 higher us statutory income tax rate 35 due taxes related sale interest westerngeco venture state income taxes offset lower rates tax international operations 2006 provided 7083 million taxes related sale interest westerngeco included estimate taxes related future repatriation nonus proceeds 2005 effective tax rate 316 reflected 106 million reduction tax expense attributable recognition deferred tax asset associated supplemental retirement plan tax filings various periods subject audit tax authorities jurisdictions conduct business audits may result assessment additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law received tax assessments various taxing authorities currently varying stages appeals andor litigation regarding matters believe substantial defenses questions raised pursue legal remedies unfavorable outcome result however resolution matters involves uncertainties assurances outcomes favorable provide uncertain tax positions pursuant fin 48 accounting uncertainty income taxes interpretation fasb statement 109 cumulative effect accounting change december 31 2005 adopted financial accounting standards board “fasb” interpretation 47 conditional asset retirement obligations “fin 47” fin 47 clarifies term “conditional asset retirement obligation” used sfas 143 accounting asset retirement obligations refers legal obligation perform asset retirement activity timing andor method settlement conditional future event may within control entity adoption fin 47 resulted charge 09 million net tax 05 million recorded cumulative effect accounting change consolidated statement operations conjunction adoption recorded conditional asset retirement obligations 16 million fair value costs associated special handling asbestos related materials certain facilities outlook worldwide oil natural gas industry outlook section read conjunction factors described “risk factors related worldwide oil natural gas industry” “risk factors related business” item 1a risk factors “forwardlooking statements” section item 7 contained herein factors could impact either positively negatively expectation oil natural gas demand oil natural gas prices exploration development spending drilling activity production spending outlook exploration development spending based upon expectations customer spending markets operate driven primarily perception industry expectations oil natural gas prices likely impact customer capital operating budgets well factors could impact economic return oil gas companies expect developing oil gas reserves energy price forecasts based information provided customers well market research analyst reports including short term energy outlook “steo” published energy information administration us department energy “doe” oil market report published international energy agency “iea” monthly oil market report published organization petroleum exporting countries “opec” outlook production spending based primarily energy price forecasts expected oil natural gas production levels outlook activity outside north america heavily influenced expectations oil prices outlook activity north america heavily influenced expectations north american natural gas prices expectations oil prices demand oil expected increase range 13 20 million barrels per day 2008 compared 2007 nonopec supply expected increase 06 11 million barrels per day gap increased demand nonopec supply expected met increased opec supply decreases oil inventories spare productive capacity buffer oil markets supply disruptions expected remain relatively low reflecting continuing tight balance supply demand january 2008 steo doe forecasted oil prices average 87bbl 2008 given relatively low levels inventory spare productive capacity prices expected remain volatile doe expects increased production capacity 2009 result prices falling 82bbl delays either opec nonopec supply additions could impact forecast believe forecasts similar forecasts customers using plan current spending levels prices averaging 60bbl 100bbl customers continue execute capital budgets planned customers likely reduce capital budgets oil price expected trade 60bbl extended period time risks oil prices falling significantly 60bbl include 1 significant economic recession either us andor china 2 increases nonopec production 3 significant disruption worldwide demand 4 reduced geopolitical tensions 5 poor opec quota discipline 6 factors result spare productive capacity higher oil inventory levels decreased demand prices rise significantly 100bbl risk high energy price environment could destroy demand significantly slow economic growth economic growth slow customers would likely decrease capital spending current levels primary risk oil prices exceeding 100bbl supply disruption major oil exporting country including iran saudi arabia iraq venezuela nigeria norway expectations north american natural gas prices january 2008 steo doe forecasted us natural gas demand would increase 06 2008 compared 2007 assuming normal weather demand us natural gas met production fields us pipeline imports canada imports lng natural gas storage buffering demand supply current us drilling activity levels additions new supply expected offset production declines us supply expected increase 16 2008 compared 2007 canadian imports expected decrease result lower activity levels canada increased demand within canada lng imports dependent global demand lng us playing role market last resort accepting gas storage needed international markets capacity accept lng imports expected constrain lng imports january 2008 steo doe forecasted us natural gas prices expected average approximately 8mmbtu 2008 believe customers’ forecasts similar doe’s prices expected remain volatile 2008 weatherdriven demand imports canadian gas lng imports production lower 48 gas fields playing significant roles determining price volatility variations supply demand balance reflected gas storage levels based industry data regarding production decline rates believe significant reduction drilling activity us canada would result decreased production within one two quarters helping rebalance supply demand quickly industry activity customer spending based upon discussions major customers review published industry reports outlook oil natural gas prices described outlook drilling activity measured baker hughes rig count anticipated customer spending trends follows • outside north america customer spending primarily directed developing oil supplies expected increase approximately 15 20 2008 compared 2007 drilling activity outside north america expected increase approximately 8 10 2008 compared 2007 assumptions regarding overall growth customer spending outside north america assume stable economic growth us china balance world outside north america expectations spending could decrease disruptions key oil natural gas production markets significant weakening economies us china significant consumers oil natural gas • north america customer spending north america primarily towards developing natural gas supplies expected increase moderately 2008 compared 2007 drilling activity expected increase 2 3 us land decrease 8 10 offshore us decrease 8 10 canada customer spending trends market reflecting drilling activity trends productionoriented spending expected increase 4 6 reflecting increases oil gas production expectations spending revenue growth north america assume normal winter summer weather stable economic growth us modest increase lng imports company outlook section read conjunction factors described “risk factors related business” “risk factors related worldwide oil natural gas industry” “forwardlooking statements” sections contained herein factors could impact either positively negatively expectation oil natural gas demand oil natural gas prices drilling activity outside north america 2008 expect revenues outside north america increase percentage range low midteens compared 2007 continuing multiyear trend growth customer spending large projects nocs expected reflect established seasonality trends resulting softer revenues first half year stronger revenues second half particular sequential decline first quarter 2008 compared fourth quarter 2007 approximately 100 million revenue primarily completion production segment addition customer spending could affected weatherrelated reductions north sea first second quarters 2008 2007 2006 2005 revenues outside north america 582 557 576 total revenues respectively north america revenue growth 2008 north america expected moderate revenue increases us land operations drilling evaluation segment moderate steady growth completion production segment throughout north america expected partially offset decreases revenue drilling evaluation segment canada us offshore 2007 2006 2005 north american revenues 418 443 424 total revenues respectively factors could significant positive impact profitability include increasing prices products services lower expected raw material labor costs andor higher planned activity conversely less expected price increases price deterioration higher expected raw material labor costs andor lower expected activity would negative impact profitability ability improve pricing dependent demand products services competitors’ strategies managing capacity commercial introduction new technology important factor realizing pricing improvement without capital discipline throughout industry whole meaningful improvements prices likely realized 2008 capital budget supports continuation infrastructure expansion began late 2006 early 2007 opened new expanded facilities many regions andor countries including latin america middle east russia addition opened first phase center technology innovation houston research engineering facility design advanced completion systems high pressure high temperature hostile environments early 2008 opened new campus dubai includes middle east asia pacific region headquarters regional operations center training center expands eastern hemisphere training capabilities capital expenditures expected approximately 13 billion 2008 including approximately 250 million 300 million expect spend infrastructure primarily outside north america execution 2008 business plan ability meet 2008 financial objectives dependent number factors key factors include strength oilfield services market outside north america ability realize price increases commensurate value provide customers excess increase raw material labor costs ability meet growth objectives areas lack transparency market makes operating deferred prosecution agreement difficult strength north american markets ability protect pricing markets demand oilfield services industry capacity closely balanced factors include limited ability recruit train retain skilled diverse workforce necessary meet business needs expand business areas growing rapidly customers whose spending expected increase substantially nocs areas market share opportunities middle east russia caspian region india manage increasing raw material component costs especially steel alloys copper tungsten carbide lead nickel chemicals electronic components continue make ongoing improvements productivity manufacturing organization manage spending north american market depending relative strength weakness market compliance business 90 countries including approximately onehalf 30 countries lowest scores indicates high levels corruption transparency international’s corruption perception index survey 2007 devote significant resources development maintenance enforcement business code conduct policy fcpa policy internal control processes procedures compliance related policies notwithstanding devotion resources part consequence thereof time discover receive information alleging potential violations laws regulations including fcpa policies processes procedures conduct internal investigations potential violations take appropriate action depending upon outcome investigation anticipate devotion significant resources compliance related issues including necessity investigations continue aspect business number countries oil natural gas exploration development production take place requested conduct operations compliance related issues limited ability business andor raised cost operating countries order provide products services countries may future utilize ventures third parties sell products distributors otherwise modify business approach order improve ability conduct business accordance laws regulations business code conduct bestinclass global ethics compliance program “compliance program” based core values integrity performance teamwork learning ii standards contained business code conduct iii laws countries operate iv commitments doj sec compliance program referred within company “c2” “completely compliant” completely compliant theme intended establish proper toneatthetop throughout company employees consistently reminded play crucial role ensuring company always conducts business ethically legally safely chief compliance officer “cco” oversees development administration enforcement business code conduct well legal compliance standards policies procedures processes cco reports directly general counsel chairman auditethics committee board directors cco ready access senior officers company legal compliance group 30 employees includes cco global ethics compliance director four regional trade directors fcpa due diligence counsel specialized investigative counsel legal compliance group company attorneys located throughout world available answer questions regarding compliance program provide assistance employees highlights compliance program include • comprehensive employee compliance training program covering substantially employees includes requiring employees take webbased fcpa training testing modules available numerous languages mandatory global inperson specialized training fcpa compliance virtually operations managers approximately 8000 employees specially designed training finance personnel approximately 2000 employees addition programs allow us verify prompt training new employees regarding core values business code conduct compliance standards • comprehensive internal policies areas payments nonus commercial agents charitable donations relating nonus operations giftgiving travel entertainment nonus government officials addition countryspecific guidance customs standards export reexport controls economic sanctions antiboycott • compliance council meets quarterly comprised division compliance officers key line managers divisions senior representatives ethics compliance group finance security human resources health safety environmental internal audit compliance council responsible assisting cco strategic direction ongoing development coordination implementation compliance program • use technology monitor report compliance matters including webbased antiboycott reporting tool planned future use global trade management software tool • whistleblower program designed encourage reporting ethics compliance matters without fear retaliation including worldwide business helpline operated third party currently available tollfree 150 languages • established blue ribbon panel comprised wellknown outside experts advising us areas securities compliance laws • significantly reduced number nonus commercial agents use conduct business nonus agents continue use employ extensive preretention fcpa due diligence requirements well proactive postretention oversight includes among things maintenance comprehensive due diligence records certification periodic recertification training nonus commercial agents including written acknowledgement agents fcpa requirements policies • conduct periodic internal audits include onsite legalaccounting audits nonus third party commercial agents specific fcpa audit steps audits conducted internal audit function fcpa risk assessments corporate ethics compliance group specified countries rated high transparency international’s corruption perception index liquidity capital resources objective financing business maintain adequate financial resources access additional liquidity 2007 cash flows operations principal sources funding anticipate cash flows operations sufficient fund liquidity needs 2008 may incur shortterm debt fund expenses capital expenditures additional stock repurchases us cash cost effectively transferred us offshore may issue commercial paper shortterm debt fund cash needs us excess cash generated us also 5000 million committed revolving credit facility provides backup liquidity event unanticipated significant demand cash flows could funded operations extent outstanding commercial paper however ability borrow credit facility reduced capital planning process focused utilizing cash flows generated operations ways enhance value company 2007 used cash variety activities including working capital needs payment dividends repurchase common stock capital expenditures cash flows cash flows provided used continuing operations type activity follows years ended december 31 millions statements cash flows entities international operations local currency functional exclude effects changes foreign currency exchange rates occur given year noncash changes result changes reflected certain accounts consolidated statements cash flows may reflect changes corresponding accounts consolidated balance sheets operating activities cash flows operating activities continuing operations provided 14747 million year ended december 31 2007 compared 5897 million year ended december 31 2006 cash flows operating activities 2007 2006 reduced 1253 million 5551 million respectively income tax payments related gain sale interest westerngeco excluding income tax payments cash flows operating activities 2007 2006 16000 million 11448 million respectively increase 4552 million increase primarily due increase 1984 million income continuing operations adjusted noncash items coupled decrease 1314 million net operating assets liabilities used less cash flows operating activities excluding westerngeco transaction 2006 steadily increasing last three years expect trend continue 2008 underlying drivers changes operating assets liabilities follows contributions defined benefit pension plans 2007 approximately 210 million compared 2006 contributions approximately 340 million decrease approximately 130 million reduction contributions primarily due lower minimum funding requirements nonus plans cash flows operating activities continuing operations provided 5897 million year ended december 31 2006 compared 9496 million year ended december 31 2005 cash flows operating activities 2006 reduced 5551 million income tax payments related gain sale interest westerngeco excluding income tax payments cash flows operating activities 2006 11448 million increase 1952 million prior year increase primarily due increase income continuing operations adjusted noncash items partially offset change net operating assets liabilities used cash flows underlying drivers changes operating assets liabilities follows investing activities principal recurring investing activity funding capital expenditures ensure appropriate levels types rental tools place generate revenues operations expenditures capital assets totaled 11270 million 9222 million 4783 million 2007 2006 2005 respectively majority expenditures rental tools including wireline tools machinery equipment also increased spending new facilities expansions existing facilities infrastructure projects increase capital assets 2007 result increased demand products services 2007 purchased 25207 million received proceeds 28388 million maturing auction rate securities 2006 purchased 38829 million received proceeds 36062 million maturing auction rate securities 2005 purchased 770 million auction rate securities auction rate securities variablerate debt securities underlying security longterm maturity interest rate reset dutch auctions typically held every 7 28 35 days cash equivalents december 31 2007 10544 million consisted primarily commercial paper money market funds invested government securities bank time deposits short longterm investment portfolios invested aaa rated non mortgagebacked auction rate securities december 31 2007 held 356 million auction rate securities part unsuccessful auctions result unsuccessful auctions interest rate resets every 28 days one month libor plus 50 basis points liquidity investments diminished based ability access cash equivalents expected operating cash flows sources cash including credit facilities commercial banks anticipate lack liquidity investments affect ability operate business investments classified availableforsale securities recorded cost believe approximates fair market value december 31 2007 based ability intent hold investments auction rate securities classified noncurrent investments december 31 2006 auction rate securities classified shortterm investments september 2007 discontinued additional investments types securities proceeds disposal assets 1788 million 1354 million 901 million 2007 2006 2005 respectively disposals relate rental tools lostinhole well machinery rental tools equipment longer used operations sold throughout year included proceeds 2006 104 million related sale certain real estate properties held sale 2007 received 99 million proceeds sale equity investment toyo petrolite company ltd 2006 sold 30 interest westerngeco 24 billion cash westerngeco also made cash distribution 596 million prior closing 2005 received distributions 300 million westerngeco recorded reduction carrying value investment also received 133 million schlumberger related westerngeco trueup payment 130 million recorded reduction carrying value investment 03 million interest income 2006 received 463 million net proceeds sale certain businesses interest affiliate specifically march 2006 completed sale baker spd received 425 million proceeds received 38 million release remaining amount held escrow related sale petreco international may 2005 received 37 million initial release escrow 2006 paid 662 million acquisitions businesses net cash acquired first quarter 2006 acquired nova technology corporation “nova” 554 million net cash acquired 30 million plus assumed debt second third quarters 2006 made three acquisitions 108 million net cash acquired 07 million 2005 paid 468 million acquisitions businesses net cash acquired december purchased zeroth technology limited “zertech” 203 million november paid 255 million net cash acquired 17 million remaining 50 interest quantx wellbore instrumentation “quantx” 2005 also made smaller acquisitions aggregate purchase price 10 million routinely evaluate potential acquisitions businesses third parties may enhance current operations expand operations new markets product lines may also time sell business operations considered part core business financing activities net repayments borrowings commercial paper shortterm debt 142 million 88 million 711 million 2007 2006 2005 respectively total debt outstanding december 31 2007 10848 million increase 97 million compared december 31 2006 total debt total capitalization defined total debt plus stockholders’ equity ratio 015 december 31 2007 017 december 31 2006 april 2004 entered interest rate swap agreement notional amount 3250 million associated 625 notes due january 2009 interest rate swap agreement designated qualified fair value hedging instrument due outlook interest rates terminated interest rate swap agreement june 2005 required us make payment 55 million amount deferred amortized increase interest expense remaining life underlying debt security received proceeds 677 million 925 million 2281 million 2007 2006 2005 respectively issuance common stock exercise stock options employee stock purchase plan prior 2005 purchases authorization remaining 5000 million repurchase common stock 2005 repurchased 17 million shares common stock average price 5817 per share total 985 million april 2006 board directors authorized repurchase additional 18 billion common stock 2006 repurchased 243 million shares common stock average price 7650 per share total 18560 million july 26 2007 board directors authorized plan repurchase 10 billion common stock time addition existing stock repurchase plan 2007 repurchased 64 million shares common stock average price 8125 per share total 5215 million authorization remaining repurchase approximately 8240 million common stock end 2007 paid dividends 1662 million 1726 million 1611 million 2007 2006 2005 respectively available credit facilities december 31 2007 10185 million credit facilities commercial banks 5000 million committed revolving credit facility “facility” expires july 2012 facility provides one year extension subject approval acceptance lenders among conditions addition facility contains provision allow increase facility amount additional 5000 million subject approval acceptance lenders among conditions facility contains certain covenants among things require maintenance funded indebtedness total capitalization ratio defined formula per facility less equal 060 restrict certain merger transactions sale substantially assets company significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations facility may accelerated events default include payment defaults lenders facility covenant defaults customary defaults december 31 2007 compliance facility covenants direct borrowings facility year ended december 31 2007 however extent outstanding commercial paper ability borrow facility reduced december 31 2007 outstanding commercial paper market conditions change revenues significantly reduced operating costs increase cash flows liquidity could reduced additionally could cause rating agencies lower credit ratings triggers facility would accelerate maturity borrowings facility however downgrade credit ratings could increase cost borrowings facility could also limit preclude ability issue commercial paper occur would seek alternative sources funding including borrowing facility believe credit ratings relationships major commercial investment banks would allow us obtain interim financing existing credit facilities currently unforeseen significant needs growth opportunities also believe interim financings could funded subsequent issuances longterm debt equity necessary cash requirements 2008 believe operating cash flows provide us sufficient capital resources liquidity manage working capital needs meet contractual obligations fund capital expenditures pay dividends repurchase common stock support development shortterm longterm operating strategies may incur shortterm debt fund expenses capital expenditures additional stock repurchases us cash cost effectively transferred us offshore may issue commercial paper shortterm debt fund cash needs us excess cash generated us 2008 expect capital expenditures approximately 13 billion excluding acquisitions expenditures expected used primarily normal recurring items necessary support growth business operations 2008 also expect make interest payments 730 million 750 million based debt levels december 31 2007 anticipate making income tax payments 8100 million 8600 million 2008 may repurchase common stock depending market conditions applicable legal requirements liquidity considerations stock repurchases 2008 february 19 2008 80 million shares common stock average price 6895 per share total 5518 million february 19 2008 authorization remaining repurchase total 2722 million common stock anticipate paying dividends 1600 million 1650 million 2008 however board directors change dividend policy anytime us merged two pension plans effective january 1 2007 resulting one taxqualified us pension plan baker hughes incorporated pension plan “bhipp” result merger plans bhipp overfunded therefore required intend make pension contributions bhipp 2008 currently estimate required make contributions bhipp four seven years thereafter expect contribute 20 million 30 million nonqualified us pension plans 130 million 150 million nonus pension plans also make benefit payments related postretirement welfare plans 130 million 150 million estimate contribute 1420 million 1530 million defined contribution plans previously discussed believe material trends demands commitments events uncertainties would reasonably likely material impact financial condition liquidity previously discussed currently information would create reasonable likelihood reported levels revenues cash flows operations 2007 indicative expect near term contractual obligations table set forth contractual cash obligations december 31 2007 certain amounts included table based estimates assumptions obligations including duration anticipated actions third parties factors contractual cash obligations actually pay future periods may vary reflected table estimates assumptions subjective millions 1 amounts represent expected cash payments total debt include unamortized discounts deferred issuance costs net deferred gains terminated interest rate swap agreements 2 amounts represent expected cash payments interest longterm debt 3 enter operating leases normal course business lease agreements provide us option renew lease future operating lease payments would change exercised renewal options entered additional operating lease agreements 4 purchase obligations include agreements purchase goods services enforceable legally binding specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations exclude agreements cancelable anytime without penalty 5 amounts represent longterm liabilities including current portion reflected consolidated balance sheet timing amount payment streams known amounts include payments certain environmental remediation liabilities payments deferred compensation payouts acquisition agreements payments certain asset retirement obligations amounts include payments pension contributions payments various postretirement welfare benefit plans postemployment benefit plans 6 estimated fin 48 tax liabilities settled result expiring statutes audit activity competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate timing particular settlement depend length tax audit related appeals process expiration statute liability settled due statute expiring favorable audit result settlement fin 48 tax liability would result cash payment offbalance sheet arrangements normal course business customers vendors others entered offbalance sheet arrangements letters credit bank issued guarantees totaled approximately 4668 million december 31 2007 also commitments outstanding purchase obligations related capital expenditures inventory purchase orders contracts approximately 2931 million december 31 2007 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements normal operating leases offbalance sheet financing arrangements securitization agreements liquidity trust vehicles synthetic leases special purpose entities materially exposed financing liquidity market credit risk could arise engaged financing arrangements critical accounting estimates preparation consolidated financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosures contingent assets liabilities base estimates judgments historical experience assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained business environment operate changes defined critical accounting estimate one important portrayal either financial condition results operations requires us make difficult subjective complex judgments estimates matters uncertain discussed development selection critical accounting estimates auditethics committee board directors auditethics committee reviewed disclosure presented past three fiscal years made material changes methodology used establish critical accounting estimates discussed except required adoption fin 48 believe following critical accounting estimates used preparation consolidated financial statements addition items within consolidated financial statements require estimation deemed critical defined allowance doubtful accounts determination collectibility amounts due customers requires us use estimates make judgments regarding future events trends including monitoring customers’ payment history current credit worthiness determine collectibility reasonably assured well consideration overall business climate customers operate inherently uncertainties require us make frequent judgments estimates regarding customers’ ability pay amounts due us order determine appropriate amount valuation allowances required doubtful accounts provisions doubtful accounts recorded becomes evident customer make required payments either contractual due dates future december 31 2007 2006 allowance doubtful accounts totaled 590 million 24 505 million 24 total gross accounts receivable respectively believe allowance doubtful accounts adequate cover potential bad debt losses current conditions however uncertainties regarding changes financial condition customers either adverse positive could impact amount timing additional provisions doubtful accounts may required five percent change allowance doubtful accounts would impact income continuing operations income taxes approximately 30 million 2007 inventory reserves inventory significant component current assets stated lower cost market requires us record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments estimates forecasts inherently include uncertainties require us make judgments regarding potential outcomes december 31 2007 2006 inventory reserves totaled 2212 million 113 2117 million 122 gross inventory respectively believe reserves adequate properly value potential excess slow moving obsolete inventory current conditions significant unanticipated changes estimates forecasts could impact amount timing additional provisions excess obsolete inventory may required five percent change inventory reserve balance would impact income continuing operations income taxes approximately 111 million 2007 impairment longlived assets longlived assets include property goodwill intangible assets investments affiliates certain assets comprise significant amount total assets review carrying values assets impairment periodically least annually goodwill whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make judgments regarding longterm forecasts future revenues costs related assets subject review turn forecasts uncertain require assumptions demand products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period given nature evaluations application specific assets specific times possible reasonably quantify impact changes assumptions however based upon evaluation current business climate operate currently anticipate significant asset impairment losses necessary foreseeable future income taxes liability method used determining income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered valuation allowances established reduce deferred tax assets likely portion deferred tax assets realized determining need valuation allowances considered made judgments estimates regarding estimated future taxable income ongoing prudent feasible tax planning strategies estimates judgments include degree uncertainty changes estimates assumptions could require us adjust valuation allowances deferred tax assets historically changes valuation allowances caused major changes business cycle certain countries changes local country law ultimate realization deferred tax assets depends generation sufficient taxable income applicable taxing jurisdictions operate 90 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenues rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability taxing jurisdiction could impact amount income taxes provide given year tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings consistent requirements fin 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” resulting change tax liability dependent numerous factors difficult estimate include among others amount nature additional taxes potentially asserted local tax authorities willingness local tax authorities negotiate fair settlement administrative process impartiality local courts sheer number countries business potential changes tax paid one country either produce fail produce offsetting tax change countries experience estimates assumptions used provide future tax assessments proven appropriate however past experience guide potential exists however limited tax resulting resolution current potential future tax controversies may differ materially amount accrued addition aforementioned assessments received various tax authorities provide taxes uncertain tax positions assessments received accordance fin 48 believe tax reserves adequate relation potential additional assessments established adjust amounts information available event occurs necessitating change reserves future events changes facts law judicial decisions regarding application existing law favorable audit outcome result changes amounts provided believe resolution tax matters material effect consolidated financial condition company although resolution could material impact consolidated statement operations particular period effective tax rate period resolution occurs pensions postretirement benefit obligations pensions postretirement benefit obligations related plan expenses calculated using actuarial models methods involves use two critical assumptions discount rate expected rate return assets important elements determining plan expenses measuring plan assets liabilities evaluate critical assumptions least annually although considered less critical assumptions used determining benefit obligations plan expenses demographic factors like retirement age mortality turnover also evaluated periodically updated reflect actual expected experience discount rate enables us state expected future cash flows present value measurement date development discount rate us plans based bond matching model whereby hypothetical bond portfolio highquality fixedincome securities selected match cash flows underlying projected benefit obligation discount rate assumption nonus plans reflects market rate highquality fixedincome securities lower discount rate increases present value benefit obligations increases plan expenses used discount rate 60 2007 55 2006 60 2005 determine plan expenses 50 basis point reduction discount rate would decreased income continuing operations income taxes approximately 33 million 2007 determine expected rate return plan assets consider current expected asset allocations well historical expected returns various categories plan assets lower rate return increases plan expenses assumed rates return plan investments 85 2007 2006 2005 50 basis point reduction expected rate return assets principal plans would decreased income continuing operations income taxes approximately 34 million 2007 discontinued operations fourth quarter 2005 management initiated board directors approved plan sell baker supply products division “baker spd” product line group within completion production segment distributes basic supplies products small tools drilling industry march 2006 completed sale baker spd received cash proceeds 425 million recorded gain sale 192 million net tax 110 million consisted aftertax gain disposal 169 million 23 million related recognition cumulative foreign currency translation adjustments earnings reclassified consolidated financial statements prior periods presented reflect operation discontinued see note 2 notes consolidated financial statements item 8 herein additional information regarding discontinued operations new accounting standards february 2006 financial accounting standards board “fasb” issued statement financial accounting standards “sfas” sfas 155 accounting certain hybrid financial instruments amendment fasb statements 133 140 “sfas 155” sfas 155 amends sfas 133 required derivative embedded host contract meet definition derivative accounted separately certain conditions sfas 155 effective financial instruments acquired issued subject remeasurement event following start entity’s first fiscal year beginning september 15 2006 adopted sfas 155 january 1 2007 impact consolidated financial statements july 2006 fasb issued fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” fin 48 clarifies accounting uncertainty income taxes recognized entity’s financial statements accordance sfas 109 accounting income taxes prescribes minimum threshold tax position required meet recognized financial statements fin 48 also provides guidance derecognition measurement classification interest penalties accounting interim periods disclosure transition adopted fin 48 january 1 2007 required recorded reduction beginning retained earnings 642 million see note 6 information september 2006 fasb issued fasb staff position aug air1 “fsp aug air1” addresses accounting planned major maintenance activities fsp aug air1 prohibits use accrueinadvance method accounting planned major maintenance activities annual interim financial reporting periods adopted fsp aug air1 january 1 2007 change method accounting repairs maintenance activities certain rental tools accrueinadvance method direct expense method adoption resulted reversal 342 million accrued liability future repairs maintenance “rm” costs recording income tax liability 90 million net impact 252 million recorded increase beginning retained earnings january 1 2007 restate prior periods impact material financial statements september 2006 fasb issued sfas 157 fair value measurements “sfas 157” intended increase consistency comparability fair value measurements defining fair value establishing framework measuring fair value expanding disclosures fair value measurements sfas 157 originally effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years november 2007 fasb placed one year deferral implementation sfas 157 nonfinancial assets liabilities however sfas 157 effective fiscal years beginning november 15 2007 financial assets liabilities well assets liabilities carried fair value recurring basis financial statements adopted sfas 157 january 1 2008 financial assets liabilities well assets liabilities carried fair value recurring basis financial statements impact consolidated financial statements begin new disclosure requirements first quarter 2008 september 2006 fasb issued sfas 158 employers’ accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r “sfas 158” sfas 158 requires employer recognize overfunded underfunded status defined benefit postretirement plan asset liability statement financial position recognize changes funded status year changes occur comprehensive income additionally requires employer measure funded status plan date year end statement financial position limited exceptions sfas 158 effective end fiscal year ending december 15 2006 however requirement measure plan assets benefit obligations date employer’s fiscal year end statement financial position effective fiscal years ending december 15 2008 adopted requirements sfas 158 december 31 2006 except funded status measurement date requirement adopted december 31 2008 allowed sfas 158 currently expect material impact consolidated financial statements result adoption funded status measurement date requirement february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities including amendment fasb statement 115 “sfas 159” sfas 159 permits entities choose measure eligible financial assets liabilities fair value unrealized gains losses items fair value option elected reported earnings sfas 159 effective fiscal years beginning november 15 2007 adopted sfas 159 january 1 2008 continue evaluate application sfas 159 currently expect material impact consolidated financial statements result adoption december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statements amendment arb 51 sfas 160 establishes accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary effort improve relevance comparability transparency financial information reporting entity provides consolidated financial statements sfas 160 effective fiscal years beginning december 15 2008 adopt sfas 160 january 1 2009 yet determined impact consolidated financial statements december 2007 fasb issued sfas 141 revised 2007 business combinations “sfas 141r” sfas 141r replaces fasb statement 141 business combinations statement retains purchase method accounting used business combinations replaces sfas 141 establishing principles requirements recognition measurement assets liabilities goodwill including requirement transaction costs restructuring costs expensed addition statement requires disclosures enable users evaluate nature financial effects business combination sfas 141 effective business combinations acquisition date beginning first annual reporting period beginning december 15 2008 adopt sfas 141r january 1 2009 acquisitions date related party transactions november 2000 entered agreement westerngeco whereby westerngeco subleases facility us period ten years current market rates 2006 entered extension sublease five additional years rent determined based market rates 2010 2006 2005 received payments 56 million 65 million respectively westerngeco related lease april 28 2006 sold 30 interest westerngeco 24 billion cash recorded pretax gain 17435 million 10352 million aftertax beginning 2007 westerngeco longer considered related party 2006 2005 received distributions 596 million 300 million respectively westerngeco recorded reductions carrying value investment 2005 received 133 million schlumberger related trueup payment associated revenues earned westerngeco four year period ending november 2004 party’s contributed multiclient seismic data libraries recorded 130 million reduction carrying value investment westerngeco 03 million interest income tax effect 33 million related payment included provision income taxes year ended december 31 2005 significant related party transactions forwardlooking statements mda certain statements notes consolidated financial statements include forwardlooking statements within meaning section 27a securities act section 21e exchange act “forwardlooking statement” words “anticipate” “believe” “ensure” “expect” “if” “intend” “estimate” “probable” “project” “forecasts” “predict” “outlook” “aim” “will” “could” “should” “would” “may” “likely” similar expressions negative thereof intended identify forwardlooking statements forwardlooking statements based assumptions believe reasonable may prove accurate statements include potential impact future transactions acquisition disposition merger joint venture transaction could occur undertake obligation publicly update revise forwardlooking statement expectations regarding business outlook including changes revenue pricing capital spending profitability strategies operations impact common stock repurchases oil natural gas market conditions market share contract terms costs availability resources economic regulatory conditions environmental matters forecasts regarding matters forwardlooking information subject risks uncertainties could cause actual results differ materially results expected although possible identify factors risks uncertainties include risk factors timing risk factors identified “risk factors related worldwide oil natural gas industry” “risk factors related business” sections contained item 1a risk factors set forth time filings sec documents available web site sec’s electronic data gathering analysis retrieval system “edgar” httpwwwsecgov risk factors related worldwide oil natural gas industry discussion risk factors cautions regarding forwardlooking statements see “risk factors related worldwide oil natural gas industry” item 1a risk factors “forwardlooking statements” section item 7 contained herein risk factors discussed intended inclusive risk factors related business discussion risk factors cautions regarding forwardlooking statements see “risk factors related business” item 1a risk factors “forwardlooking statements” section contained herein list risk factors intended inclusive item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations “mda” read conjunction consolidated financial statements “item 8 financial statements supplementary data” contained herein executive summary major supplier wellbore related products technology services systems provide products services drilling formation evaluation completion production reservoir technology consulting worldwide oil natural gas industry report results two segments drilling evaluation segment completion production segment aligned product line based upon types products services provided customers upon business characteristics product lines divisions business cycles collectively refer results two segments oilfield operations business operations divisions organized around four primary geographic regions north america latin america europe africa russia caspian middle east asia pacific region council comprised regional vice presidents division well representatives various functions human resources legal including compliance marketing finance treasury health safety environmental regional vice presidents report directly division president structure placed management close customer facilitating stronger customer relationships allowing us react quickly local market conditions needs primary driver business customers’ capital operating expenditures dedicated exploring drilling developing producing oil natural gas business cyclical dependent upon customers’ expectations future oil natural gas prices future economic growth hydrocarbon demand estimates future oil natural gas production 2008 year extreme volatility oil natural gas prices marked turning point multiyear upcycle oilfield service business worldwide economy year began oil prices trading near 100bbl natural gas prices us market trading near 8mmbtu tight supply conditions lower expected growth nonopec production projections strong demand growth particularly china india middle east weakness us dollar drove oil prices record 145bbl early july natural gas prices continued rise first half year response increase oil prices expectations demand growth lower imports liquefied natural gas “lng” compared 2007 environment customers include supermajor major integrated oil natural gas companies independent oil natural gas companies stateowned national oil companies “nocs” continued move forward exploration development projects us number rigs drilling natural gas tight shale formations continued increase providing strong demand drilling evaluation product lines canada increased gas prices improved economics gas producers resulted strong activity following spring “breakup” international activity oriented toward oil producing projects also continued expand second half 2008 outlook worldwide economy deteriorated projections worldwide oil demand revised downward oil prices began retreat historic highs decline oil prices accelerated fourth quarter 2008 hitting low 31bbl late december despite decline oil prices international activity held balance year international activity generally characterized large multiyear projects react materially shortterm changes commodity prices us outlook natural gas demand also weakened concern grew worldwide economy emerging probability increasing production unconventional shale plays would lead oversupplied gas market natural gas prices trended midyear highs close year 6mmbtu decrease natural gas prices impacted economics gas producers placing pressure rig activity compounding impact lower gas prices sharp reduction credit availability occurred financial institutions reacted events following subprime crisis many independent operators us relied upon external sources funding execute exploration development plans reduction external funding sources resulted significant number companies curtailing exploration budgets level funded internallygenerated cash flow credit crisis limited customers us impact spread customers worldwide challenging environment generated revenues 1186 billion 2008 14 increase compared 2007 exceeding 7 increase worldwide average rig count 2008 compared 2007 north american revenues increased 17 compared 6 increase us rig count 11 increase canadian rig count revenues outside north america increased 12 compared 2007 addition growth revenues increased activity revenues impacted changes market share certain product lines lesser extent pricing improvements net income 2008 164 billion compared 151 billion 2007 december 31 2008 approximately 39800 employees 4000 employees december 31 2007 approximately 57 employees work outside united states early 2009 global economy continued weaken many customers announced reductions planned 2009 spending seen continued decreases drilling activity particularly us land market nine weeks following end december 2008 us rig count declined 478 rigs 28 january 2009 began necessary actions adjust operating cost base including reduction workforce continue monitor market conditions adjust cost base deemed necessary business environment business environment corresponding operating results significantly affected level energy industry spending exploration development production oil natural gas reserves spending oil natural gas exploration production companies dependent upon forecasts regarding expected future supply future demand oil natural gas products estimates riskadjusted costs find develop produce reserves changes oil natural gas exploration production spending normally result increased decreased demand products services reflected rig count measures credit crisis declining oil prices lower natural gas prices weakening global economic outlook impacting business environment customers typically fund activity combination borrowed funds internallygenerated cash flow limited availability commercial credit negative effect general economy ability customers continue operate precrisis levels decline oil prices natural gas prices 2008 midsummer highs also negatively impacted customers’ operational cash flow challenging ability continue operate past levels well future spending products services economic slowdown also negatively impacting incremental demand hydrocarbon products especially oecd “organization economic cooperation development” countries oil natural gas prices generally changes current price expected future price oil natural gas drive customers’ expectations prospects oil natural gas sales expenditures explore produce oil natural gas accordingly changes expenditures normally result increased decreased demand products services oil bloomberg west texas intermediate wti cushing crude oil spot price natural gas bloomberg henry hub natural gas spot price prices summarized table averages daily closing prices periods indicated oil prices averaged nominal historic high 9992bbl 2008 year 2008 began oil prices trading near 100bbl early january oil prices continued increase first half year due concerns weak inventory levels limited worldwide excess productive capacity concerns demand growth would outpace production growth weakening us dollar relative currencies also contributed increase oil prices oil prices peaked early july 14529bbl oil prices declined throughout fourth quarter 2008 expectations weakening worldwide economy would adversely impact demand oil prices fell yearly low 3141bbl late december natural gas prices averaged 889mmbtu year 2008 year 2008 began high levels natural gas storage natural gas prices 8mmbtu range cold weather provided price support first quarter year natural gas prices continued strengthen first half year reflecting lower lng imports relative 2007 increasing oil prices natural gas prices reached peak 13mmbtu early july balance year growth natural gas production building inventories concerns weakening demand placed pressure natural gas prices declined low 537mmbtu late december rig counts providing rig counts public since 1944 gather relevant data field service personnel obtain necessary data routine visits various rigs customers contractors outside sources data compiled distributed various wire services trade associations published website rig counts compiled weekly us canada monthly international us workover rigs published international rig counts include rigs drilling certain locations russia caspian onshore china information cannot readily obtained rigs us counted active day count taken well drilled started drilling completed well anticipated sufficient depth may change time may vary region potential consumer drill bits rigs canada counted active data obtained canadian association oilwell drillers contractors indicates drilling operations occurred week able verify information international areas rigs counted active drilling operations taken place least 15 days month active international areas better data available weekly daily average active rigs taken international areas poor availability data rig counts estimated third party data rig count include rigs transit one location another rigging used nondrilling activities including production testing completion workover significant consumers drill bits rig counts summarized table averages periods indicated results operations discussions relating significant line items consolidated statements operations based available information represent analysis significant changes events impact comparability reported amounts appropriate identified specific events changes affect comparability trends possible practical quantified impact items discussions based consolidated financial results individual segments contribute disproportionately revenues profitability cash requirements addition discussions revenues cost revenues combined basis business drivers individual components product sales service rentals similar table details certain consolidated statement operations data percentage revenues dollar amounts millions revenues 2008 compared 2007 revenues 2008 increased 14 compared 2007 primarily due increases activity certain geographic areas evidenced 7 increase worldwide rig count price improvement changes market share selected product lines geographic areas increases partially offset impact hurricanes gulf mexico north america revenues north america accounted 44 total revenues increased 17 2008 compared 2007 despite unfavorable impact us offshore revenues hurricanerelated disruptions 2008 improvement north america revenues led completion production segment directional drilling evidenced 7 increase us rig count land inland water drilling us offshore rig count 11 due continued migration rigs gulf mexico attractive international markets weatherrelated disruptions canada revenues increased 12 compared 11 increase rig count reflecting improved economics canadian natural gas producers outside north america revenues outside north america accounted 56 total revenues increased 12 2008 compared 2007 increase reflected improvement international drilling activity evidenced 7 increase rig count outside north america market share gains certain geographic areas latin america revenues increased 25 compared 8 increase rig count improved revenue latin america led directional drilling systems brazil colombia completions production systems mexico drill bits throughout region europe africa russia caspian revenues increased 10 improved revenue region led product lines across segments norway libya completion systems well multiple product lines drilling evaluation segment kazakhstan russia partially offset lower drilling activity uk middle east asia pacific revenues increased 8 middle east revenues increased 9 compared 6 increase rig count asia pacific revenues 7 compared 5 increase rig count improvement revenues region led completion production segment china sales various product lines throughout region including oman united arab emirates 2007 compared 2006 revenues 2007 increased 16 compared 2006 primarily due increases activity certain geographic areas lesser extent improvement price net changes market share north america revenues north america accounted 42 total revenues increased 9 strength landbased activity natural gas us offset impact 19 decrease offshore rig count 27 decrease canadian rig count canada revenues decreased 9 compared 27 decrease rig count reflecting lower average natural gas prices 2007 compared 2006 challenging economics natural gas producers outside north america revenues outside north america account 58 total revenues increased 21 2007 compared 2006 increase reflected improvement international drilling activity evidenced 9 increase rig count outside north america latin america revenues increased 20 compared 10 increase rig count increase driven higher activity share brazil activity increases colombia mexico europe africa russia caspian revenues increased 24 revenues russia caspian 50 revenues europe 21 1 increase rig count driven increased activity uk norwegian sectors north sea revenues africa 14 line increase rig count middle east asia pacific revenues increased 17 middle east revenues increased 19 compared 11 increase rig count driven activities qatar egypt saudi arabia asia pacific revenues increased 16 compared 6 increase rig count growth asia pacific region led australia malaysia cost revenues cost revenues 2008 increased 16 compared 2007 cost revenues percentage revenues 67 66 2008 2007 respectively increase cost revenues percentage consolidated revenues primarily due change geographic product mix sale products services increasingly competitive conditions pricing pressures particularly north america addition higher raw material costs labor costs contributed increase cost revenues 2007 increased 17 compared 2006 cost revenues percentage revenues 66 65 2007 2006 respectively increase cost revenues percentage consolidated revenues primarily due change geographic product mix sale products services increasingly competitive conditions pricing pressures particularly north america addition higher raw material costs labor costs contributed increase effective january 1 2007 increased depreciable lives certain assets baker atlas division resulting reduction cost services rentals 2007 approximately 23 million research engineering research engineering expenses increased 15 2008 compared 2007 10 2007 compared 2006 increase years reflects increase research development expenses continued commitment developing commercializing new technologies well increase engineering expenses continue invest core product offerings research development costs increased 12 2008 compared 2007 8 2007 compared 2006 2007 opened first phase center technology innovation houston texas facility focuses research development completion production systems harsh environments second phase completed 2008 marketing general administrative marketing general administrative “mga” expenses increased 12 2008 compared 2007 increased 6 2007 compared 2006 increases correspond increased activity resulted primarily higher employee related costs including compensation training benefits higher marketing expenses result increased activity increase legal tax compliance related expenses increases partially offset foreign exchange gains litigation settlement connection settlement litigation reedhycalog june 2008 company paid reedhycalog 70 million royalties prior use certain patented technologies reedhycalog paid company 8 million royalties license certain company patented technologies net pretax charge 62 million settlement litigation reflected 2008 consolidated statement operations see note 15 “commitment contingencies litigation” notes consolidated financial statements item 8 herein gain sale product line interest affiliate february 2008 sold assets associated completion production segment’s surface safety systems “sss” product line received cash proceeds 31 million sss assets sold included hydraulic pneumatic actuators bonnet assemblies control systems recorded pretax gain 28 million 18 million aftertax april 28 2006 sold 30 interest westerngeco schlumberger 24 billion cash recorded pretax gain 1744 million 1035 million aftertax impairment loss investments company investments auction rate securities “ars” represent interests three variable rate debt securities credit linked notes generally combine low risk assets credit default swaps “cds” create security pays interest assets’ coupon payments periodic sale proceeds cds since september 2007 unable sell ars investments unsuccessful auctions estimated fair value ars investments based underlying structure security collateral values including assessments counterparty credit quality default risk underlying security expected cash flows discount rates overall capital market liquidity based analysis december 2008 recorded otherthantemporary impairment loss 25 million included consolidated statement operations december 31 2008 held ars investments totaling 11 million interest expense interest dividend income interest expense increased 23 million 2008 compared 2007 due new longterm debt issuances 125 billion october 2008 along higher average debt levels throughout 2008 interest expense decreased 3 million 2007 compared 2006 primarily due slightly lower average total debt levels interest dividend income decreased 17 million 2008 compared 2007 primarily due lower interest rates throughout 2008 shortterm investment balances compared 2007 interest dividend income decreased 24 million 2007 compared 2006 primarily due lower average cash shortterm investment balances 2007 result share repurchase programs income taxes effective tax rates 2008 2007 295 329 respectively lower us statutory income tax rate 35 due lower rates tax certain international operations offset state income taxes effective tax rate 2006 358 higher us statutory income tax rate 35 due taxes related sale interest westerngeco venture state income taxes offset lower rates tax international operations 2006 provided 708 million taxes related sale interest westerngeco included estimate taxes related future repatriation nonus proceeds tax filings various periods subject audit tax authorities jurisdictions conduct business audits may result assessment additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law received tax assessments various taxing authorities currently varying stages appeals andor litigation regarding matters believe substantial defenses questions raised pursue legal remedies unfavorable outcome result however resolution matters involves uncertainties assurances outcomes favorable provide uncertain tax positions pursuant fin 48 accounting uncertainty income taxes interpretation fasb statement 109 outlook worldwide oil natural gas industry outlook section read conjunction factors described “risk factors related worldwide oil natural gas industry” “risk factors related business” item 1a risk factors “forwardlooking statements” section item 7 contained herein factors could impact either positively negatively expectation oil natural gas demand oil natural gas prices exploration development spending drilling activity production spending credit crisis declining oil prices lower natural gas prices weakening global economic outlook impacting business environment customers typically fund activity combination borrowed funds internallygenerated cash flow limited availability commercial credit negative effect general economy ability customers continue operate precrisis levels decline oil prices natural gas prices 2008 midsummer highs also negatively impacted customers’ operational cash flow challenging ability continue operate past levels well future spending products services last economic slowdown also negatively impacting incremental demand hydrocarbon products especially oecd countries outlook exploration development spending based upon expectations customer spending markets operate driven primarily perception industry expectations oil natural gas prices likely impact customer capital operating budgets well factors could impact economic return oil gas companies expect developing oil gas reserves forecasts based analysis information provided customers well market research analyst reports including short term energy outlook “steo” published energy information administration us department energy “doe” oil market report published international energy agency “iea” monthly oil market report published organization petroleum exporting countries “opec” outlook economic growth based analysis information published number sources including international monetary fund “imf” oecd world bank oil service company revenue dependent spending customers explore develop produce oil natural gas exploration development spending customers dependent number factors including forecasts future energy demand expectations future energy prices access reserves develop produce oil gas ability fund capital programs industry cyclical past cycles driven primarily alternating periods ample supply shortage oil natural gas relative demand current cycle different primary driver rapid deterioration global economy led declining demand forecasts reductions future demand recent drop commodity prices conjunction reduced access debt markets forced many oil gas companies reduce spending levels supportable expected free cash flow north america outlook spending 2009 also dependent outlook natural gas industry increased drilling activity application horizontal drilling advanced fracturing completion technologies unconventional gas fields resulted gas production exceeding demand natural gas prices fallen expected increase drilling reduced level rate necessary offset depletion supply demand come back balance commodity cycle north american natural gas aggravated recession low natural gas prices reduced access credit many customers outlook global economy depth duration recession remains uncertain use third party forecasts including forecasts imf world bank oecd set expectations global economic growth february 2009 month brought incremental negative revisions forecasted economic level 2009 iea opec energy information administration “eia” also made significant negative revisions forecasts 2009 oil demand past 8 months expectations oil prices result global economic recession demand oil expected decrease range 06 million 12 million barrels per day 2009 compared 2008 nonopec supply growth expected moderate response decreased spending expected increase 01 million 05 million barrels per day decreased demand increased nonopec production expected pressure opec make significant cuts production levels attempt support oil prices inventories spare productive capacity buffer oil markets supply disruptions expected increase gap increasing supply decreasing demand grows february 2009 steo report doe forecasted oil prices average 43bbl 2009 oil prices volatile doe expects balance supply 2010 tighten somewhat allowing prices increase average 55bbl 2010 variables could significantly affect forecast include changes assumption global economic growth energy demand changes delays nonopec supply additions opec quota discipline expectations north american natural gas prices combination rising natural gas production recessiondriven decreases natural gas demand expected drive gas prices lower 2009 compared 2008 january 2009 steo report doe forecasted us natural gas demand would decrease 10 2009 compared 2008 assuming continued economic weakness natural gas prices would average 5mmbtu 2009 889mmbtu 2008 north american gasdirected drilling activity expected decrease us resulting fewer supply additions new wells offset production declines existing wells gas prices expected remain soft gap supply demand tightens gas demand growth exceeds gas supply growth period time doe forecasts gas prices increase modestly 6mmbtu 2010 prices remain volatile economy weatherdriven demand imports canadian gas lng imports production lower 48 states’ gas fields playing significant roles determining prices price volatility variations supply demand balance reflected gas storage levels industry activity customer spending forecasts activity customer spending based upon discussions major customers reviews published industry reports outlook oil natural gas prices described outlook drilling activity measured baker hughes rig count believe customers’ 2009 spending plans based forecasts oil gas prices energy demand similar stated addition company’s 2009 spending plans also reflect companyspecific drivers ability finance 2009 spending plans well assessments uncertainty associated forecasts current expected oil natural gas prices projects planned 2008 begin 2009 2010 may longer economically attractive light current economic conditions current oil gas prices believe customers group planning decrease spending 2009 compared 2008 customers likely reduce planned spending oil prices expected trade 40bbl extended period time risks oil prices falling 40bbl significant period time include 1 incremental weakness global economic outlook 2 significant unexpected increases nonopec production 3 significant disruption worldwide demand 4 reduced geopolitical tensions 5 poor opec quota discipline 6 factors result increased spare productive capacity higher oil inventory levels decreased demand company outlook section read conjunction factors described “risk factors related business” “risk factors related worldwide oil natural gas industry” “forwardlooking statements” sections contained herein factors could impact either positively negatively expectation oil natural gas demand oil natural gas prices drilling activity north american revenue expected decline approximately 15 25 2009 compared 2008 reflecting reduced customer spending deterioration pricing offset somewhat modest share gains decreases revenue drilling evaluation segment expected greater decline revenue completion production segment 2008 2007 2006 north american revenues 44 42 44 total revenues respectively outside north america expect revenues decline approximately 5 15 2009 compared 2008 significant declines occurring eastern hemisphere share gains activity increases brazil latin america could result increase latin america revenues 2009 compared 2008 spending large projects nocs expected reflect established seasonality trends addition customer spending could affected weatherrelated reductions north sea first second quarters 2009 2008 2007 2006 revenues outside north america 56 58 56 total revenues respectively profit expected decline 2009 compared 2008 result lower activity levels deterioration pricing offset partially cost reductions factors could significant positive impact profitability include less expected price deterioration products services lower expected raw material labor costs andor higher expected planned activity conversely greater expected price deterioration higher expected raw material labor costs andor lower expected activity would negative impact profitability ability limit price deterioration dependent demand products services competitors’ strategies managing capacity declining market competitors’ strategies defending market share price customers’ strategies obtaining price concessions 2009 capital budget supports continuation infrastructure expansion began late 2006 early 2007 opened new expanded facilities many regions andor countries including latin america middle east russia addition 2007 opened first phase center technology innovation houston research engineering facility design advanced completion systems high pressure high temperature hostile environments second phase completed 2008 also 2008 opened new campus dubai includes middle east asia pacific region headquarters regional operations center training center expands eastern hemisphere training capabilities capital expenditures expected approximately 11 billion 12 billion 2009 including approximately 350 million 400 million expect spend infrastructure primarily outside north america significant portion planned capital expenditures adjusted reflect changes expectations future customer spending expect manage capital expenditures match market demand execution 2009 business plan ability meet 2009 financial objectives dependent number factors key factors include activity spending levels markets relative strength oilfield services competition market ability limit price decreases manage raw material labor costs factors include limited ability adjust workforce control costs recruiting training retaining skilled diverse workforce necessary meet future business needs continue expand business areas expected grow rapidly economy energy market recover nocs areas market share opportunities middle east russia caspian region india manage raw material component costs especially steel alloys copper tungsten carbide lead nickel chemicals electronic components continue make ongoing improvements productivity manufacturing organization manage spending north american market compliance business 90 countries including approximately onehalf 40 countries lowest scores indicates high levels corruption transparency international’s corruption perception index survey 2008 devote significant resources development maintenance enforcement business code conduct policy antibribery compliance policies internal control processes procedures compliance related policies notwithstanding devotion resources part consequence thereof time discover receive information alleging potential violations laws regulations including fcpa policies processes procedures conduct internal investigations potential violations take appropriate action depending upon outcome investigation anticipate devotion significant resources compliancerelated issues including necessity investigations continue aspect business number countries oil natural gas exploration development production take place requested conduct operations compliancerelated issues limited ability business andor raised cost operating countries order provide products services countries may future utilize ventures third parties sell products distributors otherwise modify business approach order improve ability conduct business accordance applicable laws regulations business code conduct bestinclass global ethics compliance program “compliance program” based core values integrity performance teamwork learning ii standards contained business code conduct iii laws countries operate iv commitments doj sec compliance program referenced within company “c2” “completely compliant” completely compliant theme intended establish proper toneatthetop throughout company employees consistently reminded play crucial role ensuring company always conducts business ethically legally safely chief compliance officer “cco” oversees development administration enforcement business code conduct well legal compliance standards policies procedures processes cco reports directly general counsel chairman auditethics committee board directors cco ready access senior officers company legal compliance group 30 employees includes cco global ethics compliance director international trade counsel region trade directors region compliance counsel fcpa due diligence counsel specialized investigative counsel well labor employment counsel legal compliance group company attorneys located throughout world available answer legal questions regarding compliance program provide assistance employees connection settlements doj sec retained independent monitor assess make recommendations compliance policies procedures response monitor’s initial recommendations enhanced added several elements overall compliance program highlights compliance program including enhancements additions result independent monitor’s recommendations include following • comprehensive employee compliance training program covering substantially employees includes requiring employees take webbased fcpa training testing modules available numerous languages mandatory global inperson customized training antibribery compliance key managers customslogistics personnel sponsors commercial sales representatives persons dealing petty cash invoice coding approval expense account approval salesmarketing personnel dealing national oil companies specially designed training new employees addition programs allow us verify prompt training new employees regarding core values business code conduct compliance standards • comprehensive internal policies areas facilitating payments travel entertainment gifts charitable donations connected nonus government officials payments nonus commercial sales representatives due diligence procedures commercial sales representatives processing consultants professional consultants nonus community contributions real estate transactions selected countries use nonus police military organizations security purposes addition countryspecific guidance customs standards export reexport controls economic sanctions antiboycott laws • compliance council comprised division compliance officers senior representatives ethics compliance group compliance council responsible assisting cco strategic direction ongoing development coordination implementation compliance program • special compliance committee composed cco two group presidents chief financial officer committee meets less twice year review oversight reports active commercial sales representatives • use technology monitor report compliance matters including webbased antiboycott reporting tool global trade management software tool currently implemented • whistleblower program designed encourage reporting ethics compliance matter without fear retaliation including worldwide business helpline operated third party currently available tollfree 150 languages ensure helpline easily accessible employees language • blue ribbon panel comprised wellknown outside experts advising us areas securities compliance laws • significantly reduced number nonus commercial agents use conduct business nonus agents continue use employ extensive preretention fcpa due diligence requirements well proactive postretention oversight includes among things maintenance comprehensive due diligence records certification periodic recertification training nonus commercial agents including written acknowledgement agents fcpa requirements policies instituting program ensure internal sponsors regularly reviews nonus commercial agents including review senior management • adopted riskbased compliance due diligence procedure processing professional agents enhancing process classifying distributors creating formal policy guide business personnel determining subcontractors subjected compliance due diligence • reviewing expanding use centralized finance organization including implementation enterprisewide accounting system companywide policies regarding expense reporting petty cash approval invoice payments general ledger account coding restructured expanded corporate audit function including consolidating divisional audit functions centralized audit group established separate anticorruption group within audit function executing separate anticorruption audits countrywide basis legal audit personnel continuing refine enhance procedures fcpa compliance reviews risk assessments legal audit procedures • working ensure adequate legal compliance coverage around world including coordination compliance advice training across divisions regions creating simplified summaries accompany compliance related policies supplementing existing policies time taking steps achieve centralization customs logistics function including development uniform simplified customs policies procedures developing uniform procedures verification documentation services provided customs agents training program customs logistics personnel receive specialized training focused specifically risks associated customs process also adopted written plan reviewing reducing number customs agents freight forwarders • continuing centralize human resources function including creating consistent standards prehire screening employees screening existing employees prior promoting positions may exposed corruptionrelated risks creating uniform policy onboarding training • provide regular consistent message senior management zero tolerance fcpa violations emphasize compliance positive factor continued success business liquidity capital resources objective financing business maintain adequate financial resources access additional liquidity 2008 cash flows operations principal sources funding december 31 2008 cash equivalents 1955 million 10 billion available either committed revolving credit facilities commercial paper program extent outstanding commercial paper ability borrow committed revolving credit facilities reduced october 28 2008 sold 500 million 650 senior notes mature november 15 2013 750 million 750 senior notes mature november 15 2018 used portion net proceeds repay 500 million commercial paper matured prior year end 525 million aggregate principal amount notes matured first two months 2009 believe remaining proceeds offering available cash flows operations sufficient fund liquidity needs 2009 additional information see note 12 notes consolidated financial statements detailed description issuance notes capital planning process focused utilizing existing cash flows generated operations ways enhance value company 2008 used cash variety activities including working capital needs acquisition businesses payment dividends share repurchases capital expenditures cash flows cash flows provided used continuing operations type activity follows years ended december 31 millions statements cash flows entities international operations local currency functional exclude effects changes foreign currency exchange rates occur given year noncash changes result changes reflected certain accounts consolidated statements cash flows may reflect changes corresponding accounts consolidated balance sheets operating activities cash flows operating activities continuing operations provided 1614 million year ended december 31 2008 compared 1475 million year ended december 31 2007 cash flows operating activities 2007 reduced 125 million income tax payments related gain sale interest westerngeco excluding income tax payments cash flows operating activities 2007 1600 million increasing slightly 2008 underlying drivers 2008 changes operating assets liabilities follows contributions defined benefit pension plans 2008 15 million compared 2007 contributions 21 million decrease 6 million driven primarily change exchange rates nonus locations cash flows operating activities continuing operations provided 1475 million year ended december 31 2007 compared 590 million year ended december 31 2006 cash flows operating activities 2007 2006 reduced 125 million 555 million respectively income tax payments related gain sale interest westerngeco excluding income tax payments cash flows operating activities 2007 2006 1600 million 1145 million respectively increase 455 million increase primarily due increase 198 million income continuing operations adjusted noncash items coupled decrease 131 million net operating assets liabilities used less cash underlying drivers 2007 changes operating assets liabilities follows contributions defined benefit pension plans 2007 approximately 21 million compared 2006 contributions approximately 34 million decrease approximately 13 million reduction contributions primarily due lower minimum funding requirements nonus plans investing activities principal recurring investing activity funding capital expenditures support appropriate levels types rental tools place generate revenues operations expenditures capital assets totaled 1303 million 1127 million 922 million 2008 2007 2006 respectively majority expenditures rental tools including wireline tools machinery equipment also increased spending new facilities expansions existing facilities infrastructure projects proceeds disposal assets 222 million 179 million 135 million 2008 2007 2006 respectively disposals relate rental tools lostinhole well machinery rental tools equipment longer used operations sold throughout year included proceeds 2006 10 million related sale certain real estate properties held sale routinely evaluate potential acquisitions businesses third parties may enhance current operations expand operations new markets product lines may also time sell business operations considered part core business 2008 sold assets associated completion production segment’s surface safety systems product line received cash proceeds 31 million 2006 received cash proceeds 46 million sale certain businesses significant sale baker supply products division 43 million 2008 paid aggregate 120 million acquisitions businesses significant acquisitions reservoir technology consulting group paid cash 72 million including 4 million direct transaction costs net cash acquired 5 million result acquisitions recorded 45 million goodwill 45 million intangible assets december 31 2008 2007 carrying value equals fair value auction rate securities “ars” investments 11 million 36 million respectively change 25 million reflects otherthantemporary impairment loss recognized december 2008 since september 2007 unable sell ars investments due unsuccessful auctions based ability intent hold investments period time sufficient allow anticipated recovery fair value classified auction rate securities noncurrent investments 2007 purchased 2521 million received proceeds 2839 million maturing auction rate securities 2007 received 10 million proceeds sale equity investment toyo petrolite company ltd 2006 sold 30 interest westerngeco 24 billion cash westerngeco also made cash distribution 60 million prior closing 2006 paid 66 million acquisitions businesses net cash acquired significant nova technology corporation “nova” 55 million net cash acquired 3 million plus assumed debt financing activities net borrowings commercial paper shortterm debt 15 million 14 million 2008 2007 respectively net repayments commercial paper shortterm debt 9 million 2006 total debt outstanding december 31 2008 2333 million increase 1249 million compared december 31 2007 total debt total capitalization defined total debt plus stockholders’ equity ratio 025 december 31 2008 015 december 31 2007 october 28 2008 sold 500 million 650 senior notes mature november 15 2013 750 million 750 senior notes mature november 15 2018 collectively “notes” net proceeds offering 1235 million deducting underwriting discounts expenses offering used portion net proceeds repay outstanding commercial paper well repay 325 million aggregate principal amount outstanding 625 notes matured january 15 2009 200 million aggregate principal amount outstanding 600 notes matured february 15 2009 use remaining net proceeds offering general corporate purposes could include funding ongoing operations business acquisitions repurchases common stock notes senior unsecured obligations rank equal right payment existing future senior indebtedness senior right payment future subordinated indebtedness effectively junior future secured indebtedness existing future indebtedness subsidiaries may redeem option part notes time applicable makewhole redemption prices plus accrued unpaid interest date redemption received proceeds 87 million 67 million 92 million 2008 2007 2006 respectively issuance common stock exercise stock options employee stock purchase plan board directors authorized program repurchase common stock time 2006 repurchased 24 million shares common stock average price 7650 per share total 1856 million 2007 repurchased 6 million shares common stock average price 8125 per share total 521 million 2008 repurchased 9 million shares common stock average price 6812 per share total 627 million authorization remaining repurchase approximately 1197 million common stock end 2008 paid dividends 173 million 167 million 172 million 2008 2007 2006 respectively available credit facilities 2008 initiated commercial paper program “program” may issue time unsecured commercial paper notes maximum aggregate amount outstanding time 10 billion proceeds program used general corporate purposes including working capital expenditures acquisitions share repurchases commercial paper issued program scheduled mature within approximately 270 days issuance commercial paper redeemable prior maturity subject voluntary prepayment december 31 2008 outstanding commercial paper april 1 2008 entered credit agreement “2008 credit agreement” committed 500 million revolving credit facility expires march 2009 2008 credit agreement contains certain covenants among things require maintenance funded indebtedness total capitalization ratio restrict certain merger transactions sale substantially assets significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations 2008 credit agreement may accelerated events default include payment defaults lenders 2008 credit agreement covenant defaults customary defaults march 2009 expect renew extend facility able renew extend 2008 credit agreement acceptable terms availability commercial paper program also reduced 500 million however believe sufficient borrowing capacity liquidity fund operations december 31 2008 1508 million credit facilities commercial banks 10 billion committed revolving credit facilities include 2008 credit agreement committed facilities expire july 7 2012 500 million unless extended march 31 2009 500 million 500 million facility expires july 7 2012 provides one year extension subject approval acceptance lenders among conditions addition facility contains provision allow increase facility amount additional 500 million subject approval acceptance lenders among conditions facilities contain certain covenants among things require maintenance funded indebtedness total capitalization ratio restrict certain merger transactions sale substantially assets company significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations facilities may accelerated events default include payment defaults lenders facilities covenant defaults customary defaults december 31 2008 compliance covenants facilities direct borrowings facilities year ended december 31 2008 however extent outstanding commercial paper ability borrow facilities reduced market conditions change revenues significantly reduced operating costs increase cash flows liquidity could reduced additionally could cause rating agencies lower credit ratings triggers facilities would accelerate maturity borrowings facilities however downgrade credit ratings could increase cost borrowings facilities could also limit preclude ability issue commercial paper occur would seek alternative sources funding including borrowing facilities believe credit ratings relationships major commercial investment banks would allow us renew expiring facility well obtain interim financing existing credit facilities currently unforeseen significant needs growth opportunities also believe interim financings could funded subsequent issuances longterm debt equity necessary cash requirements 2009 believe cash hand operating cash flows provide us sufficient capital resources liquidity manage working capital needs meet contractual obligations fund capital expenditures support development shortterm longterm operating strategies may issue commercial paper shortterm debt fund cash needs us excess cash generated us 2009 expect capital expenditures 11 billion 12 billion excluding acquisitions expenditures expected used primarily normal recurring items necessary support business operations significant portion capital expenditures adjusted based future activity customers expect manage capital expenditures match market demand 2009 also expect make interest payments 150 million 155 million based debt levels december 31 2008 anticipate making income tax payments 475 million 525 million 2009 may repurchase common stock depending market conditions applicable legal requirements liquidity considerations anticipate paying dividends 180 million 190 million 2009 however board directors change dividend policy anytime required intend make pension contributions us qualified pension plan 2009 although previously expected forgo contributions period five eight years due recent downturns investment markets decline value pension plan assets may required make contributions us qualified pension plan within next two three years expect contribute 2 million 3 million nonqualified us pension plans 12 million 14 million nonus pension plans also expect make benefit payments related postretirement welfare plans 15 million 16 million estimate contribute 139 million 150 million defined contribution plans see note 14 notes consolidated financial statements item 8 herein discussion employee benefit plans contractual obligations table set forth contractual cash obligations december 31 2008 certain amounts included table based estimates assumptions obligations including duration anticipated actions third parties factors contractual cash obligations actually pay future periods may vary reflected table estimates assumptions subjective millions 1 amounts represent expected cash payments total debt include unamortized discounts deferred issuance costs net deferred gains terminated interest rate swap agreements 2 amounts represent expected cash payments interest longterm debt 3 enter operating leases normal course business lease agreements provide us option renew lease future operating lease payments reflected table would change exercised renewal options entered additional operating lease agreements 4 purchase obligations include agreements purchase goods services enforceable legally binding specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations exclude agreements cancelable anytime without penalty 5 amounts represent longterm liabilities including current portion reflected consolidated balance sheet timing amount payment streams known amounts include payments certain environmental remediation liabilities payments deferred compensation payouts acquisition agreements payments certain asset retirement obligations amounts include payments pension contributions payments various postretirement welfare benefit plans postemployment benefit plans 6 estimated fin 48 tax liabilities settled result expiring statutes audit activity competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate timing particular settlement depend length tax audit related appeals process expiration statute liability settled due statute expiring favorable audit result settlement fin 48 tax liability would result cash payment offbalance sheet arrangements normal course business customers vendors others entered offbalance sheet arrangements letters credit bank issued guarantees totaled approximately 660 million december 31 2008 also commitments outstanding purchase obligations related capital expenditures inventory purchase orders contracts approximately 433 million december 31 2008 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements normal operating leases offbalance sheet financing arrangements securitization agreements liquidity trust vehicles synthetic leases special purpose entities materially exposed financing liquidity market credit risk could arise engaged financing arrangements critical accounting estimates preparation consolidated financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosures contingent assets liabilities base estimates judgments historical experience assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained business environment operate changes defined critical accounting estimate one important portrayal either financial condition results operations requires us make difficult subjective complex judgments estimates matters uncertain discussed development selection critical accounting estimates auditethics committee board directors auditethics committee reviewed disclosure presented past three fiscal years made material changes methodology used establish critical accounting estimates discussed except required adoption fin 48 believe following critical accounting estimates used preparation consolidated financial statements addition items within consolidated financial statements require estimation deemed critical defined allowance doubtful accounts determination collectibility amounts due customers requires us use estimates make judgments regarding future events trends including monitoring customers’ payment history current credit worthiness determine collectibility reasonably assured well consideration overall business climate customers operate inherently uncertainties require us make frequent judgments estimates regarding customers’ ability pay amounts due us order determine appropriate amount valuation allowances required doubtful accounts provisions doubtful accounts recorded becomes evident customer make required payments either contractual due dates future december 31 2008 2007 allowance doubtful accounts totaled 74 million 3 59 million 2 total gross accounts receivable respectively believe allowance doubtful accounts adequate cover potential bad debt losses current conditions however uncertainties regarding changes financial condition customers either adverse positive could impact amount timing additional provisions doubtful accounts may required five percent change allowance doubtful accounts would impact income continuing operations income taxes approximately 4 million 2008 inventory reserves inventory significant component current assets stated lower cost market requires us record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments estimates forecasts inherently include uncertainties require us make judgments regarding potential outcomes december 31 2008 2007 inventory reserves totaled 244 million 11 221 million 11 gross inventory respectively believe reserves adequate properly value potential excess slow moving obsolete inventory current conditions significant unanticipated changes estimates forecasts could impact amount timing additional provisions excess obsolete inventory may required five percent change inventory reserve balance would impact income continuing operations income taxes approximately 12 million 2008 impairment longlived assets longlived assets include property goodwill intangible assets investments affiliates certain assets comprise significant amount total assets review carrying values assets impairment periodically least annually goodwill whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make judgments regarding longterm forecasts future revenues costs related assets subject review turn forecasts uncertain require assumptions demand products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period given nature evaluations application specific assets specific times possible reasonably quantify impact changes assumptions income taxes liability method used determining income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered valuation allowances established reduce deferred tax assets likely portion deferred tax assets realized determining need valuation allowances considered made judgments estimates regarding estimated future taxable income ongoing prudent feasible tax planning strategies estimates judgments include degree uncertainty changes estimates assumptions could require us adjust valuation allowances deferred tax assets historically changes valuation allowances caused major changes business cycle certain countries changes local country law ultimate realization deferred tax assets depends generation sufficient taxable income applicable taxing jurisdictions operate 90 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenues rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability taxing jurisdiction could impact amount income taxes provide given year tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings consistent requirements fin 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” resulting change tax liability dependent numerous factors difficult estimate include among others amount nature additional taxes potentially asserted local tax authorities willingness local tax authorities negotiate fair settlement administrative process impartiality local courts sheer number countries business potential changes tax paid one country either produce fail produce offsetting tax change countries experience estimates assumptions used provide future tax assessments proven appropriate however past experience guide potential exists however limited tax resulting resolution current potential future tax controversies may differ materially amount accrued addition aforementioned assessments received various tax authorities provide taxes uncertain tax positions assessments received accordance fin 48 believe tax reserves adequate relation potential additional assessments established adjust amounts information available event occurs necessitating change reserves future events changes facts law judicial decisions regarding application existing law favorable audit outcome result changes amounts provided believe resolution tax matters material effect consolidated financial condition company although resolution could material impact consolidated statement operations particular period effective tax rate period resolution occurs pensions postretirement benefit obligations pensions postretirement benefit obligations related plan expenses calculated using actuarial models methods involves use two critical assumptions discount rate expected rate return assets important elements determining plan expenses measuring plan assets liabilities evaluate critical assumptions least annually although considered less critical assumptions used determining benefit obligations plan expenses demographic factors like retirement age mortality turnover also evaluated periodically updated reflect actual expected experience discount rate enables us state expected future cash flows present value measurement date development discount rate us plans based bond matching model whereby hypothetical bond portfolio highquality fixedincome securities selected match cash flows underlying projected benefit obligation discount rate assumption nonus plans reflects market rate highquality fixedincome securities lower discount rate increases present value benefit obligations increases plan expenses used discount rate 63 2008 60 2007 55 2006 determine plan expenses 50 basis point reduction discount rate would decreased income continuing operations income taxes approximately 2 million 2008 determine expected rate return plan assets consider current expected asset allocations well historical expected returns various categories plan assets lower rate return increases plan expenses assumed rates return plan investments 85 2008 2007 2006 50 basis point reduction expected rate return assets principal plans would decreased income continuing operations income taxes approximately 4 million 2008 new accounting standards september 2006 financial accounting standards board “fasb” issued statement financial accounting standards “sfas” 157 fair value measurements “sfas 157” intended increase consistency comparability fair value measurements defining fair value establishing framework measuring fair value expanding disclosures fair value measurements sfas 157 originally effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years november 2007 fasb placed one year deferral implementation sfas 157 nonfinancial assets liabilities however sfas 157 effective fiscal years beginning november 15 2007 financial assets liabilities adopted requirements sfas 157 january 1 2008 except relate nonfinancial assets liabilities required measured fair value recurring basis adopted remaining requirements sfas 157 nonfinancial assets liabilities january 1 2009 nonfinancial assets liabilities include goodwill impairment disposal long lived assets asset retirement obligations assets liabilities relating business acquisitions see note 10 notes consolidated financial statements item 8 herein information impact standard september 2006 fasb issued sfas 158 employers’ accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r “sfas 158” sfas 158 requires employer recognize overfunded underfunded status defined benefit postretirement plan asset liability statement financial position recognize changes funded status year changes occur comprehensive income additionally requires employer measure funded status plan date year end statement financial position limited exceptions sfas 158 effective end fiscal year ending december 15 2006 however requirement measure plan assets benefit obligations date employer’s fiscal year end statement financial position effective fiscal years ending december 15 2008 adopted requirements sfas 158 december 31 2006 except funded status measurement date requirement adopted december 31 2008 allowed sfas 158 impact moving funded status measurement date october 1st december 31st reduction 4 million beginning retained earnings 2008 see note 14 notes consolidated financial statements item 8 herein information impact standard february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities including amendment fasb statement 115 “sfas 159” sfas 159 permits entities choose measure eligible financial assets liabilities fair value unrealized gains losses items fair value option elected reported earnings sfas 159 effective fiscal years beginning november 15 2007 adopted sfas 159 january 1 2008 impact consolidated financial statements choose measure eligible financial assets liabilities fair value december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statements amendment arb 51 “sfas 160” sfas 160 establishes accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary effort improve relevance comparability transparency financial information reporting entity provides consolidated financial statements sfas 160 effective fiscal years beginning december 15 2008 adopted sfas 160 january 1 2009 material impact consolidated financial statements december 2007 fasb issued sfas 141 revised 2007 business combinations “sfas 141r” sfas 141r replaces fasb statement 141 business combinations “sfas 141” statement retains purchase method accounting used business combinations replaces sfas 141 establishing principles requirements recognition measurement assets liabilities goodwill including requirement transaction restructuring costs related acquisition expensed addition statement requires disclosures enable users evaluate nature financial effects business combination sfas 141r effective business combinations acquisition date beginning first annual reporting period beginning december 15 2008 adopted sfas 141r january 1 2009 business combinations occurring date march 2008 fasb issued sfas 161 disclosures derivative instruments hedging activities amendment fasb statement 133 “sfas 161” sfas 161 requires qualitative disclosures objectives strategies using derivatives quantitative data fair value gains losses derivative contracts details creditriskrelated contingent features hedged positions statement also requires enhanced disclosures regarding entities use derivative instruments derivative instruments related hedged items accounted derivative instruments related hedged items affect entities’ financial position financial performance cash flows sfas 161 effective fiscal years beginning november 15 2008 adopt new disclosure requirements sfas 161 first quarter 2009 december 2008 fasb issued fsp fas 132 r1 employers’ disclosures postretirement benefit plan assets “fsp 132 r1” fsp 132 r1 amends fasb statement 132 revised 2003 employers’ disclosures pensions postretirement benefits provide guidance employer’s disclosures plan assets defined benefit pension postretirement plan fsp requires disclosures investment policies strategies major categories plan assets fair value measurement plan assets significant concentration credit risks fsp 132 r1 effective fiscal years ending december 15 2009 adopt new disclosure requirements fsp 132 r1 fourth quarter 2009 related party transactions april 28 2006 sold 30 interest westerngeco 24 billion cash recorded pretax gain 1744 million 1035 million aftertax significant related party transactions forwardlooking statements mda certain statements notes consolidated financial statements include forwardlooking statements within meaning section 27a securities act section 21e exchange act “forwardlooking statement” words “anticipate” “believe” “ensure” “expect” “if” “intend” “estimate” “probable” “project” “forecasts” “predict” “outlook” “aim” “will” “could” “should” “would” “may” “likely” similar expressions negative thereof intended identify forwardlooking statements forwardlooking statements based assumptions believe reasonable may prove accurate statements include potential impact future transactions acquisition disposition merger joint venture transaction could occur undertake obligation publicly update revise forwardlooking statement expectations regarding business outlook including changes revenue pricing capital spending profitability strategies operations impact common stock repurchases oil natural gas market conditions market share contract terms costs availability resources economic regulatory conditions environmental matters forecasts regarding matters forwardlooking information subject risks uncertainties could cause actual results differ materially results expected although possible identify factors risks uncertainties include risk factors timing risk factors identified “risk factors related worldwide oil natural gas industry” “risk factors related business” sections contained item 1a risk factors set forth time filings sec documents available web site sec’s electronic data gathering analysis retrieval system “edgar” httpwwwsecgov risk factors related worldwide oil natural gas industry discussion risk factors cautions regarding forwardlooking statements see “risk factors related worldwide oil natural gas industry” item 1a risk factors “forwardlooking statements” section item 7 contained herein risk factors discussed intended inclusive risk factors related business discussion risk factors cautions regarding forwardlooking statements see “risk factors related business” item 1a risk factors “forwardlooking statements” section item 7 contained herein list risk factors intended inclusive item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations “mda” read conjunction consolidated financial statements “item 8 financial statements supplementary data” contained herein executive summary major supplier wellborerelated products technology services systems provide products services drilling formation evaluation completion production reservoir technology consulting worldwide oil natural gas industry report results two segments drilling evaluation segment completion production segment aligned product line based upon types products services provided customers upon business characteristics product lines business cycles collectively refer results two segments oilfield operations primary driver business customers’ capital operating expenditures dedicated oil natural gas exploration field development production business cyclical dependent upon customers’ expectations future oil natural gas prices economic growth hydrocarbon demand estimates current future oil natural gas production prior may 4 2009 business operations organized primarily seven product line divisions secondarily four super regions north america latin america europe africa russia caspian “earc” middle east asia pacific “meap” may 4 2009 reorganized company geography product lines global operations organized number geomarket organizations report nine region presidents turn report two hemisphere presidents separately productline marketing technology organizations report president products technology presidents eastern hemisphere western hemisphere products technology vice president supply chain report chief operating officer reorganization company geography product lines intended strengthen clientfocused operations moving management countries conduct business productline organizations continue responsible product development manufacturing technology marketing delivery solutions customers advance reservoir performance supply chain organization responsible development costeffective procurement manufacturing products services new organization structure also improve crossproductline technology development sales processes integrated operations capabilities december 31 2009 approximately 34400 employees approximately 61 employees working outside united states 2009 global economy continued weaken many customers reduced 2009 exploration development spending saw significant decreases peak drilling activity particularly us land market canada addition experienced declines prices products services 2009 generated revenues 966 billion 220 billion 19 compared 2008 compared 31 decrease worldwide average rig count time period north american revenues 2009 358 billion decrease 31 compared 42 decrease average rig counts us canada reflects severe contraction customer spending activity revenues outside north america 608 billion decrease 9 compared 2008 result decline activity contractions customer spending 2009 took actions adjust operating cost base consisted primarily reductions workforce connection reductions workforce recorded expenses 92 million 2009 related employee severance costs net income 2009 421 million compared 164 billion 2008 late 2009 early 2010 modest improvement outlook global economy response higher prices oil natural gas many north american customers anticipating increase drilling activity yearend 2009 levels crude prices 7080bbl range adequate support many international projects outlook international activity influenced degree global economy improves driving demand oil natural gas pending merger bj services august 30 2009 company bj services entered merger agreement pursuant company acquire 100 outstanding common stock bj services estimated total consideration expected issued paid merger approximately 64 billion consisting approximately 08 billion paid cash approximately 56 billion paid issuance approximately 118 million shares baker hughes common stock valued february 11 2010 closing baker hughes share price 4668 per share subject satisfaction conditions closing anticipated closing transaction occur march 2010 however cannot guarantee merger completed exactly terms set forth merger agreement bj services delaware corporation formed 1990 bj services leading provider pressure pumping oilfield services petroleum industry bj services’ pressure pumping services consist cementing stimulation services used completion new oil natural gas wells remedial work existing wells onshore offshore bj services’ oilfield services include casing tubular services precommissioning maintenance turnaround services pipeline process business including pipeline inspection chemical services completion tools completion fluids business environment business environment corresponding operating results affected significantly level energy industry spending exploration development production oil natural gas reserves spending oil natural gas exploration production companies dependent upon forecasts regarding expected future supply future demand oil natural gas products estimates costs find develop produce reserves changes oil natural gas exploration production spending normally result increased decreased demand products services reflected rig count measures 2009 impact global economic recession associated decline oil natural gas consumption energy prices resulted significant decreases capital spending customers exploration development oil natural gas resources first half 2009 spending continued decline peak levels september 2008 evidenced 57 drop us rig count peak 2031 rigs september 2008 low 876 rigs june 2009 15 drop international rig count peak 1108 rigs september 2008 low 947 rigs august 2009 prices products services particularly drilling evaluation segment declined significantly first half 2009 second half 2009 oildriven activity began increase us international markets oil prices improved market began anticipate recovery economic activity oil natural gas prices oil bloomberg west texas intermediate wti cushing crude oil spot price natural gas bloomberg henry hub natural gas spot price prices summarized table averages daily closing prices periods indicated oil prices averaged 6199bbl 2009 year 2009 began oil prices trading near 46bbl early january response weakening outlook worldwide economy oil consumption oil prices decreased early february reaching low year 3398bbl mid2009 oil prices began increase driven part improving outlook global economy oil prices reached high 8104 bbl late october thereafter trading midtohigh 70bbl range balance year natural gas prices averaged 394mmbtu year 2009 year 2009 began natural gas prices high 5mmbtu range however weakness us economy expectations decline demand particularly industrial sector led weakening gas prices third quarter year early september price natural gas hit low year 188mmbtu strong production data coupled weak demand outlook led expectations natural gas inventories would rise record levels end annual injection season natural gas prices increased late december colderthannormal temperatures led strong withdrawals natural gas storage rig counts baker hughes providing rig counts public since 1944 gather relevant data field service personnel obtain necessary data routine visits various rigs customers contractors andor outside sources data compiled distributed various wire services trade associations published website rig counts compiled weekly us canada monthly international us workover rigs published international rig counts include rigs drilling certain locations russia caspian onshore china information readily available rigs us counted active day count taken well drilled started drilling completed well anticipated sufficient depth potential consumer drill bits rigs canada counted active data obtained canadian association oilwell drillers contractors indicates drilling operations occurred week able verify information international areas rigs counted active drilling operations taken place least 15 days month active international areas better data available compute weekly daily average active rigs international areas poor availability data rig counts estimated thirdparty data rig count include rigs transit one location another rigging used nondrilling activities including production testing completion workover expected significant consumers drill bits rig counts summarized table averages periods indicated results operations discussions relating significant line items consolidated statements operations based available information represent analysis significant changes events impact comparability reported amounts appropriate identified specific events changes affect comparability trends possible practical quantified impact items addition discussions revenues cost revenues combined basis business drivers individual components product sales service rentals similar table details certain consolidated statement operations data percentage revenues dollar amounts millions revenues 2009 compared 2008 revenues 2009 decreased 220 billion 19 compared 2008 primarily due decrease activity evidenced 31 decline worldwide rig count lesser extent pricing pressure products services north america revenues north america accounted 37 total revenues decreased 31 2009 compared 2008 due sharp reduction rig count activity us revenues drilling evaluation segment decreased 47 2009 compared 42 reduction us land inland water rig count 32 reduction us offshore rig count us revenues completion production segment impacted less changes rig count 16 2009 compared 2008 canada revenues decreased 23 compared 42 decrease rig count reflecting challenging economics canadian natural gas producers outside north america revenues outside north america accounted 63 total revenues decreased 9 2009 compared 2008 line 8 decrease rig count outside north america latin america revenues increased 1 compared 7 decrease rig count improved revenue latin america led directional drilling systems mexicocentral america brazil andean geomarkets drilling fluids brazil geomarket drill bits completions production systems mexicocentral america geomarket europe africa russia caspian revenues decreased 14 2009 compared 2008 revenue decline region broadbased across product lines geographies within region largest revenue decreases occurred russia uk norway caspian geomarkets middle east asia pacific revenues decreased 7 2009 compared 2008 middle east revenues decreased 11 compared 10 decrease rig count asia pacific revenues 3 line 4 decrease rig count largest revenue declines occurred saudi arabiabahrain egypt indonesia north asia geomarkets 2008 compared 2007 revenues 2008 increased 14 compared 2007 primarily due increases activity certain geographic areas evidenced 7 increase worldwide rig count price improvement changes market share selected product lines geographic areas increases partially offset impact hurricanes gulf mexico north america revenues north america accounted 44 total revenues increased 17 2008 compared 2007 despite unfavorable impact us offshore revenues hurricanerelated disruptions 2008 improvement north america revenues led completion production segment directional drilling evidenced 7 increase us rig count land inland water drilling us offshore rig count 11 due continued migration rigs gulf mexico attractive international markets weatherrelated disruptions canada revenues increased 12 compared 11 increase rig count reflecting improved economics canadian natural gas producers outside north america revenues outside north america accounted 56 total revenues increased 12 2008 compared 2007 increase reflected improvement international drilling activity evidenced 7 increase rig count outside north america market share gains certain geographic areas latin america revenues increased 25 compared 8 increase rig count improved revenue latin america led directional drilling systems brazil colombia completions production systems mexico drill bits throughout region europe africa russia caspian revenues increased 10 improved revenue region led product lines across segments norway libya completion systems well multiple product lines drilling evaluation segment kazakhstan russia partially offset lower drilling activity uk middle east asia pacific revenues increased 8 middle east revenues increased 9 compared 6 increase rig count asia pacific revenues 7 compared 5 increase rig count improvement revenues region led completion production segment china sales various product lines throughout region including oman united arab emirates cost revenues cost revenues percentage revenues 77 67 2009 2008 respectively increase primarily due significant declines activity worldwide resulting excess manufacturing capacity lower utilization rental tools price deterioration primarily north america additional contributing factors increase include costs associated employee severance 73 million increase net provision doubtful accounts 73 million change geographic product mix sale products services continue emphasize productivity cost improvements cost revenues percentage revenues 67 66 2008 2007 respectively increase primarily due change geographic product mix sale products services increasingly competitive conditions pricing pressures particularly north america addition higher raw material costs labor costs contributed increase research engineering research engineering expenses decreased 7 2009 compared 2008 decrease line decrease activity however continue committed developing commercializing new technologies well investing core product offerings decrease offset 5 million associated employee severance research development costs decreased 12 2009 compared 2008 research engineering expenses increased 15 2008 compared 2007 research development costs increased 12 2008 compared 2007 opened first phase center technology innovation houston texas facility focuses research development completion production systems harsh environments second phase completed 2008 marketing general administrative marketing general administrative “mga” expenses increased 7 2009 compared 2008 increase resulted primarily increase costs associated enterprisewide accounting system implementations reorganization activities 46 million employee severance 14 million increases partially offset lower marketing compliance related expenses mga expenses increased 12 2008 compared 2007 increase corresponds increased activity resulted primarily higher employee related costs including compensation training benefits higher marketing expenses result increased activity increase legal tax compliance related expenses increases partially offset foreign exchange gains litigation settlement connection settlement litigation reedhycalog june 2008 company paid reedhycalog 70 million royalties prior use certain patented technologies reedhycalog paid company 8 million royalties license certain company patented technologies net pretax charge 62 million settlement litigation reflected 2008 consolidated statement operations see note 15 “commitment contingencies litigation” notes consolidated financial statements item 8 herein gain sale product line february 2008 sold assets associated completion production segment’s surface safety systems “sss” product line received cash proceeds 31 million sss assets sold included hydraulic pneumatic actuators bonnet assemblies control systems recorded pretax gain 28 million 18 million aftertax gain loss investments company investments auction rate securities “ars” represent interests three variable rate debt securities credit linked notes generally combine low risk assets credit default swaps “cds” create security pays interest assets’ coupon payments periodic sale proceeds cds since september 2007 unable sell ars investments unsuccessful auctions estimated fair value ars investments based underlying structure security collateral values including assessments counterparty credit quality default risk underlying security expected cash flows discount rates overall capital market liquidity december 2008 recorded impairment loss 25 million record ars fair value december 2009 sold ars 15 million recorded gain 4 million interest expense interest dividend income interest expense increased 42 million 2009 compared 2008 increased 23 million 2008 compared 2007 increases primarily due new longterm debt issuances 125 billion october 2008 resulting higher average debt levels throughout 2009 2008 interest dividend income decreased 21 million 2009 compared 2008 decreased 17 million 2008 compared 2007 decrease years primarily due reduction average interest rate earned partially offset increase average investment balance income taxes effective tax rates 2009 2008 2007 311 295 329 respectively lower us statutory income tax rate 35 due lower rates tax certain international operations offset state income taxes tax filings various periods subject audit tax authorities jurisdictions conduct business audits may result assessment additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law received tax assessments various taxing authorities currently varying stages appeals andor litigation regarding matters believe substantial defenses questions raised pursue legal remedies unfavorable outcome result however resolution matters involves uncertainties assurances outcomes favorable provide uncertain tax positions pursuant accounting standards codification “asc” 740 income taxes outlook section read conjunction factors described “part item 1a risk factors” “forwardlooking statements” section part item 7 contained herein factors could impact either positively negatively expectation oil natural gas demand oil natural gas prices exploration development spending drilling activity production spending industry cyclical past cycles driven primarily alternating periods ample supply shortage oil natural gas relative demand oilfield services company revenue dependent spending customers oil natural gas exploration field development production spending dependent number factors including customers’ forecasts future energy demand expectations future energy prices access resources develop produce oil gas ability fund capital programs recovery global economic recession expected primary driver impacting 2010 business environment worldwide economy recovers demand hydrocarbons increase largest incremental demands oil expected generated china india middle east increasing oil demand along weakness us dollar relative currencies expected support oil prices 60bbl 85bbl north america 12month futures price natural gas quoted february 2010 trading 6mmbtu offering operators opportunity hedge future gas production lockin attractive return regardless nearterm spot prices result improved cash flow outlook stronger economic growth customers expected increase spending explore develop oil natural gas 2010 compared 2009 capital discipline part competitors attrition existing rental fleets rising demand expected result environment believe support increasing prices products services markets second half 2010 outlook exploration development spending based upon expectations customer spending markets operate driven primarily perception industry expectations oil natural gas prices likely impact customer capital operating budgets well factors could impact economic return oil gas companies expect developing oil gas reserves forecasts based analysis information provided customers well market research analyst reports including short term energy outlook “steo” published energy information administration us department energy “doe” oil market report published iea monthly oil market report published opec outlook economic growth based analysis information published number sources including international monetary fund “imf” organization economic cooperation development “oecd” world bank north america outlook spending 2010 significantly influenced outlook natural gas industry lack recovery industrial demand natural gas conjunction rebound gasdirected rig count mid2009 lows continued advances horizontal drilling advanced fracturing completion technologies led increasing rates initial production unconventional gas fields resulting high levels gas production relative demand natural gas prices recovered low levels reached third fourth quarters 2009 response colder weather throughout much us increase oildirected drilling us reflects rise oil prices low levels first half 2009 expectations oil prices due improved expectations global economy demand oil expected increase range 08 million 11 million barrels per day 2010 relative 2009 nonopec supply growth expected increase modestly 2010 related 2009 expected increase range 100 thousand 310 thousand barrels per day decreased demand moderate growth nonopec production expected pressure opec manage production levels support oil prices inventories spare productive capacity buffer oil markets supply disruptions expected increase gap increasing supply decreasing demand grows february 2010 steo report doe forecasted oil prices west texas intermediate average 81bbl second half 2010 increasing average 84bbl 2011 expectations north america natural gas prices lack overall demand growth increasing gasdirected rig count improving rates initial production new gas wells expected keep natural gas prices increasing dramatically 2010 february 2010 steo report doe forecasted us natural gas prices would average 537mmbtu 2010 doe forecasts gas prices increase average 586mmbtu 2011 capital expenditures expected approximately 11 billion 12 billion 2010 including approximately 350 million 400 million expect spend infrastructure primarily outside north america excluding pending bj services merger acquisitions significant portion planned capital expenditures adjusted reflect changes expectations future customer spending expect manage capital expenditures match market demand compliance business 90 countries including approximately onehalf 40 countries lowest scores indicates high levels corruption transparency international’s corruption perception index survey 2009 devote significant resources development maintenance enforcement business code conduct policy antibribery compliance policies internal control processes procedures compliance related policies notwithstanding devotion resources part consequence thereof time discover receive information alleging potential violations laws regulations including fcpa policies processes procedures conduct internal investigations potential violations take appropriate action depending upon outcome investigation anticipate devotion significant resources compliancerelated issues including necessity investigations continue aspect business number countries oil natural gas exploration development production take place requested conduct operations compliancerelated issues limited ability business andor raised cost operating countries order provide products services countries may future utilize ventures third parties sell products distributors otherwise modify business approach order improve ability conduct business accordance applicable laws regulations business code conduct bestinclass global ethics compliance program “compliance program” based core values integrity performance teamwork learning ii standards contained business code conduct iii laws countries operate iv commitments doj sec compliance program referenced within company “c2” “completely compliant” completely compliant theme intended establish proper toneatthetop throughout company employees consistently reminded play crucial role ensuring company always conducts business ethically legally safely chief compliance officer “cco” oversees development administration enforcement business code conduct well legal compliance standards policies procedures processes cco reports directly senior vice president general counsel chairman auditethics committee board directors cco ready access senior officers company legal compliance group includes cco international trade counsel region compliance counsel fcpa due diligence counsel specialized investigative counsel well labor employment counsel legal compliance group company attorneys located throughout world available answer legal questions regarding compliance program provide assistance employees connection settlements doj sec retained independent monitor “monitor” assess make recommendations compliance policies procedures monitor required perform two follow reviews “certify whether antibribery compliance program baker hughes including policies procedures appropriately designed implemented ensure compliance fcpa us commercial bribery laws foreign bribery laws” april 8 2009 monitor issued report first follow reviews monitor issued certification compliance program appropriately designed implemented ensure compliance response monitor’s initial recommendations enhanced added several elements overall compliance program highlights compliance program including enhancements additions result independent monitor’s recommendations include following • comprehensive employee compliance training program covering substantially employees includes requiring employees take webbased fcpa training testing modules available numerous languages mandatory global inperson customized training antibribery compliance key managers customslogistics personnel sponsors commercial sales representatives persons dealing petty cash invoice coding approval expense account approval salesmarketing personnel dealing national oil companies specially designed training new employees addition programs allow us verify prompt training new employees regarding core values business code conduct compliance standards • comprehensive internal policies areas facilitating payments travel entertainment gifts charitable donations connected nonus government officials payments nonus commercial sales representatives due diligence procedures commercial sales representatives processing consultants professional consultants nonus community contributions real estate transactions selected countries use nonus police military organizations security purposes addition countryspecific guidance customs standards export reexport controls economic sanctions antiboycott laws • special compliance committee made senior officers meets less twice year review oversight reports active commercial sales representatives • use technology monitor report compliance matters including webbased antiboycott reporting tool global trade management software tool • whistleblower program designed encourage reporting ethics compliance matter without fear retaliation including worldwide business helpline operated third party currently available tollfree 150 languages ensure helpline easily accessible employees language • blue ribbon panel comprised wellknown outside experts advising us areas securities compliance laws • continued reduction use commercial sales representatives “csrs” processing agents including reduction customs agents also continued enhance channels communication regarding agents streamlining compliance due diligence process agents including clearly delineating responsibilities participants compliance due diligence process adopted riskbased compliance due diligence procedure professional agents enhancing process classifying distributors creating formal policy guide business personnel determining subcontractors subjected compliance due diligence also instituted program ensure internal sponsors regularly reviews csrs including review senior management • adopted riskbased compliance due diligence procedure processing professional agents enhancing process classifying distributors creating formal policy guide business personnel determining subcontractors subjected compliance due diligence • reviewed expanded use centralized finance organization including implementation enterprisewide accounting system companywide policies regarding expense reporting petty cash approval invoice payments general ledger account coding also consolidated divisional audit functions redeployed resources corporate audits restructured corporate audit function incorporating additional anticorruption procedures audits applied countrywide basis also continuing refine enhance procedures fcpa compliance reviews risk assessments legal audit procedures • continue work ensure adequate legal compliance coverage around world including coordination compliance advice training across regions countries business also worked create simplified summaries flow charts faqs frequently asked questions accompany compliance related policies supplementing existing policies time taking steps achieve centralization customs logistics function including development uniform simplified customs policies procedures also developing uniform procedures verification documentation services provided customs agents training program customs logistics personnel receive specialized training focused specifically risks associated customs process also adopted written plan reviewing reducing number customs agents freight forwarders • continuing centralize human resources function including creating consistent standards prehire screening employees screening existing employees prior promoting positions may exposed corruptionrelated risks creating uniform policy onboarding training implementing training program identifies employees compliance training sets appropriate training schedules based job function risk profile addition employment grade contents training programs tailored address different risks posed different categories employees supplementing fcpa electronic training module taking steps ensure training available principal local languages employees local anticorruption laws discussed part compliance training also worked ensure helpline easily accessible employees language well taking actions counter cultural norms might discourage employees using helpline continue provide regular consistent message senior management compliance code conduct obligatory everyone baker hughes accountable upholding requirements emphasizes compliance positive factor continued success business liquidity capital resources objective financing business maintain adequate financial resources access sufficient liquidity december 31 2009 cash equivalents 159 billion 10 billion available borrowing committed revolving credit facilities commercial banks shelf registration statement file sec positions us raise additional funds capital market deemed appropriate first half 2009 declines commodity prices led reductions cash flows many customers addition tight credit markets increased costs borrowing affected availability credit factors may adverse effects financial condition customers may result delays partial payment nonpayment amounts owed us thus negatively impacting operating cash flows second half 2009 capital markets improved allowed customers renewed access capital planning process focused utilizing cash flows generated operations ways enhance value company 2009 used cash pay variety activities including working capital needs dividends debt maturities capital expenditures cash flows cash flows provided used continuing operations type activity follows years ended december 31 millions statements cash flows entities international operations local currency functional exclude effects changes foreign currency exchange rates occur given year noncash changes result changes reflected certain accounts consolidated statements cash flows may equal changes corresponding accounts consolidated balance sheets operating activities cash flows operating activities provided 1239 million year ended december 31 2009 compared 1614 million year ended december 31 2008 decrease cash flows 375 million primarily due decrease net income offset change net operating assets liabilities provided cash 2009 compared 2008 underlying drivers 2009 changes operating assets liabilities follows • decrease accounts receivable provided 399 million cash compared using 515 million 2008 change accounts receivable primarily due decrease activity offset increase days sales outstanding defined average number days net trade receivables outstanding based quarterly revenues approximately nine days reflecting slowdown customer payments cash flows operating activities continuing operations provided 1614 million year ended december 31 2008 compared 1475 million year ended december 31 2007 cash flows operating activities 2007 reduced 125 million income tax payments related gain sale interest westerngeco excluding income tax payments cash flows operating activities 2007 1600 million increasing slightly 2008 underlying drivers 2008 changes operating assets liabilities follows • increase accounts receivable used 515 million cash 2008 compared using 309 million cash 2007 increase accounts receivable primarily due increase revenues days sales outstanding defined average number days net trade receivables outstanding based quarterly revenues remained flat made 2008 including payments related employee bonuses nonincome tax liabilities payment 44 million related settlement investigations sec doj investing activities principal recurring investing activity funding capital expenditures support appropriate levels types rental tools place generate revenues operations expenditures capital assets totaled 1086 million 1303 million 1127 million 2009 2008 2007 respectively majority expenditures rental tools including wireline tools machinery equipment also increased spending new facilities expansions existing facilities infrastructure projects proceeds disposal assets 163 million 222 million 179 million 2009 2008 2007 respectively disposals relate rental tools lostinhole well machinery rental tools equipment longer used operations sold throughout year routinely evaluate potential acquisitions businesses third parties may enhance current operations expand operations new markets product lines may also time sell business operations considered part core business 2009 paid 47 million net cash acquired 4 million several acquisitions result recorded 9 million goodwill 22 million intangible assets also paid 11 million additional purchase price consideration past acquisitions 2008 paid aggregate 120 million acquisitions businesses significant acquisitions reservoir technology consulting group paid cash 72 million including 4 million direct transaction costs net cash acquired 5 million result acquisitions recorded 45 million goodwill 45 million intangible assets 2008 sold assets associated completion production segment’s surface safety systems product line received cash proceeds 31 million prior september 2007 invested auction rate securities limited investments auction rate securities “ars” non mortgagebacked securities time initial investment carried aaa equivalent rating recognized rating agency december 2008 recorded impairment loss 25 million investments december 2009 sold ars 15 million recorded gain 4 million 2007 received 10 million proceeds sale equity investment toyo petrolite company ltd financing activities net repayments commercial paper shortterm debt 16 million 2009 net borrowing commercial paper shortterm debt 15 million 14 million 2008 2007 respectively addition first quarter 2009 repaid 525 million maturing longterm debt total debt outstanding december 31 2009 180 billion decrease 533 million compared december 31 2008 total debt total capitalization defined total debt plus stockholders’ equity ratio 020 december 31 2009 025 december 31 2008 october 28 2008 sold 500 million 650 senior notes mature november 15 2013 750 million 750 senior notes mature november 15 2018 collectively “notes” net proceeds offering 1235 million deducting underwriting discounts expenses offering used portion net proceeds repay outstanding commercial paper well repay 325 million aggregate principal amount outstanding 625 notes matured january 15 2009 200 million aggregate principal amount outstanding 600 notes matured february 15 2009 used remaining net proceeds offering general corporate purposes notes senior unsecured obligations rank equal right payment existing future senior indebtedness senior right payment future subordinated indebtedness effectively junior future secured indebtedness existing future indebtedness subsidiaries may redeem option part notes time applicable makewhole redemption prices plus accrued unpaid interest date redemption received proceeds 51 million 87 million 67 million 2009 2008 2007 respectively issuance common stock exercise stock options employee stock purchase plan board directors authorized program repurchase common stock time 2007 repurchased 6 million shares common stock average price 8125 per share total 521 million 2008 repurchased 9 million shares common stock average price 6812 per share total 627 million 2009 repurchase shares common stock authorization remaining repurchase approximately 12 billion common stock end 2009 paid dividends 185 million 173 million 167 million 2009 2008 2007 respectively available credit facilities march 30 2009 entered credit agreement “2009 credit agreement” committed 500 million revolving credit facility expires march 29 2010 currently expect extend replace addition 2009 credit agreement 500 million committed revolving credit facility expires july 7 2012 committed facility lender obligated advance funds andor provide credit borrower per terms conditions stipulated credit agreement december 31 2009 10 billion committed revolving credit facilities commercial banks facilities contain certain covenants among things require maintenance funded indebtedness total capitalization ratio defined formula per facility restrict certain merger transactions sale substantially assets significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations facilities may accelerated events default include payment defaults lenders facilities covenant defaults customary defaults december 31 2009 compliance facility covenants committed credit facilities direct borrowings committed credit facilities end 2009 also outstanding commercial paper program may issue time 10 billion commercial paper maturity 270 days extent commercial paper outstanding ability borrow committed credit facilities reduced similar amount december 31 2009 commercial paper outstanding market conditions change revenues significantly reduced operating costs increase cash flows liquidity could reduced additionally could cause rating agencies lower credit rating ratings triggers would accelerate maturity borrowings committed credit facilities however downgrade credit ratings could increase cost borrowings facilities could also limit preclude ability issue commercial paper occur would seek alternative sources funding including borrowing facilities believe current credit ratings would allow us obtain interim financing existing credit facilities currently unforeseen significant needs growth opportunities also believe interim financings could funded subsequent issuances longterm debt equity necessary cash requirements 2010 believe cash hand operating cash flows provide us sufficient capital resources liquidity manage working capital needs meet contractual obligations fund capital expenditures support development shortterm longterm operating strategies may issue commercial paper shortterm debt fund cash needs us excess cash generated us expectations described exclude amounts related pending merger bj services 2010 expect capital expenditures approximately 11 billion 12 billion excluding amount related pending merger bj services acquisitions expenditures expected used primarily normal recurring items necessary support business operations significant portion capital expenditures adjusted based future activity customers expect manage capital expenditures match market demand 2010 also expect make interest payments 129 million 135 million based debt levels december 31 2009 anticipate making income tax payments 300 million 350 million 2010 may repurchase common stock depending market conditions applicable legal requirements liquidity considerations anticipate paying dividends 180 million 190 million 2010 however board directors change dividend policy anytime pension plans make annual contributions plans amounts equal greater amounts necessary meet minimum governmental funding requirements although previously expected forgo contributions period five eight years due recent downturns investment markets decline value pension plan assets may required make contributions us qualified pension plan within next one two years 2010 expect contribute 20 million 25 million us pension plans 15 million 20 million nonus pension plans 2010 also expect make benefit payments related postretirement welfare plans 18 million 20 million estimate contribute 142 million 154 million defined contribution plans see note 14 notes consolidated financial statements item 8 herein discussion employee benefit plans cash requirements pending merger subject receipt required approvals currently anticipate closing bj services merger occur march 2010 order fund estimated 794 million cash portion merger consideration expect use approximately 294 million cash hand 500 million financing available facilities market issuances debt securities addition intend use internal cash resources financing well cash hand bj services following merger december 31 2009 261 million pay estimated direct merger transaction costs professional services well preexisting change control contractual payments certain bj services employees december 31 2009 estimated approximately 280 million also connection pending merger assume approximately 500 million longterm debt bj services various guarantees contractual obligations place connection bj services’ normal course business following merger may seek additional sources funding contractual obligations table set forth contractual cash obligations december 31 2009 certain amounts included table based estimates assumptions obligations including duration anticipated actions third parties factors contractual cash obligations actually pay future periods may vary reflected table estimates assumptions subjective millions 1 amounts represent expected cash payments total debt include unamortized discounts deferred issuance costs net deferred gains terminated interest rate swap agreements 2 amounts represent expected cash payments interest longterm debt 3 enter operating leases normal course business lease agreements provide us option renew lease future operating lease payments reflected table would change exercised renewal options entered additional operating lease agreements 4 purchase obligations include agreements purchase goods services enforceable legally binding specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations exclude agreements cancelable anytime without penalty 5 amounts represent longterm liabilities including current portion reflected consolidated balance sheet timing amount payment streams known amounts include payments certain environmental remediation liabilities payments deferred compensation payouts acquisition agreements payments certain asset retirement obligations amounts include payments pension contributions payments various postretirement welfare benefit plans postemployment benefit plans 6 estimated income tax liabilities uncertain tax positions settled result expiring statutes audit activity competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate timing particular settlement depend length tax audit related appeals process expiration statute liability settled due statute expiring favorable audit result settlement tax liability would result cash payment offbalance sheet arrangements normal course business customers vendors others entered offbalance sheet arrangements letters credit bank issued guarantees totaled approximately 692 million december 31 2009 also commitments outstanding purchase obligations related capital expenditures inventory purchase orders contracts approximately 221 million december 31 2009 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements normal operating leases offbalance sheet financing arrangements securitization agreements liquidity trust vehicles synthetic leases special purpose entities materially exposed financing liquidity market credit risk could arise engaged financing arrangements critical accounting estimates preparation consolidated financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosures contingent assets liabilities base estimates judgments historical experience assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained business environment operate changes defined critical accounting estimate one important portrayal either financial condition results operations requires us make difficult subjective complex judgments estimates matters uncertain discussed development selection critical accounting estimates auditethics committee board directors auditethics committee reviewed disclosure presented past three fiscal years made material changes methodology used establish critical accounting estimates discussed except required adoption asc 740 income taxes believe following critical accounting estimates used preparation consolidated financial statements addition items within consolidated financial statements require estimation deemed critical defined allowance doubtful accounts determination collectibility amounts due customers requires us use estimates make judgments regarding future events trends including monitoring customers’ payment history current credit worthiness determine collectibility reasonably assured well consideration overall business climate customers operate inherently uncertainties require us make frequent judgments estimates regarding customers’ ability pay amounts due us order determine appropriate amount valuation allowances required doubtful accounts provisions doubtful accounts recorded becomes evident customer make required payments either contractual due dates future december 31 2009 2008 allowance doubtful accounts totaled 157 million 6 74 million 3 total gross accounts receivable respectively starting late 2008 continuing fourth quarter 2009 experienced delay receiving payments customers venezuela resulting increase provisions doubtful accounts 2009 believe allowance doubtful accounts adequate cover potential bad debt losses current conditions however uncertainties regarding changes financial condition customers either adverse positive could impact amount timing additional provisions doubtful accounts may required five percent change allowance doubtful accounts would impact income taxes approximately 8 million 2009 inventory reserves inventory significant component current assets stated lower cost market requires us record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments estimates forecasts inherently include uncertainties require us make judgments regarding potential outcomes december 31 2009 2008 inventory reserves totaled 297 million 14 244 million 11 gross inventory respectively believe reserves adequate properly value potential excess slow moving obsolete inventory current conditions significant unanticipated changes estimates forecasts could impact amount timing additional provisions excess obsolete inventory may required five percent change inventory reserve balance would impact income taxes approximately 15 million 2009 impairment longlived assets longlived assets include property goodwill intangible assets certain assets comprise significant amount total assets review carrying values assets impairment periodically least annually goodwill whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make judgments regarding longterm forecasts future revenues costs related assets subject review turn forecasts uncertain require assumptions demand products services future market conditions technological developments perform annual impairment test goodwill october 1 year performing test individually test seven reporting units tests involve use three different valuation techniques including market approach comparable transactions discounted cash flow methodology include limited assumptions regarding matters discount rates anticipated growth rates expected profitability rates similar items results 2009 test indicated impairments goodwill however three reporting units excess estimated fair value carrying value less 15 related carrying value goodwill associated three reporting units totaled approximately 394 million december 31 2009 unanticipated changes including even small revisions assumptions could require provision impairment future period given nature evaluations application specific assets specific times possible reasonably quantify impact changes assumptions income taxes liability method used determining income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered valuation allowances established reduce deferred tax assets likely portion deferred tax assets realized determining need valuation allowances considered made judgments estimates regarding estimated future taxable income ongoing prudent feasible tax planning strategies estimates judgments include degree uncertainty changes estimates assumptions could require us adjust valuation allowances deferred tax assets historically changes valuation allowances caused major changes business cycle certain countries changes local country law ultimate realization deferred tax assets depends generation sufficient taxable income applicable taxing jurisdictions operate 90 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenues rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability taxing jurisdiction could impact amount income taxes provide given year tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings consistent requirements asc 740 income taxes resulting change tax liability dependent numerous factors difficult estimate include among others amount nature additional taxes potentially asserted local tax authorities willingness local tax authorities negotiate fair settlement administrative process impartiality local courts sheer number countries business potential changes tax paid one country either produce fail produce offsetting tax change countries experience estimates assumptions used provide future tax assessments proven appropriate however past experience guide potential exists however limited tax resulting resolution current potential future tax controversies may differ materially amount accrued addition aforementioned assessments received various tax authorities provide taxes uncertain tax positions assessments received accordance asc 740 income taxes believe tax reserves adequate relation potential additional assessments established adjust amounts information available event occurs necessitating change reserves future events changes facts law judicial decisions regarding application existing law favorable audit outcome result changes amounts provided believe resolution tax matters material effect consolidated financial condition company although resolution could material impact consolidated statement operations particular period effective tax rate period resolution occurs pensions postretirement benefit obligations pensions postretirement benefit obligations related plan expenses calculated using actuarial models methods involves use two critical assumptions discount rate expected rate return assets important elements determining plan expenses measuring plan assets liabilities evaluate critical assumptions least annually although considered less critical assumptions used determining benefit obligations plan expenses demographic factors like retirement age mortality turnover also evaluated periodically updated reflect actual expected experience discount rate enables us state expected future cash flows present value measurement date development discount rate us plans based bond matching model whereby hypothetical bond portfolio highquality fixedincome securities selected match cash flows underlying projected benefit obligation discount rate assumption nonus plans reflects market rate highquality fixedincome securities lower discount rate increases present value benefit obligations increases plan expenses used discount rate 64 2009 60 2008 2007 determine plan expenses 50 basis point reduction discount rate would decreased income taxes approximately 3 million 2009 determine expected rate return plan assets consider current expected asset allocations well historical expected returns various categories plan assets lower rate return increases plan expenses assumed rates return plan investments 80 2009 2008 85 2007 50 basis point reduction expected rate return assets principal plans would decreased income taxes approximately 2 million 2009 new accounting standards accounting standards updates june 2009 financial accounting standards board “fasb” issued asc 105 generally accepted accounting principles asc identifies source authoritative accounting principles recognized fasb applied nongovernmental entities preparation financial statements conformity generally accepted accounting principles united states rules interpretive releases sec authority federal securities laws also sources authoritative gaap asc change gaap intended simplify user access authoritative gaap providing authoritative literature related particular topic one place statement effective financial statements issued interim annual periods ending september 15 2009 included references authoritative accounting literature accordance codification changes content company’s financial statements disclosures result adoption october 2009 fasb issued update asc 605 revenue recognition multiple deliverable revenue arrangements asu addresses accounting multipledeliverable arrangements enable vendors account deliverables separately provision establishes selling price hierarchy determining selling price deliverable update requires expanded disclosures multiple deliverable revenue arrangements asu effective revenue arrangements entered materially modified beginning june 15 2010 determined impact consolidated financial statements september 2006 fasb issued asc 820 fair value measurements disclosures intended increase consistency comparability fair value measurements defining fair value establishing framework measuring fair value expanding disclosures fair value measurements january 1 2008 adopted provisions asc related financial assets liabilities nonfinancial assets liabilities measured fair value recurring basis january 1 2009 adopted provisions related nonfinancial assets liabilities required permitted measured fair value recurring basis material impact consolidated financial statements related adoptions additionally april 2009 fasb issued following three accounting standards updates asc 820 determining fair value volume level activity asset liability significantly decreased identifying transactions orderly ii asc 320 recognition presentation otherthantemporary impairments iii asc 825 interim disclosures fair value financial instruments collectively provide additional guidance require additional disclosure regarding determining reporting fair values certain assets liabilities adopted three accounting standards updates second quarter 2009 material impact consolidated financial statements september 2009 fasb issued update asc 820 fair value measurements disclosures investments certain entities calculate net asset value per share equivalent asu provides practical means measuring fair value investments certain entities calculate net asset value per share asu effective first reporting period ending december 15 2009 adopted provisions disclosure requirements asu december 2009 material impact consolidated financial statements december 2007 fasb issued update asc 810 consolidation establish accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary effort improve relevance comparability transparency financial information reporting entity provides january 1 2009 adopted statement change consolidated financial statements amounts immaterial december 2007 fasb issued update asc 805 business combinations establish principles requirements recognition measurement assets liabilities goodwill requires transaction restructuring costs related acquisition expensed applied provisions asc business combinations acquisition date january 1 2009 march 2008 fasb issued update asc 815 disclosures derivative instruments hedging activities require qualitative disclosures objectives strategies using derivatives quantitative data fair value gains losses derivative contracts adopted new disclosure requirements first quarter 2009 june 2008 fasb issued update asc 260 determining whether instruments granted sharebased payment transactions participating securities clarify unvested sharebased payments contain rights nonforfeitable dividends participating securities shall included computation basic diluted earnings per share january 1 2009 adopted asc applied provisions prior year quarters impact immaterial december 2008 fasb issued update asc 715 employers’ disclosures postretirement benefit plan assets require disclosures investment policies strategies major categories plan assets fair value measurement plan assets significant concentration credit risks adopted new disclosure requirements fourth quarter 2009 see note 14 notes consolidated financial statements item 8 herein information impact standard related party transactions significant related party transactions three years ended december 31 2009 forwardlooking statements mda certain statements notes consolidated financial statements include forwardlooking statements within meaning section 27a securities act section 21e exchange act “forwardlooking statement” words “anticipate” “believe” “ensure” “expect” “if” “intend” “estimate” “probable” “project” “forecasts” “predict” “outlook” “aim” “will” “could” “should” “would” “may” “likely” similar expressions negative thereof intended identify forwardlooking statements forwardlooking statements based assumptions believe reasonable may prove accurate statements include potential impact future transactions acquisition disposition merger joint venture transaction could occur except extent specific disclosure made respect potential merger bj services undertake obligation publicly update revise forwardlooking statement expectations regarding business outlook including changes revenue pricing capital spending profitability strategies operations impact common stock repurchases oil natural gas market conditions market share contract terms costs availability resources economic regulatory conditions potential merger bj services environmental matters forecasts regarding matters forwardlooking information subject risks uncertainties could cause actual results differ materially results expected although possible identify factors risks uncertainties include risk factors timing risk factors identified item 1a risk factors set forth time filings sec documents available website sec’s electronic data gathering analysis retrieval system “edgar” httpwwwsecgov risk factors discussion risk factors cautions regarding forwardlooking statements see item 1a risk factors “forwardlooking statements” section item 7 contained herein risk factors cautions discussed intended inclusive item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations “mda” read conjunction consolidated financial statements “item 8 financial statements supplementary data” contained herein executive summary baker hughes leading supplier oilfield services products technology systems worldwide oil natural gas industry provide • products services drilling evaluation oil gas wells • products services completion production oil gas wells • industrial services including downstream refining process pipeline industries reservoir technology consulting services primary driver businesses customers’ capital operating expenditures dedicated oil natural gas exploration field development production business cyclical dependent upon customers’ expectations future oil natural gas prices economic growth hydrocarbon demand estimates current future oil natural gas production april 28 2010 completed acquisition bj services leading provider pressure pumping oilfield services 69 billion cash stock acquisition provides us proven leader areas pressure pumping stimulation fracturing complements existing product portfolio allowing us provide full suite products services meet needs customers 2010 results inclusive bj services results acquisition date december 31 2010 acquired business represented approximately 46 consolidated total assets december 31 2010 approximately 36 consolidated net income attributable baker hughes year ended december 31 2010 generated revenues 1441 billion increase 475 billion 49 compared 2009 north america oilfield revenues 2010 662 billion increase 109 compared 2009 oilfield revenues outside north america 682 billion increase 18 compared 2009 industrial services revenues 971 million increase 40 compared 2009 increases primarily due acquisition bj services april 28 2010 provided 369 billion revenue 2010 strength north america segment driven oil gasdirected drilling primarily unconventional reservoirs net income attributable baker hughes 812 million 2010 compared 421 million 2009 increase primarily due acquisition bj services provided 290 million net income 2010 improved profitability north america segment partially offset lower profits internationally december 31 2010 baker hughes approximately 53100 employees compared approximately 34400 employees december 31 2009 increase employees due primarily acquisition bj services employed approximately 14000 employees date acquisition business environment global economic growth resultant demand oil natural gas primary drivers customers’ expenditures develop produce oil gas expansion global economy following recession 20082009 continued 2010 increasing economic activity particularly emerging economies asia middle east expectations continued economic growth supported expectations increasing demand oil natural gas spending oil natural gas exploration production companies dependent upon forecasts regarding expected future supply future demand oil natural gas products estimates costs find develop produce reserves increased 2010 compared 2009 changes oil natural gas exploration production spending result increased decreased demand products services reflected rig count measures early february 2011 oil prices many international projects attractive economic returns north america customer spending increased oil gas projects resulting 44 increase north america rig count 2010 compared 2009 increase oildirected drilling reflected global price oil trading premium btu basis relative natural gas north america increase gasdirected drilling driven activity unconventional shale gas plays despite relatively low prices natural gas spending gasdirected projects 2010 supported 1 hedges production made prior periods future prices higher 2 need drill produce natural gas hold leases acquired earlier periods 3 influx equity companies interested developing position shale resource plays 4 associated production natural gas liquids certain basins outside north america customer spending heavily influenced oil prices increased 28 2010 compared 2009 economic recovery continued response higher oil prices expectations expanding economy would support prices excess 70bbl customers’ spending increased reflected 10 increase rig count outside north america oil natural gas prices oil bloomberg west texas intermediate “wti” cushing crude oil spot price bloomberg dated brent “brent” natural gas bloomberg henry hub natural gas spot price prices summarized table averages daily closing prices periods indicated wti oil prices averaged 7951bbl 2010 prices ranged high 9149bbl december 2010 low 6596bbl may 2010 oil prices strengthened low late may 2010 end year driven expectations worldwide economic recovery energy demand growth particularly asia middle east natural gas prices averaged 437mmbtu 2010 natural gas prices traded 2010 range 318mmbtu 751mmbtu traded 5mmbtu since late june 2010 end 2010 working natural gas storage 3097 bcf 08 26 bcf corresponding week 2009 rig counts baker hughes providing rig counts public since 1944 gather relevant data field service personnel obtain necessary data routine visits various rigs customers contractors andor outside sources data compiled distributed various wire services trade associations published website rig counts compiled weekly us canada monthly international us rigs published international rig counts include rigs drilling certain locations russia caspian onshore china information readily available rigs us counted active day count taken well drilled started drilling completed well anticipated sufficient depth potential consumer drill bits rigs canada counted active data obtained canadian association oilwell drillers contractors indicates drilling operations occurred week able verify information international areas rigs counted active drilling operations taken place least 15 days month active international areas better data available compute weekly daily average active rigs international areas poor availability data rig counts estimated thirdparty data rig count include rigs transit one location another rigging used nondrilling activities including production testing completion workover expected significant consumers drill bits rig counts summarized table averages periods indicated 2010 compared 2009 rig count north america increased 44 reflecting 19 increase gasdirected rig count 108 increase oildirected rig count changes regulation drilling activity gulf mexico result april 2010 deepwater horizon accident related deepwater drilling moratorium delay decrease approving drilling permits negatively impacted activity latter seven months 2010 us offshore rig count averaged 20 rigs compared 48 rigs first five months 2010 44 rigs year 2009 outside north america rig count increased 10 rig count latin america increased primarily due higher activity southern cone geomarket argentina bolivia chile andean geomarket colombia peru ecuador brazil partially offset lower activity venezuelamexico geomarket increase rig count continental europe geomarket led turkey italy romania rig count africa increased primarily due higher activity nigeria sub saharan africa geomarkets rig count increased middle east due higher activity egypt kuwait offset partially declines activity oman pakistan asia pacific region activity increased primarily india vietnam offshore china offset partially lower activity indonesia australia results operations discussions relating significant line items consolidated statements operations based available information represent analysis significant changes events impact comparability reported amounts appropriate identified specific events changes affect comparability trends possible practical quantified impact items acquired bj services april 28 2010 financial results operations acquisition date end 2010 included five reportable segments manner consistent reporting structure addition discussions revenues cost revenues total basis business drivers individual components product sales services similar dollar amounts tabulations section millions dollars unless otherwise stated segment reporting change 2010 changed internal reporting structure align geographical organization became primary vehicle allocating resources assessing performance result report results following five segments • north america canada us trinidad • latin america central south america including mexico excluding trinidad • europeafricarussia caspian “earc” europe africa excluding egypt russia republics former soviet union • middle eastasia pacific “meap” middle east including egypt • industrial services downstream chemicals process pipeline services reservoir technology consulting businesses four geographic segments represent oilfield operations prior period segment disclosures recast reflect new segments revenues profit tax performance segments evaluated based segment profit tax defined income taxes interest expense interest income certain gains losses allocated segments 2010 compared 2009 revenues 2010 increased 475 billion 49 compared 2009 excluding bj services revenues 2010 11 primary drivers change included increased activity improved pricing us land canada markets lesser extent increased activity international segments profit tax 2010 increased 725 million 69 compared 2009 excluding bj services profit tax 18 primarily due strong activity north america segment increased activity led increased utilization improved absorption manufacturing overhead costs realized pricing improvement partially offset price degradation lower profits international segments north america north america revenue increased 109 2010 compared 2009 excluding bj services revenues 2010 28 revenue pricing increases supported 45 increase us land inland waters rig count 57 increase canada rig count unconventional reservoirs demanding advanced technology deliver longer horizontals complex completions increasing hydraulic fracturing “frac” horsepower frac stages resulting improved pricing higher revenue improvement partially offset decline us gulf mexico revenue resulting drilling moratorium gulf mexico north america profit tax 116 billion 2010 increase 962 million compared 2009 excluding bj services profit tax 2010 438 million addition higher revenue driven increased activity primary drivers increase profitability included improved tool utilization improved absorption manufacturing overhead higher pricing improvement partially offset decline profitability us gulf mexico due drilling moratorium gulf mexico latin america latin america revenue increased 43 2010 compared 2009 excluding bj services revenue 2010 14 primary drivers increase included increased activity commensurate revenue growth andean brazil southern cone geomarkets driven strong demand artificial lift directional drilling fluids products services partially offset reduced activity venezuelamexico geomarket latin america profit tax decreased 5 2010 compared 2009 excluding bj services profit tax increased 17 improved profit tax andean southern cone geomarkets partially offset decreased profit tax brazil venezuelamexico geomarkets europeafricarussia caspian europeafricarussia caspian revenue increased 8 2010 compared 2009 excluding bj services revenue 2010 decreased 1 reduced revenue north africa continental europe geomarkets partially offset higher revenue russia uk nigeria norway geomarkets strong demand directional drilling artificial lift products services experienced europeafricarussia caspian profit tax decreased 43 2010 compared 2009 excluding bj services profit tax decreased 41 improved profit tax russia nigeria geomarkets offset reduced profit tax throughout rest region primarily due lower activity north africa geomarket higher overhead costs lower realized pricing middle eastasia pacific middle eastasia pacific revenue increased 16 2010 compared 2009 excluding bj services revenue 2010 flat revenue increases occurred saudi arabia egypt australasia southeast asia geomarkets driven higher activity benefiting chemicals artificial lift completion systems products services increases offset decreased revenue primarily middle east gulf india geomarkets middle eastasia pacific profit tax decreased 27 2010 compared 2009 excluding bj services profit tax decreased 34 improved profit tax egypt north asia geomarkets offset lower realized pricing higher overhead costs throughout rest region industrial services industrial services revenue increased 40 2010 compared 2009 excluding bj services revenue 2010 increased 10 industrial services profit tax increased 41 2010 compared 2009 excluding bj services profit tax increased 14 2009 compared 2008 revenues 2009 decreased 220 billion 19 compared 2008 primarily due decrease activity evidenced 31 decline worldwide rig count lesser extent pricing pressure products services profit tax 2009 decreased 163 billion 61 compared 2008 primarily due decline activity additional costs associated reorganization severance acquisition activities increase allowance doubtful accounts north america revenues north america accounted 33 total revenues decreased 33 2009 compared 2008 due sharp reduction drilling completion activity us canada evidenced 42 reduction rig count lower realized pricing decline significant drilling evaluation completion product lines coupled modest declines productionrelated oilfield chemicals artificial lift products services north america profit tax 201 million 2009 decrease 84 compared 2008 declining activity resulted lower equipment utilization latin america latin america revenue remained flat 2009 compared 2008 despite reduction 7 rig count period sharp decline activity commensurate revenue decrease southern cone geomarket offset increased revenue brazil geomarket increased directional drilling fluids revenue brazil geomarket directional drilling revenue mexicovenezuela geomarket offset decreased wireline revenue southern cone geomarket artificial lift completions revenue mexicovenezuela geomarket latin america profit tax decreased 60 2009 compared 2008 reflecting lower realized pricing challenging economics particularly venezuelamexico southern cone geomarkets europeafricarussia caspian europeafricarussia caspian revenue decreased 14 2009 compared 2008 rig count decreased 10 revenue declined uk russia caspian geomarkets partially offset increased revenue continental europe geomarket despite sharp decline rig count decline significant drilling evaluation completion product lines modest declines productionrelated oilfield chemicals europeafricarussia caspian profit tax decreased 27 2009 compared 2008 due higher overhead costs lower realized pricing decrease profit tax russia caspian sub saharan africa north africa geomarkets partially offset increase profit tax continental europe geomarket middle eastasia pacific middle eastasia pacific revenue decreased 7 2009 compared 2008 lower activity evidenced 7 decline rig count saudi arabia egypt geomarkets experienced sharpest reduction activity commensurate decline revenue partially offset increase revenue southeast asia geomarket decline significant directional drilling completion equipment drill bits offset partially revenue increases drilling fluids productionrelated artificial lift oilfield chemicals middle eastasia pacific profit tax decreased 42 2009 compared 2008 lower utilization levels price erosion partly offset cost management programs profit tax declined across geomarkets except southeast asia profit tax increased slightly industrial services industrial services revenue decreased 12 2009 compared 2008 industrial services profit tax decreased 64 2009 compared 2008 costs expenses table details certain consolidated statement operations data percentage revenues cost revenues cost revenues percentage revenues 78 77 2010 2009 respectively increase primarily due pricing pressures higher operating costs geomarket organization mitigating productivity improvements cost cutting measures additional depreciation amortization expense eight months since acquisition date approximately 93 million tangible intangible assets associated bj services acquisition also contributed increase cost revenues percentage revenues 77 67 2009 2008 respectively increase primarily due significant declines activity worldwide resulting excess manufacturing capacity lower utilization rental tools price deterioration primarily north america additional contributing factors increase include costs associated employee severance 73 million increase net provision doubtful accounts 73 million change geographic product mix sale products services continue emphasize productivity cost improvements research engineering research engineering expenses increased 8 2010 compared 2009 continue committed developing commercializing new technologies well investing core product offerings research development costs increased 23 2010 compared 2009 research engineering expenses decreased 7 2009 compared 2008 decrease line decrease activity decrease offset 5 million associated employee severance research development costs decreased 12 2009 compared 2008 marketing general administrative marketing general administrative “mga” expenses increased 12 2010 compared 2009 increase resulted primarily costs associated finance redesign efforts software implementation activities acquisition bj services mga expenses increased 7 2009 compared 2008 increase resulted primarily increase costs associated enterprisewide accounting system implementations reorganization activities 46 million employee severance 14 million increases partially offset lower marketing compliance related expenses acquisitionrelated costs acquisitionrelated costs expensed incurred include expenses directly related acquiring bj services integration expenses incurred combining companies 2010 2009 incurred 134 million 18 million respectively total acquisitionrelated costs interest expense net interest expense increased 16 million 2010 compared 2009 increase primarily due issuance 15 billion debt august 2010 assumption 500 million debt associated acquisition bj services partially offset gains interest rate swaps 16 million net interest expense increased 63 million 2009 compared 2008 primarily due new longterm debt issuances 125 billion october 2008 resulting higher average debt levels throughout 2009 reduction average interest rate earned average investment balance income taxes effective tax rates 2010 2009 2008 361 311 295 respectively current year effective tax rate higher us statutory income tax rate 35 due higher rates tax certain international operations state income taxes partially offset tax benefits arising repatriation foreign earnings prior two years’ effective tax rates lower us statutory income tax rate 35 due lower rates tax certain international operations offset state income taxes tax filings various periods subject audit tax authorities jurisdictions conduct business audits may result assessment additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law received tax assessments various taxing authorities currently varying stages appeals andor litigation regarding matters believe substantial defenses questions raised pursue legal remedies unfavorable outcome result however resolution matters involves uncertainties assurances outcomes favorable outlook section read conjunction factors described “part item 1a risk factors” “forwardlooking statements” section part ii item 7 contained herein factors could impact either positively negatively expectation oil natural gas demand oil natural gas prices exploration development spending drilling activity production spending industry cyclical past cycles driven primarily alternating periods ample supply shortage oil natural gas relative demand oilfield services company revenue dependent spending customers oil natural gas exploration field development production spending dependent number factors including customers’ forecasts future energy demand expectations future energy prices access resources develop produce oil gas impact new government regulations ability fund capital programs depth pace economic recovery global economic recession negative impact moratorium new regulations following deepwater horizon accident gulf mexico drilling us oilandgas shale plays expected primary drivers impacting 2011 business environment worldwide economy recovers demand hydrocarbons increasing january 2011 world economic outlook update international monetary fund “imf” forecasted global output would increase 44 2011 compared 2010 advanced economies’ economic growth expected remain sluggish 25 2011 compared 2010 emerging developing economies expected grow 65 2011 compared 2010 imf also noted downside risks recovery elevated primarily due sovereign financial troubles euro area policies redress fiscal imbalances advance economies general international energy agency “iea” estimated february 2011 oil market report worldwide demand would increase 15 million barrels per day 17 893 million barrels per day 2011 878 million barrels per day 2010 largest incremental demands oil expected generated developing emerging economies china india middle east increasing oil demand expected support oil prices 70bbl 100bbl 2011 north america nearmonth futures prices natural gas quoted february 2011 march 2011 400mmbtu twelve month futures price trading slightly 440mmbtu higher natural gas futures prices 2008 early 2009 provided opportunity many customers hedge natural gas production cash flow customers benefited attractive prices received hedged production allowing maintain exploration development activity however decline natural gas prices 2010 rolloff attractive hedge positions placing increased emphasis well economics cash flow capital budgets many customers nearterm impact lower cash flows sales hedging activity offset investments international oil companies seeking exposure us shale plays capital discipline part competitors attrition existing rental fleets rising demand expected result environment supports continued price increases products services markets late 2011 addition project economies favorably impacted production expected include significant amount natural gas liquids condensates sold higher price per mmbtu impact changes regulation offshore drilling us gulf mexico negatively impacting us offshore drilling activity impact offshore activity appears isolated gulf mexico time equipment people redeployed reassigned opportunities away gulf coast negative impact expected partially offset incremental spending regions oil gas companies adjust spending plans well increased spending workovers shelf gulf mexico permitted bureau ocean energy management regulation enforcement outlook exploration development spending based upon expectations customer spending markets operate driven primarily perception industry expectations oil natural gas prices likely impact customer capital operating budgets well factors could impact economic return oil gas companies expect developing oil gas reserves forecasts based analysis information provided customers well market research analyst reports including short term energy outlook “steo” published energy information administration us department energy “doe” oil market report published iea monthly oil market report published organization petroleum exporting countries “opec” outlook economic growth based analysis information published number sources including imf organization economic cooperation development “oecd” world bank north america outlook 2011 significantly influenced outlook natural gas industry however oildirected rig activity increased levels seen since early 1991 expected continue increase oil prices greater 70bbl many operators seek diversify activity away natural gas increase gasdirected rig count mid2009 low levels continued advances horizontal drilling advanced fracturing completion technologies led increasing rates initial production unconventional gas fields resulting high levels gas production relative demand expectations oil prices due expectations continued global economic expansion energy information administration “eia” expects global demand oil increase 15 million barrels per day 2011 relative 2010 nonopec supply growth expected increase 310 thousand barrels per day 2011 forecasted eia december 2010 meeting quito ecuador opec left production policy unchanged opec spare productive capacity expected essentially unchanged 2011 february 2011 steo report doe forecasted oil prices average 93bbl year 2011 early february 2011 wti oil prices normally trade premium brent oil prices trading significant discount approximately 14bbl structural causes difference expected exist end 2012 expectations north america natural gas prices increasing production near record high storage levels placing downward pressure natural gas prices storage expected remain near historically high levels throughout year february 2011 steo report doe forecasted henry hub natural gas prices average 416mmbtu 2011 compared 437mmbtu 2010 capital expenditures excluding acquisitions expected approximately 23 billion 27 billion 2011 significant portion planned capital expenditures adjusted reflect changes expectations future customer spending manage capital expenditures match market demand compliance business 80 countries including approximately 20 40 countries lowest scores transparency international’s corruption perception index survey 2010 indicates high levels corruption devote significant resources development maintenance enforcement business code conduct policy antibribery compliance policies internal control processes procedures compliance related policies notwithstanding devotion resources part consequence thereof time discover receive information alleging potential violations laws regulations including fcpa policies processes procedures conduct internal investigations potential violations take appropriate action depending upon outcome investigation anticipate devotion significant resources compliancerelated issues including necessity investigations continue aspect business number countries oil natural gas exploration development production take place requested conduct operations compliancerelated issues limited ability business andor raised cost operating countries order provide products services countries may future utilize ventures third parties sell products distributors otherwise modify business approach order improve ability conduct business accordance applicable laws regulations business code conduct bestinclass global ethics compliance program “compliance program” based core values integrity performance teamwork learning ii standards contained business code conduct iii laws countries operate iv commitments doj sec compliance program referenced within company “c2” “completely compliant” completely compliant theme intended establish proper toneatthetop throughout company employees consistently reminded play crucial role ensuring company always conducts business ethically legally safely connection settlements doj sec april 2007 retained independent monitor “monitor” assess make recommendations compliance policies procedures monitor retained term three years term ended july 1 2010 june 2010 monitor issued final report certifying “the antibribery compliance program baker hughes including policies procedures appropriately designed implemented ensure compliance fcpa us commercial bribery laws foreign bribery laws” highlights compliance program including enhancements additions result independent monitor’s recommendations include following • comprehensive employee compliance training program covering substantially employees • comprehensive internal policies areas facilitating payments travel entertainment gifts charitable donations connected nonus government officials payments nonus commercial sales representatives use nonus police military organizations security purposes addition countryspecific guidance customs standards export reexport controls economic sanctions antiboycott laws • special compliance committee made senior officers meets less year review oversight reports active commercial sales representatives • use technology monitor report compliance matters including webbased antiboycott reporting tool global trade management software tool • whistleblower program designed encourage reporting ethics compliance matter without fear retaliation including worldwide business helpline operated third party currently available tollfree 150 languages ensure helpline easily accessible employees language • continued reduction use commercial sales representatives “csrs” processing agents including reduction customs agents • due diligence procedure processing professional agents enhanced process classifying distributors creating formal policy guide business personnel determining subcontractors subjected compliance due diligence • reviewed expanded use centralized finance organization including implementation enterprisewide accounting system companywide policies regarding expense reporting petty cash approval invoice payments general ledger account coding restructured corporate audit function incorporated additional anticorruption procedures audits applied countrywide basis also continuing refine enhance procedures fcpa risk assessments legal audit procedures • continue work ensure adequate legal compliance coverage around world including coordination compliance advice training across regions countries business • continuing centralize human resources function including creating consistent standards prehire screening employees screening existing employees prior promoting positions may exposed corruptionrelated risks creating uniform policy onboarding training analyzed bj services’ compliance programs since closing acquisition integrating compliance programs within operations bj services appropriate liquidity capital resources objective financing business maintain adequate financial resources access sufficient liquidity december 31 2010 cash equivalents 146 billion shortterm investments 250 million 17 billion available borrowing committed revolving credit facilities commercial banks capital planning process focused utilizing cash flows generated operations ways enhance value company 2010 used cash pay variety activities including working capital needs dividends debt maturities acquisitions capital expenditures cash flows cash flows provided used continuing operations type activity follows years ended december 31 statements cash flows entities international operations local currency functional exclude effects changes foreign currency exchange rates occur given year noncash changes result changes reflected certain accounts consolidated statements cash flows may equal changes corresponding accounts consolidated balance sheets operating activities cash flows operating activities provided 856 million year ended december 31 2010 provided 1239 million year ended december 31 2009 decrease cash flows 383 million primarily due change net operating assets liabilities used cash 2010 compared 2009 underlying drivers 2010 compared 2009 changes operating assets liabilities follows cash flows operating activities provided 1239 million year ended december 31 2009 used 1614 million year ended december 31 2008 decrease cash flows 375 million primarily due decrease net income offset change net operating assets liabilities provided cash 2009 compared 2008 underlying drivers 2009 compared 2008 changes operating assets liabilities follows investing activities principal recurring investing activity funding capital expenditures support appropriate levels types rental tools place generate revenues operations expenditures capital assets totaled 149 billion 109 billion 130 billion 2010 2009 2008 respectively majority expenditures rental tools wireline tools machinery equipment also increased spending new facilities expansions existing facilities infrastructure projects proceeds disposal assets 208 million 163 million 222 million 2010 2009 2008 respectively disposals relate primarily rental tools lostinhole well machinery rental tools equipment longer used operations sold throughout year august 30 2010 completed sale two stimulation vessels certain assets used perform sand control services us gulf mexico received cash 55 million incurred disposition costs 16 million divestiture required doj connection acquisition bj services sale material business financial performance routinely evaluate potential acquisitions businesses third parties may enhance current operations expand operations new markets product lines may also time sell business operations considered part core business 2010 paid cash 680 million net cash acquired 113 million related bj services acquisition paid 208 million net cash acquired 4 million acquisitions 2009 paid 58 million net cash acquired 4 million acquisitions including additional purchase price consideration past acquisitions 2008 paid 120 million acquisitions including 4 million direct transaction costs net cash acquired 5 million 2008 sold assets associated surface safety systems product line received cash proceeds 31 million 2010 purchased 250 million shortterm investments consisting us treasury bills mature may 2011 proceeds used repay bj services 575 notes maturing june 2011 financing activities net borrowings commercial paper shortterm debt 52 million 2010 net repayments commercial paper shortterm debt 16 million 2009 net borrowings commercial paper shortterm debt 15 million 2008 august 24 2010 sold 15 billion 5125 senior notes mature september 15 2040 net proceeds offering approximately 148 billion deducting underwriting discounts expenses offering used 511 million net proceeds repay outstanding commercial paper used 250 million net proceeds purchase us treasury bills used repay bj services 575 notes maturing june 2011 remaining net proceeds offering used general corporate purposes 2009 repaid 525 million maturing longterm debt total debt outstanding december 31 2010 389 billion increase 209 billion compared december 31 2009 increase primarily due sale 15 billion notes assumption 500 million principal amount longterm debt bj services acquisition total debt total capitalization defined total debt plus stockholders’ equity ratio 021 december 31 2010 020 december 31 2009 october 28 2008 sold 500 million 650 senior notes mature november 15 2013 750 million 750 senior notes mature november 15 2018 net proceeds offering 124 billion deducting underwriting discounts expenses offering used portion net proceeds repay outstanding commercial paper well repay 325 million aggregate principal amount outstanding 625 notes matured january 15 2009 200 million aggregate principal amount outstanding 600 notes matured february 15 2009 used remaining net proceeds offering general corporate purposes received proceeds 74 million 51 million 87 million 2010 2009 2008 respectively issuance common stock exercise stock options employee stock purchase plan board directors authorized program repurchase common stock time 2008 repurchased 9 million shares common stock average price 6812 per share total 627 million 2010 2009 repurchase shares common stock authorization remaining repurchase approximately 12 billion common stock end 2010 paid dividends 241 million 185 million 173 million 2010 2009 2008 respectively increase 2010 primarily due 118 million shares issued acquisition bj services available credit facilities march 19 2010 entered credit agreement “2010 credit agreement” 2010 credit agreement threeyear committed 12 billion revolving credit facility expires march 19 2013 800 million revolving credit facility available immediately remaining 400 million facility became available consummation acquisition bj services occurred april 28 2010 also march 19 2010 terminated 364day credit agreement amount 500 million dated march 30 2009 expiring march 29 2010 december 31 2010 17 billion committed revolving credit facilities commercial banks consisting 2010 credit agreement 12 billion 500 million facility expiring july 7 2012 facilities contain certain covenants among things require maintenance funded indebtedness total capitalization ratio defined formula per facility restrict certain merger transactions sale substantially assets significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations facilities may accelerated events default include payment defaults lenders facilities covenant defaults customary defaults december 31 2010 compliance facility covenants committed credit facilities direct borrowings committed credit facilities end 2010 also outstanding commercial paper program may issue time 10 billion commercial paper maturity 270 days extent outstanding commercial paper ability borrow committed credit facilities reduced similar amount december 31 2010 commercial paper outstanding market conditions change revenues significantly reduced operating costs increase cash flows liquidity could reduced additionally could cause rating agencies lower credit rating ratings triggers would accelerate maturity borrowings committed credit facilities however downgrade credit ratings could increase cost borrowings facilities could also limit preclude ability issue commercial paper occur would seek alternative sources funding including borrowing facilities believe current credit ratings would allow us obtain interim financing existing credit facilities currently unforeseen significant needs growth opportunities also believe interim financings could funded subsequent issuances longterm debt equity necessary cash requirements 2011 believe cash hand cash flows operating activities provide us sufficient capital resources liquidity manage working capital needs meet contractual obligations fund capital expenditures support development shortterm longterm operating strategies may issue commercial paper shortterm debt fund cash needs us excess cash generated us 2011 expect capital expenditures approximately 23 billion 27 billion excluding amount related acquisitions expenditures expected used primarily normal recurring items necessary support business operations significant portion capital expenditures adjusted based future activity customers manage capital expenditures match market demand 2011 also expect make interest payments 215 million 225 million based debt levels december 31 2010 anticipate making income tax payments 975 million 1025 million 2011 may repurchase common stock depending market conditions applicable legal requirements liquidity considerations anticipate paying dividends 260 million 270 million 2011 however board directors change dividend policy time pension plans make annual contributions plans amounts equal greater amounts necessary meet minimum governmental funding requirements 2011 expect contribute 65 million 85 million defined benefit pension plans 2011 also expect make benefit payments related postretirement welfare plans 16 million 18 million estimate contribute 185 million 200 million defined contribution plans see note 13 notes consolidated financial statements item 8 herein discussion employee benefit plans contractual obligations table set forth contractual cash obligations december 31 2010 certain amounts included table based estimates assumptions obligations including duration anticipated actions third parties factors contractual cash obligations actually pay future periods may vary reflected table estimates assumptions subjective 1 amounts represent expected cash payments total debt include unamortized discounts deferred issuance costs net deferred gains terminated interest rate swap agreements 2 amounts represent expected cash payments interest longterm debt 3 enter operating leases normal course business lease agreements provide us option renew lease future operating lease payments reflected table would change exercised renewal options entered additional operating lease agreements 4 purchase obligations include agreements purchase goods services enforceable legally binding specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations exclude agreements cancelable anytime without penalty 5 amounts represent longterm liabilities including current portion reflected consolidated balance sheet timing amount payment streams known amounts include payments certain environmental remediation liabilities payments deferred compensation payouts acquisition agreements payments certain asset retirement obligations amounts include payments pension contributions payments various postretirement welfare benefit plans postemployment benefit plans 6 estimated income tax liabilities uncertain tax positions settled result expiring statutes audit activity competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate timing particular settlement depend length tax audit related appeals process expiration statute liability settled due statute expiring favorable audit result settlement tax liability would result cash payment offbalance sheet arrangements normal course business customers vendors others entered offbalance sheet arrangements letters credit bank issued guarantees totaled approximately 116 billion december 31 2010 also commitments outstanding purchase obligations related capital expenditures inventory purchase orders contracts approximately 264 million december 31 2010 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements normal operating leases offbalance sheet financing arrangements securitization agreements liquidity trust vehicles synthetic leases special purpose entities materially exposed financing liquidity market credit risk could arise engaged financing arrangements critical accounting estimates preparation consolidated financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosures contingent assets liabilities base estimates judgments historical experience assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained business environment operate changes defined critical accounting estimate one important portrayal either financial condition results operations requires us make difficult subjective complex judgments estimates matters uncertain discussed development selection critical accounting estimates auditethics committee board directors auditethics committee reviewed disclosure presented past three fiscal years made material changes methodology used establish critical accounting estimates discussed believe following critical accounting estimates used preparation consolidated financial statements addition items within consolidated financial statements require estimation deemed critical defined allowance doubtful accounts determination collectability amounts due customers requires us use estimates make judgments regarding future events trends including monitoring customers’ payment history current credit worthiness determine collectability reasonably assured well consideration overall business climate customers operate inherently uncertainties require us make frequent judgments estimates regarding customers’ ability pay amounts due us order determine appropriate amount valuation allowances required doubtful accounts provisions doubtful accounts recorded becomes evident customer make required payments either contractual due dates future december 31 2010 2009 allowance doubtful accounts totaled 162 million 4 157 million 6 total gross accounts receivable respectively believe allowance doubtful accounts adequate cover potential bad debt losses current conditions however uncertainties regarding changes financial condition customers either adverse positive could impact amount timing additional provisions doubtful accounts may required five percent change allowance doubtful accounts would impact income taxes approximately 8 million 2010 inventory reserves inventory significant component current assets stated lower cost market requires us record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments estimates forecasts inherently include uncertainties require us make judgments regarding potential future outcomes december 31 2010 2009 inventory reserves totaled 322 million 11 297 million 14 gross inventory respectively believe reserves adequate properly value potential excess slow moving obsolete inventory current conditions significant unanticipated changes estimates forecasts could impact amount timing additional provisions excess obsolete inventory may required five percent change inventory reserve balance would impact income taxes approximately 16 million 2010 goodwill longlived assets longlived assets include property equipment goodwill intangible assets certain assets comprise significant amount total assets review carrying values assets impairment periodically least annually goodwill whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make judgments regarding longterm forecasts future revenues costs related assets subject review turn forecasts uncertain require assumptions demand products services future market conditions technological developments perform annual impairment test goodwill october 1 year performing test individually test reporting units generally based regional structure tests involve use different valuation techniques including market approach comparable transactions discounted cash flow methodology include limited assumptions regarding matters discount rates anticipated growth rates expected profitability rates similar items results 2010 test indicated impairments goodwill unanticipated changes including even small revisions assumptions could require provision impairment future period given nature evaluations application specific assets specific times possible reasonably quantify impact changes assumptions purchase price acquired businesses allocated identifiable assets liabilities based upon estimated fair values acquisition date excess consideration transferred amount allocated assets liabilities recorded goodwill determining estimated fair values use various sources types information including limited quoted market prices replacement cost estimates accepted valuation techniques discounted cash flows existing carrying value acquired assets necessary utilize thirdparty appraisal firms assist us determining fair value inventory identifiable intangible assets significant assets liabilities measurement period necessary adjust preliminary purchase price allocation obtain information regarding asset valuations liabilities assumed judgments assumptions estimates used made determining estimated fair value assigned assets acquired liabilities assumed well asset lives materially impact results operations income taxes liability method used determining income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered valuation allowances established reduce deferred tax assets likely portion deferred tax assets realized determining need valuation allowances considered made judgments estimates regarding estimated future taxable income ongoing prudent feasible tax planning strategies estimates judgments include degree uncertainty changes estimates assumptions could require us adjust valuation allowances deferred tax assets historically changes valuation allowances caused major changes business cycle certain countries changes local country law ultimate realization deferred tax assets depends generation sufficient taxable income applicable taxing jurisdictions operate 80 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenues rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability taxing jurisdiction could impact amount income taxes provide given year tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings resulting change tax liability dependent numerous factors difficult estimate include among others amount nature additional taxes potentially asserted local tax authorities willingness local tax authorities negotiate fair settlement administrative process impartiality local courts sheer number countries business potential changes tax paid one country either produce fail produce offsetting tax change countries experience estimates assumptions used provide future tax assessments proven appropriate however past experience guide potential exists tax resulting resolution current potential future tax controversies may differ materially amount accrued addition aforementioned assessments received various tax authorities also provide taxes uncertain tax positions formal assessments received determination liabilities requires use estimates assumptions regarding future events established adjust amounts information available future event occurs necessitating change reserves changes facts law judicial decisions regarding application existing law favorable audit outcome believe resolution tax matters material effect consolidated financial condition company although resolution could material impact consolidated statement operations particular period effective tax rate period resolution occurs pensions postretirement benefit obligations pensions postretirement benefit obligations related expenses calculated using actuarial models methods involves use two critical assumptions discount rate expected rate return assets important elements determining pension expense measuring plan assets liabilities evaluate critical assumptions least annually although considered less critical assumptions used determining benefit obligations related expenses demographic factors like retirement age mortality turnover also evaluated periodically updated reflect actual expected experience discount rate enables us state expected future cash flows present value measurement date development discount rate largest plans based bond matching model whereby cash flows underlying projected benefit obligation matched yield curve constructed bond portfolio highquality fixedincome securities use lower discount rate would increase present value benefit obligations increase pension expense used discount rate 59 2010 64 2009 60 2008 determine pension expense 50 basis point reduction discount rate would decreased income taxes approximately 1 million 2010 determine expected rate return plan assets consider current target asset allocations well historical expected future returns various categories plan assets lower rate return increases plan expenses assumed rates return plan investments 71 2010 80 2009 2008 50 basis point reduction expected rate return assets principal plans would decreased income taxes approximately 4 million 2010 new accounting standards accounting standards updates october 2009 financial accounting standards board “fasb” issued update accounting standards codification “asc” 605 revenue recognition multiple deliverable revenue arrangements accounting standards update “asu” addresses accounting multipledeliverable arrangements enable vendors account deliverables separately provision establishes selling price hierarchy determining selling price deliverable update requires expanded disclosures multiple deliverable revenue arrangements asu effective us revenue arrangements entered materially modified june 15 2010 adopted provisions update material impact consolidated financial statements december 2010 fasb issued update asc 805 business combinations asu addresses disclosure comparative financial statements expands supplementary pro forma information business combinations adopt asu prospectively business combinations occurring december 15 2010 related party transactions significant related party transactions three years ended december 31 2010 forwardlooking statements mda certain statements notes consolidated financial statements include forwardlooking statements within meaning section 27a securities act section 21e exchange act “forwardlooking statement” words “anticipate” “believe” “ensure” “expect” “if” “intend” “estimate” “probable” “project” “forecasts” “predict” “outlook” “aim” “will” “could” “should” “would” “may” “likely” similar expressions negative thereof intended identify forwardlooking statements forwardlooking statements based assumptions believe reasonable may prove accurate statements include potential impact future transactions acquisition disposition merger joint venture transaction could occur undertake obligation publicly update revise forwardlooking statement expectations regarding business outlook including changes revenue pricing capital spending profitability strategies operations impact common stock repurchases oil natural gas market conditions market share contract terms costs availability resources economic regulatory conditions ongoing integration bj services environmental matters forecasts regarding matters forwardlooking information subject risks uncertainties could cause actual results differ materially results expected although possible identify factors risks uncertainties include risk factors timing risk factors identified item 1a risk factors set forth time filings sec documents available website sec’s electronic data gathering analysis retrieval system “edgar” httpwwwsecgov risk factors discussion risk factors cautions regarding forwardlooking statements see item 1a risk factors “forwardlooking statements” section item 7 contained herein item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations “mda” read conjunction consolidated financial statements item 8 financial statements supplementary data contained herein executive summary baker hughes leading supplier oilfield services products technology systems worldwide oil natural gas industry provide products services • drilling evaluation oil natural gas wells • completion production oil natural gas wells • industries including downstream refining process pipeline industries well reservoir development services operate business primarily geographic regions aggregated five reportable segments north america latin america europeafricarussia caspian middle eastasia pacific industrial services four geographical segments represent oilfield operations within oilfield operations primary driver businesses customers’ capital operating expenditures dedicated oil natural gas exploration field development production business cyclical dependent upon customers’ expectations future oil natural gas prices economic growth hydrocarbon demand estimates current future oil natural gas production 2011 generated revenue 1983 billion increase 542 billion 38 compared 2010 north america oilfield revenue 2011 1026 billion increase 55 compared 2010 oilfield revenue outside north america 833 billion increase 22 compared 2010 industrial services revenue 125 billion increase 28 compared 2010 increases primarily due increase activity service intensity primarily north america driven oildirected drilling mainly unconventional reservoirs increase revenue also due acquisition bj services occurred april 2010 net income attributable baker hughes 174 billion 2011 compared 812 million 2010 increase net income chiefly due increased activity north america lesser extent internationally increase net income also due acquisition bj services december 31 2011 baker hughes approximately 57700 employees compared approximately 53100 employees december 31 2010 business environment north america customer spending increased oil natural gas projects resulting 21 increase north america rig count 2011 compared 2010 oildirected drilling increased 60 2011 compared 2010 reflecting energy equivalent premium relative natural gas north america natural gasdirected drilling activity declined 6 2011 compared 2010 decreased activity unconventional natural gas shale plays relatively little associated natural gas liquids dry gas partially offset increased activity unconventional liquidrich natural gas shale plays relatively high volumes associated natural gas liquids wet gas despite relatively weak natural gas prices spending natural gasdirected projects 2011 supported 1 associated production natural gas liquids crude oil certain basins 2 hedges production made prior periods future prices higher 3 need companies drill produce natural gas hold leases acquired earlier periods 4 influx equity companies interested developing position unconventional shale resource plays outside north america customer spending heavily influenced brent oil prices increased 39 2011 compared 2010 economic recovery continued oil prices higher year recent concerns european fiscal issues slower growth china india threat us recession restrained oil prices however customers’ spending adversely affected 2011 reflected 7 increase rig count outside north america oil natural gas prices oil natural gas prices summarized table averages daily closing prices periods indicated 1 bloomberg dated brent “brent” 2 bloomberg west texas intermediate “wti” cushing crude oil spot price 3 bloomberg henry hub natural gas spot price brent oil prices averaged 11105bbl 2011 prices ranged low 9298bbl january 2011 high 12674bbl april 2011 beginning may 2011 continuing throughout remainder 2011 oil prices weakened driven expectations slowdown worldwide economic recovery energy demand growth particularly europe international energy agency “iea” estimated february 2012 oil market report worldwide demand would increase 08 million barrels per day 09 899 million barrels per day 2012 891 million barrels per day 2011 wti oil prices averaged 9508bbl 2011 prices ranged high 11393bbl april 2011 low 7567bbl october 2011 similar brent oil prices wti oil prices climbed first four months 2011 weakened throughout remainder 2011 natural gas prices averaged 399mmbtu 2011 much like oil prices natural gas prices peaked midyear high 492mmbtu june 2011 continued weaken throughout latter half 2011 falling low 283mmbtu late november 2011 according us department energy “doe” working natural gas storage end 2011 3472bcf 12 375bcf corresponding week 2010 rig counts baker hughes providing rig counts public since 1944 gather relevant data field service personnel obtain necessary data routine visits various rigs customers contractors andor outside sources data compiled distributed various wire services trade associations published website rig counts compiled weekly us canada monthly international us workover rigs published international rig counts include rigs drilling certain locations russia caspian iraq onshore china information readily available rigs us canada counted active day count taken well drilled started drilling completed well anticipated sufficient depth potential consumer drill bits international areas rigs counted weekly basis deemed active drilling activities occurred majority week weekly results averaged month published accordingly rig count include rigs transit one location another rigging used nondrilling activities including production testing completion workover expected significant consumers drill bits rig counts summarized table averages periods indicated 2011 compared 2010 rig count north america increased 21 reflecting 66 increase us oildirected rig count partially offset 6 decrease us natural gasdirected rig count 40 increase canadian oildirected rig count partially offset 5 decrease canadian natural gasdirected rig count growth oildirected drilling primarily result industry’s ability apply drilling completion techniques unconventional oil reservoirs originally applied similar natural gas reservoirs techniques proved successful enabled substantial volume oil reserves produced us led significant increase oildirected drilling activity natural gasdirected drilling negatively impacted continued weakness us natural gas prices discouraged new investment natural gas fields outside north america rig count increased 7 general international rig count increased operators responded relatively strong oil prices well level considered economical develop new reserves primary hydrocarbon basins world rig count latin america increased primarily due higher rig activity colombia venezuela brazil increase continental europe led turkey poland rig count africa decreased chiefly due shutdown activity libya partially offset stronger activity algeria gabon rig count increased middle east primarily due higher activity kuwait egypt abu dhabi partially offset decline activity yemen asia pacific activity decreased primarily malaysia indonesia vietnam activity increased india results operations discussions relating significant line items consolidated statements operations based available information represent analysis significant changes events impact comparability reported amounts appropriate identified specific events changes affect comparability trends possible practical quantified impact items acquired bj services april 28 2010 financial results operations since acquisition date included five reportable segments addition discussions revenue cost revenue total basis business drivers individual components product sales services similar dollar amounts tabulations section millions dollars unless otherwise stated revenue profit tax performance operating segments evaluated based profit tax defined income following income taxes net interest expense corporate expenses certain gains losses allocated segments 2011 operating segment profit tax includes charge 315 million related impairment trade names 2011 compared 2010 revenue 2011 increased 542 billion 38 compared 2010 primary drivers change included increased activity improved pricing us land canada markets lesser extent increased activity international segments increase also due acquisition bj services april 2010 profit tax 2011 increased 110 billion 62 compared 2010 primary driver increase growth revenue areas particular north america segment increased service intensity unconventional markets led increased efficiency utilization pricing improvement additionally profit tax also benefitted worldwide cost management initiatives improved absorption manufacturing overhead costs increase also due acquisition bj services april 2010 increase profit tax partially offset impairment certain trade names north america north america revenue increased 55 2011 compared 2010 revenue pricing increases supported 22 increase us land inland waters rig count 20 increase canada rig count unconventional reservoirs continue primary catalyst rapid growth seen north america unconventional reservoirs require substantially higher proportion services baker hughes across product lines revenue gulf mexico increased compared 2010 permitting modestly improved still lagged meaningfully behind premoratorium levels north america profit tax 193 billion 2011 increase 766 million compared 2010 higher revenue segment driven activity pricing primary reason increase profitability drivers increase included improved tool utilization improved absorption manufacturing overhead improvement offset decline fourth quarter 2011 profitability pressure pumping services incurred increased costs related shortages raw materials logistical inefficiencies higher labor costs although positive progress gulf mexico pace repermitting enabled activity return premoratorium levels north america profit tax negatively impacted 105 million charge associated impairment trade names latin america latin america revenue increased 39 2011 compared 2010 primary drivers increase acceleration activity benefitting drilling fluids artificial lift product lines andean area well robust deep water growth use drilling services brazil lesser extent modest pricing improvements latin america profit tax increased 207 2011 compared 2010 increased revenue contributor increased profitability primary factors included cost containment initiatives improved overhead cost absorption well meaningful operational improvements lower internal operating costs favorable change mix products services sold higher margin activity completion certain low margin contracts early 2011 latin america profit tax negatively impacted 64 million charge associated impairment trade names europeafricarussia caspian europeafricarussia caspian “earc” revenue increased 11 2011 compared 2010 primary drivers increase sales completion tools drilling fluids norway increased drilling services activity turkey israel modestly improving market conditions across europe russia higher drilling fluids wireline services drilling services activities nigeria increases partially offset impact decreased sales libya operations ceased second quarter 2011 result civil unrest minimal operational activity resuming fourth quarter year earc profit tax increased 32 2011 compared 2010 primarily result increased focus cost management initiatives operating efficiencies addition profitability improved result increased activity favorable sales mix toward products services higher margins earc profit tax negatively impacted 70 million charge associated increasing allowance doubtful accounts reserves inventory certain assets result civil unrest libya 48 million charge associated impairment trade names middle eastasia pacific middle eastasia pacific “meap” revenue increased 26 2011 compared 2010 increase segment attributable higher activity directional drilling artificial lift systems share gains saudi arabia well significant revenue gains kuwait iraq southeast asia production enhancement activity additionally wireline completions activity increased southeast asia meap profit tax increased 81 2011 compared 2010 primarily result increased focus cost management initiatives operating efficiencies addition profitability improved result increased activity favorable sales mix partially offset costs startup activities iraq elsewhere meap profit tax negatively impacted 47 million charge associated impairment trade names industrial services industrial services revenue increased 28 2011 compared 2010 industrial services profit tax decreased 46 2011 compared 2010 primarily driven 51 million charge associated impairment trade names overall increase cost goods services sold partially offset increased revenue related profitability 2010 compared 2009 revenue 2010 increased 475 billion 49 compared 2009 excluding bj services revenue 2010 11 primary drivers change included increased activity improved pricing us land canada markets lesser extent increased activity international segments profit tax 2010 increased 725 million 69 compared 2009 excluding bj services profit tax 18 primarily due strong activity north america segment increased activity led increased utilization improved absorption manufacturing overhead costs realized pricing improvement partially offset price degradation lower profits international segments north america north america revenue increased 109 2010 compared 2009 excluding bj services revenue 2010 28 revenue pricing increases supported 45 increase us land inland waters rig count 57 increase canada rig count unconventional reservoirs demanded advanced technology deliver longer horizontals complex completions increased hydraulic horsepower fracturing stages resulting improved pricing higher revenue improvement partially offset decline us gulf mexico revenue resulting drilling moratorium gulf mexico north america profit tax 116 billion 2010 increase 962 million compared 2009 excluding bj services profit tax 2010 438 million addition higher revenue driven increased activity primary drivers increase profitability included improved tool utilization improved absorption manufacturing overhead higher pricing improvement partially offset decline profitability us gulf mexico due drilling moratorium gulf mexico latin america latin america revenue increased 43 2010 compared 2009 excluding bj services revenue 2010 14 primary drivers increase included increased activity commensurate revenue growth andean brazil southern cone geomarkets driven strong demand artificial lift directional drilling fluids products services partially offset reduced activity venezuelamexico geomarket latin america profit tax decreased 5 2010 compared 2009 excluding bj services profit tax increased 17 improved profit tax andean southern cone geomarkets partially offset decreased profit tax brazil venezuelamexico geomarkets europeafricarussia caspian earc revenue increased 8 2010 compared 2009 excluding bj services revenue 2010 decreased 1 reduced revenue north africa continental europe geomarkets partially offset higher revenue russia uk nigeria norway geomarkets strong demand directional drilling artificial lift products services experienced earc profit tax decreased 43 2010 compared 2009 excluding bj services profit tax decreased 41 improved profit tax russia nigeria geomarkets offset reduced profit tax throughout rest region primarily due lower activity north africa geomarket higher overhead costs lower realized pricing middle eastasia pacific meap revenue increased 16 2010 compared 2009 excluding bj services revenue 2010 flat revenue increases occurred saudi arabia egypt australasia southeast asia geomarkets driven higher activity benefiting chemicals artificial lift completion systems products services increases offset decreased revenue primarily middle east gulf india geomarkets meap profit tax decreased 27 2010 compared 2009 excluding bj services profit tax decreased 34 improved profit tax egypt north asia geomarkets offset lower realized pricing higher overhead costs throughout rest region industrial services industrial services revenue increased 40 2010 compared 2009 excluding bj services revenue 2010 increased 10 industrial services profit tax increased 41 2010 compared 2009 excluding bj services profit tax increased 14 costs expenses table details certain consolidated statement operations data percentage revenue cost revenue cost revenue percentage revenue remained stable 2011 77 78 2011 2010 respectively slight decrease due primarily improved pricing north america coupled improved operational efficiency cost management initiatives implemented globally offset higher raw material logistics labor costs addition cost revenue impacted 70 million charge libya operations ceased second quarter 2011 minimal operational activity resuming fourth quarter year cost revenue percentage revenue 78 77 2010 2009 respectively slight increase primarily due pricing pressures higher operating costs geomarket organization mitigating productivity improvements cost cutting measures result bj services acquisition incurred additional depreciation amortization expense 93 million 2010 related stepup adjustments property plant equipment intangible assets research engineering research engineering expenses increased 8 2011 2010 compared corresponding previous year continue committed developing commercializing new technologies well investing core product offerings global technology centers strategically placed around world often collaborate customers local universities jointly develop technology specific regional needs well nextgeneration technology marketing general administrative marketing general administrative “mga” expenses decreased 5 2011 compared 2010 decrease expenses resulted cost reduction management measures implemented latter half 2010 synergies realizing continue integrate bj services operations mga expenses increased 12 2010 compared 2009 increase resulted primarily costs associated finance redesign efforts software implementation activities acquisition bj services impairment trade names 2011 recognized charge 315 million related impairment certain trade names majority related bj services trade name impairment bj services trade name due decision minimize use bj services trade name part overall branding strategy baker hughes interest expense net interest expense net interest income increased 80 million 2011 compared 2010 increase primarily due assumption 500 million debt associated acquisition bj services april 2010 issuance 15 billion debt august 2010 issuance 750 million debt august 2011 increase interest expense partially offset repayment 250 million debt early extinguishment 500 million debt second third quarters 2011 respectively net interest expense increased 16 million 2010 compared 2009 increase primarily due issuance 15 billion debt august 2010 assumption 500 million debt associated acquisition bj services partially offset gains interest rate swaps 16 million loss early extinguishment debt 2011 redeemed full 500 million debt maturing november 2013 paid redemption premium 63 million redemption resulted pretax loss 40 million early extinguishment debt included redemption premium write remaining original debt issuance costs debt discount partially offset 25 million gain termination two related interest rate swap agreements income taxes total income tax expense 596 million 2011 amount includes 214 million tax benefit associated reorganization certain foreign subsidiaries result reorganization previously accrued us deferred income taxes related subsidiaries reduced certain foreign tax credits existed prior acquisition bj services available offset future us taxes excluding impact reorganization effective tax rate operating profits 2011 2010 2009 346 361 311 respectively 2011 effective tax rate lower us statutory income tax rate 35 due lower rates tax certain international operations partially offset state income taxes 2010 effective tax rate higher us statutory income tax rate 35 due higher rates tax certain international operations state income taxes partially offset tax benefits arising repatriation foreign earnings 2009 effective tax rate lower us statutory rate 35 due lower rates tax certain international operations offset state income taxes outlook section read conjunction factors described “part item 1a risk factors” “forwardlooking statements” section part ii item 7 contained herein factors could impact either positively negatively expectation oil natural gas demand oil natural gas prices exploration development spending drilling activity production spending industry cyclical past cycles driven primarily alternating periods ample supply shortage oil natural gas relative demand oilfield services company revenue dependent spending customers oil natural gas exploration field development production spending dependent number factors including customers’ forecasts future energy demand expectations future energy prices access resources develop produce oil natural gas ability fund capital programs impact new government regulations outlook exploration development spending based upon expectations customer spending markets operate driven primarily perception industry expectations oil natural gas prices likely impact customer capital operating budgets well factors could impact economic return oil natural gas companies expect developing oil natural gas reserves forecasts based evaluating number external sources well internal estimates external sources include publications iea opec energy information administration “eia” organization economic cooperation development “oecd” acknowledge substantial amount uncertainty regarding forecasts thus internal estimates regarding economic expansion hydrocarbon demand overall oilfield activity position flexible responsive wide range potential outcomes primary drivers impacting 2012 business environment include following • worldwide economic growth general strong linkage overall economic activity growth demand hydrocarbons although continue see modest economic growth across oecd countries relatively strong growth among many developing economies substantial concern regarding economic outlook going 2012 concerns primarily fueled concern sovereign debt issues europe slowdown chinese economy european sovereign debt crisis poses substantial risk worldwide economy substantial reduction economic activity europe likely impact major economies china india us although steps taken resolve issue still concern financial equity markets european economic activity substantially slow 2012 china’s rapid economic growth industrialization major factor driving worldwide economic growth since recession 20082009 expected china continue grow meaningful pace however concern chinese central bank’s efforts limit inflation may temper growth prospects us slow recovery recession 20082009 economy continues deal effects financial crisis going forward expectation us see modest economic growth 2012 however weakness deterioration global economy particularly china india europe could curtail us economic growth current estimates • demand hydrocarbons february 2012 oil market report iea said expects global demand oil increase 08 million barrels per day 2012 relative 2011 forecasts iea eia opec revised modestly lower past months primarily reaction higher oil prices uncertainty regarding strength economic recovery expected increase demand hydrocarbons expected support increased spending develop oil natural gas increasingly important hydrocarbon meet world’s energy needs recent innovations us substantially improved production natural gas us result natural gas demand alltime high us expected continue increase 2012 europe asia increasing demand natural gas production major gas fields middle east africa asia pacific imported consuming regions • oil production global spare oil production capacity relatively limited proving inadequate decouple oil prices geopolitical supply disruptions throughout north africa middle east several key opec countries announced plans increase exploration development efforts develop resources meet expected increase global demand sustained higher oil prices led producers particularly us increase capital spending apply new technology increase oil production although positive trend us expected continue many years come provide modest offset potential supply disruption across rest world • natural gas production worldwide natural gas production continues grow result emergence unconventional shale plays north america well abundance large conventional fields middle east asia latin america low natural gas prices us driven reduction natural gasdirected rig activity us anticipated begin impact natural gas production date natural gas production continues increase per latest reports doe worldwide natural gas production tend stable high natural gas prices places europe asia encourage natural gas production current levels • oil natural gas prices wti oil prices trading 7567bbl 11393bbl unconventional plays us well conventional developments internationally provide adequate returns encourage incremental investment internationally oil developments based brent oil prices also high enough level justify investment field development based tightness oil supply anticipated modest economic growth would expect commodity prices remain relatively strong throughout 2012 barring major macroeconomic event north america natural gas prices particularly low compared oil btu equivalent basis low price driven combination far efficient production unconventional plays us well particularly warm winter although industrial demand power generation gradually increasing demanding natural gas enough offset increase production unconventional plays result expectation natural gas prices remain particularly low throughout 2012 activity spending outlook north america overall customer spending north america expected increase fiscal 2012 compared fiscal 2011 unconventional plays crude oil natural gas liquids content attracting incremental investment dry gas plays expected continue decline due historically low natural gas pricing levels service intensity increased north america customers demanding advanced directional drilling complex completion systems pressure pumping develop unconventional plays demand key technologies grown faster industry’s ability produce resulting support higher prices gulf mexico activity continental shelf remained steady second half 2011 saw modest increase deep water permits subsequently deep water drilling level activity deep water gulf mexico remains premoratorium levels however confidence permitting process better understood deepwater activity ultimately return premoratorium levels investing people processes ensure fully compliant new stringent regulatory requirements gulf mexico activity spending outlook outside north america international activity driven primarily price oil high enough provide attractive economic returns almost every region customers expected increase spending develop new resources offset declines existing developed resources areas expected see increased spending 2012 include middle east particular iraq saudi arabia brazil investment presalt resources colombia seen rapid expansion associated improved fiscal terms customers capital expenditures capital expenditures excluding acquisitions expected 31 billion 34 billion 2012 portion planned capital expenditures adjusted reflect changes expectations future customer spending compliance business 80 countries including approximately 25 40 countries lowest scores transparency international’s corruption perception index survey 2011 indicates high levels corruption devote significant resources development maintenance communication enforcement business code conduct antibribery compliance policies internal control processes procedures compliance related policies notwithstanding devotion resources part consequence thereof time discover receive information alleging potential violations laws regulations including fcpa policies processes procedures conduct timely internal investigations potential violations take appropriate action depending upon outcome investigation anticipate devotion significant resources compliancerelated issues including necessity investigations continue aspect business number countries oil natural gas exploration development production take place requested conduct operations compliancerelated issues limited ability business andor raised cost operating countries order provide products services countries may future utilize ventures third parties sell products distributors otherwise modify business approach order improve ability conduct business accordance applicable laws regulations business code conduct bestinclass global ethics compliance program “compliance program” based core values integrity performance teamwork learning ii standards contained business code conduct iii laws countries operate compliance program referenced within company “c2” “completely compliant” completely compliant theme intended establish proper toneatthetop throughout company employees consistently reminded play crucial role ensuring company always conducts business ethically legally safely highlights compliance program include following • comprehensive internal policies areas facilitating payments travel entertainment gifts charitable donations connected nonus government officials payments nonus commercial sales representatives use nonus police military organizations security purposes addition countryspecific guidance customs standards export reexport controls economic sanctions antiboycott laws • comprehensive employee compliance training program covering substantially employees • due diligence procedure commercial sales processing professional agents enhanced process classifying distributors creating formal policy guide business personnel determining subcontractors subjected compliance due diligence • special compliance committee made senior officers meets less year review oversight reports active commercial sales representatives • continued reduction use commercial sales representatives processing agents including reduction customs agents • use technology monitor report compliance matters including webbased antiboycott reporting tool global trade management software tool • program designed encourage reporting ethics compliance matter without fear retaliation including worldwide business helpline operated third party currently available tollfree 150 languages ensure helpline easily accessible employees language • continued expand use scope centralized finance organization including implementation enterprisewide accounting system companywide policies addition corporate audit function incorporated additional anticorruption procedures audits applied countrywide basis also continuing refine enhance procedures fcpa risk assessments legal audit procedures • continue work ensure adequate legal compliance coverage around world including coordination compliance advice training across regions countries business • continuing centralize human resources function including creating consistent standards prehire screening employees screening existing employees prior promoting positions may exposed corruptionrelated risks creating uniform policy new hire training liquidity capital resources objective financing business maintain adequate financial resources access sufficient liquidity december 31 2011 cash equivalents 105 billion approximately 103 billion held foreign subsidiaries substantial portion cash held foreign subsidiaries december 31 2011 reinvested international operations intent use cash among things fund operations foreign subsidiaries decide later date repatriate funds us may required provide taxes certain funds based applicable us tax rates net foreign taxes addition 25 billion available borrowing committed revolving credit facility commercial banks believe cash hand cash flows operations available credit facility including issuance commercial paper provide sufficient liquidity manage global cash needs capital planning process focused utilizing cash flows generated operations ways enhance value company 2011 used cash pay variety activities including working capital needs capital expenditures repayment debt payment dividends cash flows cash flows provided used continuing operations type activity follows years ended december 31 statements cash flows entities international operations local currency functional exclude effects changes foreign currency exchange rates occur given year noncash changes result changes reflected certain accounts consolidated statements cash flows may equal changes corresponding accounts consolidated balance sheet operating activities cash flows operating activities provided 15 billion year ended december 31 2011 provided 856 million year ended december 31 2010 increase cash flows 651 million primarily due increase net income offset change net operating assets liabilities used cash 2011 compared 2010 underlying drivers 2011 compared 2010 changes operating assets liabilities follows • increase accounts receivable used cash 102 billion 702 million 2011 2010 respectively change accounts receivable primarily due increase activity corresponding revenue growth well increase days sales outstanding defined average number days net trade receivables outstanding based quarterly revenue approximately 2 days • increase inventory used cash 641 million 243 million 2011 2010 respectively driven activity increases • increase accounts payable provided cash 314 million 292 million 2011 2010 respectively resulting increase operating assets support increased activity • accrued employee compensation accrued liabilities provided 58 million cash 2011 used 182 million 2010 increase cash provided 2011 due primarily increased employee bonus accruals 2011 partially offset employee bonuses paid 2011 earned accrued 2010 cash flows operating activities provided 856 million year ended december 31 2010 provided 124 billion year ended december 31 2009 decrease cash flows 383 million primarily due change net operating assets liabilities used cash 2010 compared 2009 underlying drivers 2010 compared 2009 changes operating assets liabilities follows • accounts receivable used 702 million cash 2010 provided 399 million 2009 change accounts receivable primarily due increase activity partially offset decrease days sales outstanding approximately 6 days • inventory used 243 million cash 2010 provided 240 million 2009 driven activity increases • accounts payable provided 292 million cash 2010 used 89 million 2009 increase primarily due increase operating assets support increased activity • decrease accrued employee compensation accrued liabilities used cash 182 million 130 million 2010 2009 respectively increase use cash 2010 due primarily payments preexisting change control contractual obligations certain bj services employees partially offset decrease payments related employee bonuses earned 2009 paid 2010 • income taxes payable provided 23 million 2010 cash used 169 million 2009 use cash 2009 primarily due federal income tax payments made 2009 155 million two quarterly installment payments related 2008 us internal revenue service allowed companies impacted hurricane ike defer third fourth quarter installment payments 2008 january 2009 investing activities principal recurring investing activity funding capital expenditures ensure appropriate levels types machinery equipment place generate revenue operations expenditures capital assets totaled 246 billion 149 billion 109 billion 2011 2010 2009 respectively majority expenditures machinery equipment continued spending new facilities expansions existing facilities infrastructure projects proceeds disposal assets 311 million 208 million 163 million 2011 2010 2009 respectively disposals related equipment lostinhole property machinery equipment longer used operations sold throughout year 2010 purchased 250 million shortterm investments consisting us treasury bills us treasury bills matured may 2011 received proceeds 250 million routinely evaluate potential acquisitions businesses third parties may enhance current operations expand operations new markets product lines may also time sell business operations considered part core business 2010 paid cash 680 million net cash acquired 113 million related bj services acquisition paid 208 million net cash acquired 4 million acquisitions 2009 paid 58 million net cash acquired 4 million acquisitions including additional purchase price consideration past acquisitions financing activities net borrowings commercial paper shortterm debt 125 million 52 million 2011 2010 respectively net repayments commercial paper shortterm debt 16 million 2009 2011 completed private placement 750 million 32 senior notes registration rights mature august 2021 resulting net proceeds approximately 742 million deducting underwriting discounts expenses offering 32 notes may transferred resold transaction registered exempt registration requirements federal state securities laws intend file registration statement sec respect offer exchange notes registered notes substantially identical terms pursuant registration rights agreement used 563 million net proceeds redeem 65 notes remaining net proceeds offering used general corporate purposes also 2011 repaid 250 million 575 notes matured total debt outstanding december 31 2011 407 billion increase 184 million compared december 31 2010 total debt total capitalization defined total debt plus equity ratio 020 december 31 2011 021 december 31 2010 sold 15 billion 5125 senior notes mature september 2040 net proceeds offering approximately 148 billion deducting underwriting discounts expenses offering used 511 million net proceeds repay outstanding commercial paper used 250 million net proceeds purchase us treasury bills used repay bj services 575 notes matured june 2011 remaining net proceeds offering used general corporate purposes 2009 repaid 525 million maturing longterm debt received proceeds 183 million 74 million 51 million 2011 2010 2009 respectively issuance common stock exercise stock options employee stock purchase plan board directors authorized program repurchase common stock time 2011 2010 2009 repurchase shares common stock authorization remaining repurchase approximately 12 billion common stock end 2011 paid dividends 261 million 241 million 185 million 2011 2010 2009 respectively increase 2010 2011 primarily due 118 million shares issued acquisition bj services available credit facility december 31 2011 25 billion committed revolving credit facility commercial banks matures september 2016 facility contains certain covenants among things restrict certain merger transactions sale substantially assets significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations facility may accelerated events default include payment defaults lenders facility covenant defaults customary defaults december 31 2011 compliance facility’s covenants direct borrowings committed credit facility end 2011 also outstanding commercial paper program may issue time 25 billion commercial paper maturity 270 days maximum combined borrowing point time commercial paper program credit facility 25 billion december 31 2011 130 million commercial paper outstanding market conditions change revenue reduced significantly operating costs increase cash flows liquidity could reduced additionally could cause rating agencies lower credit rating ratings triggers would accelerate maturity borrowings committed credit facility however downgrade credit ratings could increase cost borrowings facility could also limit preclude ability issue commercial paper occur would seek alternative sources funding including borrowing facility believe current credit ratings would allow us obtain interim financing existing credit facility currently unforeseen significant needs growth opportunities also believe interim financings could funded subsequent issuances longterm debt equity necessary cash requirements 2012 believe cash hand cash flows operating activities available credit facility provide us sufficient capital resources liquidity manage working capital needs meet contractual obligations fund capital expenditures support development shortterm longterm operating strategies may issue commercial paper shortterm debt fund cash needs us excess cash generated us 2012 expect capital expenditures approximately 31 billion 34 billion excluding amount related acquisitions expenditures expected used primarily normal recurring items necessary support business operations significant portion capital expenditures adjusted based future activity customers manage capital expenditures match market demand 2012 also expect make interest payments 225 million 240 million based debt levels december 31 2011 anticipate making income tax payments 13 billion 14 billion 2012 may repurchase common stock depending market conditions applicable legal requirements liquidity considerations anticipate paying dividends 257 million 267 million 2012 however board directors change dividend policy time pension plans make annual contributions plans amounts equal greater amounts necessary meet minimum governmental funding requirements 2012 expect contribute 80 million 95 million defined benefit pension plans 2012 also expect make benefit payments related postretirement welfare plans 16 million 18 million estimate contribute 263 million 286 million defined contribution plans see note 12 notes consolidated financial statements item 8 herein discussion employee benefit plans contractual obligations table set forth contractual cash obligations december 31 2011 certain amounts included table based estimates assumptions obligations including duration anticipated actions third parties factors contractual cash obligations actually pay future periods may vary reflected table estimates assumptions subjective 1 amounts represent expected cash payments principal amounts related debt capital lease obligations amounts debt include unamortized discounts deferred issuance costs expected cash payments interest excluded amounts 2 amounts represent expected cash payments interest longterm debt capital lease obligations 3 enter operating leases include renewal options excluded renewal options table 4 purchase obligations include capital improvements well agreements purchase goods services enforceable legally binding specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction 5 estimated income tax liabilities uncertain tax positions settled result expiring statutes audit activity competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate timing particular settlement depend length tax audit related appeals process expiration statute liability settled due statute expiring favorable audit result settlement tax liability would result cash payment offbalance sheet arrangements normal course business customers vendors others entered offbalance sheet arrangements letters credit bank issued guarantees totaled approximately 13 billion december 31 2011 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements normal operating leases offbalance sheet financing arrangements securitization agreements liquidity trust vehicles synthetic leases special purpose entities materially exposed financing liquidity market credit risk could arise engaged financing arrangements critical accounting estimates preparation consolidated financial statements requires us make estimates judgments affect reported amounts assets liabilities revenue expenses related disclosures contingent assets liabilities base estimates judgments historical experience assumptions information believed reasonable circumstances estimates assumptions future events effects subject uncertainty accordingly estimates may change new events occur experience acquired additional information obtained business environment operate changes defined critical accounting estimate one important portrayal either financial condition results operations requires us make difficult subjective complex judgments estimates matters uncertain reviewed critical accounting estimates auditethics committee board directors auditethics committee reviewed disclosure presented past three fiscal years made material changes methodology used establish critical accounting estimates believe following critical accounting estimates used preparation consolidated financial statements items within consolidated financial statements require estimation judgment deemed critical defined allowance doubtful accounts determination collectability amounts due customers requires us use estimates make judgments regarding future events trends including monitoring customers’ payment history current credit worthiness determine collectability reasonably assured well consideration overall business climate customers operate inherently uncertainties require us make frequent judgments estimates regarding customers’ ability pay amounts due us order determine amount valuation allowances required doubtful accounts provisions doubtful accounts recorded becomes evident customer make required payments either contractual due dates future december 31 2011 2010 allowance doubtful accounts totaled 229 million 4 162 million 4 total gross accounts receivable respectively believe allowance doubtful accounts adequate cover potential bad debt losses current conditions however uncertainties regarding changes financial condition customers either adverse positive could impact amount timing additional provisions doubtful accounts may required five percent change allowance doubtful accounts would impact income taxes approximately 11 million 2011 inventory reserves inventory significant component current assets stated lower cost market requires us record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments estimates forecasts inherently include uncertainties require us make judgments regarding potential future outcomes december 31 2011 2010 inventory reserves totaled 304 million 9 322 million 11 gross inventory respectively believe reserves adequate properly value potential excess slow moving obsolete inventory current conditions significant unanticipated changes estimates forecasts could impact amount timing additional provisions excess obsolete inventory may required five percent change inventory reserve balance would impact income taxes approximately 15 million 2011 goodwill longlived assets purchase price acquired businesses allocated identifiable assets liabilities based upon estimated fair values acquisition date goodwill excess consideration transferred fair value tangible identifiable intangible assets liabilities recognized determining estimated fair values use various sources types information including limited quoted market prices replacement cost estimates accepted valuation techniques discounted cash flows existing carrying value acquired assets necessary utilize thirdparty appraisal firms assist us determining fair value inventory identifiable intangible assets significant assets liabilities measurement period adjust preliminary purchase price allocation obtain information regarding asset valuations liabilities assumed judgments assumptions estimates used made determining estimated fair value assigned assets acquired liabilities assumed well future asset lives materially impact results operations perform annual impairment test goodwill october 1 year performing test individually test reporting units generally based regional structure tests involve use different valuation techniques including market approach comparable transactions discounted cash flow methodology include limited assumptions regarding matters discount rates anticipated growth rates expected profitability rates similar items results 2011 test indicated impairments goodwill however one reporting unit excess estimated fair value carrying value less 10 related carrying value goodwill associated reporting unit totaled approximately 419 million december 31 2011 unanticipated changes including even small revisions assumptions could require provision impairment future period given nature evaluations application specific assets timeframes possible reasonably quantify impact changes assumptions longlived assets include property equipment intangible assets goodwill certain assets comprise significant amount total assets review carrying values assets impairment periodically least annually certain intangible assets whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make judgments regarding longterm forecasts future revenue costs related assets subject review forecasts uncertain require assumptions demand products services future market conditions technological developments income taxes liability method used determining income tax provisions current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered valuation allowances established reduce deferred tax assets likely portion deferred tax assets realized determining need valuation allowances considered made judgments estimates regarding estimated future taxable income ongoing prudent feasible tax planning strategies estimates judgments include degree uncertainty changes estimates assumptions could require us adjust valuation allowances deferred tax assets historically changes valuation allowances caused major changes business cycle certain countries changes local country law ultimate realization deferred tax assets depends generation sufficient taxable income applicable taxing jurisdictions operate 80 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenue rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability taxing jurisdiction could impact amount income taxes provide given year tax filings various periods subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings resulting change tax liability dependent numerous factors difficult estimate include among others amount nature additional taxes potentially asserted local tax authorities willingness local tax authorities negotiate fair settlement administrative process impartiality local courts sheer number countries business potential changes tax paid one country either produce fail produce offsetting tax change countries experience estimates assumptions used provide future tax assessments proven appropriate however past experience guide potential exists tax resulting resolution current potential future tax controversies may differ materially amount accrued addition aforementioned assessments received various tax authorities also provide taxes uncertain tax positions formal assessments received determination liabilities requires use estimates assumptions regarding future events established adjust amounts information available future event occurs necessitating change reserves changes facts law judicial decisions regarding application existing law favorable audit outcome believe resolution tax matters material effect consolidated financial condition company although resolution could material impact consolidated statement operations particular period effective tax rate period resolution occurs pensions postretirement benefit obligations pensions postretirement benefit obligations related expenses calculated using actuarial models methods involves use two critical assumptions discount rate expected rate return assets important elements determining pension expense measuring plan assets liabilities evaluate critical assumptions least annually although considered less critical assumptions used determining benefit obligations related expenses demographic factors like retirement age mortality turnover also evaluated periodically updated reflect actual expected experience discount rate enables us determine expected future cash flows present value measurement date development discount rate largest plans based bond matching model whereby cash flows underlying projected benefit obligation matched yield curve constructed bond portfolio highquality fixedincome securities use lower discount rate would increase present value benefit obligations increase pension expense used discount rate 52 2011 59 2010 64 2009 determine pension expense 50 basis point reduction discount rate would decreased income taxes approximately 2 million 2011 determine expected rate return plan assets consider current target asset allocations well historical expected future returns various categories plan assets lower rate return increases plan expenses assumed rates return plan investments 72 2011 71 2010 80 2009 50 basis point reduction expected rate return assets principal plans would decreased income taxes approximately 5 million 2011 new accounting standards updates may 2011 financial accounting standards board “fasb” issued update accounting standards codification “asc” 820 fair value measurement accounting standards update “asu” conforms certain sections asc 820 international financial reporting standards order provide single converged guidance measurement fair value update also expands existing disclosure requirements fair value measurements asu effective interim annual periods beginning december 15 2011 adopt asu prospectively first quarter 2012 currently expect asu material impact consolidated financial statements june 2011 fasb issued update asc 220 comprehensive income asu requires entities present components comprehensive income either continuous statement comprehensive income two separate consecutive statements would include reclassification adjustments component items reclassified comprehensive income net income face financial statements december 2011 fasb issued update asu indefinitely deferring implementation reclassification adjustments component requirement asu issued june 2011 asus effective fiscal years interim periods within years beginning december 15 2011 adopt new presentation requirements asus retrospectively first quarter 2012 september 2011 fasb issued update asc 350 intangibles goodwill asu amends guidance asc 35020 testing goodwill impairment revised guidance allows entities testing goodwill impairment option performing qualitative assessment calculating fair value reporting unit asu change goodwill calculated assigned reporting units revise requirement test annually impairment asu limited goodwill amend annual requirement testing indefinitelived intangible assets impairment asu effective annual interim goodwill impairment tests performed fiscal years beginning december 15 2011 adopt asu 2012 goodwill impairment testing expect asu material impact consolidated financial statements related party transactions significant related party transactions three years ended december 31 2011 forwardlooking statements form 10k including mda certain statements notes consolidated financial statements includes forwardlooking statements within meaning section 27a securities act section 21e exchange act “forwardlooking statement” words “anticipate” “believe” “ensure” “expect” “if” “intend” “estimate” “probable” “project” “forecasts” “predict” “outlook” “aim” “will” “could” “should” “would” “potential “ “may” “likely” similar expressions negative thereof intended identify forwardlooking statements forwardlooking statements based assumptions believe reasonable may prove accurate statements include potential impact future transactions acquisition disposition merger joint venture transaction could occur undertake obligation publicly update revise forwardlooking statement expectations regarding business outlook including changes revenue pricing capital spending profitability strategies operations impact common stock repurchases oil natural gas market conditions business plans customers market share contract terms costs availability resources legal economic regulatory conditions environmental matters forecasts regarding matters forwardlooking information subject risks uncertainties could cause actual results differ materially results expected although possible identify factors risks uncertainties include risk factors timing risk factors identified item 1a risk factors set forth time filings sec documents available website sec’s electronic data gathering analysis retrieval system “edgar” httpwwwsecgov risk factors discussion risk factors cautions regarding forwardlooking statements see item 1a risk factors “forwardlooking statements” section item 7 contained herein item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations “mda” read conjunction consolidated financial statements item 8 financial statements supplementary data contained herein executive summary baker hughes leading supplier oilfield services products technology systems worldwide oil natural gas industry provide products services • drilling evaluation oil natural gas wells • completion production oil natural gas wells • businesses including downstream refining process pipeline services operate business primarily geographic regions aggregated five reportable segments north america latin america europeafricarussia caspian middle eastasia pacific industrial services four geographical segments represent oilfield operations within oilfield operations primary driver businesses customers’ capital operating expenditures dedicated oil natural gas exploration field development production business cyclical dependent upon customers’ expectations future oil natural gas prices economic growth hydrocarbon demand estimates current future oil natural gas production 2012 generated revenue 2136 billion increase 153 billion 8 compared 2011 north america oilfield revenue 2012 1084 billion increase 5 compared 2011 oilfield revenue outside north america 930 billion increase 11 compared 2011 industrial services revenue 122 billion increase 7 compared 2011 increases primarily due increases activity product lines outside pressure pumping north america driven oildirected drilling mainly unconventional reservoirs activity improvements gulf mexico increased activity international markets particularly middle east latin america africa net income attributable baker hughes 131 billion 2012 compared 174 billion 2011 profitability north america adversely impacted volatility experienced within pressure pumping product line related pricing pressure result increasing supply pressure pumping capacity market increased personnel raw material costs product lines us particularly drilling services upstream chemicals artificial lift completions experienced increased demand 2012 international profitability increased 2012 compared 2011 driven primarily activity increases described middle east africa well improved profitability europe russia caspian december 31 2012 baker hughes approximately 58800 employees compared approximately 57700 employees december 31 2011 business environment north america customer spending decreased 2012 compared 2011 resulting 1 decrease north america rig count natural gasdirected drilling activity decreased 36 2012 compared 2011 warm winter increased production unconventional natural gas shale basins contributed high natural gas working inventories ultimately lower commodity prices largely offset 28 increase oildirected drilling 2012 compared 2011 high oil prices year supported increased rig activity us customer spending natural gas shale basins declined throughout 2012 due low natural gas prices resulting 37 reduction natural gasdirected rig activity 2012 compared 2011 offset 38 increase oildirected rig activity time period canada low natural gas prices high oil price differentials primarily due constrained refinery pipeline capacity resulted reduced customer spending issues ultimately resulted 13 reduction canadian rig activity 2012 compared 2011 outside north america customer spending heavily influenced brent oil prices average brent oil prices flat 2012 compared 2011 2012 upward pricing pressure resulting geopolitical tensions middle east offset weak european demand caused europes economic downturn uncertainty regarding future economic growth china increasing global oil supplies despite overall flat oil prices customers’ activity spending levels increased moderately 2012 compared 2011 due longterm planning cycles associated many international projects customers tend react shortterm movements oil prices result international rig count grew 6 2012 compared 2011 largest gains seen middle east africa excluding iraq baker hughes resumed publishing june 2012 international rig count grew 2 oil natural gas prices oil natural gas prices summarized table averages daily closing prices periods indicated 1 bloomberg dated brent “brent” 2 bloomberg west texas intermediate “wti” cushing crude oil spot price 3 bloomberg henry hub natural gas spot price brent oil prices averaged 11196bbl 2012 brent oil prices fluctuated throughout year highest prices seen first quarter geopolitical disputes middle east africa reduced output threatened future production prices fell sharply may june global oil supplies rose economic concerns increased europe china brent oil prices rebounded july back 100bbl remained rest year geopolitical tensions increased middle east overall prices ranged high 12665bbl february 2012 low 8874bbl june 2012 international energy agency “iea” estimated january 2013 oil market report worldwide demand would increase 09 million barrels per day 1 908 million barrels per day 2013 899 million barrels per day 2012 wti oil prices averaged 9412bbl 2012 similar brent oil prices wti oil prices fluctuated throughout year highest prices recorded early year followed steep decline midyear prices later rebounded third quarter overall wti oil prices ranged high 10949bbl february 2012 low 7769bbl june 2012 north america natural gas prices measured henry hub natural gas spot price averaged 276mmbtu 2012 natural gas prices declined sharply late 2011 remained low throughout much 2012 due strong natural gas production levels particularly unconventional natural gas shale plays north america natural gas prices declined throughout first quarter bottomed early second quarter following mild winter across much us canada prices later increased due hotter normal summer colder normal fall key consuming areas us however prices started fall december temperatures warmer normal natural gas storage injections remained high despite 13 year low us natural gas rig count overall natural gas prices ranged low 184mmbtu april 2012 high 377mmbtu november 2012 according us department energy “doe” working natural gas storage end 2012 3517 bcf 1 45 bcf corresponding week 2011 rig counts baker hughes providing rig counts public since 1944 gather relevant data field service personnel obtain necessary data routine visits various rigs customers contractors andor outside sources data compiled distributed various wire services trade associations published website believe counting process resulting data reliable however subject ability obtain accurate timely information rig counts compiled weekly us canada monthly international rigs published international rig counts include rigs drilling certain locations russia caspian iran onshore china information readily available baker hughes resumed publication june 2012 rig count iraq first time since august 1990 rigs us canada counted active day count taken well drilled started drilling completed well anticipated sufficient depth potential consumer drill bits international areas rigs counted weekly basis deemed active drilling activities occurred majority week weekly results averaged month published accordingly rig count include rigs transit one location another rigging used nondrilling activities including production testing completion workover expected significant consumers drill bits rig counts summarized table averages periods indicated 2012 compared 2011 rig count north america decreased 1 2012 compared 2011 natural gasdirected rig counts declined 36 largely offset increase oildirected rig counts 28 natural gasdirected rig count reflected 37 decrease us 27 decrease canada oildirected rig count increased 38 us slightly offset 6 decrease canada natural gasdirected drilling negatively impacted continued weakness north america natural gas prices discouraged new investment natural gas fields growth oildirected drilling us primarily result strong oil prices industry’s ability apply drilling completion techniques unconventional oil reservoirs originally applied similar natural gas reservoirs canada many operators curtailed drilling plans second half 2012 due reduced cash flows natural gas activities high oil price differentials compared wti overall canada rig counts declined 13 2012 compared 2011 outside north america rig count increased 6 2012 compared 2011 starting june 2012 middle east rig count included iraq excluding iraq average 43 rigs 2012 international rig count increased 2 rig count latin america relatively flat increased rig activity mexico ecuador offset reductions colombia venezuela rig count europe also flat gains north sea due higher activity uk offset reductions continental europe africa rig count increased primarily due resumption drilling activities libya well higher activity algeria rig count increased middle east due higher activity saudi arabia oman abu dhabi well inclusion iraq asia pacific rig count decreased result decreased activity indonesia offshore china partially offset increased activity malaysia australia results operations discussions relating significant line items consolidated statements income based available information represent analysis significant changes events impact comparability reported amounts appropriate identified specific events changes affect comparability trends possible practical quantified impact items addition discussions revenue cost revenue total basis business drivers individual components product sales services similar dollar amounts tabulations section millions dollars unless otherwise stated conduct business operating segments aligned geographic regions aggregated five reportable segments prior 2012 reservoir development services business “rds” consisting consulting services provided third parties internal support oilfield operations included within industrial services segment first quarter 2012 changed reporting structure include rds within four oilfield geographic segments accordingly prior period segment disclosures revenue profit tax reclassified impact changes industrial services segment reduce revenue 108 million 92 million year ended december 31 2011 2010 respectively increase profit tax 42 million 28 million year ended december 31 2011 2010 respectively revenue profit tax performance segments evaluated based profit tax defined income taxes following net interest expense corporate expenses certain gains losses allocated segments 2012 compared 2011 revenue 2012 increased 153 billion 8 compared 2011 growth coming operating segments revenue growth north america driven increased demand us product lines pressure pumping increased activity deepwater drilling gulf mexico international revenue increased primarily result increased activity middle east latin america africa profit tax operations 2012 decreased 377 million 13 compared 2011 despite increase revenue profit tax significantly impacted reduced prices increased raw material expenses higher personnel costs pressure pumping product line north america additional provisions doubtful accounts latin america high operating costs third party expenses related new integrated operations contracts middle east impacted profits latin america middle eastasia pacific “meap” segments europeafricarussia caspian “earc” segment experienced improved profitability driven increased activity throughout entire geographic region well improved market conditions africa 2012 incurred charge 43 million beforetax related impairment certain information technology assets primarily associated internally developed software assets charge 20 million beforetax related closure chemical manufacturing facility uk information technology supply chain organizations support global operations charges allocated segments 2011 profit tax includes charge 315 million related impairment trade names discussion trade name impairments see note 7 goodwill intangible assets amount trade name impairment charge recorded segment follows north america 105 million latin america 64 million europeafricarussia caspian 48 million middle eastasia pacific 47 million industrial services 51 million north america north america revenue increased 5 2012 compared 2011 despite rig counts declining 1 primary catalysts revenue growth north america include sustained high oil prices 2012 compared historical prices new innovative technologies drilling completion systems wireline services resulted increased revenue particularly unconventional reservoirs us land deepwater gulf mexico additionally continuing shift drilling activities natural gasdirected unconventional reservoirs oildirected reservoirs us land resulted significant increases activity particularly production product lines artificial lift upstream chemicals gulf mexico revenue increased 32 2012 compared 2011 rig counts increased 47 driven primarily increased deepwater activity increases revenue offset reduced demand pricing pressure pumping product line us canada primarily due oversupply pressure pumping capacity industry additionally result reduced customer spending canada oildirected rig counts decreased 6 natural gasdirected rig counts 27 compared 2011 overall resulted 10 reduction canadian revenue 2012 compared 2011 north america profit tax 127 billion 2012 decrease 640 million 34 compared 2011 despite higher revenue profits us land canada impacted significantly decreased fleet utilization lower pricing higher personnel costs increased costs critical raw materials higher depreciation expenses primarily pressure pumping product line profit tax canada impacted reduced customer spending reductions partially offset increased activity us land product lines pressure pumping improved profits gulf mexico revenue profit margins returned premoratorium levels activity increased substantially 2012 deepwater drilling activity increased significantly compared shelf drilling activity shift shelf activity deepwater activity led favorable change sales mix products services higher margins improved margins drilling wireline services deepwater resulted significant increase profits gulf mexico 2012 compared 2011 north america profit tax 2012 negatively impacted 33 million charge associated information technology expenses facility closure 2011 profit tax impacted trade name impairment charge discussed previously latin america latin america revenue increased 10 2012 compared 2011 primary driver higher activity benefiting drilling services artificial lift completion systems pressure pumping product lines brazil andean region improved pricing increased activity pressure pumping product line argentina higher land activity mexico latin america profit tax decreased 12 2012 compared 2011 despite increase revenue profits negatively impacted increase 85 million allowance doubtful accounts higher personnel costs latin america profit tax 2012 also negatively impacted 7 million charge associated information technology expenses facility closure 2011 profit tax impacted trade name impairment charge discussed previously february 2013 venezuelas currency devalued prior exchange rate 43 bolivars fuertes per us dollar 63 bolivars fuertes per us dollar apply local currency denominated balances transactions estimate impact devaluation loss approximately 25 million recorded first quarter 2013 going forward although devaluation result reduction us dollar reported amount local currency denominated revenues expenses believe impact material consolidated financial statements europeafricarussia caspian earc revenue increased 8 2012 compared 2011 strong growth seen africa particularly drilling systems mozambique nigeria completion systems nigeria angola wireline services nigeria uganda angola resumed operations libya revenue increases africa augmented increases europe region due primarily increased wireline services activity norway uk eastern mediterranean well increased drilling fluids activity uk eastern mediterranean revenue also increased russia sizable growth artificial lift drilling services drilling fluids product lines earc profit tax increased 74 2012 compared 2011 favorable change sales mix russia sub sahara africa particularly uganda angola well increased activity mozambique nigeria libya contributed improved margins increased profitability activity gains europe increased profitability 2012 earc profit tax 2012 negatively impacted 11 million charge associated information technology expenses facility closure 2011 earc profit tax negatively impacted 70 million charge associated cessation operations due civil unrest libya addition trade name impairment charge discussed previously middle eastasia pacific meap revenue increased 15 2012 compared 2011 increase segment attributable significant growth completions systems drilling services drilling fluids product lines saudi arabia well new integrated operations contracts increased wireline services upstream chemicals activity iraq asia pacific increased activity particularly completions systems australia pressure pumping malaysia thailand partially offset reduced activity pressure pumping drilling fluids india meap profit tax remained relatively flat 2012 compared 2011 revenue increased profit tax impacted high operating third party costs associated new integrated operations activities iraq increased personnel costs 2012 meap profit tax also negatively impacted 10 million charge associated information technology expenses facility closure 2011 profit tax impacted trade name impairment charge discussed previously industrial services industrial services revenue increased 7 profit tax increased 38 2012 compared 2011 increase revenue primarily driven increased demand process pipeline business downstream chemical products north america increase profit tax 2012 compared 2011 mainly attributable 51 million trade name impairment charge recorded 2011 recur 2012 industrial services profit tax 2012 negatively impacted 2 million charge associated information technology expenses facility closure 2011 compared 2010 revenue 2011 increased 542 billion 38 compared 2010 primary drivers change included increased activity improved pricing us land canada markets lesser extent increased activity international segments acquired bj services april 2010 financial results operations since acquisition date included five reportable segments increase revenue also due acquisition bj services profit tax operations 2011 increased 110 billion 62 compared 2010 primary driver increase growth revenue areas particular north america segment increased service intensity unconventional markets led increased efficiency utilization pricing improvement additionally profit tax also benefited worldwide cost management initiatives improved absorption manufacturing overhead costs increase also due acquisition bj services increase profit tax partially offset impairment certain trade names north america north america revenue increased 55 2011 compared 2010 revenue pricing increases supported 22 increase us land inland waters rig count 20 increase canada rig count unconventional reservoirs continue primary catalyst rapid growth seen north america unconventional reservoirs require substantially higher proportion services baker hughes across product lines revenue gulf mexico increased compared 2010 permitting modestly improved still lagged meaningfully behind premoratorium levels north america profit tax 191 billion 2011 increase 762 million 66 compared 2010 higher revenue segment driven activity pricing primary reason increase profitability drivers increase included improved tool utilization improved absorption manufacturing overhead improvement offset decline fourth quarter 2011 profitability pressure pumping services incurred increased costs related shortages raw materials logistical inefficiencies higher labor costs although positive progress gulf mexico pace repermitting enabled activity return premoratorium levels north america profit tax negatively impacted 105 million charge associated impairment trade names latin america latin america revenue increased 39 2011 compared 2010 primary drivers increase acceleration activity benefiting drilling fluids artificial lift product lines andean area well robust deep water growth use drilling services brazil lesser extent modest pricing improvements latin america profit tax increased 201 2011 compared 2010 increased revenue contributor increased profitability primary factors included cost containment initiatives improved overhead cost absorption well meaningful operational improvements lower internal operating costs favorable change mix products services sold higher margin activity completion certain low margin contracts early 2011 latin america profit tax negatively impacted 64 million charge associated impairment trade names europeafricarussia caspian earc revenue increased 11 2011 compared 2010 primary drivers increase sales completion tools drilling fluids norway increased drilling services activity eastern mediterranean modestly improving market conditions across europe russia higher drilling fluids wireline services drilling services activities nigeria increases partially offset impact decreased sales libya operations ceased second quarter 2011 result civil unrest minimal operational activity resuming remainder year earc profit tax increased 31 2011 compared 2010 primarily result increased focus cost management initiatives operating efficiencies addition profitability improved result increased activity favorable sales mix toward products services higher margins earc profit tax negatively impacted 70 million charge associated increasing allowance doubtful accounts reserves inventory certain assets result civil unrest libya 48 million charge associated impairment trade names middle eastasia pacific meap revenue increased 26 2011 compared 2010 increase segment attributable higher activity directional drilling artificial lift systems saudi arabia well significant revenue gains kuwait iraq southeast asia production enhancement activity additionally wireline completions activity increased southeast asia meap profit tax increased 83 2011 compared 2010 primarily result increased focus cost management initiatives operating efficiencies addition profitability improved result increased activity favorable sales mix partially offset costs startup activities iraq elsewhere meap profit tax negatively impacted 47 million charge associated impairment trade names industrial services industrial services revenue increased 29 2011 compared 2010 industrial services profit tax decreased 25 2011 compared 2010 primarily driven 51 million charge associated impairment trade names overall increase cost goods services sold partially offset increased revenue related profitability costs expenses table details certain consolidated statement income data percentage revenue cost revenue cost revenue percentage revenue 81 77 2012 2011 respectively increase cost revenue percentage revenue due primarily lower pricing higher costs respect pressure pumping product line north america startup third party costs associated new integrated operations activities iraq well increased amortization expense 2012 recorded charges totaling 85 million increase allowance doubtful accounts latin america charge 20 million related closure chemical manufacturing facility part supply chain cost saving initiative cost revenue percentage revenue 77 78 2011 2010 respectively slight decrease due primarily improved pricing north america coupled improved operational efficiency cost management initiatives implemented globally offset higher raw material logistics labor costs addition cost revenue impacted 70 million charge libya operations ceased second quarter 2011 minimal operational activity resuming remainder year research engineering research engineering expenses increased 8 2012 2011 compared corresponding previous year increase research engineering expenses driven rampup activity staffing technology centers brazil saudi arabia opened fourth quarter 2011 additionally research engineering expenses impacted increasing material costs higher material usage related research development activities continue committed developing commercializing new technologies well investing core product offering marketing general administrative marketing general administrative “mga” expenses increased 11 2012 compared 2011 increase mga expenses primarily due charge 43 million related impairment certain information technology assets primarily associated internally developed software assets addition costs increase mga expenses resulted ongoing activities improve productivity efficiency coordination integration worldwide operations including software implementations enhancements partially offset decreased personnel costs mga expenses decreased 5 2011 compared 2010 decrease expenses resulted cost reduction management measures implemented latter half 2010 synergies realized continued integration bj services operations impairment trade names 2011 recognized charge 315 million related impairment certain trade names majority related bj services trade name impairment bj services trade name due decision minimize use bj services trade name part overall branding strategy baker hughes interest expense net interest expense net interest income decreased 11 million 2012 compared 2011 decrease primarily due repayment 575 notes second quarter 2011 early extinguishment third quarter 2011 65 senior notes due november 2013 increase capitalized interest 2012 associated increase capital expenditures decrease interest expense partially offset issuance 750 million 32 senior notes august 2011 inception two capital leases second third quarters 2011 pumping vessels increased borrowings commercial paper program 2012 interest expense net interest income increased 80 million 2011 compared 2010 increase primarily due assumption 500 million debt associated acquisition bj services april 2010 issuance 15 billion debt august 2010 issuance 750 million debt august 2011 increase interest expense partially offset repayment 250 million debt early extinguishment 500 million debt second third quarters 2011 respectively loss early extinguishment debt 2011 redeemed full 500 million debt maturing november 2013 paid redemption premium 63 million redemption resulted pretax loss 40 million early extinguishment debt included redemption premium write remaining original debt issuance costs debt discount partially offset 25 million gain termination two related interest rate swap agreements income taxes total income tax expense 665 million 596 million 463 million 2012 2011 2010 respectively income tax expense 2011 includes 214 million tax benefit associated reorganization certain foreign subsidiaries excluding impact reorganization 2011 effective tax rate operating profits 2012 2011 2010 336 346 361 respectively 2012 effective tax rate lower us statutory income tax rate 35 due lower rates tax certain international operations adjustments prior years tax positions partially offset state income taxes 2011 effective tax rate lower us statutory income tax rate 35 due lower rates tax certain international operations partially offset state income taxes 2010 effective tax rate higher us statutory income tax rate 35 due higher rates tax certain international operations state income taxes partially offset tax benefits arising repatriation foreign earnings january 2 2013 retroactive extension research development credit favorable tax benefits enacted part american taxpayer relief act 2012 currently evaluating financial impact legislation expect record discrete benefit first quarter 2013 2012 full year impact expect record 2013 benefit throughout year 2013 decrease annual effective tax rate outlook section read conjunction factors described “part item 1a risk factors” “forwardlooking statements” section part ii item 7 contained herein factors could impact either positively negatively expectation oil natural gas demand oil natural gas prices exploration development spending drilling activity production spending industry cyclical past cycles driven primarily alternating periods ample supply shortage oil natural gas relative demand oilfield services company revenue dependent spending customers oil natural gas exploration field development production spending dependent number factors including customers’ forecasts future energy demand expectations future energy prices access resources develop produce oil natural gas ability fund capital programs impact new government regulations outlook exploration development spending based upon expectations customer spending markets operate driven primarily perception industry expectations oil natural gas prices likely impact customer capital operating budgets well factors could impact economic return oil natural gas companies expect developing oil natural gas reserves forecasts based evaluating number external sources well internal estimates external sources include publications iea opec energy information administration “eia” organization economic cooperation development “oecd” acknowledge substantial amount uncertainty regarding forecasts thus internal estimates regarding economic expansion hydrocarbon demand overall oilfield activity position flexible responsive wide range potential outcomes primary drivers expected impact 2013 business environment include following • worldwide economic growth general strong linkage overall economic activity growth demand hydrocarbons outlook 2013 one gradual strengthening economic activity amidst ongoing concerns fueled sovereign debt issues europe slowdown chinese economy moderate rate economic growth us european sovereign debt crisis reduction economic activity impacted economies major exporters including us china although steps taken governments resolve issue crisis euro area remains threat global economic outlook chinas rapid economic growth industrialization major factor driving worldwide economic growth since recession 20082009 chinas growth rate slowed sharply 2012 activity expected pick 2013 response measures supporting domestic demand us slow recovery recession 20082009 economy continues deal effects financial crisis expectation modest economic growth us throughout 2013 however growth may hampered weakness deterioration global economy particularly china europe • demand hydrocarbons january 2013 oil market report iea said expects global demand oil increase 09 million barrels per day 2013 expected increase demand oil mainly driven countries outside oecd support higher expenditures within oil gas sector addition natural gas increasingly important hydrocarbon meet worlds energy needs january 2013 shortterm energy outlook eia stated us natural gas demand would 697 billion cubic feet per day 2013 unchanged 2012 • oil production eia january 2013 shortterm energy outlook projects nonopec production increase 14 million barrels per day 2013 2012 increase largely due continued production growth us tight oil formations canadian oil sands fostered sustained higher oil prices global opec surplus capacity overwhelmingly concentrated saudi arabia anticipated increase approximately 08 million barrels per day 31 million barrels per day 2013 time opec production anticipated fall 06 million barrels per day 2013 approximately 30 million barrels per day significant investments expected required support increases production capacity price volatility driven global economic geopolitical uncertainties may lead delays operator investment decisions across rest world • natural gas production worldwide natural gas production continues grow despite overall trend low natural gas prices north america resulted reduction natural gasdirected rig completion activity region began impact north america natural gas production 2012 resulting gradual increase henry hub spot gas prices second half 2012 relatively mild winter season key consuming regions us pressured natural gas prices downward since november 2012 overall worldwide natural gas production however tend stable high natural gas prices places europe asia encourage sustained global growth natural gas production addition announced shift away nuclear power generation several countries development natural gas projects oecd outside north america expected support natural gas prices • oil prices wti oil prices trading 7769bbl 10949bbl brent trading 8874bbl 12665bbl 2012 believe oil developments globally continue provide adequate returns encourage incremental investment new midstream infrastructure us expected 2013 help narrow price gap wti brent based oil supply forecasts modest anticipated economic growth globally would expect oil prices remain relatively strong throughout 2013 barring major macroeconomic events • natural gas prices natural gas prices trading 184mmbtu 377mmbtu 2012 particularly low compared oil btu equivalent basis believe economics dry natural gasdirected investments north america become marginal primarily due abundant supplies available unconventional plays north america including natural gas produced association unconventional oil wells expected remain high 2013 eia said january 2013 shortterm energy outlook working natural gas inventories remain near record high levels eia however expects natural gas prices north america increase average 374mmbtu 2013 result reduction natural gasdirected drilling activity spending outlook north america overall customer spending north america expected increase 2013 compared 2012 average annual rig count expected remain close levels fourth quarter 2012 part reflecting improved efficiencies drilling performance slowdown spending directly related natural gas development largely offset incremental investment develop unconventional plays crude oil natural gas liquids content unconventional dry gas plays investment declined throughout 2012 due historically low natural gas pricing levels rig count gas drilling stabilized fourth quarter 2012 gas prices rebounded moderately overall service intensity increased north america year customers demanding key technologies advanced directional drilling complex completion systems pressure pumping develop unconventional plays liquids content despite increase demand however pricing declined basins particularly hydraulic fracturing current pressure pumping capacity exceeds demand pricing pressure expected continue early 2013 gulf mexico active rig count increased near premoratorium levels activity continental shelf strong steady increase granting new deepwater permits expected exploration drilling well completions development activity gulf mexico continue increase throughout 2013 additional deepwater rigs added canada overall rig activity 2013 expected decline approximately 8 compared 2012 activity spending outlook outside north america international activity driven primarily price oil currently high enough provide attractive economic returns almost every region support major gas export projects customers expected increase spending develop new resources offset declines existing developed reserves increasingly relying higher technology services support exploration production activities deep water heavy viscous oils tight reservoirs areas expected see increased spending 2013 include middle east particular iraq including kurdistan province saudi arabia latin america largest growth expected mexico brazil colombia within southeast asia increased focus exploring developing indigenous oil natural gas resources meet rapid local demand growth rather historic role meeting exports africa traditional growth areas angola nigeria augmented new provinces ghana uganda mozambique russia striving maintain 10 million barrels oil per day end decade investing eastern siberia eventually arctic offshore efforts russia developing tight oil using vertical drilling already underway potential pilot projects 2013 beyond complex horizontal drilling completions australia leading expansion export liquefied natural gas “lng” projects requiring conventional offshore gas drilling northwest shelf well coal bed methane operations onshore queensland overall unconventional drilling outside north america still infancy activities australia china saudi arabia argentina showing early promise active interest ministry national oil company level defining unconventional resource potential almost countries active oil natural gas industries globalization natural gas trade via rapid expansion lng well major gas pipelines spur drilling natural gas regions specifically fast growing asian energy markets capital expenditures capital expenditures excluding potential acquisitions expected approximately 20 billion reduction approximately 30 compared 2012 reduction 2013 primarily related pressure pumping horsepower infrastructure spending north america portion planned capital expenditures adjusted reflect changes expectations future customer spending compliance business 80 countries including approximately 19 40 countries lowest scores transparency international’s corruption perception index survey 2012 indicates high levels corruption devote significant resources development maintenance communication enforcement business code conduct antibribery compliance policies internal control processes procedures compliance related policies notwithstanding devotion resources part consequence thereof time discover receive information alleging potential violations laws regulations including fcpa policies processes procedures conduct timely internal investigations potential violations take appropriate action depending upon outcome investigation anticipate devotion significant resources compliancerelated issues including necessity investigations continue aspect business number countries oil natural gas exploration development production take place conduct operations compliancerelated issues limited ability business andor raised cost operating countries order provide products services countries may future utilize ventures third parties sell products distributors otherwise modify business approach order improve ability conduct business accordance applicable laws regulations business code conduct bestinclass global ethics compliance program “compliance program” based core values integrity performance teamwork learning ii standards contained business code conduct iii laws countries operate compliance program referenced within company “c2” “completely compliant” completely compliant theme intended establish proper toneatthetop throughout company employees consistently reminded play crucial role ensuring company always conducts business ethically legally safely highlights compliance program include following • comprehensive internal policies areas facilitating payments travel entertainment gifts charitable donations connected nonus government officials payments nonus commercial sales representatives use nonus police military organizations security purposes addition countryspecific guidance customs standards export reexport controls economic sanctions antiboycott laws • comprehensive employee compliance training program covering substantially employees • due diligence procedure commercial sales processing professional agents enhanced process classifying distributors creating formal policy guide business personnel determining subcontractors subjected compliance due diligence • special compliance committee made senior officers meets less year review oversight reports active commercial sales representatives • continued reduction use commercial sales representatives processing agents including reduction customs agents • use technology monitor report compliance matters including webbased antiboycott reporting tool global trade management software tool • program designed encourage reporting ethics compliance matter without fear retaliation including worldwide business helpline operated third party currently available tollfree 150 languages ensure helpline easily accessible employees language • continued expand use scope centralized finance organization including implementation enterprisewide accounting system companywide policies addition corporate audit function incorporated additional anticorruption procedures audits certain countries also continuing refine enhance procedures fcpa risk assessments legal audit procedures • continue work ensure adequate legal compliance coverage around world including coordination compliance advice training across regions countries business • continuing centralize human resources function including creating consistent standards prehire screening employees screening existing employees prior promoting positions may exposed corruptionrelated risks creating uniform policy new hire training liquidity capital resources objective financing business maintain adequate financial resources access sufficient liquidity december 31 2012 cash equivalents 102 billion substantially held foreign subsidiaries substantial portion cash held foreign subsidiaries december 31 2012 reinvested international operations intent use cash among things fund operations foreign subsidiaries decide later date repatriate funds us may required provide taxes certain funds based applicable us tax rates net foreign taxes addition 25 billion committed revolving credit facility commercial banks commercial paper program may issue 25 billion maximum combined borrowing time credit facility commercial paper program 25 billion december 31 2012 commercial paper outstanding 925 million therefore amount available borrowing facility december 31 2012 1575 billion believe cash hand cash flows operations available credit facility including issuance commercial paper provide sufficient liquidity manage global cash needs capital planning process focused utilizing cash flows generated operations ways enhance value company 2012 used cash pay variety activities including working capital needs capital expenditures payment dividends cash flows cash flows provided used type activity follows years ended december 31 operating activities cash flows operating activities provided 184 billion 151 billion year ended december 31 2012 2011 respectively cash flows operating activities increased 328 million 2012 primarily due change net operating assets liabilities used less cash 2012 compared 2011 underlying drivers 2012 compared 2011 changes operating assets liabilities follows • change accounts receivable provided cash 16 million used cash 102 billion 2012 2011 respectively slight change accounts receivable 2012 primarily due improved collections prior year partially offset increase activity change accounts receivable 2011 primarily due increase activity well increase days sales outstanding defined average number days net trade receivables outstanding based quarterly revenue due temporary invoicing delays resulting implementation enterprise wide software system bj services north america • increase inventory used cash 547 million 641 million 2012 2011 respectively driven increase activity levels • accrued employee compensation accrued liabilities used cash 90 million provided cash 58 million 2012 2011 respectively net change 148 million due primarily increase payments related employee bonuses earned 2011 paid 2012 coupled lower employee compensation accruals 2012 • income taxes payable used cash 56 million 121 million 2012 2011 respectively change 65 million primarily due decrease income taxes paid 2012 compared 2011 • operating items used cash 213 million 19 million 2012 2011 respectively net change 194 million primarily due increase payments prepaid assets line increased activity increase contributions pension plans cash flows operating activities provided 151 billion 856 million year ended december 31 2011 2010 respectively increase cash flows 651 million primarily due increase net income offset change net operating assets liabilities used cash 2011 compared 2010 underlying drivers 2011 compared 2010 changes operating assets liabilities follows • increase accounts receivable used cash 102 billion 702 million 2011 2010 respectively change accounts receivable primarily due increase activity corresponding revenue growth well increase days sales outstanding • increase inventory used cash 641 million 243 million 2011 2010 respectively driven activity increases • increase accounts payable provided cash 314 million 292 million 2011 2010 respectively resulting increase operating assets support increased activity • accrued employee compensation accrued liabilities provided cash 58 million 2011 used cash 182 million 2010 increase cash provided 2011 due primarily increased employee bonus accruals 2011 partially offset employee bonuses paid 2011 earned accrued 2010 investing activities principal recurring investing activity funding capital expenditures ensure appropriate levels types machinery equipment place generate revenue operations expenditures capital assets totaled 291 billion 246 billion 149 billion 2012 2011 2010 respectively majority expenditures machinery equipment continued spending new facilities expansions existing facilities infrastructure projects proceeds disposal assets 389 million 311 million 208 million 2012 2011 2010 respectively disposals related equipment lostinhole property machinery equipment longer used operations sold throughout year 2010 purchased 250 million shortterm investments consisting us treasury bills us treasury bills matured may 2011 received proceeds 250 million routinely evaluate potential acquisitions businesses third parties may enhance current operations expand operations new markets product lines may also time sell business operations considered part core business 2010 paid cash 680 million net cash acquired 113 million related bj services acquisition paid 208 million net cash acquired 4 million acquisitions financing activities net borrowings commercial paper shortterm debt 847 million 125 million 52 million 2012 2011 2010 respectively 2011 completed private placement 750 million 32 senior notes mature august 2021 resulting net proceeds approximately 742 million deducting underwriting discounts expenses offering used 563 million net proceeds redeem 65 notes full remaining net proceeds senior notes used general corporate purposes addition 2011 repaid 250 million 575 notes matured march 2012 pursuant registration rights agreement filed registration statement sec became effective respect offer exchange unregistered 32 senior notes substantially identical registered notes without existing transfer restrictions offer closed may 2012 notes exchanged exchange impact financial statements cash flows total debt outstanding december 31 2012 492 billion increase 847 million compared december 31 2011 total debt total capitalization defined total debt plus equity ratio 022 december 31 2012 020 december 31 2011 2010 sold 15 billion 5125 senior notes mature september 2040 net proceeds offering approximately 148 billion deducting underwriting discounts expenses offering used 511 million net proceeds repay outstanding commercial paper used 250 million net proceeds purchase us treasury bills used repay bj services 575 notes matured june 2011 remaining net proceeds offering used general corporate purposes received proceeds 81 million 183 million 74 million 2012 2011 2010 respectively issuance common stock exercise stock options employee stock purchase plan board directors authorized program repurchase common stock time 2012 2011 2010 repurchase shares common stock authorization remaining repurchase approximately 12 billion common stock end 2012 paid dividends 263 million 261 million 241 million 2012 2011 2010 respectively available credit facility december 31 2012 25 billion committed revolving credit facility commercial banks matures september 2016 facility contains certain covenants among things restrict certain merger transactions sale substantially assets significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations facility may accelerated events default include payment defaults lenders facility covenant defaults customary defaults december 31 2012 compliance facility’s covenants direct borrowings committed credit facility 2012 also commercial paper program may issue time 25 billion commercial paper maturity 270 days maximum combined borrowing point time commercial paper program credit facility 25 billion december 31 2012 925 million commercial paper outstanding therefore amount available borrowing facility december 31 2012 1575 billion market conditions change revenue reduced significantly operating costs increase cash flows liquidity could reduced additionally could cause rating agencies lower credit rating ratings triggers would accelerate maturity borrowings committed credit facility however downgrade credit ratings could increase cost borrowings facility could also limit preclude ability issue commercial paper occur would seek alternative sources funding including borrowing facility believe current credit ratings would allow us obtain interim financing existing credit facility currently unforeseen significant needs growth opportunities also believe interim financings could funded subsequent issuances longterm debt equity necessary cash requirements 2013 believe cash hand cash flows operating activities available credit facility provide us sufficient capital resources liquidity manage working capital needs meet contractual obligations fund capital expenditures support development shortterm longterm operating strategies may issue commercial paper shortterm debt fund cash needs us excess cash generated us 2013 expect capital expenditures approximately 20 billion excluding amount related acquisitions expenditures expected used primarily normal recurring items necessary support business operations significant portion capital expenditures adjusted based future activity customers accordingly manage capital expenditures match market demand 2013 also expect make interest payments 225 million 240 million based debt levels december 31 2012 anticipate making income tax payments 800 million 900 million 2013 may repurchase common stock depending market conditions applicable legal requirements liquidity considerations anticipate paying dividends 263 million 273 million 2013 however board directors change dividend policy time defined benefit defined contribution postretirement plans expect contribute 385 million 420 million plans 2013 see note 10 notes consolidated financial statements item 8 herein discussion employee benefit plans contractual obligations table set forth contractual cash obligations december 31 2012 certain amounts included table based estimates assumptions obligations including duration anticipated actions third parties factors contractual cash obligations actually pay future periods may vary reflected table estimates assumptions subjective 1 amounts represent expected cash payments principal amounts related debt including outstanding commercial paper 925 million capital lease obligations amounts debt include unamortized discounts deferred issuance costs expected cash payments interest excluded amounts 2 amounts represent expected cash payments interest longterm debt capital lease obligations 3 enter operating leases include renewal options excluded renewal options table 4 purchase obligations include capital improvements well agreements purchase goods services enforceable legally binding specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction 5 estimated income tax liabilities uncertain tax positions settled result expiring statutes audit activity competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate timing particular settlement depend length tax audit related appeals process expiration statute liability settled due statute expiring favorable audit result settlement tax liability would result cash payment offbalance sheet arrangements normal course business customers vendors others entered offbalance sheet arrangements letters credit bank issued guarantees totaled approximately 15 billion december 31 2012 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements normal operating leases offbalance sheet financing arrangements securitization agreements liquidity trust vehicles synthetic leases special purpose entities materially exposed financing liquidity market credit risk could arise engaged financing arrangements critical accounting estimates preparation consolidated financial statements requires us make estimates judgments affect reported amounts assets liabilities revenue expenses related disclosures well disclosures contingent assets liabilities base estimates judgments historical experience assumptions information believed reasonable circumstances estimates assumptions future events effects subject uncertainty accordingly estimates may change new events occur experience acquired additional information obtained business environment operate changes defined critical accounting estimate one important portrayal either financial condition results operations requires us make difficult subjective complex judgments estimates matters uncertain auditethics committee board directors reviewed critical accounting estimates disclosure presented past three fiscal years made material changes methodology used establish critical accounting estimates believe following critical accounting estimates used preparation consolidated financial statements items within consolidated financial statements require estimation judgment deemed critical defined allowance doubtful accounts determination collectability amounts due customers requires us make judgments estimates regarding customers’ ability pay amounts due us order determine amount valuation allowances required doubtful accounts monitor customers’ payment history current credit worthiness determine collectability reasonably assured also consider overall business climate customers operate provisions doubtful accounts recorded becomes evident customer make required payments either contractual due dates future december 31 2012 2011 allowance doubtful accounts totaled 308 million 6 229 million 4 total gross accounts receivable respectively believe allowance doubtful accounts adequate cover potential bad debt losses current conditions however uncertainties regarding changes financial condition customers either adverse positive could impact amount timing additional provisions doubtful accounts may required five percent change allowance doubtful accounts would impact income taxes approximately 15 million 2012 inventory reserves inventory significant component current assets stated lower cost market requires us record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments estimates forecasts inherently include uncertainties require us make judgments regarding potential future outcomes december 31 2012 2011 inventory reserves totaled 346 million 8 304 million 9 gross inventory respectively believe reserves adequate properly value potential excess slow moving obsolete inventory current conditions significant unanticipated changes estimates forecasts could impact amount timing additional provisions excess obsolete inventory may required five percent change inventory reserve balance would impact income taxes approximately 17 million 2012 goodwill longlived assets purchase price acquired businesses allocated identifiable assets liabilities based upon estimated fair values acquisition date goodwill excess consideration transferred fair value tangible identifiable intangible assets liabilities recognized determining estimated fair values use various sources types information including limited quoted market prices replacement cost estimates accepted valuation techniques discounted cash flows existing carrying value acquired assets necessary utilize thirdparty appraisal firms assist us determining fair value inventory identifiable intangible assets significant assets liabilities judgments assumptions estimates used made determining estimated fair value assigned assets acquired liabilities assumed well future asset lives materially impact results operations perform annual assessment goodwill impairment october 1 year reporting units generally based regional structure assessments include qualitative quantitative factors necessary calculate fair value reporting unit using different valuation techniques including market approach comparable transactions discounted cash flow methodology include limited assumptions regarding matters discount rates anticipated growth rates expected profitability rates similar items results 2012 assessment indicated impairments goodwill unanticipated changes including even small revisions assumptions could require provision impairment future period given nature evaluations application specific assets timeframes possible reasonably quantify impact changes assumptions longlived assets include property equipment intangible assets goodwill certain assets comprise significant amount total assets review carrying values assets impairment periodically least annually certain intangible assets whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make judgments regarding longterm forecasts future revenue costs related assets subject review forecasts uncertain require assumptions demand products services future market conditions technological developments income taxes liability method used determining income tax provisions current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered valuation allowances established reduce deferred tax assets likely portion deferred tax assets realized determining need valuation allowances considered made judgments estimates regarding estimated future taxable income ongoing prudent feasible tax planning strategies estimates judgments include degree uncertainty changes estimates assumptions could require us adjust valuation allowances deferred tax assets historically changes valuation allowances caused major changes business cycle certain countries changes local country law ultimate realization deferred tax assets depends generation sufficient taxable income applicable taxing jurisdictions operate 80 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenue rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability taxing jurisdiction could impact amount income taxes provide given year tax filings various periods subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings resulting change tax liability dependent numerous factors including among others amount nature additional taxes potentially asserted local tax authorities willingness local tax authorities negotiate fair settlement administrative process impartiality local courts number countries business potential changes tax paid one country either produce fail produce offsetting tax change countries experience estimates assumptions used provide future tax assessments proven appropriate however past experience guide potential exists tax resulting resolution current potential future tax controversies may differ materially amount accrued addition aforementioned assessments received various tax authorities also provide taxes uncertain tax positions formal assessments received determination liabilities requires use estimates assumptions regarding future events established adjust amounts information available future event occurs necessitating change reserves changes facts law judicial decisions regarding application existing law favorable audit outcome believe resolution tax matters material effect consolidated financial condition company although resolution could material impact consolidated statements income particular period effective tax rate period resolution occurs pensions postretirement benefit obligations pensions postretirement benefit obligations related expenses calculated using actuarial models methods involves use two critical assumptions discount rate expected rate return assets important elements determining pension expense measuring plan liabilities evaluate critical assumptions least annually necessary utilize third party actuarial firms assist us although considered less critical assumptions used determining benefit obligations related expenses demographic factors like retirement age mortality turnover also evaluated periodically updated reflect actual expected experience discount rate enables us determine expected future cash flows present value measurement date development discount rate largest plans based bond matching model whereby cash flows underlying projected benefit obligation matched yield curve constructed bond portfolio highquality fixedincome securities use lower discount rate would increase present value benefit obligations increase pension expense used weighted average discount rate 46 2012 52 2011 59 2010 determine pension expense 50 basis point reduction weighted average discount rate would decreased income taxes approximately 2 million 2012 determine expected rate return plan assets consider current target asset allocations well historical expected future returns various categories plan assets lower rate return would decrease plan assets results higher pension expense assumed weighted average rate return plan investments 70 2012 72 2011 71 2010 50 basis point reduction weighted average expected rate return assets principal plans would decreased income taxes approximately 4 million 2012 new accounting standards updates june 2011 financial accounting standards board “fasb” issued update accounting standards codification “asc” 220 comprehensive income accounting standards update “asu” requires entities present components comprehensive income either continuous statement comprehensive income two separate consecutive statements would include reclassification adjustments component items reclassified comprehensive income net income face financial statements december 2011 fasb issued update asu indefinitely deferring implementation reclassification adjustments component requirement asu issued june 2011 adopted new presentation requirement first quarter 2012 using twostatement approach september 2011 fasb issued update asc 350 intangibles goodwill asu amends guidance asc 35020 testing goodwill impairment revised guidance allows entities testing goodwill impairment option performing qualitative assessment calculating fair value reporting unit asu change goodwill calculated assigned reporting units revise requirement test annually impairment asu limited goodwill amend annual requirement testing indefinitelived intangible assets impairment asu effective goodwill impairment tests performed fiscal years beginning december 15 2011 adopted asu effective january 1 2012 impact consolidated financial statements july 2012 fasb issued update asc 350 intangibles goodwill asu amends guidance asc 35030 testing indefinitelived intangible assets impairment revised guidance permits entity first assess qualitative factors determine whether likely indefinitelived intangible asset impaired basis determining whether necessary perform quantitative impairment test asu effective impairment tests performed fiscal years beginning september 15 2012 adopt asu 2013 impairment testing expect material impact consolidated financial statements related party transactions significant related party transactions three years ended december 31 2012 forwardlooking statements form 10k including mda certain statements notes consolidated financial statements includes forwardlooking statements within meaning section 27a securities act section 21e exchange act “forwardlooking statement” words “anticipate” “believe” “ensure” “expect” “if” “intend” “estimate” “probable” “project” “forecasts” “predict” “outlook” “aim” “will” “could” “should” “would” “potential “ “may” “likely” similar expressions negative thereof intended identify forwardlooking statements forwardlooking statements based assumptions believe reasonable may prove accurate statements include potential impact future transactions acquisition disposition merger joint venture transaction could occur undertake obligation publicly update revise forwardlooking statement expectations regarding business outlook including changes revenue pricing capital spending profitability strategies operations impact common stock repurchases oil natural gas market conditions business plans customers market share contract terms costs availability resources legal economic regulatory conditions environmental matters forecasts regarding matters forwardlooking information subject risks uncertainties could cause actual results differ materially results expected although possible identify factors risks uncertainties include risk factors timing risk factors identified item 1a risk factors set forth time filings sec documents available website sec’s electronic data gathering analysis retrieval system “edgar” httpwwwsecgov item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations “mda” read conjunction consolidated financial statements included item 8 financial statements supplementary data contained herein executive summary baker hughes leading supplier oilfield services products technology systems worldwide oil natural gas industry referred oilfield operations manage oilfield operations four geographic segments consisting north america latin america europeafricarussia caspian middle eastasia pacific industrial services businesses reported fifth segment main products services provided oilfield operations fall one two categories drilling evaluation completion production classification based two major phases constructing oil andor natural gas well drilling phase completion phase products services utilized phase also provide products services downstream chemicals process pipeline industries referred industrial services within oilfield operations primary driver businesses customers’ capital operating expenditures dedicated oil natural gas exploration field development production business cyclical dependent upon customers’ expectations future oil natural gas prices economic growth hydrocarbon demand estimates current future oil natural gas production 2013 generated revenue 2236 billion increase 1 billion 5 compared 2012 revenue north america segment 2013 1088 billion flat compared 2012 revenue latin america segment 2013 231 billion decrease 4 compared 2012 western hemisphere negatively impacted activity declines several markets particularly us canada brazil rig counts 2012 levels revenue eastern hemisphere 790 billion increase 14 compared 2012 revenue middle eastasia pacific segment grew 775 million 24 2013 compared 2012 industrial services revenue 128 billion increase 5 compared 2012 net income attributable baker hughes 110 billion 2013 compared 131 billion 2012 profit tax north america segment 968 million 2013 compared 127 billion 2012 profitability north america adversely impacted continued supply pressure pumping capacity market partially mitigated increased activity margins gulf mexico profit tax latin america segment 66 million 2013 compared 197 million 2012 profitability latin america declined due reduced activity lower pricing brazil severance costs incurred across entire segment realigned business respond lower activity levels profit tax eastern hemisphere 105 billion 2013 compared 899 million 2012 increase profitability eastern hemisphere driven primarily activity increases improved profitability asia pacific russia caspian december 31 2013 baker hughes approximately 59400 employees compared approximately 58800 employees december 31 2012 business environment north america customer spending decreased 2013 compared 2012 resulting 7 decrease north america rig count natural gasdirected drilling activity decreased 23 2013 compared 2012 increased production unconventional natural gas shale basins contributed high natural gas working inventories ultimately low commodity prices us low natural gas prices resulted reduced customer spending natural gas shale basins resulting 31 reduction natural gasdirected rig activity 2013 compared 2012 oildirected rig activity us increased 1 period canada high oil price differentials primarily due constrained refinery pipeline capacity resulted 11 reduction oildirected customer activity offset 18 increase natural gasdirected rigs driven drilling condensate rich zones alberta service activity oil sands issues ultimately resulted 3 reduction canadian rig activity 2013 compared 2012 outside north america customer spending heavily influenced brent oil prices due longterm planning cycles associated many international projects customers tend react shortterm movements oil prices average brent oil prices flat 2013 compared 2012 2013 upward pricing pressure resulting geopolitical tensions middle east offset weak european demand caused europes economic downturn uncertainty regarding future economic growth china increasing global oil supplies despite overall flat oil prices customers’ activity spending levels increased moderately 2013 compared 2012 result international rig count grew 5 2013 compared 2012 largest gains seen africa middle east continental europe oil natural gas prices oil natural gas prices summarized table averages daily closing prices periods indicated 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 brent oil prices averaged 10881bbl 2013 brent oil prices fluctuated throughout year highest prices seen first quarter geopolitical disputes middle east africa reduced output threatened future production overall prices ranged high 11934bbl february 2013 low 9679bbl april 2013 low price april result unfavorable economic data us europe china led negative demand forecasts fears global economic downturn fears eased early summer months prices stabilized remainder year near 2013 average price 10881bbl international energy agency “iea” estimated january 2014 oil market report worldwide demand increased 12 million barrels per day 912 million barrels per day 2013 compared 2012 wti oil prices averaged 9798bbl 2013 similar brent oil prices wti oil prices fluctuated throughout year highest prices recorded third quarter overall wti oil prices ranged low 8668bbl april 2013 high 11053bbl september 2013 high prices third quarter result wti crude increasingly displacing brentquality crude imports north america increased us oil production improved crudebyrail pipeline infrastructure brentwti spread difference spot prices brent wti crude oils narrowed within 066bbl third quarter represented lowest spread three years spread widened significantly fourth quarter however wti prices pressured downward increased supplies light grade oil us brent prices supported upward temporary reductions libyan production due increased political tensions brentwti spread closed year 2013 differential 1240bbl north america natural gas prices measured henry hub natural gas spot price averaged 373mmbtu 2013 natural gas prices increased 35 2013 2012 average levels natural gas prices improved throughout year due lower storage levels reduced natural gasdirected rig counts overall natural gas prices ranged low 308mmbtu january 2013 high 452mmbtu december 2013 according us department energy “doe” working natural gas storage end 2013 2974 billion cubic feet bcf 16 562 bcf corresponding week 2012 baker hughes rig count baker hughes providing rig counts public since 1944 gather relevant data field service personnel obtain necessary data routine visits various rigs customers contractors andor outside sources base classification well either oil natural gas primarily upon filings made operators relevant jurisdiction data compiled distributed various wire services trade associations published website believe counting process resulting data reliable however subject ability obtain accurate timely information rig counts compiled weekly us canada monthly international rigs published international rig counts include rigs drilling certain locations russia caspian iran onshore china information readily available baker hughes resumed publication june 2012 rig count iraq first time since august 1990 rigs us canada counted active day count taken well drilled started drilling completed well anticipated sufficient depth potential consumer drill bits international areas rigs counted weekly basis deemed active drilling activities occurred majority week weekly results averaged month published accordingly rig count include rigs transit one location another rigging used nondrilling activities including production testing completion workover expected significant consumers drill bits baker hughes rig counts important business barometer drilling industry suppliers drilling rigs active consume products services produced oil service industry rig count trends governed exploration development spending oil gas companies turn influenced current future price expectations oil gas therefore counts may reflect relative strength stability energy prices overall market activity however counts solely relied specific pervasive conditions may exist affects overall energy prices market activity rig counts summarized table averages periods indicated 2013 compared 2012 rig count north america decreased 7 2013 compared 2012 primarily driven 23 decline natural gasdirected rigs oildirected rig count declined 1 natural gasdirected rig count reflected 31 decrease us offset 18 increase canada oildirected rig count increased 1 us decreased 11 canada natural gasdirected drilling us negatively impacted continued weakness north america natural gas prices discouraged new investment natural gas fields canada increase natural gasdirected rigs driven drilling condensate rich zones alberta service oil sands drilling activity canada many operators curtailed oildirected drilling plans second half 2013 due high oil price differentials compared wti wet weather southern alberta saskatchewan overall canada rig counts decreased 3 2013 compared 2012 outside north america rig count increased 5 2013 compared 2012 rig count latin america relatively flat increased rig activity argentina ecuador offset reductions brazil colombia rig count continental europe increased 18 higher activity turkey balkans sakhalin north sea rig count increased 5 primarily due increased activity norway africa rig count increased primarily due resumption drilling activities libya well higher activity algeria kenya rig count increased 5 middle east due higher activity iraq abu dhabi pakistan offset reduction egypt due political unrest 2012 compared 2011 rig count north america decreased 1 2012 compared 2011 natural gasdirected rig counts declined 36 largely offset increase oildirected rig counts 28 natural gasdirected rig count reflected 37 decrease us 27 decrease canada oildirected rig count increased 38 us slightly offset 6 decrease canada natural gasdirected drilling negatively impacted continued weakness north america natural gas prices discouraged new investment natural gas fields growth oildirected drilling us primarily result strong oil prices industry’s ability apply drilling completion techniques unconventional oil reservoirs originally applied similar natural gas reservoirs canada many operators curtailed drilling plans second half 2012 due reduced cash flows natural gas activities high oil price differentials compared wti overall canada rig counts declined 13 2012 compared 2011 outside north america rig count increased 6 2012 compared 2011 starting june 2012 middle east rig count included iraq excluding iraq average 43 rigs 2012 international rig count increased 2 rig count latin america relatively flat increased rig activity mexico ecuador offset reductions colombia venezuela rig count europe also flat gains north sea due higher activity uk offset reductions continental europe africa rig count increased primarily due resumption drilling activities libya well higher activity algeria rig count increased middle east due higher activity saudi arabia oman abu dhabi well inclusion iraq asia pacific rig count decreased result decreased activity indonesia offshore china partially offset increased activity malaysia australia baker hughes well count baker hughes began providing us well count data oil natural gas industry july 2013 baker hughes well count extension baker hughes rig count provides quarterly census number new onshore oil natural gas wells drilling began spud us baker hughes well count includes wells identified significant consumers oilfield services supplies excludes wells categorized workover plugged abandoned completed well count trends governed oil company exploration development spending us turn influenced current expected price oil natural gas well counts therefore may reflect strength stability energy prices however many factors influence well count including new technologies pad drilling weather seasonal spending changes local regulations believe counting process resulting data reliable however subject ability obtain accurate timely information 2013 35676 wells spud land us compares 36824 wells spud 2012 reduction 3 results operations discussions relating significant line items consolidated statements income based available information represent analysis significant changes events impact comparability reported amounts appropriate identified specific events changes affect comparability trends reasonably practicable quantified impact items addition discussions revenue cost revenue total basis business drivers product sales services similar dollar amounts tabulations section millions dollars unless otherwise stated revenue profit tax revenue profit tax five operating segments provided performance segments evaluated based profit tax defined income taxes following net interest expense corporate expenses certain gains losses allocated segments 2013 compared 2012 revenue 2013 increased 1 billion 5 compared 2012 increase coming predominantly eastern hemisphere continue grow operations middle east asia pacific africa russia caspian north america revenue growth gulf mexico essentially offset lower revenue canada profit tax operations 2013 decreased 278 million 11 compared 2012 despite increase revenue profit tax significantly impacted low equipment utilization resulting capacity pressure pumping business north america decline activity lower prices drilling services brazil reduced pricing increased startup costs associated new drilling contract norway fourth quarter 2013 incurred costs 79 million iraq related significant disruption operations increased personnel security costs nonrecurring items end december 2013 additional security measures place operations iraq resumed reductions profit tax partially offset asia pacific experienced significant improvement profitability throughout region driven increased activity improved mix product sales 2013 incurred charge 23 million beforetax related currency devaluation venezuela well severance charges 56 million beforetax due restructuring business match current market conditions throughout regions 2012 profit tax included charges 63 million 43 million related impairment certain information technology assets primarily associated internally developed software assets 20 million related closure chemical manufacturing facility uk information technology supply chain organizations support global operations charges allocated segments amount impairment charges recorded segment 2012 follows north america 33 million latin america 7 million europeafricarussia caspian 11 million middle eastasia pacific 10 million industrial services 2 million north america north america revenue flat 2013 compared 2012 despite rig counts declining 7 revenue gulf mexico increased inline rig count increase 17 compared 2012 main drivers revenue growth gulf mexico increased activity drilling completion fluids pressure pumping completion systems wireline services product lines despite 9 decline us onshore rig count 2013 compared 2012 driven lower natural gasdirected rigs total revenue us onshore business flat year 2013 experienced revenue growth us onshore drilling services artificial lift completion systems product lines however increases mostly offset reduced revenue drilling completion fluids pressure pumping product lines although experienced share gains 2013 compared 2012 pressure pumping product line across several basins us revenue declined pressure pumping business due continued oversupply pressure pumping capacity industry revenue canada declined 2013 compared 2012 part due 11 decline oildirected rig count significant driver operations country revenue canada also negatively impacted decline pressure pumping product line experienced lower demand hydraulic fracturing unfavorable change canadian exchange rate relative us dollar also contributed year revenue decline north america profit tax 968 million 2013 decrease 300 million 24 compared 2012 profits us onshore canadian operations significantly impacted continued oversupply pressure pumping equipment resulting low fleet utilization increased competition north america profit tax reduced higher depreciation amortization expense 64 million higher compensation costs reductions partially offset improved profits gulf mexico resulting favorable mix sales deepwater completion systems pressure pumping services well lower costs raw materials efficiency gains cost savings recognized part pressure pumping profit improvement plan 2012 north america profit tax negatively impacted impairment charges associated information technology assets facility closure discussed previously latin america latin america revenue decreased 4 2013 compared 2012 primary drivers reduced revenues brazil venezuela partially offset increased revenues throughout rest region activity declined across almost product lines brazil part due 23 reduction rig count compared 2012 also due new drilling services contract lower activity pricing revenue venezuela decreased across almost product lines due lower activity levels impact devaluation local currency decreases partially offset increased revenues drilling services artificial lift product lines ecuador pressure pumping wireline services argentina pressure pumping drilling services mexico latin america profit tax decreased 131 million 66 2013 compared 2012 main drivers behind reduction lower revenues pricing drilling services product line brazil expenses associated demobilization equipment brazil lower activity levels venezuela severance charges 32 million throughout latin america february 2013 venezuelas currency devalued prior exchange rate 43 bolivars fuertes per us dollar 63 bolivars fuertes per us dollar applies local currency denominated balances impact devaluation loss 23 million recorded marketing general administrative expense first quarter 2013 2012 latin america profit tax negatively impacted impairment charges associated information technology assets facility closure discussed previously january 2014 venezuela announced establishment dual exchange rate system whereby rate 63 bolivares fuertes us dollar applied certain economic sectors food medicine sectors economy apply exchange rate determined based results venezuelan central bank’s system weekly currency auctions functional currency operations venezuela us dollar portion transactions balances denominated bolivares fuertes financial reporting purposes local currency transactions remeasured us dollars official exchange rate 63 bolivares fuertes us dollar assessing applicability impact potential change exchange rates required apply different exchange rate may incur loss 2014 example apply exchange rate 113 bolivares fuertes per us dollar rate per recent auction local currency denominated balances december 31 2013 would result loss approximately 10 million europeafricarussia caspian “earc” earc revenue increased 6 2013 compared 2012 revenue increased africa russia caspian europe remaining flat increase africa predominantly nigeria drilling services completion systems product lines experienced increased activity well north africa resumption activity libya benefited drilling services wireline services completion systems product lines increased activity algeria share gains mauritania also contributed increased revenues compared 2012 growth russia caspian due increased demand drilling services completion systems pressure pumping artificial lift product lines europe revenue flat compared 2012 new drilling services contract higher activity pressure pumping wireline services norway offset completion significant projects eastern mediterranean lower activity across drilling evaluation product lines united kingdom earc profit tax decreased 16 million 3 2013 compared 2012 europe profit margins declined due reduced pricing increased startup costs associated new drilling services contract norway europe profitability also impacted reduced drilling evaluation activity united kingdom completion projects eastern mediterranean declines partially mitigated improved profits africa russia caspian primarily associated higher revenue 2012 earc profit tax negatively impacted impairment charges associated information technology assets facility closure discussed previously middle eastasia pacific “meap” meap revenue increased 24 2013 compared 2012 corresponding rig count increased 4 period middle east asia pacific posted strong revenue growth geographies notably iraq saudi arabia arabian gulf southeast asia china iraq revenue increased due growth integrated services contracts however iraq revenue negatively impacted fourth quarter 2013 due significant disruption operations saudi arabia saw significant increase revenue due higher demand drilling services pressure pumping wireline services product lines well growth integrated services contract revenue increased arabian gulf due increased demand drilling services wireline services product lines united arab emirates well wireline services india within asia pacific revenue growth strongest south east asia drilling services completion systems pressure pumping indonesia china experienced increased activity drilling services demand wireline services grew papua new guinea meap profit tax improved 165 million 53 2013 compared 2012 primary driver increase profit tax higher incremental profit increased revenue asia pacific lesser extent middle east experienced favorable shift product mix higher proportion revenue derived drilling services completion systems product lines profit tax 2013 also benefited ongoing profit improvement initiatives asia pacific improvements offset 79 million losses iraq related significant disruption operations expenses associated personnel movements security measures nonrecurring items 2012 meap profit tax negatively impacted impairment charges associated information technology assets facility closure discussed previously industrial services industrial services revenue increased 5 profit tax increased 3 2013 compared 2012 increase revenue primarily driven increased demand process pipeline business increase profit tax due revenue increase offset higher compensation expenses 2012 industrial services profit tax negatively impacted impairment charges associated information technology assets facility closure discussed previously 2012 compared 2011 revenue 2012 increased 153 billion 8 compared 2011 growth coming segments revenue growth north america driven increased demand us product lines pressure pumping increased activity deepwater drilling gulf mexico international revenue increased primarily result increased activity middle east latin america africa profit tax operations 2012 decreased 377 million 13 compared 2011 despite increase revenue profit tax significantly impacted reduced prices increased raw material expenses higher personnel costs pressure pumping product line north america additional provisions doubtful accounts latin america high operating costs third party expenses related new integrated operations contracts middle east impacted profits latin america meap earc experienced improved profitability driven increased activity throughout entire segment well improved market conditions africa 2012 incurred charges 63 million associated impairment certain information technology assets closure chemical manufacturing facility uk discussed comparison operating results 2013 2012 2011 profit tax included charge 315 million related impairment trade names discussion trade name impairments see note 7 goodwill intangible assets amount trade name impairment charge recorded segment follows north america 105 million latin america 64 million europeafricarussia caspian 48 million middle eastasia pacific 47 million industrial services 51 million north america north america revenue increased 5 2012 compared 2011 despite rig counts declining 1 primary catalysts revenue growth north america include sustained high oil prices 2012 compared historical prices new innovative technologies drilling completion systems wireline services resulted increased revenue particularly unconventional reservoirs us deepwater gulf mexico additionally continuing shift drilling activities natural gasdirected unconventional reservoirs oildirected reservoirs us resulted significant increases activity particularly production product lines artificial lift upstream chemicals gulf mexico revenue increased 32 2012 compared 2011 rig counts increased 47 driven primarily increased deepwater activity increases revenue offset reduced demand pricing pressure pumping product line us canada primarily due oversupply pressure pumping capacity industry additionally result reduced customer spending canada oildirected rig counts decreased 6 natural gasdirected rig counts 27 compared 2011 overall resulted 10 reduction canadian revenue 2012 compared 2011 north america profit tax 127 billion 2012 decrease 640 million 34 compared 2011 despite higher revenue profits us canada impacted significantly decreased fleet utilization lower pricing higher personnel costs increased costs critical raw materials primarily pressure pumping product line additionally higher depreciation amortization expense 125 million also contributed decrease profitability profit tax canada impacted reduced customer spending reductions partially offset increased activity us product lines pressure pumping improved profits gulf mexico revenue profit margins returned premoratorium levels activity increased substantially 2012 deepwater drilling activity increased significantly compared shelf drilling activity shift shelf activity deepwater activity led favorable change sales mix products services higher margins improved margins drilling wireline services deepwater resulted significant increase profits gulf mexico 2012 compared 2011 north america profit tax 2012 negatively impacted 33 million charge associated information technology expenses facility closure 2011 profit tax impacted trade name impairment charge discussed previously latin america latin america revenue increased 10 2012 compared 2011 primary driver higher activity benefiting drilling services artificial lift completion systems pressure pumping product lines brazil andean region improved pricing increased activity pressure pumping product line argentina higher land activity mexico latin america profit tax decreased 12 2012 compared 2011 despite increase revenue profits negatively impacted increase 85 million allowance doubtful accounts higher personnel costs latin america profit tax 2012 also negatively impacted 7 million charge associated information technology expenses facility closure 2011 profit tax impacted trade name impairment charge discussed previously europeafricarussia caspian earc revenue increased 8 2012 compared 2011 strong growth seen africa particularly drilling systems mozambique nigeria completion systems nigeria angola wireline services nigeria uganda angola resumed operations libya revenue increases africa augmented increases europe region due primarily increased wireline services activity norway uk eastern mediterranean well increased drilling fluids activity uk eastern mediterranean revenue also increased russia sizable growth artificial lift drilling services drilling fluids product lines earc profit tax increased 74 2012 compared 2011 favorable change sales mix russia sub sahara africa particularly uganda angola well increased activity mozambique nigeria libya contributed improved margins increased profitability activity gains europe increased profitability 2012 earc profit tax 2012 negatively impacted 11 million charge associated information technology expenses facility closure 2011 earc profit tax negatively impacted 70 million charge associated cessation operations due civil unrest libya addition trade name impairment charge discussed previously middle eastasia pacific meap revenue increased 15 2012 compared 2011 increase segment attributable significant growth completion systems drilling services drilling fluids product lines saudi arabia well new integrated operations contracts increased wireline services upstream chemicals activity iraq asia pacific increased activity particularly completion systems australia pressure pumping malaysia thailand partially offset reduced activity pressure pumping drilling fluids india meap profit tax remained relatively flat 2012 compared 2011 revenue increased profit tax impacted high operating third party costs associated new integrated operations activities iraq increased personnel costs 2012 meap profit tax also negatively impacted 10 million charge associated information technology expenses facility closure 2011 profit tax impacted trade name impairment charge discussed previously industrial services industrial services revenue increased 7 profit tax increased 38 2012 compared 2011 increase revenue primarily driven increased demand process pipeline business downstream chemical products north america increase profit tax 2012 compared 2011 mainly attributable 51 million trade name impairment charge recorded 2011 recur 2012 industrial services profit tax 2012 negatively impacted 2 million charge associated information technology expenses facility closure costs expenses table details certain consolidated statement income data percentage revenue cost revenue cost revenue percentage revenue 83 81 2013 2012 respectively increase cost revenue percentage revenue due primarily lower margins pressure pumping product line north america result overcapacity pressure pumping industry additionally depreciation expense across segments increased cost revenue 160 million 2013 compared 2012 latin america lower pricing drilling services contract brazil led increase cost revenue relative revenue europe reduced pricing increased startup costs new drilling services contract norway decreased margins well unfavorable change sales mix margins middle east negatively impacted third party costs related iraq integrated contracts cost revenue negatively impacted disruption operations iraq fourth quarter 2013 margins favorably impacted higher incremental profit revenue asia pacific improvement sales mix africa russia caspian gulf mexico well lower provision doubtful accounts 25 million cost revenue percentage revenue 81 77 2012 2011 respectively increase cost revenue due primarily lower margins pressure pumping product line north america startup third party costs associated new integrated operations activities iraq well increased amortization expense 2012 recorded charges totaling 85 million increase allowance doubtful accounts latin america charge 20 million related closure chemical manufacturing facility part supply chain cost saving initiative research engineering research engineering expenses increased 12 2013 compared 2012 2013 continued ramp research development activity technology centers brazil saudi arabia resulted higher personnel material costs result research development activities 2013 commercially launched 100 new products services committed expanding core services include critical capabilities emerging technologies research engineering expenses increased 8 2012 compared 2011 increase research engineering expenses driven increased activity staffing technology centers opened fourth quarter 2011 additionally research engineering expenses impacted increasing material costs higher material usage related research development activities marketing general administrative marketing general administrative “mga” expenses decreased 1 2013 compared 2012 mga expenses 2013 decreased result nonrecurring charge recorded third quarter 2012 43 million related impairment certain information technology assets well winding worldwide integration efforts subsequent acquisition bj services 2010 conclusion integration efforts resulted decreased costs related technology project management personnel led improved efficiencies among global operations support functions reduction mga largely offset loss 23 million due currency devaluation venezuela occurred first quarter 2013 higher salaries wage costs personnel foreign exchange losses caused unfavorable movement exchange rates foreign currencies us dollar mga expenses increased 11 2012 compared 2011 increase mga expenses primarily due charge 43 million related impairment certain information technology assets addition costs increase mga expenses resulted ongoing activities improve productivity efficiency coordination integration worldwide operations including software implementations enhancements partially offset decreased personnel costs impairment trade names 2011 recognized charge 315 million related impairment certain trade names majority related bj services trade name impairment bj services trade name due decision minimize use bj services trade name part overall branding strategy baker hughes interest expense net interest expense net interest income 234 million 2013 increase 24 million compared 2012 increase interest expense primarily due reduction capitalized interest 2013 corresponds decrease capital expenditures interest expense net interest income 210 million 2012 decrease 11 million compared 2011 decrease primarily due repayment 575 notes second quarter 2011 early extinguishment third quarter 2011 65 senior notes due november 2013 increase capitalized interest 2012 associated increase capital expenditures decrease interest expense partially offset issuance 750 million 32 senior notes august 2011 inception two capital leases second third quarters 2011 pumping vessels increased borrowings commercial paper program 2012 loss early extinguishment debt 2011 redeemed full 500 million debt maturing november 2013 paid redemption premium 63 million redemption resulted pretax loss 40 million early extinguishment debt included redemption premium write remaining original debt issuance costs debt discount partially offset 25 million gain termination two related interest rate swap agreements income taxes total income tax expense 612 million 665 million 596 million 2013 2012 2011 respectively income tax expense 2011 includes 214 million tax benefit associated reorganization certain foreign subsidiaries excluding impact reorganization 2011 effective tax rate operating profits 2013 2012 2011 357 336 346 respectively 2013 effective tax rate higher us statutory income tax rate 35 due higher rates certain international operations primarily resulting foreign losses tax benefit state income taxes partially offset adjustments prior years’ tax positions 2012 2011 effective tax rates lower us statutory income tax rate 35 due lower rates tax certain international operations adjustments prior years tax positions partially offset state income taxes outlook section read conjunction factors described “part item 1a risk factors” “forwardlooking statements” section part ii item 7 contained herein factors could impact either positively negatively expectation oil natural gas demand oil natural gas prices exploration development spending drilling activity production spending industry cyclical past cycles driven primarily alternating periods ample supply shortage oil natural gas relative demand oilfield services company revenue dependent spending customers oil natural gas exploration field development production spending dependent number factors including customers’ forecasts future energy demand expectations future energy prices access resources develop produce oil natural gas ability fund capital programs impact new government regulations outlook exploration development spending based upon expectations customer spending markets operate driven primarily perception industry expectations oil natural gas prices likely impact customer capital operating budgets well factors could impact economic return oil natural gas companies expect developing oil natural gas reserves forecasts based evaluating number external sources well internal estimates external sources include publications iea opec energy information administration “eia” organization economic cooperation development “oecd” acknowledge substantial amount uncertainty regarding forecasts thus internal estimates regarding economic expansion hydrocarbon demand overall oilfield activity position flexible responsive wide range potential outcomes consider primary drivers impacting 2014 business environment include following • worldwide economic growth general strong correlation overall economic growth global demand hydrocarbons economic outlook 2014 includes strengthened economic activity also heightened risks european countries face concerns rising sovereign debt levels chinas economy experiencing slowdown growth us continues moderate pace recovery sovereign debt crisis europe affected economies major commodities exporters including us china though steps taken governments maintain growth rates worsening macroeconomic conditions eurozone remain threat global economic outlook since recession 20082009 chinas rapid development industrialization major factor driving worldwide economic growth however chinas economic growth rates slowed recent years low 76 2013 compared 2012 2014 international monetary fund imf estimates china’s economic growth even lower 75 policymakers refrain stimulating activity amid inflation concerns us imf forecasts 28 gross domestic product growth 2014 slight increase 2013 driven continued strong private demand particular recovering housing market however growth may hampered deterioration global economy particularly china europe additionally federal reserve hinted potential withdrawal quantitative easing middle 2014 would eliminate approximately 1 trillion yearly liquidity injections could result interest rate hikes therefore increase cost borrowing towards new capital projects including hydrocarbons • demand hydrocarbons january 2014 oil market report iea forecasted global demand oil increase 13 million barrels per day “bpd” 2014 reaching 925 million bpd expected increase mainly driven countries outside oecd support upstream investment oil natural gas production around world addition global growth oil demand natural gas continue play increasingly important role meeting world’s energy needs january 2014 shortterm energy outlook eia estimated industrial demand natural gas us increase 02 billion cubic feet per day “bcfd” 2014 reaching 206 bcfd overall us natural gas demand expected decline 16 bcfd 696 bcfd 2014 due lower electric power sector demand lower heating demand • oil production january 2014 iea oil market report projected nonopec production grow 17 million bpd 2014 increase largely due continued production growth us tight oil formations canadian oil sands fostered sustained higher oil prices opec’s production target unchanged 30 million bpd slight changes possible substantial movement oil price significant investments expected required increase production capacity especially output mature fields decline production rates early wells unconventional deposits continue drop • natural gas production natural gas production continues grow worldwide including north america drilling activity slowed despite us natural gasdirected rig counts reaching 18year lows recent months averaging 383 rigs 2013 556 rigs 2012 natural gas production us increased january 2014 shortterm energy outlook eia estimated us natural gas production increase 21 2014 702 bcfd 717 bcfd overall global natural gas output tend 2014 due increased production us well eastern hemisphere high natural gas prices europe asia encourage growth • oil prices wti oil prices trading 8668bbl 11053bbl brent trading 9679bbl 11934bbl 2013 global oil activity continue provide adequate returns encourage incremental investment based oil supply forecasts modest anticipated economic growth globally oil prices expected remain relatively stable throughout 2014 barring major macroeconomic changes • natural gas prices henry hub natural gas prices trading 308mmbtu 452mmbtu 2013 eia projecting january 2014 shortterm energy outlook average 389mmbtu 2014 economics dry natural gasdirected investments north america likely continue marginal primarily due abundant supplies unconventional plays north america including associated gas produced liquidsrich unconventional plays activity spending outlook north america overall customer spending north america expected increase 4 5 2014 compared 2013 average annual rig count expected flat part reflecting improved efficiencies drilling performance overall service activity increased north america customers demand robust technologies advanced directional drilling complex completion systems pressure pumping develop liquidsrich unconventional plays eagle ford bakken drilling activity gulf mexico expected increase 2014 addition 4 5 new deepwater exploration rigs completions development activity gulf mexico also continue grow 2014 canada overall rig activity 2014 expected approximately 5 compared 2013 activity spending outlook outside north america international activity driven primarily oil gas price environment currently provides attractive economic returns almost every geographic region strong enough support major natural gas export projects customers expected increase spending develop new resources offset declines existing producing fields relying advanced drilling techniques support exploration production activities deepwater heavy viscous oils tight reservoirs 2014 anticipate 10 increase international rig activity relative 2013 improvements anticipated international regions areas expected see largest increases include middle east particular saudi arabia iraq gulf states asia pacific largest growth expected australia around world drivers oil gas commercialization changed within southeast asia increased focus exploration development oil natural gas resources meet high local demand growth rather historic focus exports africa traditional growth areas angola nigeria augmented new producers ghana uganda mozambique tanzania russia striving maintain 10 million barrels oil production per day 2020 investing eastern siberia eventually technically challenging offshore arctic deposits efforts russia developing tight oil using vertical drilling already underway government provided support pilot projects 2013 featuring complex horizontal drilling completions natural gas australia leading expansion lng export projects using offshore gas drilling northwest shelf well onshore coalbed methane operations largescale gas pipeline exports caspian region china europe expected grow significantly next five years spurring drilling deeper targets onshore offshore increased natural gas process plant capacity sour gas development unconventional oil natural gas deposits still infancy outside north america general consensus unconventional resources play growing role future global energy supply countries taking active steps develop unconventional reserves base include australia china saudi arabia argentina however demonstrated interest ministry national oil company levels defining unconventional resource potential almost countries active hydrocarbon industries compliance business 80 countries including approximately 19 40 countries lowest scores transparency international’s corruption perception index survey 2013 indicates high levels corruption devote significant resources development maintenance communication enforcement business code conduct antibribery compliance policies internal control processes procedures compliance related policies notwithstanding devotion resources part consequence thereof time discover receive information alleging potential violations laws regulations including fcpa policies processes procedures conduct timely internal investigations potential violations take appropriate action depending upon outcome investigation anticipate devotion significant resources compliancerelated issues including necessity investigations continue aspect business number countries oil natural gas exploration development production take place conduct operations compliancerelated issues limited ability business raised cost operating countries order provide products services countries may future utilize ventures third parties sell products distributors otherwise modify business approach order improve ability conduct business accordance applicable laws regulations business code conduct bestinclass global ethics compliance program “compliance program” based core values integrity performance teamwork learning courage ii standards contained business code conduct iii laws countries operate compliance program referenced within company “c2” “completely compliant” completely compliant theme intended establish proper toneatthetop throughout company employees consistently reminded play crucial role ensuring company always conducts business ethically legally safely highlights compliance program include following • comprehensive internal policies areas facilitating payments travel entertainment gifts charitable donations connected nonus government officials payments nonus commercial sales representatives use nonus police military organizations security purposes addition countryspecific guidance customs standards visa processing export reexport controls economic sanctions antiboycott laws • comprehensive employee compliance training program covering substantially employees • due diligence procedure commercial sales processing professional agents enhanced process classifying distributors • special compliance committee made senior officers meets less year review oversight reports active commercial sales representatives • continued reduction use commercial sales representatives processing agents including reduction customs agents • use technology monitor report compliance matters including webbased antiboycott reporting tool global trade management software tool • program designed encourage reporting ethics compliance matter without fear retaliation including worldwide business helpline operated third party currently available tollfree 150 languages ensure helpline easily accessible employees language • centralized finance organization including enterprisewide accounting system companywide policies addition corporate audit function incorporated anticorruption procedures audits certain countries also conduct fcpa risk assessments legal audit procedures • continue work ensure adequate legal compliance coverage around world including coordination compliance advice customized training across regions countries business • centralized human resources function including consistent standards prehire screening employees screening existing employees prior promoting positions may exposed corruptionrelated risks uniform policy new hire training liquidity capital resources objective financing business maintain sufficient liquidity adequate financial resources financial flexibility order fund requirements business december 31 2013 cash equivalents 140 billion substantially held foreign subsidiaries substantial portion cash held foreign subsidiaries december 31 2013 reinvested international operations intent use cash among things fund operations foreign subsidiaries decide later date repatriate funds us may required provide taxes certain funds based applicable us tax rates net foreign tax credits addition 250 billion committed revolving credit facility commercial banks commercial paper program may issue 250 billion maximum combined borrowing time credit facility commercial paper program 250 billion december 31 2013 commercial paper outstanding 254 million therefore amount available borrowing facility december 31 2013 2246 billion believe cash hand cash flows generated operations available credit facility including issuance commercial paper provide sufficient liquidity manage global cash needs 2013 used cash pay variety activities including working capital needs capital expenditures repurchase common stock payment dividends cash flows cash flows provided used type activity follows years ended december 31 operating activities cash flows operating activities provided 316 billion 184 billion years ended december 31 2013 2012 respectively cash flows operating activities increased 133 billion 2013 primarily due change net operating assets liabilities used less cash 2013 compared 2012 main underlying drivers 2013 compared 2012 changes operating assets liabilities follows • increase accounts receivable used cash 453 million provided cash 16 million 2013 2012 respectively increase accounts receivable 2013 primarily due increase activity corresponding revenue growth partially offset improved collections evidenced decrease days sales outstanding defined average number days net trade receivables outstanding based quarterly revenue • increase inventory used cash 120 million 547 million 2013 2012 respectively driven increase activity levels partially offset improved inventory utilization • increase accounts payable provided 845 million cash 2013 used cash 94 million 2012 increase accounts payable primarily due increased activity improvement days payable outstanding resulting vendor management initiatives • accrued employee compensation accrued liabilities provided cash 231 million used cash 90 million 2013 2012 respectively increase cash provided 2013 primarily due change accrued employee compensation driven increase employee bonus accruals 2013 compared 2012 coupled lower payments employee bonuses 2013 compared 2012 additionally cash improvement accrued liabilities resulted advanced customer payments cash flows operating activities provided 184 billion 151 billion year ended december 31 2012 2011 respectively increase cash flows 328 million primarily due change net operating assets liabilities used less cash 2012 compared 2011 main underlying drivers 2012 compared 2011 changes operating assets liabilities follows • change accounts receivable provided cash 16 million used cash 102 billion 2012 2011 respectively slight change accounts receivable 2012 primarily due improved collections prior year partially offset increase activity change accounts receivable 2011 primarily due increase activity well increase days sales outstanding due temporary invoicing delays resulting implementation enterprise wide software system bj services north america • increase inventory used cash 547 million 641 million 2012 2011 respectively driven increase activity • accrued employee compensation accrued liabilities used cash 90 million provided cash 58 million 2012 2011 respectively net change 148 million primarily due increase payments related employee bonuses earned 2011 paid 2012 coupled lower employee compensation accruals 2012 • income taxes payable used cash 56 million 121 million 2012 2011 respectively change 65 million primarily due decrease income taxes paid 2012 compared 2011 • operating items used cash 213 million 19 million 2012 2011 respectively net change 194 million primarily due increase payments prepaid assets line increased activity increase contributions pension plans investing activities principal recurring investing activity funding capital expenditures ensure appropriate levels types machinery equipment place generate revenue operations expenditures capital assets totaled 209 billion 291 billion 246 billion 2013 2012 2011 respectively majority expenditures machinery equipment continued spending new facilities expansions existing facilities infrastructure projects proceeds disposal assets 455 million 389 million 311 million 2013 2012 2011 respectively disposals related equipment lostinhole property machinery equipment longer used operations sold throughout year 2011 us treasury bills mature resulting receipt proceeds 250 million routinely evaluate potential acquisitions businesses may enhance current operations expand operations new markets product lines may also time sell business operations considered part core business 2013 2012 2011 significant business acquisitions dispositions financing activities net repayments commercial paper shortterm debt 571 million 2013 net borrowing commercial paper shortterm debt 847 million 125 million 2012 2011 respectively 2011 completed private placement 750 million 32 senior notes mature august 2021 resulting net proceeds approximately 742 million deducting underwriting discounts expenses offering used 563 million net proceeds redeem 65 notes full remaining net proceeds senior notes used general corporate purposes addition 2011 repaid 250 million 575 notes matured total debt outstanding december 31 2013 438 billion decrease 535 million compared december 31 2012 total debttocapital defined total debt plus equity ratio 020 december 31 2013 022 december 31 2012 received proceeds 101 million 81 million 183 million 2013 2012 2011 respectively issuance common stock exercise stock options employee stock purchase plan board directors authorized program repurchase common stock time 2013 board directors increased authorization purchase common stock share repurchase program 800 million total remaining authorized amount 20 billion fourth quarter 2013 repurchased 63 million shares common stock average price 5559 per share total 350 million authorization remaining repurchase approximately 165 billion common stock end 2013 2012 2011 repurchase shares common stock january 1 2014 february 7 2014 repurchased 14 million shares common stock average price 5679 per share total 78 million february 7 2014 authorization remaining purchase approximately 157 billion common stock paid dividends 267 million 263 million 261 million 2013 2012 2011 respectively available credit facility december 31 2013 250 billion committed revolving credit facility commercial banks matures september 2016 facility contains certain covenants among things restrict certain merger transactions sale substantially assets significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations facility may accelerated events default include payment defaults lenders facility covenant defaults customary defaults december 31 2013 compliance facility’s covenants direct borrowings committed credit facility 2013 also commercial paper program may issue time 250 billion commercial paper maturity 270 days maximum combined borrowing point time commercial paper program credit facility 250 billion december 31 2013 254 million commercial paper outstanding therefore amount available borrowing facility december 31 2013 2246 billion market conditions change revenue reduced significantly operating costs increase cash flows liquidity could reduced additionally could cause rating agencies lower credit rating ratings triggers would accelerate maturity borrowings committed credit facility however downgrade credit ratings could increase cost borrowings facility could also limit preclude ability issue commercial paper occur would seek alternative sources funding including borrowing facility believe current credit ratings would allow us obtain interim financing existing credit facility currently unforeseen significant needs growth opportunities also believe interim financings could funded subsequent issuances longterm debt equity necessary cash requirements 2014 believe cash hand cash flows operating activities available credit facility provide us sufficient capital resources liquidity manage working capital needs meet contractual obligations fund capital expenditures support development shortterm longterm operating strategies necessary may issue commercial paper shortterm debt fund cash needs us excess cash generated us 2014 expect capital expenditures approximately 20 billion excluding amount related acquisitions expenditures expected used primarily normal recurring items necessary support business operations significant portion capital expenditures adjusted managed us match market demand activity levels 2014 also expect make interest payments 235 million 255 million based debt levels december 31 2013 anticipate making income tax payments 10 billion 11 billion 2014 may repurchase common stock depending market conditions applicable legal requirements liquidity considerations anticipate paying dividends 263 million 273 million 2014 however board directors change dividend policy time defined benefit defined contribution postretirement plans expect contribute 385 million 422 million plans 2014 see note 10 notes consolidated financial statements item 8 herein discussion employee benefit plans contractual obligations table set forth contractual cash obligations december 31 2013 certain amounts included table based estimates assumptions obligations including duration anticipated actions third parties factors contractual cash obligations actually pay future periods may vary reflected table estimates assumptions subjective 1 amounts represent expected cash payments principal amounts related debt including outstanding commercial paper 254 million capital lease obligations amounts debt include unamortized discounts deferred issuance costs expected cash payments interest excluded amounts 2 amounts represent expected cash payments interest longterm debt capital lease obligations 3 represents future minimum payments noncancelable operating leases initial remaining terms one year enter operating leases include renewal options excluded renewal options table unless anticipated exercise renewals 4 purchase obligations include capital improvements well agreements purchase goods services enforceable legally binding specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction 5 estimated income tax liabilities uncertain tax positions settled result expiring statutes audit activity competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate timing particular settlement depend length tax audit related appeals process expiration statute liability settled due statute expiring favorable audit result settlement tax liability would result cash payment 6 include obligations pension postretirement benefits expect make employer contributions 115 million 129 million 2014 offbalance sheet arrangements normal course business customers vendors others entered offbalance sheet arrangements surety bonds performance letters credit bank issued guarantees totaled approximately 15 billion december 31 2013 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements normal operating leases offbalance sheet financing arrangements securitization agreements liquidity trust vehicles synthetic leases special purpose entities materially exposed financing liquidity market credit risk could arise engaged financing arrangements critical accounting estimates preparation consolidated financial statements requires us make estimates judgments affect reported amounts assets liabilities revenue expenses related disclosures well disclosures contingent assets liabilities base estimates judgments historical experience assumptions information believed reasonable circumstances estimates assumptions future events effects subject uncertainty accordingly estimates may change new events occur experience acquired additional information obtained business environment operate changes defined critical accounting estimate one important portrayal either financial condition results operations requires us make difficult subjective complex judgments estimates matters uncertain auditethics committee board directors reviewed critical accounting estimates disclosure presented past three fiscal years made material changes methodology used establish critical accounting estimates believe following critical accounting estimates used preparation consolidated financial statements items within consolidated financial statements require estimation judgment deemed critical defined allowance doubtful accounts determination collectability amounts due customers requires us make judgments estimates regarding customers’ ability pay amounts due us order determine amount valuation allowances required doubtful accounts monitor customers’ payment history current credit worthiness determine collectability reasonably assured also consider overall business climate customers operate provisions doubtful accounts recorded becomes evident customer make required payments either contractual due dates future december 31 2013 2012 allowance doubtful accounts totaled 238 million 4 308 million 6 total gross accounts receivable respectively believe allowance doubtful accounts adequate cover potential bad debt losses current conditions however uncertainties regarding changes financial condition customers either adverse positive could impact amount timing additional provisions doubtful accounts may required five percent change allowance doubtful accounts would impact income taxes approximately 12 million 2013 inventory reserves inventory significant component current assets stated lower cost market requires us record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments estimates forecasts inherently include uncertainties require us make judgments regarding potential future outcomes december 31 2013 2012 inventory reserves totaled 382 million 9 346 million 8 gross inventory respectively believe reserves adequate properly value potential excess slow moving obsolete inventory current conditions significant unanticipated changes estimates forecasts could impact amount timing additional provisions excess slow moving obsolete inventory may required five percent change inventory reserve balance would impact income taxes approximately 19 million 2013 goodwill longlived assets purchase price acquired businesses allocated identifiable assets liabilities based upon estimated fair values acquisition date goodwill excess purchase price fair value tangible identifiable intangible assets liabilities acquired business acquisition goodwill december 31 2013 totaled 597 billion perform annual test goodwill impairment october 1 year reporting units generally based organizational reporting structure determining carrying amount reporting units corporate assets liabilities allocated extent relate operations reporting units tests include qualitative quantitative factors necessary calculate fair value reporting unit using various valuation techniques including market approach comparable transactions approach discounted cash flow dcf methodology market approach comparable transactions approach provide value indications company comparison guideline public companies guideline transactions respectively entail selecting relevant financial information subject company capitalizing amounts using valuation multiples based empirical market observations dcf methodology includes limited assumptions regarding matters discount rates anticipated growth rates expected profitability rates timing expected future cash flows results 2013 test indicated impairments goodwill unanticipated changes including even small revisions assumptions could require provision impairment future period given nature evaluations application specific assets timeframes possible reasonably quantify impact changes assumptions longlived assets include property equipment intangible assets goodwill certain assets comprise significant amount total assets review carrying values assets impairment periodically least annually certain intangible assets whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make judgments regarding longterm forecasts future revenue costs cash flows related assets subject review forecasts uncertain require assumptions demand products services future market conditions technological developments income taxes liability method used determining income tax provisions current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered valuation allowances established reduce deferred tax assets likely portion deferred tax assets realized determining need valuation allowances considered made judgments estimates regarding estimated future taxable income ongoing prudent feasible tax planning strategies estimates judgments include degree uncertainty changes estimates assumptions could require us adjust valuation allowances deferred tax assets historically changes valuation allowances caused major changes business cycle certain countries changes local country law ultimate realization deferred tax assets depends generation sufficient taxable income applicable taxing jurisdictions operate 80 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenue rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability taxing jurisdiction could impact amount income taxes provide given year tax filings various periods subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings resulting change tax liability dependent numerous factors including among others amount nature additional taxes potentially asserted local tax authorities willingness local tax authorities negotiate fair settlement administrative process impartiality local courts number countries business potential changes tax paid one country either produce fail produce offsetting tax change countries experience estimates assumptions used provide future tax assessments proven appropriate however past experience guide potential exists tax resulting resolution current potential future tax controversies may differ materially amount accrued addition aforementioned assessments received various tax authorities also provide taxes uncertain tax positions formal assessments received determination liabilities requires use estimates assumptions regarding future events established adjust amounts information available future event occurs necessitating change reserves changes facts law judicial decisions regarding application existing law favorable audit outcome believe resolution tax matters material effect consolidated financial condition company although resolution could material impact consolidated statements income particular period effective tax rate period resolution occurs pensions postretirement benefit obligations pensions postretirement benefit obligations related expenses calculated using actuarial models methods involves use two critical assumptions discount rate expected rate return assets important elements determining pension expense measuring plan liabilities evaluate critical assumptions least annually necessary utilize third party actuarial firms assist us although considered less critical assumptions used determining benefit obligations related expenses demographic factors like retirement age mortality turnover also evaluated periodically updated reflect actual expected experience discount rate enables us determine expected future cash flows present value measurement date development discount rate largest plans based bond matching model whereby cash flows underlying projected benefit obligation matched yield curve constructed bond portfolio highquality fixedincome securities use lower discount rate would increase present value benefit obligations increase pension expense used weighted average discount rate 40 2013 46 2012 52 2011 determine pension expense 50 basis point reduction weighted average discount rate would increased pension expense projected benefit obligation principal pension plans approximately 8 million 92 million respectively 2013 determine expected rate return plan assets consider current target asset allocations well historical expected future returns various categories plan assets lower rate return would decrease plan assets results higher pension expense assumed weighted average expected rate return plan assets 69 2013 70 2012 72 2011 50 basis point reduction weighted average expected rate return assets principal pension plans would increased pension expense approximately 6 million 2013 new accounting standards updates february 2013 fasb issued asu 201302 reporting amounts reclassified accumulated comprehensive income asu requires entities present separately among items amount change due reclassifications amount due current period comprehensive income adopted new presentation requirements notes financial statements first quarter 2013 see note 12 notes consolidated financial statements item 8 herein additional information july 2012 financial accounting standards board fasb issued update asc 350 intangibles goodwill asu amends guidance asc 35030 testing indefinitelived intangible assets impairment revised guidance permits entity first assess qualitative factors determine whether likely indefinitelived intangible asset impaired basis determining whether necessary perform quantitative impairment test asu effective impairment tests performed fiscal years beginning september 15 2012 adopted asu 2013 impairment testing material impact consolidated financial statements related party transactions significant related party transactions three years ended december 31 2013 forwardlooking statements form 10k including mda certain statements notes consolidated financial statements includes forwardlooking statements within meaning section 27a securities act section 21e exchange act “forwardlooking statement” words “anticipate” “believe” “ensure” “expect” “if” “intend” “estimate” “probable” “project” “forecasts” “predict” “outlook” “aim” “will” “could” “should” “would” “potential” “may” “likely” similar expressions negative thereof intended identify forwardlooking statements forwardlooking statements based assumptions believe reasonable may prove accurate statements include potential impact future transactions acquisition disposition merger joint venture transaction could occur undertake obligation publicly update revise forwardlooking statement expectations regarding business outlook including changes revenue pricing capital spending profitability strategies operations impact common stock repurchases oil natural gas market conditions business plans customers market share contract terms costs availability resources legal economic regulatory conditions environmental matters forecasts regarding matters forwardlooking information subject risks uncertainties could cause actual results differ materially results expected although possible identify factors risks uncertainties include risk factors timing risk factors identified item 1a risk factors set forth time filings sec documents available website sec’s electronic data gathering analysis retrieval system “edgar” httpwwwsecgov item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations “mda” read conjunction consolidated financial statements included item 8 financial statements supplementary data contained herein executive summary baker hughes leading supplier oilfield services products technology systems worldwide oil natural gas industry referred oilfield operations manage oilfield operations four geographic segments consisting north america latin america europeafricarussia caspian middle eastasia pacific industrial services businesses reported fifth segment december 31 2014 baker hughes approximately 62000 employees compared approximately 59400 employees december 31 2013 within oilfield operations primary driver businesses customers’ capital operating expenditures dedicated oil natural gas exploration field development production main products services provided oilfield operations fall one two categories drilling evaluation completion production classification based two major phases constructing oil andor natural gas well drilling phase completion phase products services utilized phase also provide products services downstream chemicals process pipeline services referred industrial services financial results 2014 generated revenue 2455 billion increase 219 billion 10 compared 2013 revenue north america segment 2014 1208 billion increase 12 billion 11 compared 2013 increase segment result higher activity levels us onshore operations improved utilization pricing pressure pumping business growing demand new technologies unconventional plays revenue latin america segment 2014 224 billion decrease 71 million 3 compared 2013 slight reduction segment attributed revenue declines venezuela brazil partially offset revenue growth argentina mexico ecuador revenue middle eastasia pacific meap segment 2014 446 billion increase 597 million 15 compared 2013 strong growth segment driven primarily increased drilling activity across region particular saudi arabia revenue europeafricarussia caspian earc segment 2014 442 billion increase 376 million 9 compared 2013 increase driven mainly revenue growth africa continental europe united kingdom industrial services revenue 136 billion increase 85 million 7 compared 2013 large contributor growth segment acquisition complementary pipeline services business third quarter 2014 net income attributable baker hughes 172 billion 2014 compared 110 billion 2013 operating profit tax increased significantly year due robust activity growth higher incremental profit increased revenue north america meap earc improved profitability latin america north america profit tax increased 498 million 51 compared 2013 addition strong activity levels us onshore increased profitability driven improved utilization pricing pressure pumping operations along growing demand new technologies command higher premium latin america profit tax improved 224 million 339 compared 2013 business realignment performed late 2013 provided improved cost structure 2014 activity levels additionally segment saw higher incremental profit increased revenue mexico argentina earc profit tax increased 30 million 5 compared 2013 profitability increased result activity growth year partially offset 58 million restructuring charge north africa foreign exchange losses particularly russia meap profit tax increased 218 million 48 compared 2013 increase profitability due combination strong activity growth improved profitability iraq prior year incurred business disruption charge 79 million negatively impacted profit tax profitability industrial services segment decreased 16 million 12 result integration expenses related acquisition along increase environmental remediation costs compared prior year halliburton merger agreement november 16 2014 baker hughes halliburton company “halliburton” entered definitive agreement plan merger halliburton acquire outstanding shares baker hughes stock cash transaction terms agreement stockholders baker hughes receive share common stock baker hughes fixed exchange ratio 112 halliburton shares plus 1900 cash transaction subject approvals company’s stockholders regulatory approvals customary closing conditions transaction expected close second half 2015 however baker hughes cannot predict certainty pending merger completed completion transaction subject conditions beyond control baker hughes information merger see note 2 halliburton merger agreement notes consolidated financial statements item 8 herein outlook industry cyclical past cycles driven primarily alternating periods ample supply shortages oil natural gas relative demand oilfield services company revenue dependent spending customers oil natural gas exploration field development production spending dependent number factors including customers’ forecasts future energy demand expectations future energy prices access resources develop produce oil natural gas ability fund capital programs impact new government regulations second half 2014 oil market experienced excess supply result sustained high output tight oil plays north america slowdown demand key consumer regions europe east asia organization petroleum exporting countries opec position late november cut production market imbalance resulted rapid decline oil prices brent west texas intermediate prices dropping near sixyear lows 60 2014 peak highs oil prices continued drop early 2015 changes market conditions clear indicator early stages cycle industry past cycles early days always marked high degree uncertainty capital spending customers remaining highly uncertain result rapid decline commodity prices north america activity levels began decline late december expect based prior cycles activity continue decline throughout 2015 last three downturns dating back 1990s north america rig counts fallen 40 60 period twelve months end january 2015 us onshore oildirected rig count fallen approximately 25 october highs declining faster predicted early january canadian rig count previously expected remain flat first quarter year already trending 10 prior quarter average increased likelihood declines signs early spring break already impacting oilfield activity accelerated pace north america rig count currently trending exit first quarter 2015 approximately 1000 rigs 50 compared fourth quarter average outside north america prior cycles international rig count fallen sharply begins drop steadily couple months first signs weakness appear north america unlike prior cycles already seeing international rig count decline customers beginning defer new projects executing spending reductions 2015 decline expected begin onshore shallow water markets deepwater activity spending national oil companies remaining resilient based expected reduction activity customer spending pricing declines products services potentially occur result excess supply equipment increase customers’ needs cost reductions order maintain economic viability current projects combination reduced activity increased pricing pressure customers result contraction revenue margins 2015 objective cycle remain nimble maintain strong focus asset utilization working capital returns believe well positioned financially strategically proactively adapt changing market conditions rightsizing cost structure reflect expected nearterm activity levels reducing discretionary spending lowering costs within supply chain previously announced late january 2015 undertaking workforce reduction approximately 7000 positions record charge range 160 million 185 million severance first quarter 2015 additionally reviewing operations cost saving consolidation opportunities may result asset impairments workforce reductions although actions reduce cost base still anticipate margin contraction occur globally throughout 2015 international energy agency indicates january 2015 report rebalancing market could begin early second half year however mean return 2014 oil prices market clearly undergone historical change result us oil production growth technology critical differentiator oilfield service providers new environment customers’ need innovative solutions important ever remain committed strategy leveraging strength technology development deliver differentiating new products services designed solve customer’s three biggest challenges efficient well construction optimized well production increase ultimate recovery current market conditions notwithstanding long term outlook industry remains strong world’s demand energy continue rise supply energy continue increase complexity requiring greater service intensity advanced technology oilfield service business environment operate 80 countries helping customers find evaluate drill produce transport process hydrocarbon resources revenue predominately generated sale products services major national independent oil natural gas companies worldwide dependent spending customers oil natural gas exploration field development production spending dependent number factors including customers’ forecasts future energy demand supply access resources develop produce oil natural gas ability fund capital programs impact new government regulations importantly expectations oil gas prices key driver cash flows oil natural gas prices oil natural gas prices summarized table averages daily closing prices periods indicated 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 heavily influenced brent oil prices fluctuated significantly throughout year ranging high 11500bbl june 2014 low 5576bbl december 2014 brent oil prices highest second quarter 2014 geopolitical disputes middle east africa reduced output threatened future production september 2014 oil prices began steadily decline rapidly increasing production tight oil plays north america coupled unfavorable economic data europe asia led negative demand forecasts fears global economic downturn turn caused imbalance market opecs decision late november maintain current crude oil production target despite lower oil prices put additional downward pressure price expectations result brent oil prices exited 2014 reflecting 52 reduction compared peak earlier year north america customer spending highly driven wti oil prices similar brent oil prices fluctuated significantly throughout year highest prices recorded third quarter overall wti oil prices ranged high 10762bbl july 2014 low 5327bbl december 2014 high prices third quarter result wti crude increasingly displacing brentquality crude imports north america increased us oil production improved crudebyrail pipeline infrastructure north america natural gas prices measured henry hub natural gas spot price averaged 435mmbtu 2014 representing 17 increase prior year natural gas prices average first two months year settling closer average remainder year december 2014 based forecasts increased production exceeding demand natural gas prices began falling declined low 275mmbtu according us department energy “doe” working natural gas storage end 2014 3220 billion cubic feet bcf 78 232 bcf corresponding week 2013 baker hughes rig count baker hughes rig counts important business barometer drilling industry suppliers drilling rigs active consume products services produced oil service industry rig count trends governed exploration development spending oil gas companies turn influenced current future price expectations oil gas therefore counts may reflect relative strength stability energy prices overall market activity however counts solely relied specific pervasive conditions may exist affects overall energy prices market activity baker hughes providing rig counts public since 1944 gather relevant data field service personnel obtain necessary data routine visits various rigs customers contractors andor outside sources base classification well either oil natural gas primarily upon filings made operators relevant jurisdiction data compiled distributed various wire services trade associations published website believe counting process resulting data reliable however subject ability obtain accurate timely information rig counts compiled weekly us canada monthly international rigs published international rig counts include rigs drilling certain locations russia caspian region iran onshore china information readily available rigs us canada counted active day count taken well drilled started drilling completed well anticipated sufficient depth potential consumer drill bits international areas rigs counted weekly basis deemed active drilling activities occurred majority week weekly results averaged month published accordingly rig count include rigs transit one location another rigging used nondrilling activities including production testing completion workover expected significant consumers drill bits rig counts summarized table averages periods indicated 2014 compared 2013 rig count north america increased 6 2014 compared 2013 primarily driven 9 growth oildirected rigs oildirected rig count increased 11 us result increased exploration production spending decreased 6 canada many operators curtailed oildirected drilling plans second half 2014 due high oil price differentials compared wti wet weather southern alberta saskatchewan natural gasdirected rig count north america declined 2 reflecting 13 decrease us partially offset 34 increase canada natural gasdirected drilling us negatively impacted continued weakness north america natural gas prices discouraged new investment natural gas fields canada increase natural gasdirected rigs driven drilling condensate rich zones alberta service oil sands drilling activity overall canada rig counts increased 7 2014 compared 2013 outside north america rig count increased 3 2014 compared 2013 rig count latin america decreased 5 result reduced rig activity brazil mexico partially offset increase activity emerging unconventional plays argentina north sea rig count decreased 5 primarily due decline rig activity norway rig count continental europe increased 13 higher activity turkey romania africa rig count increased 7 primarily due higher activity kenya angola chad rig count increased 9 middle east due higher activity saudi arabia oman kuwait slightly offset reduction iraq due political unrest rig count asia pacific increased 3 due increased activity offshore china partially offset activity reduction indonesia malaysia new zealand 2013 compared 2012 rig count north america decreased 7 2013 compared 2012 primarily driven 23 decline natural gasdirected rigs oildirected rig count declined 1 natural gasdirected rig count reflected 31 decrease us offset 18 increase canada oildirected rig count increased 1 us decreased 11 canada natural gasdirected drilling us negatively impacted continued weakness north america natural gas prices discouraged new investment natural gas fields canada increase natural gasdirected rigs driven drilling condensate rich zones alberta service oil sands drilling activity canada many operators curtailed oildirected drilling plans second half 2013 due high oil price differentials compared wti wet weather southern alberta saskatchewan overall canada rig counts decreased 3 2013 compared 2012 outside north america rig count increased 5 2013 compared 2012 rig count latin america relatively flat increased rig activity argentina ecuador offset reductions brazil colombia rig count continental europe increased 18 higher activity turkey balkans sakhalin north sea rig count increased 5 primarily due increased activity norway africa rig count increased primarily due resumption drilling activities libya well higher activity algeria kenya rig count increased 5 middle east due higher activity iraq abu dhabi pakistan offset reduction egypt due political unrest baker hughes well count baker hughes began providing us well count data oil natural gas industry july 2013 baker hughes well count extension baker hughes rig count provides quarterly census number new onshore oil natural gas wells drilling began spud us baker hughes well count includes wells identified significant consumers oilfield services supplies excludes wells categorized workover plugged abandoned completed well count trends governed oil company exploration development spending us turn influenced current expected price oil natural gas well counts therefore may reflect strength stability energy prices however many factors influence well count including new technologies pad drilling weather seasonal spending changes local regulations believe counting process resulting data reliable however subject ability obtain accurate timely information 2014 37508 wells spud land us compares 35676 wells spud 2013 increase 5 results operations discussions relating significant line items consolidated statements income based available information represent analysis significant changes events impact comparability reported amounts appropriate identified specific events changes affect comparability trends reasonably practicable quantified impact items addition discussions revenue cost revenue total basis business drivers product sales services similar dollar amounts tabulations section millions dollars unless otherwise stated revenue profit tax revenue profit tax five operating segments provided performance segments evaluated based profit tax defined income taxes following net interest expense corporate expenses certain gains losses allocated segments 2014 certain north african entities previously reported middle eastasia pacific segment realigned reported within europeafricarussia caspian segment reflect manage business accordingly prior segment disclosures recast reflect realignment 2014 compared 2013 revenue 2014 increased 22 billion 10 compared 2013 segments except latin america experienced revenue growth 2014 north america largest contributor likewise revenue grew across product lines particular drilling services artificial lift pressure pumping profit tax operations 2014 increased 954 million 43 compared 2013 strong activity growth north america meap improved profitability latin america contributed significant year increase profit tax increase also driven improved utilization improved contractual terms pressure pumping us onshore operations north america north america revenue 2014 increased 12 billion 11 compared 2013 rig counts increasing 6 prior year average increase revenue driven almost entirely us onshore operations higher activity levels improved utilization market conditions pressure pumping along increased demand new technologies unconventional plays contributed solid growth across districts product lines largest contributor revenue growth pressure pumping operations market conditions gradually improved year reversing supply hydraulic fracturing equipment combined multiyear improvement initiative product line resulted improved utilization increased efficiencies artificial lift drilling services drill bit product lines also delivered exceptionally strong growth demand increased new technologies specifically designed unconventional plays revenue canada declined 2014 compared 2013 part due 6 decline oildirected rig count significant driver operations country addition experienced decline canadian revenue pressure pumping product line due lower demand hydraulic fracturing partially offset strong growth drill bit artificial lift product lines revenue gulf mexico declined slightly despite relatively flat rig count 2014 compared 2013 revenue decline attributable activity delays primarily drilling stimulation resulted unusually strong ocean currents second half 2014 north america profit tax 1466 million 2014 increase 498 million 51 compared 2013 addition strong activity levels us onshore increased profitability driven improved contractual terms utilization pressure pumping operations well efficiency gains cost savings recognized part pressure pumping profit improvement plan growing demand new technologies command higher premium also contributed improvement gulf mexico profitability improved despite decline revenue result favorable mix revenue increase deepwater completion systems canada profitability decreased line revenue decline costs savings achieved pressure pumping offset foreign exchange impact weakening canadian dollar profitability 2014 negatively impacted 29 million severance costs 13 million costs associated technology royalty agreement latin america latin america revenue decreased 71 million 3 2014 compared 2013 revenue reductions brazil venezuela partially offset increased revenue throughout rest region revenue declined across product lines brazil due lower activity levels 2014 evidenced 27 reduction rig count compared 2013 revenue venezuela decreased across product lines result decision may 2014 move official rate 63 bolivares fuertes “bsf” per us dollar sicad 2 rate approximately 50 bsf per us dollar decreases partially offset increased activity share gains pressure pumping completion services product lines argentina unconventional activity continued grow offshore drilling mexicos marine region artificial lift upstream chemicals product lines ecuador latin america profit tax increased 224 million 339 2014 compared 2013 significant improvement profitability primarily attributed cost reduction strategies implemented throughout region second half 2013 particular focus brazil 2013 includes charge 19 million severance related actions increased activity argentina mexico ecuador also contributed profitability improvement 2014 profitability also impacted foreign exchange losses 12 million 23 million 2014 2013 respectively due currency devaluation venezuela operations venezuela could impacted devaluations local currency however believe potential impact would material consolidated financial statements europeafricarussia caspian “earc” earc revenue increased 376 million 9 2014 compared 2013 2014 delivered strong revenue growth africa continental europe russia caspian revenue negatively impacted unfavorable change exchange rates several currencies including russian ruble relative us dollar africa revenue increased result activity growth share gains across region predominately west africa increases slightly offset decline activity north africa resulting industrywide disruptions libya due political instability country third quarter 2014 continental europe revenue growth driven increased demand completion production product lines north sea drilling evaluation activity increases united kingdom entirely offset reduced activity norway russia caspian region revenue growth driven increased activity completion production product lines earc profit tax increased 30 million 5 2014 compared 2013 incremental profitability growth increased revenue almost entirely offset 58 million charge associated restructuring operations north africa impairment certain assets mainly due recent disruption operations libya profitability also negatively impacted foreign exchange losses result devaluation several currencies including russian ruble middle eastasia pacific “meap” meap revenue increased 597 million 15 2014 compared 2013 corresponding rig count increased 7 period posted strong revenue growth virtually geographies notably saudi arabia iraq arabian gulf southeast asia china saudi arabia revenue increases primarily related activity growth integrated operations contracts addition experienced strong demand drilling services completion services product lines average rig count reached another record 2014 24 compared prior year average iraq revenue increased 2014 prior year 2013 negatively impacted significant disruption operations fourth quarter partially offset decline activity 2014 due demobilization major contract revenue increased arabian gulf due increased demand drilling services pressure pumping product lines united arab emirates india within asia pacific revenue growth strongest south east asia china predominately drilling services product line meap profit tax improved 218 million 48 2014 compared 2013 primary driver increase profit tax higher incremental profit increased revenue across segment notably saudi arabia iraq experienced favorable shift product mix higher proportion revenue derived drilling services product line profit tax 2013 negatively impacted 79 million losses iraq related significant disruption operations expenses associated personnel movements security measures nonrecurring items industrial services industrial services revenue increased 7 profit tax decreased 12 2014 compared 2013 increase revenue primarily driven acquisition complementary pipeline services business third quarter 2014 profitability segment decreased result integration expenses related acquisition along increase environmental costs compared prior year 2013 compared 2012 revenue 2013 increased 1 billion 5 compared 2012 increase coming predominantly eastern hemisphere continue grow operations middle east asia pacific africa russia caspian north america revenue growth gulf mexico essentially offset lower revenue canada profit tax operations 2013 decreased 278 million 11 compared 2012 despite increase revenue profit tax significantly impacted low equipment utilization resulting capacity pressure pumping business north america decline activity lower prices drilling services brazil reduced pricing increased startup costs associated new drilling contract norway additionally fourth quarter 2013 incurred costs 79 million iraq related significant disruption operations increased personnel security costs nonrecurring items reductions profit tax partially offset asia pacific experienced significant improvement profitability throughout region driven increased activity improved mix product sales 2012 profit tax included charges 63 million 43 million related impairment certain information technology assets primarily associated internally developed software assets 20 million related closure chemical manufacturing facility uk information technology supply chain organizations support global operations charges allocated segments amount impairment charges recorded segment 2012 follows north america 33 million latin america 7 million europeafricarussia caspian 11 million middle eastasia pacific 10 million industrial services 2 million north america north america revenue flat 2013 compared 2012 despite rig counts declining 7 revenue gulf mexico increased inline rig count increase 17 compared 2012 main drivers revenue growth gulf mexico increased activity drilling completion fluids pressure pumping completion systems wireline services product lines despite 9 decline us onshore rig count 2013 compared 2012 driven lower natural gasdirected rigs total revenue us onshore business flat year 2013 experienced revenue growth us onshore drilling services artificial lift completion systems product lines however increases mostly offset reduced revenue drilling completion fluids pressure pumping product lines although experienced share gains 2013 compared 2012 pressure pumping product line across several basins us revenue declined pressure pumping business due continued oversupply pressure pumping capacity industry revenue canada declined 2013 compared 2012 part due 11 decline oildirected rig count significant driver operations country revenue canada also negatively impacted decline pressure pumping product line experienced lower demand hydraulic fracturing unfavorable change canadian exchange rate relative us dollar also contributed year revenue decline north america profit tax 968 million 2013 decrease 300 million 24 compared 2012 profits us onshore canadian operations significantly impacted continued oversupply pressure pumping equipment resulting low fleet utilization increased competition north america profit tax reduced higher depreciation amortization expense 64 million higher compensation costs reductions partially offset improved profits gulf mexico resulting favorable mix sales deepwater completion systems pressure pumping services well lower costs raw materials efficiency gains cost savings recognized part pressure pumping profit improvement plan 2012 north america profit tax negatively impacted impairment charges associated information technology assets facility closure discussed previously latin america latin america revenue decreased 92 million 4 2013 compared 2012 primary drivers reduced revenue brazil venezuela partially offset increased revenue throughout rest region activity declined across almost product lines brazil part due 23 reduction rig count compared 2012 also due new drilling services contract lower activity pricing revenue venezuela decreased across almost product lines due lower activity levels impact devaluation local currency decreases partially offset increased revenue drilling services artificial lift product lines ecuador pressure pumping wireline services argentina pressure pumping drilling services mexico latin america profit tax decreased 131 million 66 2013 compared 2012 main drivers behind reduction lower revenue pricing drilling services product line brazil expenses associated demobilization equipment brazil lower activity levels venezuela severance charges 32 million throughout latin america february 2013 venezuelas currency devalued prior exchange rate 43 bolivars fuertes per us dollar 63 bolivars fuertes per us dollar applies local currency denominated balances impact devaluation loss 23 million recorded mga expense first quarter 2013 2012 latin america profit tax negatively impacted impairment charges associated information technology assets facility closure discussed previously europeafricarussia caspian earc revenue increased 231 million 6 2013 compared 2012 revenue increased africa russia caspian europe remaining flat increase africa predominantly nigeria drilling services completion systems product lines experienced increased activity well north africa resumption activity libya benefited drilling services wireline services completion systems product lines increased activity algeria share gains mauritania also contributed increased revenue compared 2012 growth russia caspian due increased demand drilling services completion systems pressure pumping artificial lift product lines europe revenue flat compared 2012 new drilling services contract higher activity pressure pumping wireline services norway offset completion significant projects eastern mediterranean lower activity across drilling evaluation product lines united kingdom earc profit tax decreased 14 million 2 2013 compared 2012 europe profit margins declined due reduced pricing increased startup costs associated new drilling services contract norway europe profitability also impacted reduced drilling evaluation activity united kingdom completion projects eastern mediterranean declines partially mitigated improved profits africa russia caspian primarily associated higher revenue 2012 earc profit tax negatively impacted impairment charges associated information technology assets facility closure discussed previously middle eastasia pacific meap revenue increased 760 million 25 2013 compared 2012 corresponding rig count increased 4 period middle east asia pacific posted strong revenue growth geographies notably iraq saudi arabia arabian gulf southeast asia china iraq revenue increased due growth integrated services contracts however iraq revenue negatively impacted fourth quarter 2013 due significant disruption operations saudi arabia saw significant increase revenue due higher demand drilling services pressure pumping wireline services product lines well growth integrated services contract revenue increased arabian gulf due increased demand drilling services wireline services product lines united arab emirates well wireline services india within asia pacific revenue growth strongest south east asia drilling services completion systems pressure pumping indonesia china experienced increased activity drilling services demand wireline services grew papua new guinea meap profit tax increased 163 million 55 2013 compared 2012 primary driver increase profit tax higher incremental profit increased revenue asia pacific lesser extent middle east experienced favorable shift product mix higher proportion revenue derived drilling services completion systems product lines profit tax 2013 also benefited ongoing profit improvement initiatives asia pacific improvements offset 79 million losses iraq related significant disruption operations expenses associated personnel movements security measures nonrecurring items 2012 meap profit tax negatively impacted impairment charges associated information technology assets facility closure discussed previously industrial services industrial services revenue increased 5 profit tax increased 3 2013 compared 2012 increase revenue primarily driven increased demand process pipeline business increase profit tax due revenue increase offset higher compensation expenses 2012 industrial services profit tax negatively impacted impairment charges associated information technology assets facility closure discussed previously costs expenses table details certain consolidated statement income data percentage revenue cost revenue cost revenue percentage revenue 80 83 2014 2013 respectively improvement cost revenue percentage revenue due primarily continued improvement us onshore pressure pumping business resulted higher asset utilization organizational efficiencies well improved contractual terms latin america margins improved due cost reduction strategies implemented throughout region second half 2013 margins meap segment improved higher incremental profit increased revenue combined favorable shift product mix reduced disruptions iraq operations 2014 also contributed lower cost revenue meap segment earc segment profitability increased continental europe united kingdom africa partially offset restructuring charges 58 million associated operations north africa primarily disruptions libya improvements partially offset 113 million increased depreciation expense across segments except latin america 29 million severance charges north america 29 million costs associated technology royalty agreement cost revenue percentage revenue 83 81 2013 2012 respectively increase cost revenue percentage revenue due primarily lower margins pressure pumping product line north america result overcapacity pressure pumping industry additionally depreciation expense across segments increased cost revenue 160 million 2013 compared 2012 latin america lower pricing drilling services contract brazil led increase cost revenue relative revenue europe reduced pricing increased startup costs new drilling services contract norway decreased margins well unfavorable change sales mix margins middle east negatively impacted third party costs related iraq integrated contracts cost revenue negatively impacted disruption operations iraq fourth quarter 2013 margins favorably impacted higher incremental profit revenue asia pacific improvement sales mix africa russia caspian gulf mexico research engineering research engineering expenses increased 10 2014 compared 2013 continued commitment invest research product development required meet customers need innovative new products emerging technologies focusing lowering cost well construction optimizing well production increasing ultimate recoveries result research development activities 2014 commercially launched 160 new products services research engineering expenses increased 12 2013 compared 2012 2013 continued ramp research development activities technology centers resulted higher personnel material costs result research development activities 2013 commercially launched 100 new products services committed expanding core services include critical capabilities emerging technologies marketing general administrative marketing general administrative “mga” expenses decreased 3 2014 compared 2013 mga expenses 2014 includes net gain 34 million recognized deconsolidation jointly owned legal entity discussion see note 3 acquisitions deconsolidation notes consolidated financial statements item 8 herein cost savings experienced across organization mostly offset charge 14 million related impairment technology investment 11 million merger related expenses also included mga 2014 2013 foreign exchange losses 12 million 23 million respectively due currency devaluation venezuela mga expenses decreased 1 2013 compared 2012 mga expenses 2013 decreased result nonrecurring charges recorded 2012 including 43 million related impairment certain information technology assets well winding worldwide integration efforts subsequent acquisition bj services 2010 conclusion integration efforts resulted decreased costs related technology project management personnel led improved efficiencies among global operations support functions reduction mga largely offset loss 23 million due currency devaluation venezuela higher salaries wage costs personnel foreign exchange losses caused unfavorable movement exchange rates foreign currencies us dollar litigation settlement second quarter 2014 recorded charge 62 million related litigation settlements wage hour lawsuits discussion see note 13 commitments contingencies litigation notes consolidated financial statements item 8 herein interest expense net interest expense net interest income 232 million 2014 remained relatively flat compared 234 million 2013 interest expense net interest income increased 24 million compared 2012 primarily due reduction capitalized interest 2013 corresponds decrease capital expenditures income taxes total income tax expense 896 million 612 million 665 million 2014 2013 2012 respectively effective tax rate operating profits 2014 2013 2012 341 357 336 respectively 2014 effective tax rate lower us statutory income tax rate 35 due lower rates certain international operations partially offset state income taxes adjustments prior years’ tax positions 2013 effective tax rate higher us statutory income tax rate 35 due higher rates certain international operations primarily resulting foreign losses tax benefit state income taxes partially offset adjustments prior years’ tax positions 2012 effective tax rate lower us statutory income tax rate 35 due lower rates tax certain international operations adjustments prior years tax positions partially offset state income taxes compliance business 80 countries including approximately 18 40 countries lowest scores transparency international’s corruption perception index survey 2014 indicates high levels corruption devote significant resources development maintenance communication enforcement business code conduct antibribery compliance policies internal control processes procedures compliance related policies notwithstanding devotion resources part consequence thereof time discover receive information alleging potential violations laws regulations including fcpa policies processes procedures conduct timely internal investigations potential violations take appropriate action depending upon outcome investigation anticipate devotion significant resources compliancerelated issues including necessity investigations continue aspect business number countries oil natural gas exploration development production take place conduct operations compliancerelated issues limited ability business raised cost operating countries order provide products services countries may future utilize ventures third parties sell products distributors otherwise modify business approach order improve ability conduct business accordance applicable laws regulations business code conduct bestinclass global ethics compliance program “compliance program” based core values integrity performance teamwork learning courage ii standards contained business code conduct iii laws countries operate compliance program referenced within company “c2” “completely compliant” completely compliant theme intended establish proper toneatthetop throughout company employees consistently reminded play crucial role ensuring company always conducts business ethically legally safely highlights compliance program include following • comprehensive internal policies areas facilitating payments travel entertainment gifts charitable donations connected nonus government officials payments nonus commercial sales representatives use nonus police military organizations security purposes addition countryspecific guidance customs standards visa processing export reexport controls economic sanctions antiboycott laws • comprehensive employee compliance training program covering substantially employees • due diligence procedure commercial sales processing professional agents enhanced process classifying distributors • special compliance committee made senior officers meets less year review oversight reports active commercial sales representatives • continued reduction use commercial sales representatives processing agents including reduction customs agents • use technology monitor report compliance matters including webbased antiboycott reporting tool global trade management software tool • compliance governance committee includes senior officers company reviews effectiveness compliance processes controls companys global compliance program including areas covered business code conduct • program designed encourage reporting ethics compliance matter without fear retaliation including worldwide business helpline operated third party currently available tollfree 150 languages ensure helpline easily accessible employees language • centralized finance organization including enterprisewide accounting system companywide policies addition corporate audit function incorporated anticorruption procedures audits certain countries also conduct fcpa risk assessments legal audit procedures • continue work ensure adequate legal compliance coverage around world including coordination compliance advice customized training across regions countries business • centralized human resources function including consistent standards prehire screening employees screening existing employees prior promoting positions may exposed corruptionrelated risks uniform policy new hire training liquidity capital resources objective financing business maintain sufficient liquidity adequate financial resources financial flexibility order fund requirements business december 31 2014 cash equivalents 174 billion approximately 131 billion held foreign subsidiaries substantial portion cash held foreign subsidiaries december 31 2014 reinvested international operations intent use cash among things fund operations foreign subsidiaries decide later date repatriate funds us may required provide taxes certain funds based applicable us tax rates net foreign tax credits committed revolving credit facility commercial banks related commercial paper program maximum combined borrowing time credit facility commercial paper program 250 billion december 31 2014 commercial paper outstanding therefore amount available borrowing facility december 31 2014 250 billion believe cash hand cash flows generated operations available credit facility including issuance commercial paper provide sufficient liquidity manage global cash needs 2014 used cash pay variety activities including working capital needs capital expenditures acquisitions repurchase common stock payment dividends cash flows cash flows provided used type activity follows years ended december 31 operating activities cash flows operating activities provided 295 billion 316 billion years ended december 31 2014 2013 respectively cash flows operating activities decreased 208 million 2014 primarily due change net operating assets liabilities used cash 2014 compared 2013 partially offset increase net income main underlying drivers 2014 compared 2013 changes operating assets liabilities follows • increase accounts receivable used cash 524 million 453 million 2014 2013 respectively increase accounts receivable 2014 primarily due increase activity corresponding revenue growth partially offset improved collections evidenced decrease days sales outstanding defined average number days net trade receivables outstanding based quarterly revenue • increase inventory used cash 259 million 120 million 2014 2013 respectively driven increase activity levels • increase accounts payable provided cash 291 million 845 million 2014 2013 respectively increase accounts payable 2014 primarily due increase activity continuation vendor management initiatives • accrued employee compensation accrued liabilities provided cash 115 million 231 million 2014 2013 respectively decrease cash provided 2014 2013 primarily due higher payments employee bonuses 2014 compared 2013 cash flows operating activities provided 316 billion 184 billion year ended december 31 2013 2012 respectively cash flows operating activities increased 133 billion 2013 primarily due change net operating assets liabilities used less cash 2013 compared 2012 main underlying drivers 2013 compared 2012 changes operating assets liabilities follows • increase accounts receivable used cash 453 million provided cash 16 million 2013 2012 respectively increase accounts receivable 2013 primarily due increase activity corresponding revenue growth partially offset improved collections evidenced decrease days sales outstanding • increase inventory used cash 120 million 547 million 2013 2012 respectively driven increase activity levels partially offset improved inventory utilization • increase accounts payable provided 845 million cash 2013 used cash 94 million 2012 increase accounts payable primarily due increased activity improvement days payable outstanding resulting vendor management initiatives • accrued employee compensation accrued liabilities provided cash 231 million used cash 90 million 2013 2012 respectively increase cash provided 2013 primarily due change accrued employee compensation driven increase employee bonus accruals 2013 compared 2012 coupled lower payments employee bonuses 2013 compared 2012 additionally cash improvement accrued liabilities resulted advanced customer payments investing activities principal recurring investing activity funding capital expenditures ensure appropriate levels types machinery equipment place generate revenue operations expenditures capital assets totaled 179 billion 209 billion 291 billion 2014 2013 2012 respectively majority expenditures machinery equipment also includes expenditures new facilities expansions existing facilities infrastructure projects proceeds disposal assets 437 million 455 million 389 million 2014 2013 2012 respectively disposals related equipment lostinhole property machinery equipment longer used operations sold throughout year routinely evaluate potential acquisitions businesses may enhance current operations expand operations new markets product lines may also time sell business operations considered part core business 2014 paid 314 million acquisitions net cash acquired 7 million 2013 2012 significant business acquisitions dispositions merger agreement halliburton described note 2 halliburton merger agreement notes consolidated financial statements item 8 herein restrictions ability acquire dispose businesses merger pending financing activities net repayments commercial paper shortterm debt 248 million 571 million 2014 2013 respectively net borrowing commercial paper shortterm debt 847 million 2012 total debt outstanding december 31 2014 413 billion decrease 248 million compared december 31 2013 total debttocapital defined total debt plus equity ratio 018 december 31 2014 020 december 31 2013 received proceeds 216 million 101 million 81 million 2014 2013 2012 respectively issuance common stock exercise stock options employee stock purchase plan board directors authorized program repurchase common stock time 2013 board directors increased authorization purchase common stock share repurchase program 800 million 2014 repurchased 91 million shares common stock average price 6575 per share total 600 million authorization remaining repurchase approximately 105 billion common stock end 2014 2013 repurchased 63 million shares common stock average prices 5559 per share total 350 million 2012 repurchase shares common stock paid dividends 279 million 267 million 263 million 2014 2013 2012 respectively merger agreement halliburton described note 2 halliburton merger agreement notes consolidated financial statements item 8 herein generally agreed repurchase shares common stock increase quarterly dividend merger pending available credit facility committed revolving credit facility “credit facility” commercial banks related commercial paper program maximum combined borrowing time credit facility commercial paper program 25 billion credit facility matures september 2016 contains certain covenants among things restrict certain merger transactions sale substantially assets significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations credit facility may accelerated events default include payment defaults lenders credit facility covenant defaults customary defaults compliance credit facility’s covenants direct borrowings credit facility 2014 commercial paper program may issue time 25 billion commercial paper maturities 270 days amount available borrow credit facility reduced amount commercial paper outstanding december 31 2014 outstanding borrowings commercial paper program market conditions change revenue reduced significantly operating costs increase cash flows liquidity could reduced additionally could cause rating agencies lower credit rating ratings triggers would accelerate maturity borrowings committed credit facility however downgrade credit ratings could increase cost borrowings facility could also limit preclude ability issue commercial paper occur would seek alternative sources funding including borrowing facility believe current credit ratings would allow us obtain interim financing existing credit facility currently unforeseen significant needs cash requirements 2015 believe cash hand cash flows operating activities available credit facility provide us sufficient capital resources liquidity manage working capital needs meet contractual obligations fund capital expenditures dividends support development shortterm longterm operating strategies necessary may issue commercial paper shortterm debt fund cash needs us excess cash generated us 2015 expect capital expenditures approximately 14 billion excluding amount related acquisitions expenditures expected used primarily normal recurring items necessary support business significant portion capital expenditures adjusted managed us match market demand activity levels also anticipate making income tax payments range 350 million 450 million 2015 defined benefit defined contribution postretirement plans expect contribute 350 million 390 million plans 2015 see note 12 employee benefit plans notes consolidated financial statements item 8 herein discussion may 2014 board directors approved 002 per share increase quarterly cash dividend 017 per share common stock august 2014 holders record previous quarters dividend 015 per share common stock anticipate paying dividends range 287 million 297 million 2015 however board directors change dividend policy time merger agreement halliburton described note 2 halliburton merger agreement notes consolidated financial statements item 8 herein agreed increase quarterly dividend merger pending contractual obligations table set forth contractual cash obligations december 31 2014 certain amounts included table based estimates assumptions obligations including duration anticipated actions third parties factors contractual cash obligations actually pay future periods may vary reflected table estimates assumptions subjective 1 amounts represent expected cash payments principal amounts related debt including capital lease obligations amounts debt include unamortized discounts deferred issuance costs expected cash payments interest excluded amounts 2 amounts represent expected cash payments interest longterm debt capital lease obligations 3 represents future minimum payments noncancelable operating leases initial remaining terms one year enter operating leases include renewal options excluded renewal options table unless anticipated exercise renewals 4 purchase obligations include capital improvements well agreements purchase goods services enforceable legally binding specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction 5 estimated income tax liabilities uncertain tax positions settled result expiring statutes audit activity competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate timing particular settlement depend length tax audit related appeals process expiration statute liability settled due statute expiring favorable audit result settlement tax liability would result cash payment 6 amount include expected contributions pension postretirement benefit plans 85 million 100 million majority contributions relate amounts greater necessary meet minimum funding requirements would considered contractual obligation offbalance sheet arrangements normal course business customers vendors others entered offbalance sheet arrangements surety bonds performance letters credit bank issued guarantees totaled approximately 13 billion december 31 2014 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements december 31 2014 material offbalance sheet financing arrangements normal operating leases materially exposed financing liquidity market credit risk could arise engaged financing arrangements critical accounting estimates preparation consolidated financial statements requires us make estimates judgments affect reported amounts assets liabilities revenue expenses related disclosures well disclosures contingent assets liabilities base estimates judgments historical experience assumptions information believed reasonable circumstances estimates assumptions future events effects subject uncertainty accordingly estimates may change new events occur experience acquired additional information obtained business environment operate changes defined critical accounting estimate one important portrayal either financial condition results operations requires us make difficult subjective complex judgments estimates matters uncertain auditethics committee board directors reviewed critical accounting estimates disclosure presented past three fiscal years made material changes methodology used establish critical accounting estimates believe following critical accounting estimates used preparation consolidated financial statements items within consolidated financial statements require estimation judgment deemed critical defined allowance doubtful accounts determination collectability amounts due customers requires us make judgments estimates regarding customers’ ability pay amounts due us order determine amount valuation allowances required doubtful accounts monitor customers’ payment history current credit worthiness determine collectability reasonably assured also consider overall business climate customers operate provisions doubtful accounts recorded becomes evident customer make required payments either contractual due dates future december 31 2014 2013 allowance doubtful accounts totaled 224 million 4 238 million 4 total gross accounts receivable respectively believe allowance doubtful accounts adequate cover potential bad debt losses current conditions however uncertainties regarding changes financial condition customers either adverse positive could impact amount timing additional provisions doubtful accounts may required five percent change allowance doubtful accounts would impact income taxes approximately 11 million 2014 inventory reserves inventory significant component current assets stated lower cost market requires us record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments estimates forecasts inherently include uncertainties require us make judgments regarding potential future outcomes december 31 2014 2013 inventory reserves totaled 319 million 7 382 million 9 gross inventory respectively believe reserves adequate properly value potential excess slow moving obsolete inventory current conditions significant unanticipated changes estimates forecasts could impact amount timing additional provisions excess slow moving obsolete inventory may required five percent change inventory reserve balance would impact income taxes approximately 16 million 2014 goodwill longlived assets purchase price acquired businesses allocated identifiable assets liabilities based upon estimated fair values acquisition date goodwill excess purchase price fair value tangible identifiable intangible assets liabilities acquired business acquisition goodwill december 31 2014 2013 totaled 608 billion 597 billion respectively perform annual test goodwill impairment october 1 year reporting units five reportable segments option performing qualitative quantitative assessment determine impairment occurred qualitative assessment indicates likely fair value reporting unit less carrying amount would required perform quantitative impairment test goodwill 2014 performed qualitative assessment annual goodwill impairment test 2013 2012 quantitative assessment determination impairment made comparing carrying amount reporting unit fair value impairments goodwill three years ended december 31 2014 determining carrying amount reporting units corporate assets liabilities allocated extent relate operations reporting units impairment tests include qualitative quantitative factors necessary calculate fair value reporting unit using various valuation techniques including market approach comparable transactions approach discounted cash flow dcf methodology market approach comparable transactions approach provide value indications company comparison guideline public companies guideline transactions respectively entail selecting relevant financial information subject company capitalizing amounts using valuation multiples based empirical market observations dcf methodology includes limited assumptions regarding matters discount rates anticipated growth rates expected profitability rates timing expected future cash flows unanticipated changes including even small revisions assumptions could require provision impairment future period given nature evaluations application specific assets timeframes possible reasonably quantify impact changes assumptions longlived assets include property equipment intangible assets goodwill certain assets comprise significant amount total assets review carrying values assets impairment periodically least annually certain intangible assets whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make judgments regarding longterm forecasts future revenue costs cash flows related assets subject review forecasts uncertain require assumptions demand products services future market conditions technological developments income taxes liability method used determining income tax provisions current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered valuation allowances established reduce deferred tax assets likely portion deferred tax assets realized determining need valuation allowances considered made judgments estimates regarding estimated future taxable income ongoing prudent feasible tax planning strategies estimates judgments include degree uncertainty changes estimates assumptions could require us adjust valuation allowances deferred tax assets historically changes valuation allowances caused major changes business cycle certain countries changes local country law ultimate realization deferred tax assets depends generation sufficient taxable income applicable taxing jurisdictions operate 80 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenue rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability taxing jurisdiction could impact amount income taxes provide given year tax filings various periods subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings resulting change tax liability dependent numerous factors including among others amount nature additional taxes potentially asserted local tax authorities willingness local tax authorities negotiate fair settlement administrative process impartiality local courts number countries business potential changes tax paid one country either produce fail produce offsetting tax change countries experience estimates assumptions used provide future tax assessments proven appropriate however past experience guide potential exists tax resulting resolution current potential future tax controversies may differ materially amount accrued addition aforementioned assessments received various tax authorities also provide taxes uncertain tax positions formal assessments received determination liabilities requires use estimates assumptions regarding future events established adjust amounts information available future event occurs necessitating change reserves changes facts law judicial decisions regarding application existing law favorable audit outcome believe resolution tax matters material effect consolidated financial condition company although resolution could material impact consolidated statements income particular period effective tax rate period resolution occurs pensions postretirement benefit obligations pensions postretirement benefit obligations related expenses calculated using actuarial models methods involves use two critical assumptions discount rate expected rate return assets important elements determining pension expense measuring plan liabilities evaluate critical assumptions least annually necessary utilize third party actuarial firms assist us although considered less critical assumptions used determining benefit obligations related expenses demographic factors like retirement age mortality turnover also evaluated periodically updated reflect actual expected experience discount rate enables us determine expected future cash flows present value measurement date development discount rate largest plans based bond matching model whereby cash flows underlying projected benefit obligation matched yield curve constructed bond portfolio highquality fixedincome securities use lower discount rate would increase present value benefit obligations increase pension expense used weighted average discount rate 45 2014 40 2013 46 2012 determine pension expense 50 basis point reduction weighted average discount rate would increased pension expense projected benefit obligation principal pension plans approximately 3 million 108 million respectively 2014 determine expected rate return plan assets consider current target asset allocations well historical expected future returns various categories plan assets lower rate return would decrease plan assets results higher pension expense assumed weighted average expected rate return plan assets 67 2014 69 2013 70 2012 50 basis point reduction weighted average expected rate return assets principal pension plans would increased pension expense approximately 7 million 2014 new accounting standards updates may 2014 financial accounting standards board “fasb” issued accounting standards update asu 201409 revenue contracts customers asu supersede existing revenue recognition requirements us gaap require entities recognize revenue amount reflects consideration company expects entitled exchange transferring goods services customer new standard also requires significantly expanded disclosures regarding qualitative quantitative information entitys nature amount timing uncertainty revenue cash flows arising contracts customers pronouncement effective annual reporting periods beginning december 15 2016 including interim periods within reporting period applied retrospectively early application permitted currently evaluating impact pronouncement consolidated financial statements related disclosures april 2014 fasb issued asu 201408 presentation financial statements property plant equipment reporting discontinued operations disclosures disposals components entity amends definition discontinued operation raising threshold disposal qualify discontinued operations asu also require entities provide additional disclosures discontinued operations well disposal transactions meet discontinued operations criteria pronouncement effective prospectively disposals except disposals classified held sale adoption date components initially classified held sale periods beginning december 15 2014 early adoption permitted adopted asu second quarter 2014 impact consolidated financial statements notes financial statements related party transactions significant related party transactions three years ended december 31 2014 forwardlooking statements form 10k including mda certain statements notes consolidated financial statements contains forwardlooking statements within meaning section 27a securities act 1933 amended section 21e exchange act 1934 amended “forwardlooking statement” words “anticipate” “believe” “ensure” “expect” “if” “intend” “estimate” “probable” “project” “forecasts” “predict” “outlook” “aim” “will” “could” “should” “would” “potential” “may” “likely” similar expressions negative thereof intended identify forwardlooking statements forwardlooking statements based assumptions believe reasonable may prove accurate statements include potential impact future transactions acquisition disposition merger joint venture transaction could occur including pending merger halliburton undertake obligation publicly update revise forwardlooking statement expectations regarding business outlook including changes revenue pricing capital spending profitability strategies operations impact common stock repurchases oil natural gas market conditions business plans customers market share contract terms costs availability resources legal economic regulatory conditions environmental matters forecasts regarding matters forwardlooking information subject risks uncertainties could cause actual results differ materially results expected although possible identify factors risks uncertainties include risk factors timing risk factors identified item 1a risk factors set forth time filings sec documents available website sec’s electronic data gathering analysis retrieval edgar system httpwwwsecgov item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations “mda” read conjunction consolidated financial statements included item 8 financial statements supplementary data contained herein executive summary baker hughes leading supplier oilfield services products technology systems use worldwide oil natural gas industry referred oilfield operations manage oilfield operations four geographic segments consisting north america latin america europeafricarussia caspian middle eastasia pacific industrial services businesses reported fifth segment december 31 2015 baker hughes approximately 43000 employees compared approximately 62000 employees december 31 2014 within oilfield operations primary driver businesses customers’ capital operating expenditures dedicated oil natural gas exploration field development production main products services provided oilfield operations fall one two categories drilling evaluation completion production classification based two major phases constructing oil andor natural gas well drilling phase completion phase products services utilized phase also provide products services downstream chemicals process pipeline services referred industrial services 2015 extremely challenging year oil natural gas industry crude oil prices declined significantly fourth quarter 2014 experienced significant volatility 2015 reaching seven year low december 2015 following opecs decision eliminate oil production ceiling response lower commodity prices 2015 customers curtailed spending reducing drilling activity less economical unconventional plays delaying well completion activities result changes market conditions significant decrease activity customer spending experienced significant decline demand increased pricing pressure products services 2015 generated revenue 1574 billion decrease 881 billion 36 compared 2014 net loss attributable baker hughes 197 billion 2015 compared net income attributable baker hughes 172 billion 2014 steep decline activity evidenced 46 decline global rig count since fourth quarter 2014 price deterioration experienced across segments large driver decline revenue profitability notably north america beginning first quarter 2015 initiated actions restructure adjust operations cost structure reflect reduced activity levels result restructuring activities recorded charges totaling 830 million 2015 included workforce reductions contract terminations facility closures writedown excess machinery equipment addition restructuring activities result downturn energy market impact business outlook determined carrying amount certain assets exceeded respective fair values therefore recorded impairment charge 116 billion charges excluded results operating segments 2016 crude oil prices continued decline reaching twelveyear low first quarter although visibility remains limited expecting rig activity worldwide continue decline throughout year pricing pressures continue across globe current commodity prices global rig count could decline much 30 2016 customers’ challenges maximizing production lowering overall costs protecting cash flows acute products services put us excellent position help customers achieve business objectives capitalize opportunities continue convert capabilities earnings targeting opportunities remain focused generating positive cash flow proactively managing cost structure reducing working capital maximizing return invested capital halliburton merger agreement november 16 2014 baker hughes halliburton entered definitive agreement plan merger halliburton acquire outstanding shares baker hughes stock cash transaction terms merger agreement share common stock baker hughes converted right receive 112 halliburton shares plus 1900 cash march 27 2015 halliburtons stockholders approved proposal issue shares halliburton common stock contemplated merger agreement addition baker hughes stockholders adopted merger agreement thereby approved proposed combination two companies transaction still subject regulatory approvals customary closing conditions regard baker hughes halliburton agreed extend period parties obtain required competition approvals april 30 2016 permitted merger agreement remain focused completing transaction early possible 2016 however baker hughes cannot predict certainty pending merger completed completion transaction subject conditions beyond control baker hughes information merger see note 2 halliburton merger agreement notes consolidated financial statements item 8 herein business environment operate 80 countries helping customers find evaluate drill produce transport process hydrocarbon resources revenue predominately generated sale products services major national independent oil natural gas companies worldwide dependent spending customers oil natural gas exploration field development production spending dependent number factors including customers’ forecasts future energy demand supply access resources develop produce oil natural gas ability fund capital programs impact new government regulations importantly expectations oil natural gas prices key driver cash flows oil natural gas prices oil natural gas prices summarized table averages daily closing prices periods indicated 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 heavily influenced brent oil prices fluctuated significantly throughout year ranging high 6637bbl may 2015 low 3478bbl december 2015 oil prices started decline end 2014 continued volatile throughout first half 2015 market experienced significant supply capacity second half 2015 continuing first quarter 2016 oil prices began steadily decline rapidly increasing production primarily opec countries coupled unfavorable economic data europe asia reignited fears longterm market imbalance opecs decision fourth quarter eliminate official oil production ceiling despite lower oil prices put additional downward pressure price expectations result brent oil prices approached sevenyear lows exited 2015 reflecting 46 reduction compared peak earlier year north america customer spending highly driven wti oil prices similar brent oil prices fluctuated significantly throughout year highest prices recorded second quarter overall wti oil prices ranged high 6143bbl june 2015 low 3473bbl december 2015 north america natural gas prices measured henry hub natural gas spot price averaged 261mmbtu 2015 representing 40 decrease prior year lowest annual average since 1999 natural gas prices began 2015 supported colder normal winter fell throughout year production storage inventories hit record levels despite significant decline natural gasdirected rig count fourth quarter 2015 average temperatures forecasts warmer winter us drove natural gas prices decline reaching low 153mmbtu december according us department energy “doe” working natural gas storage end 2015 3756 billion cubic feet bcf 167 536 bcf corresponding week 2014 baker hughes rig count baker hughes rig counts important business barometer drilling industry suppliers drilling rigs active consume products services produced oil service industry rig count trends governed exploration development spending oil natural gas companies turn influenced current future price expectations oil gas therefore counts may reflect relative strength stability energy prices overall market activity however counts solely relied specific pervasive conditions may exist affect overall energy prices market activity baker hughes providing rig counts public since 1944 gather relevant data field service personnel obtain necessary data routine visits various rigs customers contractors andor outside sources base classification well either oil natural gas primarily upon filings made operators relevant jurisdiction data compiled distributed various wire services trade associations published website believe counting process resulting data reliable however subject ability obtain accurate timely information rig counts compiled weekly us canada monthly international rigs published international rig counts include rigs drilling certain locations russia caspian region iran onshore china information readily available rigs us canada counted active day count taken well drilled started drilling completed well anticipated sufficient depth potential consumer drill bits international areas rigs counted weekly basis deemed active drilling activities occurred majority week weekly results averaged month published accordingly rig count include rigs transit one location another rigging used nondrilling activities including production testing completion workover expected significant consumers drill bits rig counts summarized table averages periods indicated 2015 compared 2014 rig count north america decreased 47 2015 compared 2014 primarily driven 52 decline oildirected rigs result reduced spending customers adapt lower oil price environment oildirected rig count decreased 51 us lower wti prices forced operators reduce exploration development spending order protect cash flows focus production optimization opportunities canada oildirected rig count decreased 61 many operators curtailed drilling plans heavy oil sands projects economical current oil prices natural gasdirected rig count north america declined 32 2015 natural gas prices deteriorated 40 compared 2014 average natural gasdirected drilling declining 32 us 33 canada outside north america rig count decreased 13 2015 compared 2014 also driven reduced customer spending lower oil price environment rig count latin america decreased 20 result customer budgetary constraints across region primarily mexico colombia ecuador one exception emerging unconventional plays argentina activity remained relatively stable 2015 north sea rig count decreased 7 largely due decline drilling activity netherlands rig count continental europe decreased 24 mainly result reduced drilling turkey romania africa rig count decreased 21 predominantly due reduced customer spending across majority region particularly libya chad angola nigeria 2015 rig count middle east remained unchanged 2014 activity declines iraq egypt offset increased activity saudi arabia oman abu dhabi kuwait rig count asia pacific decreased 13 consequence reduced drilling activity primarily india indonesia australia new zealand 2014 compared 2013 rig count north america increased 6 2014 compared 2013 primarily driven 9 growth oildirected rigs oildirected rig count increased 11 us result increased exploration production spending decreased 6 canada many operators curtailed oildirected drilling plans second half 2014 due high oil price differentials compared wti wet weather southern alberta saskatchewan natural gasdirected rig count north america declined 2 reflecting 13 decrease us partially offset 34 increase canada natural gasdirected drilling us negatively impacted continued weakness north america natural gas prices discouraged new investment natural gas fields canada increase natural gasdirected rigs driven drilling condensate rich zones alberta service oil sands drilling activity overall canada rig counts increased 7 2014 compared 2013 outside north america rig count increased 3 2014 compared 2013 rig count latin america decreased 5 result reduced rig activity brazil mexico partially offset increase activity emerging unconventional plays argentina north sea rig count decreased 5 primarily due decline rig activity norway rig count continental europe increased 13 higher activity turkey romania africa rig count increased 7 primarily due higher activity kenya angola chad rig count increased 9 middle east due higher activity saudi arabia oman kuwait slightly offset reduction iraq due political unrest rig count asia pacific increased 3 due increased activity offshore china partially offset activity reduction indonesia malaysia new zealand results operations discussions relating significant line items consolidated statements income loss based available information represent analysis significant changes events impact comparability reported amounts appropriate identified specific events changes affect comparability trends reasonably practicable quantified impact items addition discussions revenue cost revenue total basis business drivers product sales services similar dollar amounts tabulations section millions dollars unless otherwise stated revenue profit tax revenue profit loss tax five operating segments provided performance operating segments evaluated based profit loss tax defined income loss income taxes following net interest expense corporate expenses certain gains losses including impairment restructuring charges allocated operating segments 2015 compared 2014 north america north america revenue 2015 601 billion decrease 607 billion 50 compared 2014 steep reduction commodity prices experienced industry 2015 severely impacted onshore north america exploration production companies result higher lifting cost per barrel many producers operators addressed cash constraints reducing drilling activity less economical unconventional plays delaying well completion activities driving price discounts service providers await higher commodity prices lower activity levels evident 47 rig count drop deteriorating pricing conditions main drivers revenue decline segment product lines unfavorably impacted drop activity production chemicals deepwater operations artificial lift showing resilience additionally reduced activity well completion delays created oversupply hydraulic fracturing equipment caused price deterioration onshore pressure pumping product line severe lost market share product line 2015 worked maintain cash flow positive operations despite oversupplied market north america loss tax 687 million 2015 decrease 215 billion 147 compared profit tax 147 billion 2014 reduction profitability primarily due sharp decline activity increasingly unfavorable pricing environment additionally result industry downturn impact business incurred costs 181 million 2015 writedown carrying value certain inventory impact unfavorable market conditions partially mitigated actions taken year reduce workforce close consolidate facilities improve commercial terms vendors ultimately resulted lower operating costs latin america latin america revenue 2015 180 billion decrease 437 million 20 compared 2014 reduction segment attributed activity declines across region result customer budgetary constraints predominately andean area rig count declined 46 venezuela restructured operational footprint late 2014 reduction partially offset revenue growth brazil share gains drilling services product line latin america profit tax decreased 156 million 54 2015 compared 2014 reduction profitability mainly attributed decline activity foreign exchange losses primarily argentina increase expense related reserves doubtful accounts additionally incurred costs 13 million 2015 writedown carrying value certain inventory partially offset improvements made operational cost structure europeafricarussia caspian “earc” earc revenue 2015 328 billion decrease 114 billion 26 compared 2014 decrease driven mainly activity declines unfavorable pricing across region revenue also negatively impacted unfavorable change foreign exchange rates accounted approximately one third revenue reduction 2015 deconsolidation joint venture north africa late last year also contributed decline revenue product lines unfavorably impacted drop activity price production chemicals drilling services showing resilience earc profit tax decreased 464 million 75 2015 compared 2014 unfavorable impact profitability pricing deterioration lower activity levels change foreign exchange rates increased costs related reserves doubtful accounts partially offset savings recent cost reduction measures unfavorable change foreign exchange rates 2015 accounted approximately 40 decline profitability also 2014 included 58 million charge associated restructuring operations north africa impairment certain assets repeat 2015 middle eastasia pacific “meap” meap revenue 2015 344 billion decrease 102 billion 23 compared 2014 revenue decline segment driven primarily lower activity across asia particular china australia vietnam reduced revenue iraq revenue drop iraq attributed reduced activity evident 34 decline rig count rationalization operational footprint country including completing integrated operations activities revenue also impacted unfavorable pricing across region meap profit tax decreased 471 million 70 2015 compared 2014 reduction profitability driven largely lower activity levels unfavorable pricing current year also includes charges related reducing operations iraq reductions partially offset benefit recent costsaving actions industrial services industrial services revenue 122 billion decrease 149 million 11 compared 2014 decline revenue segment driven primarily reduced activity unfavorable change foreign exchange rates industrial services profit tax decreased 18 2015 compared 2014 reduction profitability resulting lower activity levels partially offset costsaving efforts however industrial services profit tax prior year included integration costs related pipeline services business acquired 2014 incur 2015 2014 compared 2013 north america north america revenue 2014 increased 12 billion 11 compared 2013 rig counts increasing 6 prior year average increase revenue driven almost entirely us onshore operations higher activity levels improved utilization market conditions pressure pumping along increased demand new technologies unconventional plays contributed solid growth across districts product lines largest contributor revenue growth pressure pumping operations market conditions gradually improved year reversing supply hydraulic fracturing equipment combined multiyear improvement initiative product line resulted improved utilization increased efficiencies artificial lift drilling services drill bit product lines also delivered exceptionally strong growth demand increased new technologies specifically designed unconventional plays revenue canada declined 2014 compared 2013 part due 6 decline oildirected rig count significant driver operations country revenue gulf mexico declined slightly despite relatively flat rig count 2014 compared 2013 revenue decline attributable activity delays primarily drilling stimulation resulted unusually strong ocean currents second half 2014 north america profit tax 1466 million 2014 increase 498 million 51 compared 2013 addition strong activity levels us onshore increased profitability driven improved contractual terms utilization pressure pumping operations well efficiency gains cost savings recognized part pressure pumping profit improvement plan growing demand new technologies command higher premium also contributed improvement gulf mexico profitability improved despite decline revenue result favorable mix revenue increase deepwater completion systems canada profitability decreased line revenue decline costs savings achieved pressure pumping offset foreign exchange impact weakening canadian dollar profitability 2014 negatively impacted 29 million severance costs 13 million costs associated technology royalty agreement latin america latin america revenue decreased 71 million 3 2014 compared 2013 revenue reductions brazil venezuela partially offset increased revenue throughout rest region revenue declined across product lines brazil due lower activity levels 2014 evidenced 27 reduction rig count compared 2013 revenue venezuela decreased across product lines result devaluation bolivares fuertes relative us dollar latin america profit tax increased 224 million 339 2014 compared 2013 significant improvement profitability primarily attributed cost reduction strategies implemented throughout region second half 2013 particular focus brazil 2013 includes charge 19 million severance related actions increased activity argentina mexico ecuador also contributed profitability improvement 2014 profitability also impacted foreign exchange losses 12 million 23 million 2014 2013 respectively due currency devaluation venezuela europeafricarussia caspian earc revenue increased 376 million 9 2014 compared 2013 2014 delivered strong revenue growth africa continental europe russia caspian revenue negatively impacted unfavorable change exchange rates several currencies including russian ruble relative us dollar africa revenue increased result activity growth share gains across region predominately west africa increases slightly offset activity declines libya due political instability third quarter 2014 continental europe revenue growth driven increased demand completion production product lines russia caspian region revenue growth driven increased activity completion production product lines earc profit tax increased 30 million 5 2014 compared 2013 incremental profitability growth increased revenue almost entirely offset 58 million charge associated restructuring operations north africa impairment certain assets mainly due recent disruption operations libya profitability also negatively impacted foreign exchange losses result devaluation several currencies including russian ruble middle eastasia pacific meap revenue increased 597 million 15 2014 compared 2013 corresponding rig count increased 7 period posted strong revenue growth virtually geographies notably saudi arabia iraq arabian gulf southeast asia china saudi arabia revenue increases primarily related activity growth integrated operations contracts addition experienced strong demand drilling services completion services product lines iraq revenue increased 2014 prior year 2013 negatively impacted significant disruption operations fourth quarter partially offset decline activity 2014 due demobilization major contract revenue increased arabian gulf due increased demand drilling services pressure pumping product lines united arab emirates india within asia pacific revenue growth strongest south east asia china predominately drilling services product line meap profit tax improved 218 million 48 2014 compared 2013 primary driver increase profit tax higher incremental profit increased revenue across segment notably saudi arabia iraq experienced favorable shift product mix higher proportion revenue derived drilling services product line profit tax 2013 negatively impacted 79 million losses iraq related significant disruption operations expenses associated personnel movements security measures nonrecurring items industrial services industrial services revenue increased 7 profit tax decreased 12 2014 compared 2013 increase revenue primarily driven acquisition complementary pipeline services business third quarter 2014 profitability segment decreased result integration expenses related acquisition along increase environmental costs compared prior year costs expenses table details certain data consolidated statements income loss percentage revenue cost revenue cost revenue percentage revenue 92 80 2015 2014 respectively result steep decline activity customer spending experienced significant pricing pressure decline demand products services despite actions restructure global operations operate lower price activity environment decline revenue outpaced benefit cost saving measures additionally product lines significantly impacted downturn rig activity also capitalintensive accordingly fixed costs associated product lines lessened positive impact cost reduction efforts 2015 cost revenue 2015 also negatively impacted charge 194 million adjust carrying value certain inventory due industrywide market decline 87 million expenses related merger cost revenue percentage revenue 80 83 2014 2013 respectively improvement cost revenue percentage revenue due primarily continued improvement us onshore pressure pumping business resulted higher asset utilization organizational efficiencies well improved contractual terms latin america margins improved due cost reduction strategies implemented throughout region second half 2013 margins meap segment improved higher incremental profit increased revenue combined favorable shift product mix reduced disruptions iraq operations 2014 also contributed lower cost revenue meap segment earc segment profitability increased continental europe united kingdom africa partially offset restructuring charges 58 million associated operations north africa primarily disruptions libya improvements partially offset 113 million increased depreciation expense across segments except latin america 29 million severance charges north america 29 million costs associated technology royalty agreement research engineering research engineering expenses decreased 21 2015 compared 2014 yet increased slightly percentage revenue reduction research engineering expense driven cost reduction measures partially offset 17 million expenses related merger research engineering expenses increased 10 2014 compared 2013 continued commitment invest research product development required meet customers need innovative new products emerging technologies focusing lowering cost well construction optimizing well production increasing ultimate recoveries result research development activities 2014 commercially launched 160 new products services marketing general administrative marketing general administrative “mga” expenses decreased 8 2015 compared 2014 reduction mga costs mainly result workforce reductions lower discretionary spending included mga expenses 2015 costs 191 million related merger partially offset impact cost reduction measures mga expenses decreased 3 2014 compared 2013 mga expenses 2014 includes net gain 34 million recognized deconsolidation jointly owned legal entity cost savings experienced across organization mostly offset charge 14 million related impairment technology investment 11 million merger related expenses also included mga 2014 2013 foreign exchange losses 12 million 23 million respectively due currency devaluation venezuela impairment restructuring charges 2015 recorded restructuring charges 830 million consisting 436 million workforce reduction costs 121 million contract termination costs 273 million asset impairments related excess machinery equipment facilities total cash paid 2015 related charges 446 million addition restructuring activities response downturn energy market impact business outlook determined carrying amount number assets exceeded respective fair values therefore recorded impairment charge 116 billion charges excluded results operating segments discussion impairment restructuring charges see note 3 “impairment restructuring charges” notes financial statements item 8 herein reduction costs eliminating depreciation reduced employee expenses 2015 approximately 700 million expected 16 billion annualized basis 2016 litigation settlement second quarter 2014 recorded charge 62 million related previously disclosed litigation settlements wage hour lawsuits portion settlement paid claims made basis second quarter 2015 date passed class members could file claim provision settlement agreement amount claims made less estimated accordingly reduced accrual approximately 13 million recorded adjustment litigation settlements second quarter 2015 interest expense net interest expense net interest income 20 million 217 million 2015 decrease 15 million compared 232 million 2014 decrease due primarily lower shortterm borrowings latin america increase interest income interest expense net interest income 13 million remained relatively flat 2014 compared 234 million 2013 income taxes total income tax benefit 639 million 2015 compared income tax expense 896 million 612 million 2014 2013 respectively effective tax rate operating profits losses 2015 2014 2013 245 341 357 respectively 2015 effective tax rate lower us statutory income tax rate 35 due losses foreign jurisdictions tax benefit adjustments prior years’ tax positions partially offset favorable amended returns return accrual adjustments 2014 effective tax rate lower us statutory income tax rate 35 due lower rates certain international operations partially offset state income taxes adjustments prior years’ tax positions 2013 effective tax rate higher us statutory income tax rate 35 due higher rates certain international operations primarily resulting foreign losses tax benefit state income taxes partially offset adjustments prior years’ tax positions compliance business 80 countries including approximately 16 40 countries lowest scores transparency international’s corruption perception index survey 2015 indicates high levels corruption devote significant resources development maintenance communication enforcement business code conduct antibribery compliance policies internal control processes procedures numerous compliance related policies notwithstanding devotion resources part consequence thereof time discover receive information alleging potential violations laws regulations including fcpa policies processes procedures conduct timely internal investigations potential violations take appropriate action depending upon outcome investigation anticipate devotion significant resources compliancerelated issues including necessity investigations continue aspect business number countries oil natural gas exploration development production take place conduct operations compliancerelated issues time limited ability business raised cost operating countries order provide products services countries may future utilize ventures third parties sell products distributors otherwise modify business approach order improve ability conduct business accordance applicable laws regulations business code conduct bestinclass global ethics compliance program “compliance program” based core values integrity performance teamwork learning courage ii standards contained business code conduct iii laws countries operate compliance program referenced within company “c2” “completely compliant” completely compliant theme intended establish proper toneatthetop throughout company employees consistently reminded play crucial role ensuring company always conducts business ethically legally safely highlights compliance program include following • comprehensive internal policies areas facilitating payments travel entertainment gifts charitable donations connected nonus government officials payments nonus commercial sales representatives use nonus police military organizations security purposes addition countryspecific guidance customs standards visa processing export reexport controls economic sanctions antiboycott laws • comprehensive employee compliance training program covering substantially employees • due diligence procedure commercial sales processing professional agents enhanced process classifying distributors • continued reduction use commercial sales representatives processing agents including reduction customs agents • compliance governance committee includes senior officers company reviews effectiveness compliance processes controls companys global compliance program including areas covered business code conduct • special compliance committee made senior officers meets less year review oversight reports active commercial sales representatives • use technology monitor report compliance matters including webbased antiboycott reporting tool global trade management software tool • program designed encourage reporting ethics compliance matter without fear retaliation including worldwide business helpline operated third party currently available tollfree 150 languages ensure helpline easily accessible employees language • centralized finance organization including enterprisewide accounting system companywide policies addition corporate audit function incorporated anticorruption procedures audits certain countries also conduct fcpa risk assessments legal audit procedures relating third party commercial agents nonus jurisdictions • continue work ensure adequate legal compliance coverage around world including coordination compliance advice customized training across regions countries business • centralized human resources function including among things consistent standards prehire screening employees screening existing employees prior promoting positions may exposed corruptionrelated risks uniform policy new hire training compliance component liquidity capital resources objective financing business maintain sufficient liquidity adequate financial resources financial flexibility order fund requirements business december 31 2015 cash equivalents 232 billion approximately 201 billion held foreign subsidiaries substantial portion cash held foreign subsidiaries december 31 2015 reinvested international operations intent use cash among things fund operations foreign subsidiaries decide later date repatriate funds us may required provide taxes certain funds based applicable us tax rates net foreign tax credits committed revolving credit facility credit facility commercial banks related commercial paper program maximum combined borrowing time credit facility commercial paper program 250 billion december 31 2015 commercial paper outstanding therefore amount available borrowing credit facility december 31 2015 250 billion believe cash hand cash flows generated operations available credit facility including issuance commercial paper provide sufficient liquidity manage global cash needs 2015 used cash pay variety activities including working capital needs capital expenditures payment dividends cash flows cash flows provided used type activity follows years ended december 31 operating activities cash flows operating activities provided 180 billion 295 billion years ended december 31 2015 2014 respectively cash flows operating activities decreased 116 billion 2015 primarily due decrease net income noncash charges partially offset reduction working capital receivables inventories accounts payable provided cash 2015 compared 2014 due lower activity levels additionally decrease net income market activity resulted lower income taxes paid included cash flows operating activities 2015 payments 446 million made employee severance contract termination costs result restructuring activities initiated year cash flows operating activities provided 295 billion 316 billion year ended december 31 2014 2013 respectively cash flows operating activities decreased 208 million 2014 primarily due increase working capital used cash 2014 compared 2013 partially offset increase net income main drivers increase working capital due increase activity levels continuation vendor management initiatives partially offset improved collections additionally increase net income market activity resulted higher income taxes paid investing activities principal recurring investing activity funding capital expenditures ensure appropriate levels types machinery equipment place generate revenue operations expenditures capital assets totaled 965 million 179 billion 209 billion 2015 2014 2013 respectively decline capital expenditures 2015 result lower demand products services majority expenditures machinery equipment also includes expenditures new facilities expansions existing facilities infrastructure projects proceeds disposal assets 388 million 437 million 455 million 2015 2014 2013 respectively disposals related equipment lostinhole property machinery equipment longer used operations sold throughout year 2015 purchased shortterm longterm investment securities totaling 310 million 2014 paid 314 million acquisitions net cash acquired 7 million merger agreement halliburton described note 2 halliburton merger agreement notes consolidated financial statements item 8 herein restrictions ability acquire dispose businesses merger pending financing activities net repayments commercial paper shortterm debt 45 million 248 million 571 million 2015 2014 2013 respectively total debt outstanding december 31 2015 404 billion decrease 92 million compared december 31 2014 total debttocapital defined total debt plus equity ratio 020 december 31 2015 018 december 31 2014 received proceeds 116 million 216 million 101 million 2015 2014 2013 respectively issuance common stock exercise stock options employee stock purchase plan board directors authorized program repurchase common stock time 2013 board directors increased authorization purchase common stock share repurchase program 800 million 2015 repurchase shares common stock authorization remaining repurchase approximately 105 billion common stock end 2015 2014 repurchased 91 million shares common stock average price 6575 per share total 600 million 2013 repurchased 63 million shares common stock average prices 5559 per share total 350 million paid dividends 297 million 279 million 267 million 2015 2014 2013 respectively merger agreement halliburton described note 2 halliburton merger agreement notes consolidated financial statements item 8 herein generally agreed repurchase shares common stock increase quarterly dividend merger pending available credit facility discussed committed revolving credit facility commercial banks related commercial paper program maximum combined borrowing time credit facility commercial paper program 25 billion credit facility matures september 2016 contains certain covenants among things restrict certain merger transactions sale substantially assets significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations credit facility may accelerated events default include payment defaults lenders credit facility covenant defaults customary defaults compliance credit facility’s covenants direct borrowings credit facility 2015 commercial paper program may issue time 25 billion commercial paper maturities 270 days amount available borrow credit facility reduced amount commercial paper outstanding december 31 2015 outstanding borrowings commercial paper program market conditions change revenue reduced significantly operating costs increase cash flows liquidity could reduced additionally could cause rating agencies lower credit rating ratings triggers would accelerate maturity borrowings committed credit facility however downgrade credit ratings could increase cost borrowings credit facility could also limit preclude ability issue commercial paper occur would seek alternative sources funding including borrowing credit facility believe current credit ratings would allow us obtain interim financing existing credit facility currently unforeseen significant needs cash requirements 2016 believe cash hand cash flows operating activities available credit facility provide us sufficient capital resources liquidity manage working capital needs meet contractual obligations fund capital expenditures dividends support development shortterm longterm operating strategies necessary may issue commercial paper shortterm debt fund cash needs us excess cash generated us capital expenditures adjusted managed us match market demand activity levels light current market conditions capital expenditures 2016 made appropriate rate estimate would equal 450 million 550 million annualized basis expenditures expected used primarily normal recurring items necessary support business also anticipate making income tax payments range 300 million 350 million 2016 defined benefit defined contribution postretirement plans expect contribute 245 million 275 million plans 2016 see note 13 employee benefit plans notes consolidated financial statements item 8 herein discussion may 2014 board directors approved 002 per share increase quarterly cash dividend 017 per share common stock august 2014 holders record previous quarters dividend 015 per share common stock anticipate paying dividends range 70 million 78 million first quarter 2016 merger agreement halliburton described note 2 halliburton merger agreement notes consolidated financial statements item 8 herein agreed increase quarterly dividend merger pending contractual obligations table set forth contractual cash obligations december 31 2015 certain amounts included table based estimates assumptions obligations including duration anticipated actions third parties factors contractual cash obligations actually pay future periods may vary reflected table estimates assumptions subjective 1 amounts represent expected cash payments principal amounts related debt including capital lease obligations amounts debt include unamortized discounts deferred issuance costs expected cash payments interest excluded amounts 2 amounts represent expected cash payments interest longterm debt capital lease obligations 3 amounts represent future minimum payments noncancelable operating leases initial remaining terms one year enter operating leases include renewal options however excluded renewal options table unless anticipated exercise renewals 4 purchase obligations include capital improvements well agreements purchase goods services enforceable legally binding specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction 5 estimated income tax liabilities uncertain tax positions settled result expiring statutes audit activity competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate timing particular settlement depend length tax audit related appeals process expiration statute liability settled due statute expiring favorable audit result settlement tax liability would result cash payment 6 amounts include expected contributions pension postretirement defined benefit plans 80 million 95 million 2016 majority contributions amounts excess minimum funding requirements would considered contractual obligation offbalance sheet arrangements normal course business customers vendors others entered offbalance sheet arrangements surety bonds performance letters credit bank issued guarantees totaled approximately 12 billion december 31 2015 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements december 31 2015 material offbalance sheet financing arrangements normal operating leases discussed materially exposed financing liquidity market credit risk could arise engaged financing arrangements critical accounting estimates preparation consolidated financial statements requires us make estimates judgments affect reported amounts assets liabilities revenue expenses related disclosures well disclosures contingent assets liabilities base estimates judgments historical experience assumptions information believed reasonable circumstances estimates assumptions future events effects subject uncertainty accordingly estimates may change new events occur experience acquired additional information obtained business environment operate changes defined critical accounting estimate one important portrayal either financial condition results operations requires us make difficult subjective complex judgments estimates matters uncertain auditethics committee board directors reviewed critical accounting estimates disclosure presented past three fiscal years made material changes methodology used establish critical accounting estimates believe following critical accounting estimates used preparation consolidated financial statements items within consolidated financial statements require estimation judgment deemed critical defined allowance doubtful accounts determination collectability amounts due customers requires us make judgments estimates regarding customers’ ability pay amounts due us order determine amount valuation allowances required doubtful accounts monitor customers’ payment history current credit worthiness determine collectability reasonably assured also consider overall business climate customers operate provisions doubtful accounts recorded based aging status customer accounts becomes evident customer make required payments either contractual due dates future december 31 2015 2014 allowance doubtful accounts totaled 383 million 11 224 million 4 total gross accounts receivable respectively believe allowance doubtful accounts adequate cover potential bad debt losses current conditions however uncertainties regarding changes financial condition customers either adverse positive could impact amount timing additional provisions doubtful accounts may required five percent change allowance doubtful accounts would impact income taxes approximately 19 million 2015 inventory reserves inventory significant component current assets stated lower cost market requires us record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments estimates forecasts inherently include uncertainties require us make judgments regarding potential future outcomes december 31 2015 2014 inventory reserves totaled 278 million 9 319 million 7 gross inventory respectively believe reserves adequate properly value potential excess slow moving obsolete inventory current conditions significant unanticipated changes estimates forecasts could impact amount timing additional provisions excess slow moving obsolete inventory may required five percent change inventory reserve balance would impact income taxes approximately 14 million 2015 goodwill longlived assets purchase price acquired businesses allocated identifiable assets liabilities based upon estimated fair values acquisition date goodwill excess purchase price fair value tangible identifiable intangible assets liabilities acquired business acquisition goodwill december 31 2015 2014 totaled 607 billion 608 billion respectively perform annual test goodwill impairment october 1 year reporting units five reportable segments performing annual impairment test option performing qualitative quantitative assessment determine impairment occurred qualitative assessment indicates likely fair value reporting unit less carrying amount would required perform quantitative impairment test goodwill 2015 2014 performed qualitative assessment annual goodwill impairment test 2013 quantitative assessment determination impairment made comparing carrying amount reporting unit fair value performing annual goodwill impairment analysis 2015 qualitative assessment included consideration current industry market conditions circumstances well mitigating factors would affect fair value company reporting units among mitigating factors considered value consideration received closing merger based terms merger agreement compared carrying value company reporting units based assessment consideration totality facts circumstances including business environment fourth quarter 2015 determined likely fair value company reporting units less respective carrying amounts impairments goodwill recorded year ended december 31 2015 prior years included accompanying financial statements determining carrying amount reporting units corporate assets liabilities allocated extent relate operations reporting units necessary calculate fair value reporting unit using various valuation techniques including market approach comparable transactions approach discounted cash flow dcf methodology market approach comparable transactions approach provide value indications company comparison guideline public companies guideline transactions respectively entail selecting relevant financial information subject company capitalizing amounts using valuation multiples based empirical market observations dcf methodology includes limited assumptions regarding matters discount rates anticipated growth rates expected profitability rates timing expected future cash flows unanticipated changes including even small revisions assumptions could result provision impairment future period addition decline stock price could result impairment given nature evaluations application specific assets timeframes possible reasonably quantify impact changes assumptions longlived assets include property equipment intangible assets goodwill certain assets comprise significant amount total assets review carrying values assets impairment periodically least annually certain intangible assets whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make judgments regarding longterm forecasts future revenue costs cash flows related assets subject review forecasts uncertain require assumptions demand products services future market conditions technological developments income taxes liability method used determining income tax provisions current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered valuation allowances established reduce deferred tax assets likely portion deferred tax assets realized determining need valuation allowances considered made judgments estimates regarding estimated future taxable income ongoing prudent feasible tax planning strategies estimates judgments include degree uncertainty changes estimates assumptions could require us adjust valuation allowances deferred tax assets historically changes valuation allowances caused major changes business cycle certain countries changes local country law ultimate realization deferred tax assets depends generation sufficient taxable income applicable taxing jurisdictions operate 80 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different jurisdictions taxed various bases including actual income taxes deemed profits generally determined using percentage revenue rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability taxing jurisdiction could impact amount income taxes provide given year tax filings various periods subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings resulting change tax liability dependent numerous factors including among others amount nature additional taxes potentially asserted local tax authorities willingness local tax authorities negotiate fair settlement administrative process impartiality local courts number countries business potential changes tax paid one country either produce fail produce offsetting tax change countries experience estimates assumptions used provide future tax assessments proven appropriate however past experience guide potential exists tax resulting resolution current potential future tax controversies may differ materially amount accrued addition aforementioned assessments received various tax authorities also provide taxes uncertain tax positions formal assessments received determination liabilities requires use estimates assumptions regarding future events established adjust amounts information available future event occurs necessitating change reserves changes facts law judicial decisions regarding application existing law favorable audit outcome believe resolution tax matters material effect consolidated financial condition company although resolution could material impact consolidated statements income loss particular period effective tax rate period resolution occurs pensions postretirement benefit obligations pensions postretirement benefit obligations related expenses calculated using actuarial models methods involves use two critical assumptions discount rate expected rate return assets important elements determining pension expense measuring plan liabilities evaluate critical assumptions least annually necessary utilize third party actuarial firms assist us although considered less critical assumptions used determining benefit obligations related expenses demographic factors like retirement age mortality turnover also evaluated periodically updated reflect actual expected experience discount rate enables us determine expected future cash flows present value measurement date development discount rate largest plans based bond matching model whereby cash flows underlying projected benefit obligation matched yield curve constructed bond portfolio highquality fixedincome securities use lower discount rate would increase present value benefit obligations increase pension expense used weighted average discount rate 36 2015 45 2014 40 2013 determine pension expense 50 basis point reduction weighted average discount rate would increased pension expense projected benefit obligation principal pension plans approximately 7 million 85 million respectively 2015 determine expected rate return plan assets consider current target asset allocations well historical expected future returns various categories plan assets lower rate return would decrease plan assets results higher pension expense assumed weighted average expected rate return plan assets 68 2015 67 2014 69 2013 50 basis point reduction weighted average expected rate return assets principal pension plans would increased pension expense approximately 7 million 2015 new accounting standards updates may 2014 financial accounting standards board “fasb” issued accounting standards update asu 201409 revenue contracts customers asu supersede existing revenue recognition requirements us gaap require entities recognize revenue amount reflects consideration company expects entitled exchange transferring goods services customer new standard also requires significantly expanded disclosures regarding qualitative quantitative information entitys nature amount timing uncertainty revenue cash flows arising contracts customers pronouncement applied retrospectively effective annual reporting periods beginning december 15 2017 early adoption permitted january 1 2017 completed evaluation impact pronouncement consolidated financial statements related disclosures april 2015 fasb issued asu 20153 simplifying presentation debt issuance costs asu requires debt issuance costs related recognized debt liability presented balance sheet direct deduction carrying amount debt liability consistent debt discounts pronouncement effective annual reporting periods beginning december 15 2015 currently report debt issuance costs consistent guidance asu therefore impact consolidated financial statements related disclosures upon adoption april 2015 fasb issued asu 20155 customers accounting fees paid cloud computing arrangement asu provides guidance customers whether cloud computing arrangement includes software license related accounting treatment pronouncement effective annual reporting periods beginning december 15 2015 adoption pronouncement expected material impact consolidated financial statements related disclosures july 2015 fasb issued asu 201511 simplifying measurement inventory requires inventory measured using fifo average cost methods subsequently measured lower cost net realizable value net realizable value estimated selling price ordinary course business less reasonably predictable costs completion disposal transportation currently inventory measured using methods required subsequently measured lower cost market defined replacement cost net realizable value net realizable value less normal profit margin pronouncement effective annual reporting periods beginning december 15 2016 prospective basis early adoption permitted completed evaluation impact pronouncement consolidated financial statements related disclosures november 2015 fasb issued asu 201517 balance sheet classification deferred taxes amends existing guidance income taxes require classification deferred tax assets liabilities noncurrent balance sheet pronouncement effective annual reporting periods beginning december 15 2016 may applied either prospectively retrospectively completed evaluation impact pronouncement consolidated financial statements related disclosures related party transactions significant related party transactions three years ended december 31 2015 forwardlooking statements form 10k including mda certain statements notes consolidated financial statements contains forwardlooking statements within meaning section 27a securities act 1933 amended section 21e exchange act 1934 amended “forwardlooking statement” words “anticipate” “believe” “ensure” “expect” “if” “intend” “estimate” “probable” “project” “forecasts” “predict” “outlook” “aim” “will” “could” “should” “would” “potential” “may” “likely” similar expressions negative thereof intended identify forwardlooking statements forwardlooking statements based assumptions believe reasonable may prove accurate statements include potential impact future transactions acquisition disposition merger joint venture transaction could occur including pending merger halliburton undertake obligation publicly update revise forwardlooking statement expectations regarding business outlook including changes revenue pricing capital spending profitability strategies operations impact common stock repurchases oil natural gas market conditions business plans customers market share contract terms costs availability resources legal economic regulatory conditions environmental matters forecasts regarding matters forwardlooking information subject risks uncertainties could cause actual results differ materially results expected although possible identify risk factors risks uncertainties include factors timing factors identified annual report item 1a risk factors item 7 managements discussion analysis financial condition results operations set forth time filings sec documents available website sec’s electronic data gathering analysis retrieval edgar system httpwwwsecgov light risks uncertainties caution place undue reliance forwardlooking statements forwardlooking statements speak date annual report earlier date made intend disclaim obligation update revise forwardlooking statements unless required securities law item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations mda read conjunction condensed consolidated combined financial statements included item 8 financial statements supplementary data contained herein executive summary july 3 2017 closed transactions combine ge og baker hughes creating fullstream oilfield technology provider unique mix integrated oilfield products services digital solutions result transactions bhge became holding company combined businesses transactions executed using partnership structure pursuant ge og baker hughes contributed operating assets company ge holds approximate 625 controlling interest us former baker hughes shareholders hold approximate 375 interest ownership 100 class common stock bhge ges interest held voting interest class b common stock bhge economic interest corresponding number common units results operations company include results baker hughes july 3 2017 date acquisition december 31 2017 majority baker hughes business operations included oilfield services segment transactions treated “reverse acquisition” accounting purposes historical financial statements accounting acquirer ge og historical financial statements company current year results balances may comparable prior years current year includes results baker hughes july 3 2017 operate four business segments oilfield services ofs oilfield equipment ofe turbomachinery processing solutions tps digital solutions ds december 31 2017 bhge llc employs 64000 employees operates 120 countries 2017 generated revenue 17259 million compared 13269 million 2016 increase revenue driven primarily ofs result acquisition baker hughes lesser extent ds partially offset declines tps ofe loss income taxes equity loss affiliate 160 million 2017 included restructuring impairment charges 412 million merger related costs 373 million restructuring impairment charges recorded result continued actions adjust operations cost structure reflect reduced activity levels 2016 income taxes equity loss affiliate 584 million also included restructuring impairment charges 516 million merger related costs 33 million outlook business exposed number different macro factors influence expectations outlook expectations purely based market see today subject change given volatile conditions industry • north america onshore activity 2017 experienced acceleration rig count growth compared 2016 expect increased activity north america continue grow 2018 however slower pace seen 2017 remain optimistic outlook • international onshore activity seen moderate increase rig count activity 2017 expect growth continue 2018 moderate rate seen signs improvement increase commodity prices due continued volatility remain cautious growth expectations • offshore projects although commodity prices increased 2017 yet see change customer spending behavior result continued oil price volatility expect final investment decisions continue remain fluid seen increase subsea tree awards 2017 expect tree awards increase 2018 still levels significantly prior 2012 2013 peaks customers continue remain cautious regards major capital expenditures near term • liquefied natural gas lng projects believe market continues oversupplied remain current state next years expect final investment decisions move forward bhge llc 2017 form 10k 23 short term however view long term economics lng industry positive given outlook supply demand • refinery petrochemical industrial projects refining believe large complex refineries gain advantage competitive oversupplied landscape 2018 industry globalizes refiners position meet local demand secure export potential petrochemicals continue see healthy demand costadvantaged supply driving projects forward 2018 industrial market continues grow outdated infrastructure replaced policy changes come effect power decentralized continue see growing demand across markets 2018 segments portfolio correlated different industrial metrics digital solutions business overall believe portfolio uniquely positioned compete across value chain deliver unique solutions customers remain optimistic longterm economics industry continuing operate flexibility given expectations volatility changing assumptions near term 2016 solar wind net additions exceeded coal gas first time continued throughout 2017 governments may change may continue incentives renewable energy additions long term renewables cost decline may accelerate compete newbuilt fossil capacity however anticipate significant impacts business foreseeable future despite nearterm volatility longterm outlook industry remains strong believe world’s demand energy continue rise supply energy continue increase complexity requiring greater service intensity advanced technology oilfield service companies remain focused delivering innovative costefficient solutions deliver step changes operating economic performance customers business environment following discussion analysis summarizes significant factors affecting results operations financial condition liquidity position year ended december 31 2017 2016 2015 read conjunction consolidated combined financial statements related notes company amounts reported millions graphs within report computed based amounts hundreds result sum components reported millions may equal total amount reported millions due rounding operate 120 countries helping customers find evaluate drill produce transport process hydrocarbon resources revenue predominately generated sale products services major national independent oil natural gas companies worldwide dependent spending customers oil natural gas exploration field development production spending driven number factors including customers forecasts future energy demand supply access resources develop produce oil natural gas ability fund capital programs impact new government regulations importantly expectations oil natural gas prices key driver cash flows oil natural gas prices oil natural gas prices summarized table averages daily closing prices periods indicated 1 energy information administration eia europe brent spot price per barrel bhge llc 2017 form 10k 24 2 eia cushing ok wti west texas intermediate spot price 3 eia henry hub natural gas spot price per million british thermal unit outside north america customer spending heavily influenced brent oil prices fluctuated significantly throughout year ranging low 4398bbl june 2017 high 6880bbl december 2017 oil prices bottomed early 2016 due impending production increases iran economic sanctions lifted 2017 opec considered production cuts fourth quarter announced extensions agreedupon production cuts result fourth quarter 2017 brent oil prices shifted meaningfully higher addition demand oil higher expected due robust consumption north america revisions chinese russian european demand growth expectations north america customer spending highly driven wti oil prices similar brent oil prices fluctuated significantly throughout year highest prices recorded towards end year overall wti oil prices ranged low 4248bbl june 2017 high 6046bbl december 2017 although oil prices rebounded 100 previous years twelveyear low 26bbl reached february 2016 near 60bbl end 2017 yet material change customer behavior certain us basins suggest nearterm broader recovery activity levels north america natural gas prices measured henry hub natural gas spot price averaged 299 mmbtu 2017 representing 19 increase prior year throughout year henry hub natural gas spot prices ranged high 371 mmbtu january 2017 low 244 mmbtu february 2017 according us department energy doe working natural gas storage end 2017 3126 billion cubic feet bcf 56 185 bcf corresponding week 2016 baker hughes rig count baker hughes rig counts important business barometer drilling industry suppliers drilling rigs active consume products services produced oil service industry rig count trends driven exploration development spending oil natural gas companies turn influenced current future price expectations oil natural gas counts may reflect relative strength stability energy prices overall market activity however counts solely relied specific pervasive conditions may exist affect overall energy prices market activity providing rig counts public since 1944 gather relevant data field service personnel obtain necessary data routine visits various rigs customers contractors outside sources necessary base classification well either oil natural gas primarily upon filings made operators relevant jurisdiction data compiled distributed various wire services trade associations published website believe counting process resulting data reliable however subject ability obtain accurate timely information rig counts compiled weekly us canada monthly international rigs published international rig counts include rigs drilling certain locations russia caspian region iran onshore china information readily available rigs us canada counted active day count taken well drilled started drilling completed well anticipated sufficient depth potential consumer drill bits international areas rigs counted weekly basis deemed active drilling activities occurred majority week weekly results averaged month published accordingly rig count include rigs transit one location another rigging used nondrilling activities including production testing completion workover expected significant consumers drill bits bhge llc 2017 form 10k 25 rig counts summarized table averages periods indicated 2017 compared 2016 overall rig count 2030 2017 increase 27 compared 2016 due primarily north american activity rig count north america increased 69 2017 compared 2016 internationally rig count decreased 1 2017 compared period last year within north america increase primarily driven land rig count 72 partially offset decrease offshore rig count 16 internationally rig count decrease driven primarily decreases latin america 7 europe region africa region 4 2 respectively partially offset asiapacific region 8 2016 compared 2015 overall rig count 1598 2016 decrease 32 compared 2015 due primarily north american activity rig count north america decreased 46 2016 compared 2015 internationally rig count decreased 18 2016 compared 2015 within north america decrease primarily driven 44 decline oildirected rigs natural gasdirected rig count north america declined 50 2016 natural gas well productivity improved internationally rig count decrease driven primarily decreases latin america 38 africa region 20 europe region asiapacific region 18 15 respectively key performance indicators millions product services backlog product services consolidated combined statement income loss displays sales costs sales accordance sec regulations goods required include sales tangible products services must include sales including service activities amounts shown distinguish equipment product services product services refer sales product services agreements including sales goods spare parts equipment upgrades related services monitoring maintenance repairs important part operations refer product services simply services within business environment section managements discussion analysis backlog defined unfilled customer orders products services believed firm product services amount included expected life contract bhge llc 2017 form 10k 26 orders backlog december 31 2017 2016 2015 millions orders 2017 recognized orders 17376 million increase 6103 million 54 2016 increase orders driven primarily acquisition baker hughes service orders 38 equipment orders 87 2016 recognized orders 11273 million decrease 4112 million 2015 driven broader market conditions continued see delays final investment decisions projects pricing pressure backlog december 31 2017 backlog 21022 million decrease 675 million 3 2016 equipment backlog decreased 2016 primarily driven lower intake large equipment orders service backlog increased 2016 result order intake december 31 2016 backlog 21697 million decrease 2244 million 2015 primarily driven decrease equipment backlog 32 well strengthening us dollar accounted decrease 309 million services backlog increased 5 15223 million backlog remains strong provides indication longterm revenue within company results operations discussions relating significant line items consolidated combined statements income loss based available information represent analysis significant changes events impact comparability reported amounts appropriate identified specific events changes affect comparability trends reasonably practicable quantified impact items addition discussions revenue cost revenue total basis business drivers product sales services similar dollar amounts tabulations section millions dollars unless otherwise stated certain columns rows may add due use rounded numbers results operations company include results baker hughes july 3 2017 date acquisition end year ended december 31 2017 results operations evaluated chief executive officer combined consolidated basis well segment level bhge llc 2017 form 10k 27 performance operating segments evaluated based segment operating income loss defined income loss income taxes equity loss affiliate following net interest expense net non operating income loss corporate expenses restructuring impairment charges inventory impairment merger related costs goodwill impairment certain gains losses allocated operating segments evaluating segment performance company uses following volume price volume increase decrease products andor services sold periodoverperiod excluding impact foreign exchange price volume impact profit calculated multiplying prior period profit rate change revenue volume current prior period price defined change sales price comparable product service periodoverperiod calculated periodoverperiod change sales prices comparable products services foreign exchange fx measures translational foreign exchange impact translation impact periodoverperiod change sales costs directly attributable change foreign exchange rate compared us dollar fx impact calculated multiplying functional currency amounts revenue profit periodoverperiod fx rate variance using average exchange rate respective period inflationdeflation defined increase decrease direct indirect costs type equal amount volume calculated yearoveryear change cost ie price paid direct material compensation benefits overhead costs productivity measured remaining variance profit adjusting periodoverperiod impact volume price foreign exchange inflationdeflation defined improved lower periodoverperiod cost productivity result cost efficiencies inefficiencies cost decreasing increasing volume cost increasing decreasing less volume changes sales mix among segments also includes periodoverperiod variance transactional foreign exchange aside foreign currency devaluations reported separately business evaluation purposes revenue segment operating income loss tax revenue segment operating income loss four operating segments provided bhge llc 2017 form 10k 28 1 inventory impairments related charges reported cost goods sold caption consolidated combined statements income loss 2017 includes 87 million adjustments writeup acquired inventory estimated fair value acquisition baker hughes inventory used sold six months ended december 31 2017 fiscal year 2017 fiscal year 2016 revenue 2017 17259 million increase 3990 million 30 2016 increase primarily driven acquisition baker hughes ofs increased 5052 million ds increased 223 million ofe decreased 910 million tps decreased 374 million total segment operating income 2017 1295 million decrease 431 million 25 2016 acquisition baker hughes added 309 million segment operating income offset organic impact lower productivity pricing pressure ofs increased 275 million tps decreased 402 million ofe decreased 282 million ds decreased 22 million oilfield services ofs 2017 revenue 5851 million increase 5052 million 2016 primarily result acquisition baker hughes july 3 2017 ofs 2017 segment operating income 71 million compared loss 204 million 2016 acquisition baker hughes added 315 million segment operating income includes increased depreciation amortization expense driven purchase accounting partially offset pricing pressure oilfield equipment ofe 2017 revenue 2637 million decrease 910 million 26 2016 revenue decline primarily due continued volume pressures lesser extent negative pricing driven delays final investment decisions customers prior years bhge llc 2017 form 10k 29 ofe 2017 segment operating income 38 million compared 320 million 2016 decline profitability result negative productivity volume strong deflation savings offset pricing pressures turbomachinery process solutions tps 2017 revenue 6463 million decrease 374 million 5 2016 decline primarily attributable negative pricing lesser extent volume decreases driven lower equipment contracts awarded prior years continued softness services market tps 2017 segment operating income 853 million compared 1255 million 2016 decline profitability primarily due unfavorable cost productivity factors lower margin equipment backlog throughput impact negative pricing digital solutions ds 2017 revenue 2309 million increase 223 million 11 2016 driven acquisition baker hughes added 211 million revenue versus prior year ds 2017 segment operating income 333 million compared 355 million 2016 decline profitability primarily driven pricing pressure lesser extent baker hughes acquisition contributing 5 million segment operating loss corporate 2017 corporate expenses 373 million decrease 7 million compared 2016 primarily due selective decreases rd program investments cost productivity restructuring impairment 2017 recognized 412 million restructuring impairment charges decrease 104 million compared 2016 decrease driven absence significant currency devaluations angola nigeria experienced 2016 merger related costs recorded 373 million merger related costs 2017 increase 340 million prior year primarily related acquisition baker hughes interest expense net 2017 incurred net interest expense 131 million increase 29 million prior year primarily driven debt acquired acquisition baker hughes income tax 2017 income tax expense decreased 78 million 250 million 2016 172 million 2017 decrease primarily due benefit 32 million related recent us tax reform decline profit addition since partnership us federal tax purposes tax benefits associated us losses recognized members reflected tax expense fiscal year 2016 fiscal year 2015 revenue 2016 13269 million decrease 3419 million 20 2015 decrease primarily due continued decline customer activity across product lines due continued weakness oil prices ofe decreased 1513 million tps decreased 1148 million ofs decreased 612 million ds decreased 146 million bhge llc 2017 form 10k 30 total segment operating income 2016 1726 million decrease 965 million 36 2015 decrease primarily driven combined impact lower volume pricing pressure tps decreased 429 million ofe decreased 357 million ofs decreased 125 million ds decreased 54 million oilfield services ofs 2016 revenue 799 million decrease 612 million 43 2015 decline primarily driven impact lower oil prices customer purchasing decisions throughout year ofs 2016 segment operating loss 204 million compared loss 79 million 2015 decline profitability mainly due lower cost productivity partially offset cost deflation oilfield equipment ofe 2016 revenue 3547 million decrease 1513 million 30 2015 decline primarily due customers’ activity reductions lesser extent strengthening us dollar ofe 2016 segment operating income 320 million compared 677 million 2015 decline profitability result lower revenue negative pricing well lower cost productivity partially offset deflation savings turbomachinery process solutions tps 2016 revenue 6837 million decrease 1148 million 14 2015 decline primarily attributable decreases volume price driven uncertainty broader market delays equipment contracts tps 2016 segment operating income 1255 million compared 1684 million 2015 decline profitability primarily due impact lower volume negative pricing digital solutions ds 2016 revenue 2086 million decrease 146 million 7 2015 decline due lower sales volume driven delay capital spending projects oil gas sector ds 2016 segment operating income 355 million compared 409 million 2015 decline profitability driven lower cost productivity weaker sales volume corporate 2016 corporate expenses 380 million increase 120 million compared 2015 primarily due selective increases rd program investments lower cost productivity restructuring impairment 2016 recognized 516 million restructuring impairment charges increase 105 million compared 2015 increase driven continued focus cost rationalization better align operating structure market conditions significant currency devaluations angola nigeria merger related costs recorded 33 million merger related costs 2016 increase 6 million prior year primarily related acquisition baker hughes interest expense net 2016 incurred net interest expense 102 million decrease 18 million prior year primarily related factoring accounts receivable mainly ge capital bhge llc 2017 form 10k 31 income tax 2016 income tax expense decreased 223 million 250 million 473 million 2015 decrease primarily due decline profit excluding impairment nondeductible goodwill 453 million occurred 2015 partially offset decrease benefit global operations including foreign tax credit benefits 132 million compliance conduct activities committed maintaining core values two legacy companies ge oil gas baker hughes incorporated well high safety ethical quality standards also reported quality management system qms believe commitment integral running sound successful sustainable business ensure live high standards devote significant resources maintain comprehensive global ethics compliance program compliance program designed prevent detect appropriately respond timely fashion potential violations law code conduct spirit letter bhge policies procedures highlights compliance program include following • comprehensive internal policies areas antibribery travel entertainment gifts charitable donations connected government officials payments commercial sales representatives use nonus police military organizations security purposes addition countryspecific guidance customs standards visa processing export reexport controls economic sanctions antiboycott laws • global structure legal compliance counsel professionals providing compliance advice customized training investigations governance across regions countries business • comprehensive employee compliance training program combines instructorled webbased training modules tailored key risks employees face ongoing basis • due diligence procedures commercial sales agents administrative service providers professional consultants enhanced riskbased process classifying channel partners suppliers • due diligence procedures merger acquisition activities • specifically tailored compliance risk assessments focused country third party risk • compliance review board comprised senior officers company meets quarterly monitor effectiveness compliance program well product company regional compliance committees meet quarterly • technology monitor report compliance matters including internal investigations management system webbased antiboycott reporting tool global trade management systems • compliance program designed create “open reporting environment” employees encouraged report ethics compliance matter without fear retaliation including global network trained employee ombudspersons worldwide 24hour business helpline operated third party available 150 languages • centralized finance organization companywide policies • anticorruption audits highrisk countries conducted legal compliance internal audit well risk based compliance audits third parties conducted legal compliance • centralized human resources function including locally compliant processes procedures management hr related issues including implementation locally compliant standards prehire screening employees process screen existing employees prior promotion select roles bhge llc 2017 form 10k 32 may exposed finance andor corruptionrelated risks implementation global new hire compliance training module employees liquidity capital resources objective financing business maintain sufficient liquidity adequate financial resources financial flexibility order fund requirements business december 31 2017 cash equivalents 70 billion compared 981 million cash equivalents december 31 2016 cash equivalents includes 997 million cash held behalf ge december 31 2017 december 31 2017 approximately 32 billion cash equivalents held foreign subsidiaries compared approximately 878 million december 31 2016 substantial portion cash held foreign subsidiaries december 31 2017 reinvested active nonus business operations december 31 2017 intent among things use cash fund operations foreign subsidiaries changed indefinite reinvestment decision result us tax reform reassess course 2018 decide later date repatriate funds us may required provide taxes certain funds however due enactment us tax reform repatriations foreign earnings generally free us federal tax may incur taxes withholding state taxes july 3 2017 connection transactions entered new fiveyear 3 billion committed unsecured revolving credit facility 2017 credit agreement commercial banks maturing july 2022 december 31 2017 borrowings 2017 credit agreement november 3 2017 entered commercial paper program may issue time 3 billion commercial paper maturities 397 days december 31 2017 borrowings outstanding commercial paper program maximum combined borrowing time 2017 credit agreement commercial paper program 3 billion november 6 2017 bhge announced board directors authorized us repurchase 3 billion common units ge bhge december 31 2017 repurchased 16173202 common units total consideration 501 million december 15 2017 filed shelf registration statement form s3 sec give us ability sell 3 billion debt securities amounts determined time offering occur may happen one transactions specific terms securities sold described supplemental filings sec registration statement expire 2020 year ended december 31 2017 used cash fund variety activities including certain working capital needs restructuring costs capital expenditures business acquisitions repurchases common units distributions members believe cash hand cash flows generated operations available credit facility provide sufficient liquidity manage global cash needs cash flows cash flows provided used type activity follows years ended december 31 bhge llc 2017 form 10k 33 operating activities largest source operating cash payments customers largest component collecting cash related product services sales including advance payments progress collections work performed primary use operating cash pay suppliers employees tax authorities others wide range material services cash flows operating activities used cash 799 million generated cash 262 million years ended december 31 2017 2016 respectively cash flows operating activities decreased 1061 million 2017 primarily driven 1201 million negative impact ending receivables monetization program fourth quarter restructuring related payments throughout year cash outflows partially offset strong working capital cash flows especially fourth quarter 2017 included cash flows operating activities 2017 2016 payments 612 million 177 million respectively made employee severance contract termination costs result restructuring activities initiated year cash flows operating activities generated 262 million 1277 million years ended december 31 2016 2015 respectively cash flows operating activities decreased 1015 million 2016 primarily due decrease net income partially offset improvements working capital categories due improvements collection past due receivables improved inventory management restructuring investing activities cash flows investing activities used cash 4130 million 472 million 466 million years ended december 31 2017 2016 2015 respectively principal recurring investing activity funding capital expenditures ensure appropriate levels types machinery equipment place generate revenue operations expenditures capital assets totaled 665 million 424 million 607 million 2017 2016 2015 respectively partially offset cash flows sale property plant equipment 172 million 20 million 30 million 2017 2016 2015 respectively proceeds disposal assets related primarily equipment lostinhole property machinery equipment longer used operations sold throughout period 2017 cash flows investing activities also includes 7498 million distribution bhge fund special dividend paid bhge former baker hughes stockholders acquisition baker hughes net 4133 million cash received acquisition material business dispositions 2017 material acquisitions dispositions 2016 however 2015 generated cash approximately 181 million business dispositions utilized cash 86 million business acquisitions financing activities cash flows financing activities generated cash 10915 million used cash 102 million 515 million years ended december 31 2017 2016 2015 respectively 2017 primary source financing cash flows contribution 7400 million ge fund substantially distribution made bhge special dividend paid former baker hughes stockholders also generated financing cash flows 3950 million debt issued private placement offering december 11 2017 incurred issuance costs 26 million related debt issuance net repayments shortterm debt 663 million 156 million 2017 2016 respectively net borrowings 177 million 2015 december 2017 purchased 176 million aggregate outstanding principal amount associated longterm outstanding notes debentures pursuant cash tender offer purchases resulted payment earlytender premium including various fees 28 million bhge llc 2017 form 10k 34 additionally 2017 made distribution 406 million members used 477 million cash repurchase common units members including ge pro rata basis repurchases result change ges approximate 625 interest us cash flows financing activities 2017 also included net transfers ge 1498 million primarily driven cash pooling activity ge prior transactions financing items year included payment 193 million complete purchase noncontrolling interest pipeline inspection integrity business within digital solutions available credit facility commercial paper program july 3 2017 connection transactions entered new fiveyear 3 billion committed unsecured revolving credit facility 2017 credit agreement commercial banks maturing july 2022 2017 credit agreement contains certain customary representations warranties certain affirmative covenants negative covenants upon occurrence certain events default obligations 2017 credit agreement may accelerated events default include payment defaults lenders 2017 credit agreement customary defaults compliance credit facilitys covenants 2017 borrowings credit facility november 3 2017 entered commercial paper program may issue time 3 billion commercial paper maturities 397 days december 31 2017 borrowings outstanding commercial paper program maximum combined borrowing time 2017 credit agreement commercial paper program 3 billion market conditions change revenue reduced significantly operating costs increase cash flows liquidity could reduced additionally could cause rating agencies lower credit rating ratings triggers would accelerate maturity borrowings committed credit facility however downgrade credit ratings could increase cost borrowings credit facility could also limit preclude ability issue commercial paper occur could seek alternative sources funding including borrowing credit facility cash requirements 2018 believe cash hand cash flows operating activities available debt shelf registration 2017 credit agreement provide us sufficient capital resources liquidity manage working capital needs meet contractual obligations fund capital expenditures distributions members support development shortterm longterm operating strategies necessary may issue commercial paper shortterm debt fund cash needs us excess cash generated us capital expenditures adjusted managed us match market demand activity levels light current market conditions capital expenditures 2018 made appropriate rate estimate would equal 5 annual revenue expenditures expected used primarily normal recurring items necessary support business also anticipate making income tax payments range 325 million 375 million 2018 bhge llc 2017 form 10k 35 contractual obligations table set forth contractual obligations december 31 2017 certain amounts included table based estimates assumptions obligations including duration anticipated actions third parties factors contractual obligations actually pay future periods may vary reflected table estimates assumptions subjective 1 amounts represent expected cash payments principal amounts related debt including capital lease obligations amounts debt include deferred issuance costs unamortized discounts premiums including step value debt acquisition baker hughes expected cash payments interest excluded amounts total debt capital lease obligations includes 1124 million payable ge affiliates fixed payment schedule amount payable ge affiliates classified payable less one year 2 amounts represent expected cash payments interest longterm debt capital lease obligations 3 amounts represent future minimum payments noncancelable operating leases initial remaining terms one year enter operating leases include renewal options however excluded renewal options table unless anticipated exercise renewals 4 purchase obligations include capital improvements 2018 well agreements purchase goods services enforceable legally binding specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction due uncertainty respect timing potential future cash outflows associated uncertain tax positions unable make reasonable estimates period cash settlement respective taxing authorities therefore 543 million uncertain tax positions including interest penalties excluded contractual obligations table see note 10 income taxes notes consolidated combined financial statements item 8 herein information certain defined benefit pension postretirement benefit plans covering certain us international employees 2017 made contributions paid direct benefits approximately 63 million connection plans anticipate funding approximately 68 million 2018 amounts pension funding obligations based assumptions subject change therefore currently able reasonably estimate contribution figures 2018 see note 9 employee benefit plans notes consolidated combined financial statements item 8 herein information offbalance sheet arrangements normal course business customers vendors others entered offbalance sheet arrangements surety bonds performance letters credit bank issued guarantees totaled approximately 34 billion december 31 2017 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated combined financial statements bhge llc 2017 form 10k 36 december 31 2017 material offbalance sheet financing arrangements normal operating leases discussed materially exposed financing liquidity market credit risk could arise engaged financing arrangements factors affecting liquidity customer receivables line industry practice may bill customers services provided arrears dependent upon contractual terms challenging economic environment may experience delays payment invoices due customers lower cash flow operations limited access credit markets historically material nonpayment events attempt mitigate risk working customers restructure debts customers failure delay payment could material adverse effect shortterm liquidity results operations december 31 2017 20 gross trade receivables customers united states united states country single customer accounted 10 gross trade receivables date december 31 2016 13 gross trade receivables customers united states venezuela oil production considered important venezuelan economy therefore intend continue provide services primary customer country however required assess ability customer make timely payments amounts owed us assessment performed quarterly basis business relying variety data sources assess collectability outstanding receivables recoverability assets supporting customer noted recent market indicators decline bond prices several delayed payments various bond obligations indicate customer’s financial condition may worsened last three months continue actively manage relationship customer transition difficult period ongoing dialogue key executives companies including discussions regarding customers ability intent ultimately settle trade receivables performing analysis customerspecific assets december 31 2017 considered outstanding receivables priority certain customer’s obligations concluded may take extended period time ultimately collect outstanding receivables accordingly recorded increase allowance doubtful accounts 55 million three months ended december 31 2017 fully offset remaining exposure trade receivables assets customer addition since future receivables generated result ongoing contracts priority existing receivables issued business concluded allowance amounting 32 million reduce inventory purchased contracts redeployable fulfill customer contracts lower cost net realizable value warranted update analysis quarterly basis extent outstanding receivables settled likelihood settling outstanding receivables near term improves reverse existing provision doubtful accounts would result income period reversal international operations cash held outside us 46 total cash balance december 31 2017 may able use cash quickly efficiently due exchange cash controls could make challenging result cash balance may represent ability quickly efficiently use cash bhge llc 2017 form 10k 37 critical accounting estimates accounting estimates assumptions discussed section considered critical understanding financial statements involve significant judgments uncertainties many estimates include determining fair value estimates reflect best judgment current estimates future economic market conditions potential effects based information available date financial statements conditions change expected reasonably possible judgments estimates described could change may result future impairments goodwill intangibles longlived assets increases reserves contingencies establishment valuation allowances deferred tax assets increased tax liabilities among effects also see note 1 summary significant accounting policies notes consolidated combined financial statements item 8 herein discusses significant accounting policies defined critical accounting estimate one important portrayal either financial condition results operations requires us make difficult subjective complex judgments estimates matters uncertain audit committee board directors reviewed critical accounting estimates disclosure presented past three fiscal years made material changes methodology used establish critical accounting estimates believe following critical accounting estimates used preparation consolidated combined financial statements items within consolidated combined financial statements require estimation judgment deemed critical defined revenue recognition longterm product services agreements longterm service agreements customers predominately within tps segment agreements typically require us maintain assets sold customer defined contract term agreements average contract terms 15 years time contract terms may extended contract modifications amendments may result revisions future billing cost estimates recognize revenue incur costs perform arrangements estimated margin rate contract revenue recognition longterm product services agreements requires estimates customer payments costs perform required maintenance services contract term develop billings estimates consider number billable events occur based estimated utilization asset contract life contract term estimated utilization consider historical market conditions asset retirements new product introductions applicable develop cost estimates consider timing extent maintenance overhaul events including amount cost labor spare parts resources required perform services developing cost estimates utilize combination historical cost experience expected cost improvements cost improvements included future cost estimates savings observed actual results proven effective extensive regulatory engineering approval process routinely review estimates used product services agreements regularly revise adjust changes revisions based objectively verifiable information available time review difference timing revenue recognition cash received customers results either contract asset revenue excess billings contract liability billings excess revenue december 31 2017 2016 recorded contract asset 1410 million 1046 million contract liability 83 million 103 million respectively regularly assess customer credit risk inherent carrying amounts receivables contract assets estimated earnings including risk contractual penalties may sufficient offset accumulated investment event customer termination gain insight expected future utilization cost trends well credit risk knowledge equipment installed close interaction customers supplying critical services parts extended periods revisions cost billing estimates may bhge llc 2017 form 10k 38 affect product services agreement’s total estimated profitability resulting adjustment earnings adjustments generated earnings 344 million 293 million 256 million years ended december 31 2017 2016 2015 respectively provide probable losses become evident continue evaluate provisions asc 606 revenue contracts customers assessment impact consolidated combined financial statements related disclosures also see note 1 summary significant accounting policies notes consolidated combined financial statements item 8 herein additional information disclosure goodwill identified intangible assets test goodwill impairment annually using data july 1 year impairment test consists two different steps step one carrying value reporting unit compared fair value step two applied carrying value fair value amount goodwill impairment derived deducting fair value reporting unit’s assets liabilities fair value equity comparing amount carrying amount goodwill determine fair values reporting units using market approach available appropriate income approach combination assess valuation methodology based upon relevance availability data time valuation performed pension assumptions pension benefits calculated using significant inputs actuarial models measure pension benefit obligations related effects operations two assumptions discount rate expected return assets important elements plan expense assetliability measurement evaluate critical assumptions least annually plan country specific basis periodically evaluate assumptions involving demographic factors retirement age mortality turnover update reflect experience expectations future actual results given year often differ actuarial assumptions economic factors projected benefit obligations measured present value expected payments discounted using weighted average market observed yields high quality fixed income securities maturities correspond payment benefits lower discount rates increase present values subsequent year pension expense higher discount rates decrease present values subsequent year pension expense discount rates used determine benefit obligations principal pension plans december 31 2017 2016 2015 299 341 383 respectively reflecting market interest rates expected return assets december 31 2017 2016 2015 626 686 691 respectively income taxes operate 120 countries effective tax rate based income statutory tax rates differences tax laws us generally accepted accounting principles gaap various jurisdictions tax laws complex subject different interpretations taxpayer respective governmental taxing authorities income tax rate significantly affected tax rate global operations addition local country tax laws regulations rate depends extent earnings indefinitely reinvested outside us historically us taxes due upon repatriation foreign earnings due enactment us tax reform repatriations foreign earnings generally free us federal tax may incur taxes withholding state taxes indefinite reinvestment determined management’s judgment intentions concerning future operations company earnings reinvested active nonus business operations december 31 2017 changed indefinite reinvestment decision result us tax reform reassess course 2018 december 31 2017 approximately 80 billion earnings indefinitely reinvested outside us additional foreign earnings could become subject additional tax remitted deemed remitted dividend computation potential deferred tax liability associated undistributed earnings basis differences practicable bhge llc 2017 form 10k 39 deferred income tax assets represent amounts available reduce income taxes payable future years evaluate recoverability future tax deductions credits assessing adequacy future taxable income sources including reversal taxable temporary differences forecasted operating earnings available tax planning strategies sources income rely heavily estimates use historical experience short long range business forecasts provide insight record valuation allowance likely portion deferred tax assets realized december 22 2017 us enacted tax cuts jobs act us tax reform lowers statutory tax rate us earnings taxes historic foreign earnings previously deferred us taxation reduced rate tax transition tax establishes territorial tax system enacts new taxes associated global operations impact us tax reform recorded provisional basis legislation provides additional guidance issued us department treasury several provisions including computation transition tax guidance 2018 could impact information required calculation transition tax charge could affect decisions affect tax various us foreign items would impact final amounts included transition tax charge impact revaluation deferred taxes addition analysis performed conclusions reached part tax return filing process additional guidance accounting tax reform could affect provisional amount additionally part us tax reform us enacted tax base eroding payments us minimum tax foreign earnings global intangible lowtaxed income aspects new minimum tax effect operations uncertain aspects accounting rules associated provision resolved made provisional accrual deferred tax aspects provision consequently made accounting policy election deferred tax treatment tax filings routinely subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved tax authorities courts provided amounts believe ultimately result proceedings settlements issues raised audits may affect tax rate 395 million gross unrecognized tax benefits excluding interest penalties december 31 2017 able reasonably estimate future periods amounts ultimately settled loss contingencies loss contingencies uncertain unresolved matters arise ordinary course business result events actions others potential result future loss contingencies include limited environmental obligations litigation regulatory proceedings product quality losses resulting events developments preparation consolidated combined financial statements requires us make estimates judgments affect reported amounts assets liabilities revenue expenses related disclosures well disclosures contingent assets liabilities base estimates judgments historical experience assumptions information believed reasonable circumstances estimates assumptions future events effects subject uncertainty accordingly estimates may change new events occur experience acquired additional information obtained business environment operate changes allowance doubtful accounts determination collectability amounts due customers requires us make judgments estimates regarding customers ability pay amounts due us order determine amount valuation allowances required doubtful accounts monitor customers payment history current credit worthiness determine collectability reasonably assured also consider overall business climate customers operate provisions doubtful accounts recorded based aging status customer accounts becomes evident customer make required payments either contractual due dates future december 31 2017 2016 allowance doubtful accounts totaled 330 million 186 million total gross accounts receivable respectively believe allowance bhge llc 2017 form 10k 40 doubtful accounts adequate cover potential bad debt losses current conditions however uncertainties regarding changes financial condition customers either adverse positive could impact amount timing additional provisions doubtful accounts may required inventory reserves inventory significant component current assets stated lower cost net realizable value requires us record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments estimates forecasts inherently include uncertainties require us make judgments regarding potential future outcomes december 31 2017 2016 inventory reserves totaled 360 million 260 million gross inventory respectively believe reserves adequate properly value potential excess slow moving obsolete inventory current conditions significant unanticipated changes estimates forecasts could impact amount timing additional provisions excess slow moving obsolete inventory may required acquisitions purchase price allocation allocate purchase price acquired business identifiable assets liabilities based estimated fair values excess purchase price amount allocated assets liabilities recorded goodwill use available information estimate fair values including quoted market prices carrying value acquired assets widely accepted valuation techniques discounted cash flows engage thirdparty appraisal firms assist fair value determination inventories identifiable intangible assets significant assets liabilities appropriate judgments made determining estimated fair value assigned class assets acquired liabilities assumed well asset lives materially impact results operations new accounting standards adopted see note 1 summary significant accounting policies notes consolidated combined financial statements item 8 herein discussion accounting standards adopted related party transactions see note 14 related party transactions notes consolidated combined financial statements item 8 herein discussion related party transactions items iran threat reduction syria human rights act 2012 company making following disclosure pursuant section 13r securities exchange act 1934 section 13r securities exchange act 1934 enacted 2012 required disclose periodic reports affiliates knowingly engaged business activities relating iran even activities conducted accordance authorizations subsequently issued us government reportable activities include investments significantly enhance iran’s ability develop petroleum resources valued 20 million aggregate twelvemonth period reporting also required transactions related iran’s domestic production refined petroleum products iran’s ability import refined petroleum products valued 5 million aggregate twelvemonth period january 2016 us department treasury’s office foreign assets control ofac issued general license h authorizing usowned controlled foreign entities engage transactions iran entities meet requirements general license pursuant authorization nonus bhge affiliate received seven purchase orders fourth quarter 2017 sale goods pursuant general license h could potentially enhance iran’s ability develop petroleum resources purchase orders cover sale valves parts industrial machinery equipment used gas plants petrochemical plants gas bhge llc 2017 form 10k 41 production projects iran purchase orders valued less €01 million 01 million less €01 million 01 million less €01 million 01 million €03 million 03 million €07 million 08 million €01 million 01 million €08 million 1 0 million nonus affiliate also received cancellation previously reported contract sale spare parts gas turbines purchase order cancellation reduces previously reported contract values €123 million 129 million nonus affiliate attributed €68 million 82 million gross revenue €14 million 17 million net profits previously reported transactions quarter ending december 31 2017 second nonus bhge affiliate received three purchase orders fourth quarter 2017 sale spares parts support development offshore petroleum resources three purchase orders individually valued less €01 million 01 million less €01 million 01 million less €01 million 01 million nonus affiliate recognize revenue profit quarter ending december 31 2017 third nonus bhge affiliate received purchase order pursuant general license h valued €02 million 02 million fourth quarter 2017 nonus affiliate also received purchase order end third quarter valued €03 million 03 million purchase orders cover sale films used inspection pipelines iran nonus affiliate recognize revenue profit quarter ending december 31 2017 nonus affiliates intend continue activities described permitted applicable laws regulations forwardlooking statements form 10k including mda certain statements notes consolidated combined financial statements contains forwardlooking statements within meaning section 27a securities act 1933 amended section 21e exchange act 1934 amended forwardlooking statement forwardlooking statements concern future circumstances results statements historical facts sometimes identified words may potential intend expect endeavor seek anticipate estimate overestimate underestimate believe could project predict continue target similar words expressions forwardlooking statements based upon current plans estimates expectations subject risks uncertainties assumptions one risks uncertainties materialize underlying assumptions prove incorrect actual results may vary materially indicated anticipated forwardlooking statements inclusion statements regarded representation plans estimates expectations achieved important factors could cause actual results differ materially plans estimates expectations include among others risk factors risk factors section part 1 item 1a form 10k set forth timetotime filings company sec documents available website secs electronic data gathering analysis retrieval edgar system httpwwwsecgov light risks uncertainties caution place undue reliance forwardlooking statements forwardlooking statements speak date annual report earlier date made intend disclaim obligation update revise forwardlooking statements unless required securities law item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations mda read conjunction consolidated combined financial statements included item 8 financial statements supplementary data contained herein executive summary july 3 2017 closed transactions combine ge og baker hughes creating fullstream oilfield technology provider unique mix integrated oilfield products services digital solutions transactions executed using partnership structure pursuant ge og baker hughes contributed operating assets company december 31 2018 ge holds approximate 504 interest us bhge holds approximate 496 interest ges interest held voting interest class b common stock bhge economic interest corresponding number common units results operations company include results baker hughes july 3 2017 date acquisition december 31 2018 majority baker hughes business operations included oilfield services segment transactions treated “reverse acquisition” accounting purposes historical financial statements accounting acquirer ge og historical financial statements company current year results may comparable prior years prior years include results baker hughes july 3 2017 operate four business segments oilfield services ofs oilfield equipment ofe turbomachinery processing solutions tps digital solutions ds december 31 2018 bhge llc employs approximately 66000 employees operates 120 countries june 2018 ge announced intention pursue orderly separation bhge time end fourth quarter 2018 certain equity transactions completed ge’s ownership bhge reduced approximately 625 approximately 504 time completed master agreement framework designed solidify commercial technological collaboration us ge position us future master agreement framework focuses areas work closely ge developing leading technology executing customers first defined parameters longterm collaboration partnership ge critical rotating equipment technology second digital software technology business maintain status quo exclusive supplier ge digital oilandgas applications finally reached agreements number areas including controls business pension taxes intercompany services details master agreement framework see note 16 related party disclosures notes consolidated combined financial statements item 8 herein aggregate anticipate net financial impact agreements contemplated master agreement framework slightly negative impact operating margin rates approximately 20 40 basis points addition expect incur onetime charges related separation ge approximately 02 billion 03 billion next three years expect charges primarily related buildout information technology infrastructure well customary transaction fees discussion certain risks associated separation including risks related business financial condition results operations see “item 1a risk factorsrisks factors related transactions separation ge” 2018 generated revenue 22877 million compared 17179 million 2017 increase revenue driven primarily ofs 2018 included full year results baker hughes compared six months 2017 lesser extent ds partially offset declines tps ofe income taxes equity loss affiliate 680 million 2018 included restructuring impairment charges 433 million merger related costs 153 million restructuring impairment charges recorded result continued actions adjust operations cost structure reflect reduced activity levels 2017 loss income taxes equity loss affiliate 335 million also included restructuring impairment charges 412 million merger related costs 373 million bhge llc 2018 form 10k 24 outlook business exposed number different macro factors influence expectations outlook expectations purely based market see today subject change given volatile conditions industry • north america onshore activity 2018 experienced acceleration rig count growth compared 2017 driven increase commodity prices first 10 months year fourth quarter wti prices declined 38 driven increased supply geopolitical events expect decline commodity prices may negative impact activity north america 2019 • international onshore activity seen moderate increase rig count activity 2018 expect growth continue 2019 slightly increased rate seen signs improvement increase commodity prices due continued volatility remain cautious growth expectations • offshore projects although commodity prices volatile begun see increasing customer activity offshore projects final investment decisions made subsea tree awards increased 2018 expect tree awards roughly flat 2019 though still levels significantly prior 2012 2013 peaks expect customers continue evaluate timing final investment decisions light increased commodity price volatility may project delays • liquefied natural gas lng projects remain optimistic lng market currently oversupplied believe significant number final investment decisions needed fill projected supplydemand imbalance early middle part next decade 2018 saw positive final investment decisions new lng capacity continue view longterm economics lng industry positive given outlook supply demand • refinery petrochemical industrial projects refining believe large complex refineries gain advantage competitive oversupplied landscape 2019 industry globalizes refiners position meet local demand secure export potential petrochemicals continue see healthy demand costadvantaged supply driving projects forward 2019 industrial market continues grow outdated infrastructure replaced policy changes come effect power decentralized continue see growing demand across markets 2019 segments portfolio correlated different industrial metrics digital solutions business overall believe portfolio uniquely positioned compete across value chain deliver comprehensive solutions customers remain optimistic longterm economics industry continuing operate flexibility given expectations volatility changing assumptions near term solar wind net additions continued exceed coal gas throughout 2018 governments may change may continue incentives renewable energy additions long term renewables cost decline may accelerate compete newbuilt fossil capacity however anticipate significant impacts business foreseeable future despite nearterm volatility longterm outlook industry remains positive believe world’s demand energy continue rise supply energy continue increase complexity requiring greater service intensity advanced technology oilfield service companies remain focused delivering innovative costefficient solutions deliver step changes operating economic performance customers business environment following discussion analysis summarizes significant factors affecting results operations financial condition liquidity position year ended december 31 2018 2017 2016 bhge llc 2018 form 10k 25 read conjunction consolidated combined financial statements related notes company operate 120 countries helping customers find evaluate drill produce transport process hydrocarbon resources revenue predominately generated sale products services major national independent oil natural gas companies worldwide dependent spending customers oil natural gas exploration field development production spending driven number factors including customers forecasts future energy demand supply access resources develop produce oil natural gas ability fund capital programs impact new government regulations importantly expectations oil natural gas prices key driver cash flows oil natural gas prices oil natural gas prices summarized table averages daily closing prices periods indicated 1 energy information administration eia europe brent spot price per barrel 2 eia cushing ok wti west texas intermediate spot price 3 eia henry hub natural gas spot price per million british thermal unit 2018 demonstrated volatility oil gas market first three quarters 2018 experienced stability north american international markets however fourth quarter 2018 commodity prices dropped nearly 40 resulting increased customer uncertainty offshore standpoint 2018 saw multiple large offshore projects reach positive final investment decisions lng market outlook improved throughout 2018 driven increased demand globally 2018 first large north american lng positive final investment decision reached outside north america customer spending highly driven brent oil prices increased average throughout year average brent oil prices increased 7134bbl 2018 5412bbl 2017 ranged low 5057bbl december 2018 high 8607bbl october 2018 first three quarters 2018 brent oil prices increased sequentially however fourth quarter brent oil prices declined 39 versus end third quarter result increased supply us worries global economic slowdown lower expected production cuts north america customer spending highly driven wti oil prices similar brent oil prices average increased throughout year average wti oil prices increased 6523bbl 2018 5080bbl 2017 ranged low 4448bbl december 2018 high 7741bbl june 2018 north america natural gas prices measured henry hub natural gas spot price averaged 315mmbtu 2018 representing 6 increase prior year throughout year henry hub natural gas spot prices ranged high 624mmbtu january 2018 low 249mmbtu february 2018 according us department energy doe working natural gas storage end 2018 2705 billion cubic feet bcf 156 421 bcf corresponding week 2017 baker hughes rig count baker hughes rig counts important business barometer drilling industry suppliers drilling rigs active consume products services produced oil service industry rig count trends driven exploration development spending oil natural gas companies turn influenced current future price expectations oil natural gas counts may reflect relative bhge llc 2018 form 10k 26 strength stability energy prices overall market activity however counts solely relied specific pervasive conditions may exist affect overall energy prices market activity providing rig counts public since 1944 gather relevant data field service personnel obtain necessary data routine visits various rigs customers contractors outside sources necessary base classification well either oil natural gas primarily upon filings made operators relevant jurisdiction data compiled distributed various wire services trade associations published website believe counting process resulting data reliable however subject ability obtain accurate timely information rig counts compiled weekly us canada monthly international rigs published international rig counts include rigs drilling certain locations russia caspian region onshore china information readily available rigs us canada counted active day count taken well drilled started drilling completed well anticipated sufficient depth potential consumer drill bits international areas rigs counted weekly basis deemed active drilling activities occurred majority week weekly results averaged month published accordingly rig count include rigs transit one location another rigging used nondrilling activities including production testing completion workover expected significant consumers drill bits rig counts summarized table averages periods indicated 2018 compared 2017 overall rig count 2211 2018 increase 9 compared 2017 due primarily north american activity rig count north america increased 13 2018 compared 2017 internationally rig count increased 4 2018 compared period last year within north america increase primarily driven us rig count 18 average versus 2017 partially offset decrease canadian rig count 8 average internationally improvement rig count driven primarily increases africa region 18 asiapacific region latin america region also 9 3 respectively partially offset europe region 8 2017 compared 2016 overall rig count 2030 2017 increase 27 compared 2016 due primarily north american activity rig count north america increased 69 2017 compared 2016 internationally rig count decreased 1 2017 compared period last year within north america increase primarily driven land rig count 72 partially offset decrease offshore rig count 16 internationally rig count decrease driven primarily decreases latin america 7 europe region africa region 4 2 respectively partially offset asiapacific region 8 bhge llc 2018 form 10k 27 results operations discussions relating significant line items consolidated combined statements income loss based available information represent analysis significant changes events impact comparability reported amounts appropriate identified specific events changes affect comparability trends reasonably practicable quantified impact items addition discussions revenue cost revenue total basis business drivers product sales services similar dollar amounts tabulations section millions dollars unless otherwise stated certain columns rows may add due use rounded numbers results operations company include results baker hughes july 3 2017 date acquisition year ended december 31 2018 results operations evaluated chief executive officer consolidated basis well segment level performance operating segments evaluated based segment operating income loss defined income loss income taxes equity loss affiliate following net interest expense net non operating income corporate expenses restructuring impairment charges inventory impairment merger related costs certain gains losses allocated operating segments evaluating segment performance company uses following volume increase decrease products andor services sold periodoverperiod excluding impact foreign exchange price volume impact profit calculated multiplying prior period profit rate change revenue volume current prior period also includes price defined change sales price comparable product service periodoverperiod calculated periodoverperiod change sales prices comparable products services foreign exchange fx measures translational foreign exchange impact translation impact periodoverperiod change sales costs directly attributable change foreign exchange rate compared us dollar fx impact calculated multiplying functional currency amounts revenue profit periodoverperiod fx rate variance using average exchange rate respective period inflationdeflation defined increase decrease direct indirect costs type equal amount volume calculated yearoveryear change cost ie price paid direct material compensation benefits overhead costs productivity measured remaining variance profit adjusting periodoverperiod impact volume price foreign exchange inflationdeflation defined improved lower periodoverperiod cost productivity result cost efficiencies inefficiencies cost decreasing increasing volume cost increasing decreasing less volume changes sales mix among segments also includes periodoverperiod variance transactional foreign exchange aside foreign currency devaluations reported separately business evaluation purposes orders remaining performance obligations orders recognized orders 23904 million 17159 million 11066 million 2018 2017 2016 respectively 2018 service orders 36 equipment orders 45 compared 2017 service orders 39 equipment orders 88 compared 2016 increase orders 2018 2017 driven primarily acquisition baker hughes remaining performance obligations rpo december 31 2018 2017 aggregate amount transaction price allocated unsatisfied partially unsatisfied performance obligations 210 billion year respectively bhge llc 2018 form 10k 28 revenue segment operating income loss tax revenue segment operating income loss four operating segments provided 1 inventory impairments related charges reported cost goods sold caption consolidated combined statements income loss 2017 includes 87 million adjustments writeup acquired inventory estimated fair value acquisition baker hughes inventory used sold six months ended december 31 2017 fiscal year 2018 fiscal year 2017 revenue 2018 22877 million increase 5698 million 33 2017 increase revenue largely result incremental baker hughes revenue 2018 ofs increased 5736 million ds increased 262 million ofe decreased 20 million tps decreased 280 million total segment operating income 2018 1796 million increase 681 million 61 2017 increase primarily driven ofs increased 718 million ds increased 33 million partially offset tps decreased 44 million ofe decreased 26 million bhge llc 2018 form 10k 29 oilfield services ofs 2018 revenue 11617 million increase 5736 million 2017 primarily result full year baker hughes revenue 2018 addition incremental revenue baker hughes improvement revenue also due increased activity north american international markets compared prior year evidenced 9 increase worldwide rig counts ofs 2018 segment operating income 785 million compared 67 million 2017 additional contribution resulting acquisition baker hughes lesser extent higher activity synergy benefits drove increase operating income oilfield equipment ofe 2018 revenue 2641 million decrease 20 million 1 2017 decrease driven primarily lower volume flexible pipe business additionally decrease driven lower opening rpo subsea production systems business partially offset higher volume surface pressure control services businesses ofe 2018 segment operating income breakeven compared 26 million 2017 decline profitability primarily driven negative mix longterm projects lesser extent foreign exchange headwinds deflation savings positive cost productivity partially offset decrease turbomachinery process solutions tps 2018 revenue 6015 million decrease 280 million 4 2017 decrease primarily driven lower volume businesses serve upstream segments lesser extent lower volume businesses serve downstream segments equipment revenue 2018 represented 40 service revenue represented 60 total revenue tps 2018 segment operating income 621 million compared 665 million 2017 decline profitability driven primarily lower volume lesser extent negative cost productivity decrease partially offset favorable business mix cost reduction actions implemented company digital solutions ds 2018 revenue 2604 million increase 262 million 11 2017 primarily result incremental baker hughes revenue 2018 outside contribution decrease controls business due softness power endmarket offset revenue increases across product lines ds 2018 segment operating income 390 million compared 357 million 2017 increase profitability driven positive cost productivity including synergy benefits corporate 2018 corporate expenses 405 million increase 35 million compared 2017 primarily additional expenses related acquisition baker hughes partially offset realized synergies restructuring impairment 2018 recognized 433 million restructuring impairment charges increase 21 million compared 2017 increase primarily due costs driven implementation synergy plans merger related costs recorded 153 million merger related costs 2018 decrease 220 million prior year decrease primarily due decline costs finalize merger related activities partially offset costs incurred relation anticipated separation ge bhge llc 2018 form 10k 30 interest expense net 2018 incurred net interest expense 223 million increase 92 million prior year primarily driven 395 billion debt issued fourth quarter 2017 debt obtained baker hughes acquisition partially offset reduced interest expense associated retirement debt 615 million january 2018 addition interest expense declined ceased participation ge receivables monetization program equity loss affiliate 2018 recorded loss 139 million related equity method investment bj services result discontinued applying equity method resume application equity method share unrecognized net income equals share net loss recognized period equity method suspended cash impact bhge income tax 2018 income tax expense increased 256 million 146 million 2017 402 million 2018 increase primarily due higher foreign taxes related increased foreign earnings geographical mix earnings addition since partnership us federal tax purposes tax benefits associated us losses recognized members reflected tax expense fiscal year 2017 fiscal year 2016 revenue 2017 17179 million increase 4097 million 31 2016 increase primarily driven acquisition baker hughes ofs increased 5093 million ds increased 256 million ofe decreased 879 million tps decreased 373 million total segment operating income 2017 1115 million decrease 404 million 27 2016 acquisition baker hughes added 321 million segment operating income offset organic impact lower productivity pricing pressure ofs increased 274 million tps decreased 393 million ofe decreased 279 million ds decreased 6 million oilfield services ofs 2017 revenue 5881 million increase 5093 million 2016 primarily result acquisition baker hughes july 3 2017 ofs 2017 segment operating income 67 million compared loss 207 million 2016 acquisition baker hughes added 327 million segment operating income includes increased depreciation amortization expense driven purchase accounting partially offset pricing pressure oilfield equipment ofe 2017 revenue 2661 million decrease 879 million 25 2016 revenue decline primarily due continued volume pressures lesser extent negative pricing driven delays final investment decisions customers prior years ofe 2017 segment operating income 26 million compared 305 million 2016 decline profitability result negative productivity volume strong deflation savings offset pricing pressures turbomachinery process solutions tps 2017 revenue 6295 million decrease 373 million 6 2016 decline primarily attributable negative pricing lesser extent volume decreases driven lower equipment contracts awarded prior years continued softness services market bhge llc 2018 form 10k 31 tps 2017 segment operating income 665 million compared 1058 million 2016 decline profitability primarily due unfavorable cost productivity factors lower margin equipment backlog throughput impact negative pricing digital solutions ds 2017 revenue 2342 million increase 256 million 12 2016 driven acquisition baker hughes added 211 million revenue versus prior year ds 2017 segment operating income 357 million compared 363 million 2016 decline profitability primarily driven baker hughes acquisition contributing 5 million segment operating loss corporate 2017 corporate expenses 370 million decrease 5 million compared 2016 primarily due selective decreases rd program investments cost productivity restructuring impairment 2017 recognized 412 million restructuring impairment charges decrease 104 million compared 2016 decrease driven absence significant currency devaluations angola nigeria experienced 2016 merger related costs recorded 373 million merger related costs 2017 increase 340 million prior year primarily related acquisition baker hughes interest expense net 2017 incurred net interest expense 131 million increase 29 million prior year primarily driven debt acquired acquisition baker hughes income tax 2017 income tax expense decreased 27 million 173 million 2016 146 million 2017 decrease primarily due benefit 32 million related recent us tax reform decline profit addition since partnership us federal tax purposes tax benefits associated us losses recognized members reflected tax expense compliance conduct activities committed maintaining core values company well high safety ethical quality standards also reported quality management system qms believe commitment integral running sound successful sustainable business ensure live high standards devote significant resources maintain comprehensive global ethics compliance program compliance program designed prevent detect appropriately respond timely fashion potential violations law code conduct spirit letter bhge policies procedures bhge llc 2018 form 10k 32 highlights compliance program include following • comprehensive internal policies areas antibribery travel entertainment gifts charitable donations connected government officials payments commercial sales representatives use nonus police military organizations security purposes addition countryspecific guidance customs standards visa processing export reexport controls economic sanctions antiboycott laws • global structure legal compliance counsel professionals providing compliance advice customized training investigations governance across regions countries business • comprehensive employee compliance training program combines instructorled webbased training modules tailored key risks employees face ongoing basis • due diligence procedures commercial sales agents administrative service providers professional consultants enhanced riskbased process classifying channel partners suppliers • due diligence procedures merger acquisition activities • specifically tailored compliance risk assessments focused country third party risk • compliance review board comprised senior officers company meets quarterly monitor effectiveness compliance program well product company regional compliance committees meet quarterly • technology monitor report compliance matters including internal investigations management system webbased antiboycott reporting tool global trade management systems • compliance program designed create “open reporting environment” employees encouraged report ethics compliance matter without fear retaliation including global network trained employee ombudspersons worldwide 24hour business helpline operated third party available 150 languages • centralized finance organization companywide policies • anticorruption audits highrisk countries conducted legal compliance internal audit well risk based compliance audits third parties conducted legal compliance • centralized human resources function including locally compliant processes procedures management hr related issues including implementation locally compliant standards prehire screening employees process screen existing employees prior promotion select roles may exposed finance andor corruptionrelated risks implementation global new hire compliance training module employees liquidity capital resources objective financing business maintain sufficient liquidity adequate financial resources financial flexibility order fund requirements business december 31 2018 cash equivalents restricted cash 3677 million compared 7026 million december 31 2017 cash equivalents restricted cash includes 747 million 997 million cash held behalf ge december 31 2018 2017 respectively excluding cash held behalf ge us subsidiaries held approximately 07 billion 36 billion foreign subsidiaries held approximately 23 billion 24 billion cash equivalents restricted cash december 31 2018 2017 respectively substantial portion cash held foreign subsidiaries december 31 2018 reinvested active nonus business operations decide later date repatriate funds us may required provide taxes certain funds however due bhge llc 2018 form 10k 33 enactment us tax reform repatriations foreign earnings generally free us federal tax may incur taxes withholding state taxes fiveyear 3 billion committed unsecured revolving credit facility 2017 credit agreement commercial banks maturing july 2022 2017 credit agreement contains certain customary representations warranties certain affirmative covenants negative covenants upon occurrence certain events default obligations 2017 credit agreement may accelerated events default include payment defaults lenders 2017 credit agreement customary defaults compliance credit facilitys covenants 2018 borrowings credit facility commercial paper program may issue time 3 billion commercial paper maturities 397 days december 31 2018 borrowings outstanding commercial paper program maximum combined borrowing time 2017 credit agreement commercial paper program 3 billion market conditions change revenue reduced significantly operating costs increase cash flows liquidity could reduced additionally could cause rating agencies lower credit rating ratings triggers would accelerate maturity borrowings committed credit facility however downgrade credit ratings could increase cost borrowings credit facility could also limit preclude ability issue commercial paper occur could seek alternative sources funding including borrowing credit facility year ended december 31 2018 used cash fund variety activities including certain working capital needs restructuring costs capital expenditures repayment debt repurchase units distribution members believe cash hand cash flows generated operations available credit facility provide sufficient liquidity manage global cash needs cash flows cash flows provided used type activity follows years ended december 31 operating activities largest source operating cash payments customers largest component collecting cash related product services sales including advance payments progress collections work performed primary use operating cash pay suppliers employees tax authorities others wide range material services cash flows operating activities generated cash 1738 million used cash 798 million years ended december 31 2018 2017 respectively cash flows operating activities increased 2536 million 2018 primarily driven better operating performance cash inflows supported strong working capital cash flows especially fourth quarter 2018 including approximately 300 million progress collection payment customer included cash flows operating activities 2018 2017 payments 473 million 612 million respectively made primarily employee severance result restructuring activities merger related costs cash flows operating activities used 798 million generated 262 million years ended december 31 2017 2016 respectively cash flows operating activities decreased 1061 million 2017 primarily driven 1201 million negative impact ending receivables monetization program fourth quarter restructuring related payments throughout year cash outflows partially offset strong working capital cash flows especially fourth quarter 2017 included cash flows operating bhge llc 2018 form 10k 34 activities 2017 2016 payments 612 million 177 million respectively made employee severance result restructuring activities merger related costs investing activities cash flows investing activities used cash 578 million 4123 million 472 million years ended december 31 2018 2017 2016 respectively principal recurring investing activity funding capital expenditures ensure appropriate levels types machinery equipment place generate revenue operations expenditures capital assets totaled 995 million 665 million 424 million 2018 2017 2016 respectively partially offset cash flows sale property plant equipment 458 million 172 million 20 million 2018 2017 2016 respectively proceeds disposal assets related primarily equipment lostinhole property machinery equipment longer used operations sold throughout period 2018 company received 453 million sale businesses primarily driven sale natural gas solution ngs business 375 million also 2018 company adnoc signed strategic partnership agreement company acquired five percent stake adnoc drilling cash consideration 500 million 2017 cash flows investing activities also includes 7498 million distribution bhge fund special dividend paid bhge former baker hughes stockholders acquisition baker hughes net 4133 million cash received acquisition financing activities cash flows financing activities used cash 4381 million generated cash 10914 million used cash 102 million years ended december 31 2018 2017 2016 respectively 2018 returned 33 billion cash members repurchase units distributions members specifically used cash 1 billion repurchase units members pro rata basis additionally november 2018 repurchased 65 million units ge cash consideration 1461 million december 31 2018 stock repurchase program substantially completed 2018 made distribution members 824 million net repayments shortterm debt 376 million 663 million 2018 2017 respectively repayment longterm debt 2018 consisted primarily repayment certain senior notes capital leases total consideration 684 million 2017 primary source financing cash flows contribution 7400 million ge fund substantially distribution made bhge special dividend paid former baker hughes stockholders also generated financing cash flows 3950 million debt issued private placement offering december 2017 incurred issuance costs 26 million related debt issuance december 2017 purchased 176 million aggregate outstanding principal amount associated longterm outstanding notes debentures pursuant cash tender offer purchases resulted payment earlytender premium including various fees 28 million additionally 2017 made distribution 406 million members used 477 million cash repurchase units members including ge pro rata basis repurchases 2017 result change ges approximate 625 interest us cash flows financing activities 2017 also included net transfers ge 1498 million primarily driven cash pooling activity ge prior transactions financing items year included payment 193 million complete purchase noncontrolling interest pipeline inspection integrity business within digital solutions bhge llc 2018 form 10k 35 cash requirements 2019 believe cash hand cash flows operating activities available revolving credit facility availability existing shelf registrations debt provide us sufficient capital resources liquidity manage working capital needs meet contractual obligations fund capital expenditures distribution members support development shortterm longterm operating strategies necessary may issue commercial paper shortterm debt fund cash needs us excess cash generated us capital expenditures adjusted managed us match market demand activity levels light current market conditions capital expenditures 2019 made appropriate rate estimate would equal 5 annual revenue expenditures expected used primarily normal recurring items necessary support business also anticipate making income tax payments range 425 million 475 million 2019 contractual obligations table set forth contractual obligations december 31 2018 certain amounts included table based estimates assumptions obligations including duration anticipated actions third parties factors contractual obligations actually pay future periods may vary reflected table estimates assumptions subjective 1 amounts represent expected cash payments principal amounts related debt including capital lease obligations amounts debt include deferred issuance costs unamortized discounts premiums including step value debt acquisition baker hughes expected cash payments interest excluded amounts total debt capital lease obligations includes 896 million payable ge affiliates fixed payment schedule amount payable ge affiliates classified payable less one year 2 amounts represent expected cash payments interest longterm debt capital lease obligations 3 amounts represent future minimum payments noncancelable operating leases initial remaining terms one year enter operating leases include renewal options however excluded renewal options table unless anticipated exercise renewals 4 purchase obligations include expenditures capital assets 2019 well agreements purchase goods services enforceable legally binding specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction due uncertainty respect timing potential future cash outflows associated uncertain tax positions unable make reasonable estimates period cash settlement respective taxing authorities therefore 597 million uncertain tax positions including interest penalties excluded contractual obligations table see note 12 income taxes notes consolidated combined financial statements item 8 herein information certain defined benefit pension postretirement benefit plans covering certain us international employees 2018 made contributions paid direct benefits approximately 72 million connection plans anticipate funding approximately 41 million 2019 amounts pension funding obligations based assumptions subject change therefore currently bhge llc 2018 form 10k 36 able reasonably estimate contribution figures 2019 see note 11 employee benefit plans notes consolidated combined financial statements item 8 herein information offbalance sheet arrangements normal course business customers vendors others entered offbalance sheet arrangements surety bonds performance letters credit bank issued guarantees totaled approximately 36 billion december 31 2018 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated combined financial statements december 31 2018 material offbalance sheet financing arrangements normal operating leases discussed materially exposed financing liquidity market credit risk could arise engaged financing arrangements factors affecting liquidity registration statements november 2018 bhge filed universal shelf registration statement form s3asr automatic shelf registration sec ability sell various types securities including debt securities class common stock preferred stock guarantees debt securities purchase contracts units specific terms securities sold would described supplemental filings sec registration statement expire 2021 december 2017 baker hughes coobligor inc filed shelf registration statement form s3 sec ability sell 3 billion debt securities amounts determined time offering occur may happen one transactions specific terms debt securities sold would described supplemental filings sec registration statement expire 2020 customer receivables line industry practice may bill customers services provided arrears dependent upon contractual terms challenging economic environment may experience delays payment invoices due customers lower cash flow operations limited access credit markets historically material nonpayment events attempt mitigate risk working customers restructure debts customers failure delay payment could material adverse effect shortterm liquidity results operations december 31 2018 24 gross trade receivables customers united states united states country single customer accounted 10 gross trade receivables date december 31 2017 20 gross trade receivables customers united states international operations cash held outside us 81 total cash balance december 31 2018 may able use cash quickly efficiently due exchange cash controls could make challenging result cash balance may represent ability quickly efficiently use cash bhge llc 2018 form 10k 37 critical accounting estimates accounting estimates assumptions discussed section considered critical understanding financial statements involve significant judgments uncertainties many estimates include determining fair value estimates reflect best judgment current estimates future economic market conditions potential effects based information available date financial statements conditions change expected reasonably possible judgments estimates described could change may result future impairments goodwill intangibles longlived assets increases reserves contingencies establishment valuation allowances deferred tax assets increased tax liabilities among effects also see note 1 summary significant accounting policies notes consolidated combined financial statements item 8 herein discusses significant accounting policies defined critical accounting estimate one important portrayal either financial condition results operations requires us make difficult subjective complex judgments estimates matters uncertain audit committee board directors reviewed critical accounting estimates disclosure presented past three fiscal years made material changes methodology used establish critical accounting estimates believe following critical accounting estimates used preparation consolidated combined financial statements items within consolidated combined financial statements require estimation judgment deemed critical defined revenue recognition longterm product services agreements longterm service agreements customers predominately within tps segment agreements typically require us maintain assets sold customer defined contract term agreements average contract terms 15 years time contract terms may extended contract modifications amendments may result revisions future billing cost estimates revenue recognition longterm product services agreements requires estimates customer payments costs perform required maintenance services contract term recognize revenue overtime basis using input method measure progress toward completion estimated margin rate contract develop billings estimates consider number billable events occur based estimated utilization asset contract life contract term estimated utilization consider historical market conditions asset retirements new product introductions applicable develop cost estimates consider timing extent maintenance overhaul events including amount cost labor spare parts resources required perform services developing cost estimates utilize combination historical cost experience expected cost improvements cost improvements included future cost estimates savings observed actual results proven effective extensive regulatory engineering approval process routinely review estimates used product services agreements regularly revise adjust changes revisions based objectively verifiable information available time review difference timing revenue recognition cash received customers results either contract asset revenue excess billings contract liability billings excess revenue see note 8 contract deferred assets note 9 progress collections deferred income notes consolidated combined financial statements item 8 herein information regularly assess customer credit risk inherent carrying amounts receivables contract assets estimated earnings including risk contractual penalties may sufficient offset accumulated investment event customer termination gain insight expected future utilization cost trends well credit risk knowledge equipment installed close interaction customers bhge llc 2018 form 10k 38 supplying critical services parts extended periods revisions cost billing estimates may affect product services agreement’s total estimated profitability resulting adjustment earnings adjustments generated earnings 26 million 44 million 113 million three years ended december 31 2018 2017 2016 respectively provide probable losses become evident december 31 2018 longterm product service agreements net related billings excess revenues 04 billion represent approximately 43 total estimated life contract billings 103 billion cash billings collected contracts approximately 06 billion 05 billion years ended december 31 2018 2017 respectively contracts average approximately 16 complete based costs incurred date estimate future costs revisions estimates future revenue costs increase decrease total estimated contract profitability 1 would increase decrease longterm product service agreements balance 004 billion goodwill identified intangible assets test goodwill impairment annually using data july 1 year impairment test consists two different steps step one carrying value reporting unit compared fair value step two applied carrying value fair value amount goodwill impairment derived deducting fair value reporting unit’s assets liabilities fair value equity comparing amount carrying amount goodwill determine fair values reporting units using market approach available appropriate income approach combination assess valuation methodology based upon relevance availability data time valuation performed pension assumptions pension benefits calculated using significant inputs actuarial models measure pension benefit obligations related effects operations two assumptions discount rate expected return assets important elements plan expense assetliability measurement evaluate critical assumptions least annually plan country specific basis periodically evaluate assumptions involving demographic factors retirement age mortality turnover update reflect experience expectations future actual results given year often differ actuarial assumptions economic factors projected benefit obligations measured present value expected payments discounted using weighted average market observed yields high quality fixed income securities maturities correspond payment benefits lower discount rates increase present values subsequent year pension expense higher discount rates decrease present values subsequent year pension expense discount rates used determine benefit obligations principal pension plans december 31 2018 2017 2016 343 299 341 respectively reflecting market interest rates expected return assets december 31 2018 2017 2016 594 626 686 respectively income taxes operate 120 countries effective tax rate based income statutory tax rates differences tax laws us gaap various jurisdictions tax laws complex subject different interpretations taxpayer respective governmental taxing authorities income tax rate significantly affected tax rate global operations addition local country tax laws regulations rate depends extent earnings indefinitely reinvested outside us historically us taxes due upon repatriation foreign earnings due enactment us tax reform repatriations foreign earnings generally free us federal tax may incur taxes withholding state taxes indefinite reinvestment determined management’s judgment intentions concerning future operations company earnings reinvested active nonus business operations however result us tax reform substantially prior unrepatriated foreign earnings subject us tax accordingly expect ability repatriate earnings without incremental us federal tax result us tax reform changed intent regarding certain cash repatriations accrued additional 9 million foreign withholding taxes december 31 2018 cumulative amount indefinitely bhge llc 2018 form 10k 39 reinvested foreign earnings approximately 63 billion computation potential deferred tax liability associated undistributed earnings basis differences practicable deferred income tax assets represent amounts available reduce income taxes payable future years evaluate recoverability future tax deductions credits assessing adequacy future taxable income sources including reversal taxable temporary differences forecasted operating earnings available tax planning strategies sources income rely heavily estimates use historical experience short long range business forecasts provide insight record valuation allowance likely portion deferred tax assets realized december 22 2017 us enacted tax cuts jobs act us tax reform lowers statutory tax rate us earnings taxes historic foreign earnings previously deferred us taxation reduced rate tax transition tax establishes territorial tax system enacts new taxes associated global operations impact us tax reform initially recorded provisional basis legislation provided additional guidance issued us department treasury several provisions including computation transition tax based guidance received date finalization purchase accounting baker hughes acquisition finalization 2017 us income tax returns recorded 25 million tax expense 2018 additionally part us tax reform us enacted tax base eroding payments us minimum tax foreign earnings global intangible lowtaxed income made accounting policy election account taxes period costs tax filings routinely subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved tax authorities courts provided amounts believe ultimately result proceedings settlements issues raised audits may affect tax rate 472 million gross unrecognized tax benefits excluding interest penalties december 31 2018 able reasonably estimate future periods amounts ultimately settled loss contingencies loss contingencies uncertain unresolved matters arise ordinary course business result events actions others potential result future loss contingencies include limited environmental obligations litigation regulatory proceedings product quality losses resulting events developments preparation consolidated combined financial statements requires us make estimates judgments affect reported amounts assets liabilities revenue expenses related disclosures well disclosures contingent assets liabilities base estimates judgments historical experience assumptions information believed reasonable circumstances estimates assumptions future events effects subject uncertainty accordingly estimates may change new events occur experience acquired additional information obtained business environment operate changes allowance doubtful accounts determination collectability amounts due customers requires us make judgments estimates regarding customers ability pay amounts due us order determine amount valuation allowances required doubtful accounts monitor customers payment history current credit worthiness determine collectability reasonably assured also consider overall business climate customers operate provisions doubtful accounts recorded based aging status customer accounts becomes evident customer make required payments either contractual due dates future december 31 2018 2017 allowance doubtful accounts totaled 327 million 330 million total gross accounts receivable respectively believe allowance doubtful accounts adequate cover potential bad debt losses current conditions however uncertainties bhge llc 2018 form 10k 40 regarding changes financial condition customers either adverse positive could impact amount timing additional provisions doubtful accounts may required inventory reserves inventory significant component current assets stated lower cost net realizable value requires us record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments estimates forecasts inherently include uncertainties require us make judgments regarding potential future outcomes december 31 2018 2017 inventory reserves totaled 430 million 360 million gross inventory respectively believe reserves adequate properly value potential excess slow moving obsolete inventory current conditions significant unanticipated changes estimates forecasts could impact amount timing additional provisions excess slow moving obsolete inventory may required acquisitionspurchase price allocation allocate purchase price acquired business identifiable assets liabilities based estimated fair values excess purchase price amount allocated assets liabilities recorded goodwill use available information estimate fair values including quoted market prices carrying value acquired assets widely accepted valuation techniques discounted cash flows engage thirdparty appraisal firms assist fair value determination inventories identifiable intangible assets significant assets liabilities appropriate judgments made determining estimated fair value assigned class assets acquired liabilities assumed well asset lives materially impact results operations new accounting standards adopted see note 1 summary significant accounting policies notes consolidated combined financial statements item 8 herein discussion accounting standards adopted related party transactions see note 16 related party transactions notes consolidated combined financial statements item 8 herein discussion related party transactions items brexit june 2016 uk voters approved uk’s exit brexit eu uk currently negotiating terms exit eu scheduled march 29 2019 remains significant uncertainty whether withdrawal agreement uk government eu approved terms brexit happen range outcomes possible brexit abrupt cutoff uk’s future trading relationship eu withdrawal agreement contemplates transition period march 2019 december 2020 allow time future trade deal agreed although customer base global predominant exposure us dollar manufacturing service base uk euro procurement thus exposed fluctuations value british pound versus us dollar euro currencies hedging program looks accommodate potential volatility iran threat reduction syria human rights act 2012 company making following disclosure pursuant section 13r securities exchange act 1934 section 13r securities exchange act 1934 enacted 2012 required disclose bhge llc 2018 form 10k 41 periodic reports affiliates knowingly engaged business activities relating iran even activities conducted accordance authorizations subsequently issued us government reportable activities include investments significantly enhance iran’s ability develop petroleum resources valued 20 million aggregate twelvemonth period reporting also required transactions related iran’s domestic production refined petroleum products iran’s ability import refined petroleum products valued 5 million aggregate twelvemonth period january 2016 us department treasury’s office foreign assets control ofac issued general license h authorizing usowned controlled foreign entities engage transactions iran entities meet requirements general license may 8 2018 president trump announced united states cease participation joint comprehensive plan action jcpoa begin reimposing us nuclearrelated sanctions june 27 2018 ofac revoked general license h added section 560537 iranian transactions sanctions regulations itsr authorized transactions activities ordinarily incident necessary winding activities previously approved general license h november 4 2018 prior may 8 2018 certain nonus bhge affiliates conducted limited activities described accordance general license h november 5 2018 nonus bhge affiliates concluded activity previously conducted general license h iran activities conducted accordance applicable laws regulations year ending december 31 2018 prior expiration wind period general license h nonus bhge affiliates conducted following reportable activities • nonus affiliate bhge received five purchase orders attributed €314 million 360 million gross revenues €86 million 99 million net profits related sale valves parts industrial machinery equipment used gas plants petrochemical plants gas production projects iran • second nonus affiliate bhge received 12 purchase orders attributed €01 million 01 million gross revenues less €01 million 01 million net profits sale valves spare parts use petrochemical industry iran • third nonus affiliate bhge attributed €03 million 03 million gross revenues €01 million 01 million net profits transactions involving sale films used inspection pipelines iran nonus affiliates intend continue activities described company ended activities full compliance us sanctions time intend seek specific us government authorization collect revenues associated previously reported projects additional information business activities related iran please refer items section within mda quarterly report form 10q quarter ended september 30 2018 bhge llc 2018 form 10k 42 forwardlooking statements form 10k including mda certain statements notes consolidated combined financial statements contains forwardlooking statements within meaning section 27a securities act 1933 amended section 21e exchange act 1934 amended forwardlooking statement forwardlooking statements concern future circumstances results statements historical facts sometimes identified words may potential intend expect endeavor seek anticipate estimate overestimate underestimate believe could project predict continue target similar words expressions forwardlooking statements based upon current plans estimates expectations subject risks uncertainties assumptions one risks uncertainties materialize underlying assumptions prove incorrect actual results may vary materially indicated anticipated forwardlooking statements inclusion statements regarded representation plans estimates expectations achieved important factors could cause actual results differ materially plans estimates expectations include among others risk factors risk factors section part 1 item 1a form 10k set forth timetotime filings company sec documents available website secs electronic data gathering analysis retrieval edgar system httpwwwsecgov light risks uncertainties caution place undue reliance forwardlooking statements forwardlooking statements speak date annual report earlier date made intend disclaim obligation update revise forwardlooking statements unless required securities law item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations mda read conjunction consolidated combined financial statements included item 8 financial statements supplementary data contained herein managements discussion analysis financial condition results operations fiscal year 2018 compared fiscal year 2017 please refer part ii item 7 managements discussion analysis financial condition results operations form 10k fiscal year ended december 31 2018 filed sec february 19 2019 executive summary energy technology company diversified portfolio technologies services span energy industrial value chain conduct business 120 countries employ approximately 68000 employees operate four business segments oilfield services ofs oilfield equipment ofe turbomachinery process solutions tps digital solutions ds sell products services primarily global oil gas markets within upstream midstream downstream segments throughout 2019 industry experienced continued volatility north america activity declining versus 2018 growth internationally offshore markets remained relatively stable approximately 300 subsea trees awarded 2019 strong year liquefied natural gas lng related markets 71 million tons per annum final investment decisions reached projects lastly global gdp growth remained healthy throughout 2019 headwinds across power sector 2019 generated revenue 23838 million compared 22877 million 2018 increase revenue driven primarily increased activity ofs ofe partially offset declines tps ds income taxes equity loss affiliate 753 million 2019 included restructuring impairment charges 342 million separation merger related costs 184 million separation merger related costs include costs incurred connection separation ge finalization master agreement framework 2018 loss income taxes equity loss affiliate 680 million also included restructuring impairment charges 433 million separation merger related costs 153 million june 2018 ge announced intention pursue orderly separation baker hughes time fourth quarter 2018 entered master agreement framework includes series related ancillary agreements binding term sheets later negotiated definitive agreements designed solidify commercial technological collaboration us ge master agreement framework focuses areas work closely ge developing leading technology executing customers first defined parameters longterm collaboration partnership ge critical rotating equipment technology second digital software technology business agreed maintain status quo exclusive supplier ge digital oil andgas applications although commercial arrangement modified pursuant omnibus agreement discussed including rendering relationship ge digital nonexclusive respect digital offerings oil gas space finally reached agreements number areas including controls business pension taxes intercompany services agreements within master agreement framework finalized first quarter 2019 july 31 2019 also entered omnibus agreement general framework agreement addresses certain outstanding matters existing longterm commercial agreements us ge omnibus agreement contains provisions regarding among things repayment certain outstanding amounts mutually owed parties ii certain employee assets transfers including allocation costs expenses associated therewith iii certain matters related three international joint ventures modifications commercial arrangements us ge included among things modification relationship bhge llc ge digital nonexclusive respect digital offerings oil gas space details agreements see note 17 related party transactions notes consolidated combined financial statements item 8 herein september 16 2019 certain equity transactions bhge llc 2019 form 10k 22 completed ge’s ownership us reduced approximately 503 approximately 368 december 31 2019 ges interest us 367 aggregate anticipate net financial impact agreements contemplated master agreement framework slightly negative impact operating margin rates approximately 20 40 basis points addition expect incur onetime charges related separation ge approximately 02 billion 03 billion three years expect charges primarily related buildout information technology infrastructure well customary transaction fees discussion certain risks associated separation including risks related business financial condition results operations see “item 1a risk factorsrisk factors related separation ge” outlook business exposed number different macro factors influence expectations outlook expectations purely based market see today subject change given volatile conditions industry • north america onshore activity 2019 experienced decline rig count compared 2018 driven lower commodity prices year expect north american onshore activity continue decline 2020 longterm remain optimistic outlook • international onshore activity seen moderate increase rig count activity 2019 expect growth continue 2020 albeit slower rate expect growth come middle east latin america europe • offshore projects seen stable customer activity final investment decisions offshore projects 2019 expect offshore market fundamentals support another solid year orders subsea tree awards 2020 expected remain relatively consistent 2019 expect see continued growth flexible pipe market following strong orders performance 2019 • liquefied natural gas projects remain optimistic lng market currently oversupplied believe significant number final investment decisions needed fill projected supplydemand imbalance 2019 seen multiple largescale lng projects reach positive final investment decision continue view longterm economics lng industry positive • refinery petrochemical industrial projects refining believe large complex refineries gain advantage competitive oversupplied landscape 2019 industry globalizes refiners position meet local demand secure export potential industrial market continues grow outdated infrastructure replaced policy changes come effect power decentralized continue see growing demand across markets 2020 segments portfolio correlated different industrial metrics digital solutions business overall believe portfolio uniquely positioned compete across value chain deliver comprehensive solutions customers remain optimistic longterm economics industry continuing operate flexibility given expectations volatility changing assumptions near term governments may change may continue incentives renewable energy additions long term renewables cost decline may accelerate compete newbuilt fossil capacity however anticipate significant impacts business foreseeable future despite nearterm volatility longterm outlook industry remains positive believe world’s demand energy continue rise supply energy continue increase complexity requiring greater service intensity advanced technology oilfield service companies remain focused delivering innovative costefficient solutions deliver step changes operating economic performance customers bhge llc 2019 form 10k 23 business environment following discussion analysis summarizes significant factors affecting results operations financial condition liquidity position year ended december 31 2019 2018 read conjunction consolidated combined financial statements related notes company operate 120 countries helping customers find evaluate drill produce transport process hydrocarbon resources revenue predominately generated sale products services major national independent oil natural gas companies worldwide dependent spending customers oil natural gas exploration field development production spending driven number factors including customers forecasts future energy demand supply access resources develop produce oil natural gas ability fund capital programs impact new government regulations importantly expectations oil natural gas prices key driver cash flows oil natural gas prices oil natural gas prices summarized table averages daily closing prices periods indicated 1 energy information administration eia europe brent spot price per barrel 2 eia cushing ok wti west texas intermediate spot price 3 eia henry hub natural gas spot price per million british thermal unit outside north america customer spending heavily influenced brent oil prices volatile fourth quarter 2018 oil prices dropped nearly 40 stability positive sentiment start 2019 brent oil prices increased low 5323bbl january 2019 high 7494bbl april 2019 however average brent oil prices decreased 6428bbl 2019 7134bbl 2018 primarily due higher prices first three quarters 2018 north america customer spending highly driven wti oil prices similar brent oil prices average decreased 5698bbl 2019 6523bbl 2018 ranged low 4631bbl january 2019 high 6624bbl april 2019 north america natural gas prices measured henry hub natural gas spot price averaged 256mmbtu 2019 representing 19 decrease prior year throughout year henry hub natural gas spot prices ranged high 425mmbtu march 2019 low 175mmbtu december 2019 according us department energy doe working natural gas storage end 2019 3192 billion cubic feet bcf 153 487 bcf corresponding week 2018 baker hughes rig count baker hughes rig counts important business barometer drilling industry suppliers drilling rigs active consume products services produced oil service industry rig count trends driven exploration development spending oil natural gas companies turn influenced current future price expectations oil natural gas counts may reflect relative strength stability energy prices overall market activity however counts solely relied specific pervasive conditions may exist affect overall energy prices market activity providing rig counts public since 1944 gather relevant data field service personnel obtain necessary data routine visits various rigs customers contractors bhge llc 2019 form 10k 24 outside sources necessary base classification well either oil natural gas primarily upon filings made operators relevant jurisdiction data compiled distributed various wire services trade associations published website believe counting process resulting data reliable however subject ability obtain accurate timely information rig counts compiled weekly us canada monthly international rigs published international rig counts include rigs drilling certain locations russia caspian region onshore china information readily available beginning second quarter 2019 ukraine added baker hughes international rig count company continue tracking active drilling rigs country going forward historical periods updated rigs us canada counted active day count taken well drilled started drilling completed well anticipated sufficient depth potential consumer drill bits international areas rigs counted weekly basis deemed active drilling activities occurred majority week weekly results averaged month published accordingly rig count include rigs transit one location another rigging used nondrilling activities including production testing completion workover expected significant consumers drill bits rig counts summarized table averages periods indicated 2019 compared 2018 overall rig count 2174 2019 decrease 2 compared 2018 due primarily north american activity rig count north america decreased 12 2019 compared 2018 result lower commodity prices exploration production capital expenditure reductions internationally rig count increased 11 2019 compared period last year excluding ukraine international rig count 6 compared period last year within north america decrease primarily driven canadian rig count 30 average compared period last year decrease us rig count 9 average internationally improvement rig count driven primarily increases europe region 72 primarily related addition ukraine second quarter 2019 excluding ukraine rig count europe region 15 africa region middle east region also 19 5 respectively results operations discussions relating significant line items consolidated combined statements income loss based available information represent analysis significant changes events impact comparability reported amounts appropriate identified specific events changes affect comparability trends reasonably practicable quantified impact items addition discussions revenue cost revenue total basis business drivers product sales services similar dollar amounts tabulations section millions dollars unless otherwise stated certain columns rows may add due use rounded numbers bhge llc 2019 form 10k 25 results operations evaluated chief executive officer consolidated basis well segment level performance operating segments evaluated based segment operating income loss defined income loss income taxes equity loss affiliate following net interest expense net non operating income corporate expenses restructuring impairment charges inventory impairment separation merger related costs certain gains losses allocated operating segments evaluating segment performance company uses following volume increase decrease products andor services sold periodoverperiod excluding impact foreign exchange price volume impact profit calculated multiplying prior period profit rate change revenue volume current prior period also includes price defined change sales price comparable product service periodoverperiod calculated periodoverperiod change sales prices comparable products services foreign exchange fx measures translational foreign exchange impact translation impact periodoverperiod change sales costs directly attributable change foreign exchange rate compared us dollar fx impact calculated multiplying functional currency amounts revenue profit periodoverperiod fx rate variance using average exchange rate respective period inflationdeflation defined increase decrease direct indirect costs type equal amount volume calculated yearoveryear change cost ie price paid direct material compensation benefits overhead costs productivity measured remaining variance profit adjusting periodoverperiod impact volume price foreign exchange inflationdeflation defined improved lower periodoverperiod cost productivity result cost efficiencies inefficiencies cost decreasing increasing volume cost increasing decreasing less volume changes sales mix among segments also includes periodoverperiod variance transactional foreign exchange aside foreign currency devaluations reported separately business evaluation purposes orders remaining performance obligations statement income loss displays sales costs sales accordance sec regulations “goods” required include sales tangible products “services” must include sales including services activities amounts shown distinguish “equipment” “product services” product services refers sales product services agreements including sales goods spare parts equipment upgrades related services monitoring maintenance repairs important part operations refer “product services” simply “services” within management’s discussion analysis financial condition results operations orders recognized orders 26973 million 23904 million 2019 2018 respectively 2019 equipment orders 26 service orders 3 compared 2018 remaining performance obligations rpo december 31 2019 2018 aggregate amount transaction price allocated unsatisfied partially unsatisfied performance obligations 229 billion 210 billion respectively bhge llc 2019 form 10k 26 revenue segment operating income tax revenue segment operating income four operating segments provided 1 inventory impairments related charges reported cost goods sold caption consolidated combined statements income loss fiscal year 2019 fiscal year 2018 revenue 2019 23838 million increase 961 million 4 2018 increase revenue largely result increased activity ofs ofe partially offset declines tps ds ofs increased 1272 million ofe increased 280 million tps decreased 479 million ds decreased 112 million total segment operating income 2019 2035 million increase 239 million 13 2018 increase primarily driven ofs increased 132 million ofe increased 55 million tps increased 98 million partially offset ds decreased 47 million oilfield services ofs 2019 revenue 12889 million increase 1272 million 2018 primarily result increased international activity 2019 compared 2018 international revenue 8293 million 2019 increase 1386 million 2018 faster growth international rig count driven activity bhge llc 2019 form 10k 27 middle east asia pacific latin america north america revenue 4596 million 2019 decrease 114 million 2018 driven declining rig counts north america ofs 2019 segment operating income 917 million compared 785 million 2018 increase primarily driven higher volume increased cost productivity oilfield equipment ofe 2019 revenue 2921 million increase 280 million 11 2018 increase primarily driven higher volume subsea production systems business subsea services business increases partially offset lower volume flexible pipe business ofe 2019 segment operating income 55 million compared breakeven 2018 increase primarily driven higher volume increased cost productivity turbomachinery process solutions tps 2019 revenue 5536 million decrease 479 million 8 2018 decrease primarily driven lower equipment installation volume business dispositions partially offset higher contractual services revenue equipment revenue 2019 represented 36 service revenue represented 64 total revenue tps 2019 segment operating income 719 million compared 621 million 2018 increase profitability driven primarily higher cost productivity favorable business mix digital solutions ds 2019 revenue 2492 million decrease 112 million 4 2018 driven primarily lower volume bentley controls pipeline process solutions software businesses partially offset higher volume measurement sensing business ds 2019 segment operating income 343 million compared 390 million 2018 decrease profitability driven lower volume negative cost productivity corporate 2019 corporate expenses 433 million increase 28 million compared 2018 primarily additional expenses related separation ge restructuring impairment 2019 recognized 342 million restructuring impairment charges decrease 91 million compared 2018 decrease primarily due accelerated amortization costs 2018 repeat 2019 reduced integration related restructuring activities partially offset additional charges ofs segment focused supply chain optimization improving asset utilization driving product service delivery costs separation merger related recorded 184 million separation merger related costs 2019 increase 31 million prior year costs 2019 primarily relate finalization master agreement framework ongoing activities related separation ge 2018 separation merger related costs primarily included costs associated integration bhi interest expense net 2019 incurred net interest expense 237 million increase 14 million prior year primarily driven costs associated refinancing senior notes due august 2021 lower interest income bhge llc 2019 form 10k 28 equity loss affiliate discontinued applying equity method investment bj services record gain loss 2019 compared loss 139 million 2018 resume application equity method share unrecognized net income equals share net loss recognized period equity method suspended income tax 2019 income tax expense increased 74 million 402 million 2018 476 million 2019 increase primarily due higher foreign taxes related increased foreign earnings geographical mix earnings addition since partnership us federal tax purposes tax benefits associated us losses recognized members reflected tax expense compliance conduct activities committed maintaining core values company well high safety ethical quality standards also reported quality management system qms believe commitment integral running sound successful sustainable business ensure live high standards devote significant resources maintain comprehensive global ethics compliance program compliance program designed prevent detect appropriately respond timely fashion potential violations law way baker hughes code conduct company policies procedures highlights compliance program include following • comprehensive internal policies areas antibribery travel entertainment gifts charitable donations government officials parties payments commercial sales representatives use nonus police military organizations security purposes addition policies procedures address customs requirements visa processing risks export reexport controls economic sanctions antimoney laundering antiboycott laws • global structure legal compliance counsel professionals providing compliance advice customized training governance well investigating concerns across regions countries business • comprehensive employee compliance training program combines instructorled webbased training modules tailored key risks employees face ongoing basis • due diligence procedures third parties conduct business behalf including commercial sales agents administrative service providers professional consultants well enhanced riskbased process classifying channel partners suppliers • due diligence procedures merger acquisition activities • specifically tailored compliance risk assessments audits focused country third party risk • compliance review board comprised senior officers company meets quarterly monitor effectiveness compliance program well product company regional compliance committees meet quarterly • technology monitor report compliance matters including internal investigations management system webbased antiboycott reporting tool global trade management systems comprehensive watch list screening • compliance program designed create “open reporting environment” employees encouraged report ethics compliance matter without fear retaliation including global network trained employee ombudspersons worldwide 24hour business helpline operated third party available approximately 150 languages bhge llc 2019 form 10k 29 • centralized finance organization companywide policies • anticorruption audits highrisk countries conducted legal compliance internal audit well riskbased compliance audits third parties conducted legal compliance • regionspecific processes procedures management hr related issues including prehire screening employees process screen existing employees prior promotion select roles may exposed finance andor corruptionrelated risks implementation global new hire compliance training module employees liquidity capital resources objective financing business maintain sufficient liquidity adequate financial resources financial flexibility order fund requirements business december 31 2019 cash equivalents 3245 million compared 3677 million december 31 2018 cash equivalents includes 162 million 747 million cash held behalf ge december 31 2019 2018 respectively excluding cash held behalf ge us subsidiaries held approximately 04 billion 07 billion foreign subsidiaries held approximately 27 billion 23 billion cash equivalents december 31 2019 2018 respectively substantial portion cash held foreign subsidiaries december 31 2019 reinvested active nonus business operations decide later date repatriate funds us generally free us federal tax may incur taxes withholding state taxes december 2019 entered 3 billion committed unsecured revolving credit facility 2019 credit agreement commercial banks maturing december 2024 2019 credit agreement contains certain customary representations warranties certain customary affirmative covenants certain customary negative covenants upon occurrence certain events default obligations 2019 credit agreement may accelerated events default include payment defaults lenders 2019 credit agreement customary defaults events default occurred connection entry 2019 credit agreement terminated thenexisting fiveyear committed 3 billion revolving credit agreement dated july 3 2017 credit agreement 2019 2018 borrowings 2019 2017 credit agreement commercial paper program may issue time 3 billion commercial paper maturities 397 days december 31 2019 borrowings outstanding commercial paper program market conditions change revenue reduced significantly operating costs increase cash flows liquidity could reduced additionally could cause rating agencies lower credit rating ratings triggers would accelerate maturity borrowings committed credit facility however downgrade credit ratings could increase cost borrowings credit facility could also limit preclude ability issue commercial paper occur could seek alternative sources funding including borrowing credit facility year ended december 31 2019 used cash fund variety activities including certain working capital needs restructuring costs capital expenditures repayment debt distributions members repurchases units believe cash hand cash flows generated operations available credit facility provide sufficient liquidity manage global cash needs bhge llc 2019 form 10k 30 cash flows cash flows provided used type activity follows years ended december 31 fiscal year 2019 fiscal year 2018 operating activities largest source operating cash payments customers largest component collecting cash related sales products services including advance payments progress collections work performed primary use operating cash pay suppliers employees tax authorities others wide range goods services cash flows operating activities generated cash 2168 million 1738 million years ended december 31 2019 2018 respectively cash flows operating activities increased 430 million 2019 primarily driven improved operating performance cash inflows supported 627 million working capital generation mainly due net positive progress collections receivables tps equipment contracts well continued improvement working capital processes included cash flows operating activities 2019 2018 payments 307 million 473 million respectively made primarily employee severance result restructuring activities separation merger related costs including buildout information technology infrastructure result ge separation activities investing activities cash flows investing activities used cash 1045 million 578 million years ended december 31 2019 2018 respectively principal recurring investing activity funding capital expenditures ensure appropriate levels types machinery equipment place generate revenue operations expenditures capital assets totaled 1240 million 995 million 2019 2018 respectively partially offset cash flows sale property plant equipment 264 million 458 million 2019 2018 respectively proceeds disposal assets related primarily equipment lostinhole property machinery equipment longer used operations sold throughout period 2019 received 77 million sale highspeed reciprocating compression business 2018 received 453 million sale businesses primarily driven sale natural gas solution ngs business 375 million also 2018 company adnoc signed strategic partnership agreement acquired five percent stake adnoc drilling cash consideration 500 million financing activities cash flows financing activities used cash 1534 million 4381 million years ended december 31 2019 2018 respectively 2019 distributed 745 million members additionally september 2019 repurchased 119 million units ge cash consideration 250 million 2018 distributed 824 million members also used cash 1025 million repurchase cancel units ge baker hughes pro rata basis additionally november 2018 repurchased 65 million units ge cash consideration 1461 million bhge llc 2019 form 10k 31 net repayments shortterm debt 542 million 376 million 2019 2018 respectively repayment longterm debt 570 million 684 million 2019 2018 respectively consisted primarily repayment certain senior notes november 2019 issued 525 million 3138 senior notes due november 2029 used proceeds offering repurchase outstanding 32 senior notes due august 2021 cash requirements 2020 believe cash hand cash flows operating activities available revolving credit facility availability existing shelf registrations debt provide us sufficient capital resources liquidity manage working capital needs meet contractual obligations fund capital expenditures distributions support development shortterm longterm operating strategies necessary issue commercial paper shortterm debt fund cash needs us excess cash generated us capital expenditures adjusted managed us match market demand activity levels based current market conditions capital expenditures net proceeds disposal assets 2020 made appropriate rate estimate would equal 5 annual revenue expenditures expected used primarily normal recurring items necessary support business also anticipate making income tax payments range 500 million 600 million 2020 contractual obligations table set forth contractual obligations december 31 2019 certain amounts included table based estimates assumptions obligations including duration anticipated actions third parties factors contractual obligations actually pay future periods may vary reflected table estimates assumptions subjective 1 amounts represent expected cash payments principal amounts related debt including finance lease obligations amounts debt include deferred issuance costs unamortized discounts premiums including step value debt acquisition bhi expected cash payments interest excluded amounts total debt finance lease obligations includes 273 million payable ge affiliates fixed payment schedule amount payable ge affiliates classified payable less one year 2 amounts represent expected cash payments interest longterm debt finance lease obligations 3 amounts represent future minimum payments operating leases initial terms one year lease terms may include options extend terminate lease reasonably certain exercise option 4 purchase obligations include expenditures capital assets 2020 well agreements purchase goods services enforceable legally binding specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction due uncertainty respect timing potential future cash outflows associated uncertain tax positions unable make reasonable estimates period cash settlement respective taxing authorities therefore 573 million uncertain tax positions including interest penalties bhge llc 2019 form 10k 32 excluded contractual obligations table see note 13 income taxes notes consolidated combined financial statements item 8 herein information certain defined benefit pension postretirement benefit plans covering certain us international employees 2019 made contributions paid direct benefits approximately 39 million connection plans anticipate funding approximately 32 million 2020 amounts pension funding obligations based assumptions subject change therefore currently able reasonably estimate contribution figures 2020 see note 12 employee benefit plans notes consolidated combined financial statements item 8 herein information offbalance sheet arrangements normal course business customers vendors others entered offbalance sheet arrangements surety bonds performance letters credit bank issued guarantees totaled approximately 39 billion december 31 2019 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated combined financial statements december 31 2019 material offbalance sheet financing arrangements discussed materially exposed financing liquidity market credit risk could arise engaged financing arrangements factors affecting liquidity registration statements november 2018 baker hughes filed universal shelf registration statement form s3asr automatic shelf registration sec ability sell various types securities including debt securities class common stock preferred stock guarantees debt securities purchase contracts units specific terms securities sold would described supplemental filings sec registration statement expire 2021 december 2017 bhge llc baker hughes coobligor inc filed shelf registration statement form s3 sec ability sell 3 billion debt securities amounts determined time offering occur may happen one transactions specific terms debt securities sold would described supplemental filings sec registration statement expire december 2020 customer receivables line industry practice may bill customers services provided arrears dependent upon contractual terms challenging economic environment may experience delays payment invoices due customers lower cash flow operations limited access credit markets historically material nonpayment events attempt mitigate risk working customers restructure debts customers failure delay payment could material adverse effect shortterm liquidity results operations december 31 2019 19 gross trade receivables customers united states united states country single customer accounted 10 gross trade receivables date december 31 2018 24 gross trade receivables customers united states international operations cash held outside us 88 total cash balance december 31 2019 may able use cash quickly efficiently due exchange cash controls could make challenging result cash balance may represent ability quickly efficiently use cash bhge llc 2019 form 10k 33 critical accounting estimates accounting estimates assumptions discussed section considered critical understanding financial statements involve significant judgments uncertainties many estimates include determining fair value estimates reflect best judgment current estimates future economic market conditions potential effects based information available date financial statements conditions change expected reasonably possible judgments estimates described could change may result future impairments goodwill intangibles longlived assets increases reserves contingencies establishment valuation allowances deferred tax assets increased tax liabilities among effects also see note 1 summary significant accounting policies notes consolidated combined financial statements item 8 herein discusses significant accounting policies defined critical accounting estimate one important portrayal either financial condition results operations requires us make difficult subjective complex judgments estimates matters uncertain audit committee board directors reviewed critical accounting estimates disclosure presented past three fiscal years made material changes methodology used establish critical accounting estimates believe following critical accounting estimates used preparation consolidated combined financial statements items within consolidated combined financial statements require estimation judgment deemed critical defined revenue recognition longterm product services agreements longterm service agreements customers predominately within tps segment agreements typically require us maintain assets sold customer defined contract term agreements average contract terms 15 years time contract terms may extended contract modifications amendments may result revisions future billing cost estimates revenue recognition longterm product services agreements requires estimates customer payments costs perform required maintenance services contract term recognize revenue overtime basis using input method measure progress toward completion estimated margin rate contract develop billings estimates consider number billable events occur based estimated utilization asset contract life contract term estimated utilization consider historical market conditions asset retirements new product introductions applicable develop cost estimates consider timing extent maintenance overhaul events including amount cost labor spare parts resources required perform services developing cost estimates utilize combination historical cost experience expected cost improvements cost improvements included future cost estimates savings observed actual results proven effective extensive regulatory engineering approval process routinely review estimates used product services agreements regularly revise adjust changes revisions based objectively verifiable information available time review difference timing revenue recognition cash received customers results either contract asset revenue excess billings contract liability billings excess revenue see note 8 contract deferred assets note 9 progress collections deferred income notes consolidated combined financial statements item 8 herein information regularly assess customer credit risk inherent carrying amounts receivables contract assets estimated earnings including risk contractual penalties may sufficient offset accumulated investment event customer termination gain insight expected future utilization cost trends well credit risk knowledge equipment installed close interaction customers bhge llc 2019 form 10k 34 supplying critical services parts extended periods revisions cost billing estimates may affect product services agreement’s total estimated profitability resulting adjustment earnings adjustments generated earnings 1 million 26 million 44 million three years ended december 31 2019 2018 2017 respectively provide probable losses become evident december 31 2019 longterm product service agreements net related billings excess revenues 03 billion represent approximately 29 total estimated life contract billings 103 billion cash billings collected contracts approximately 06 billion years ended december 31 2019 2018 contracts average approximately 17 complete based costs incurred date estimate future costs revisions estimates future revenue costs increase decrease total estimated contract profitability 1 would increase decrease longterm product service agreements balance 004 billion goodwill identified intangible assets test goodwill impairment annually using data july 1 year impairment test consists two different steps step one carrying value reporting unit compared fair value step two applied carrying value fair value amount goodwill impairment derived deducting fair value reporting unit’s assets liabilities fair value equity comparing amount carrying amount goodwill determine fair values reporting units using market approach available appropriate income approach combination assess valuation methodology based upon relevance availability data time valuation performed pension assumptions pension benefits calculated using significant inputs actuarial models measure pension benefit obligations related effects operations two assumptions discount rate expected return assets important elements plan expense assetliability measurement evaluate critical assumptions least annually plan country specific basis periodically evaluate assumptions involving demographic factors retirement age mortality turnover update reflect experience expectations future actual results given year often differ actuarial assumptions economic factors projected benefit obligations measured present value expected payments discounted using weighted average market observed yields high quality fixed income securities maturities correspond payment benefits lower discount rates increase present values subsequent year pension expense higher discount rates decrease present values subsequent year pension expense discount rates used determine benefit obligations principal pension plans december 31 2019 2018 234 343 respectively reflecting market interest rates expected return assets december 31 2019 2018 548 594 respectively bhge llc 2019 form 10k 35 income taxes operate 120 countries effective tax rate based income statutory tax rates differences tax laws gaap various jurisdictions tax laws complex subject different interpretations taxpayer respective governmental taxing authorities income tax rate significantly affected tax rate global operations addition local country tax laws regulations rate depends extent earnings indefinitely reinvested outside us historically us taxes due upon repatriation foreign earnings due enactment us tax reform repatriations foreign earnings generally free us federal tax may incur taxes withholding state taxes indefinite reinvestment determined management’s judgment intentions concerning future operations company earnings reinvested active nonus business operations however result us tax reform substantially 2017 prior unrepatriated foreign earnings subject us tax accordingly expect ability repatriate earnings without incremental us federal tax december 31 2019 cumulative amount indefinitely reinvested foreign earnings approximately 67 billion computation potential deferred tax liability associated undistributed earnings basis differences practicable deferred income tax assets represent amounts available reduce income taxes payable future years evaluate recoverability future tax deductions credits assessing adequacy future taxable income sources including reversal taxable temporary differences forecasted operating earnings available tax planning strategies sources income rely heavily estimates use historical experience short long range business forecasts provide insight record valuation allowance likely portion deferred tax assets realized december 22 2017 us enacted tax cuts jobs act us tax reform lowers statutory tax rate us earnings taxes historic foreign earnings previously deferred us taxation reduced rate tax transition tax establishes territorial tax system enacts new taxes associated global operations impact us tax reform initially recorded provisional basis legislation provided additional guidance issued us department treasury several provisions including computation transition tax based guidance received date finalization purchase accounting bhi acquisition finalization 2017 us income tax returns recorded 25 million tax expense 2018 additionally part us tax reform us enacted tax base eroding payments us minimum tax foreign earnings global intangible lowtaxed income made accounting policy election account taxes period costs tax filings routinely subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved tax authorities courts provided amounts believe ultimately result proceedings settlements issues raised audits may affect tax rate 451 million gross unrecognized tax benefits excluding interest penalties december 31 2019 able reasonably estimate future periods amounts ultimately settled loss contingencies loss contingencies uncertain unresolved matters arise ordinary course business result events actions others potential result future loss contingencies include limited environmental obligations litigation regulatory proceedings product quality losses resulting events developments preparation consolidated combined financial statements requires us make estimates judgments affect reported amounts assets liabilities revenue expenses related disclosures well disclosures contingent assets liabilities base estimates judgments historical experience assumptions information believed reasonable circumstances estimates assumptions future events effects subject uncertainty bhge llc 2019 form 10k 36 accordingly estimates may change new events occur experience acquired additional information obtained business environment operate changes allowance doubtful accounts determination collectability amounts due customers requires us make judgments estimates regarding customers ability pay amounts due us order determine amount valuation allowances required doubtful accounts monitor customers payment history current credit worthiness determine collectability reasonably assured also consider overall business climate customers operate provisions doubtful accounts recorded based aging status customer accounts becomes evident customer make required payments either contractual due dates future december 31 2019 2018 allowance doubtful accounts totaled 323 million 327 million total gross accounts receivable respectively believe allowance doubtful accounts adequate cover potential bad debt losses current conditions however uncertainties regarding changes financial condition customers either adverse positive could impact amount timing additional provisions doubtful accounts may required inventory reserves inventory significant component current assets stated lower cost net realizable value requires us record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments estimates forecasts inherently include uncertainties require us make judgments regarding potential future outcomes december 31 2019 2018 inventory reserves totaled 429 million 430 million gross inventory respectively believe reserves adequate properly value potential excess slow moving obsolete inventory current conditions significant unanticipated changes estimates forecasts could impact amount timing additional provisions excess slow moving obsolete inventory may required acquisitionspurchase price allocation allocate purchase price acquired business identifiable assets liabilities based estimated fair values excess purchase price amount allocated assets liabilities recorded goodwill use available information estimate fair values including quoted market prices carrying value acquired assets widely accepted valuation techniques discounted cash flows engage thirdparty appraisal firms assist fair value determination inventories identifiable intangible assets significant assets liabilities appropriate judgments made determining estimated fair value assigned class assets acquired liabilities assumed well asset lives materially impact results operations new accounting standards adopted see note 1 summary significant accounting policies notes consolidated combined financial statements item 8 herein discussion accounting standards adopted related party transactions see note 17 related party transactions notes consolidated combined financial statements item 8 herein discussion related party transactions bhge llc 2019 form 10k 37 items brexit united kingdom exited brexit european union eu january 31 2020 per terms exit uk ceased eu member continue follow rules contribute budget 11 month transition period ending december 31 2020 purpose transition period give time uk eu negotiate future relationship including trade deal remains significant uncertainty outcome negotiations terms future trade deal although customer base global predominant exposure us dollar manufacturing service base uk euro procurement thus exposed fluctuations value british pound versus us dollar euro currencies hedging program looks accommodate potential volatility forwardlooking statements form 10k including mda certain statements notes consolidated combined financial statements contains forwardlooking statements within meaning section 27a securities act 1933 amended section 21e exchange act 1934 amended forwardlooking statement forwardlooking statements concern future circumstances results statements historical facts sometimes identified words may potential intend expect endeavor seek anticipate estimate overestimate underestimate believe could project predict continue target similar words expressions forwardlooking statements based upon current plans estimates expectations subject risks uncertainties assumptions one risks uncertainties materialize underlying assumptions prove incorrect actual results may vary materially indicated anticipated forwardlooking statements inclusion statements regarded representation plans estimates expectations achieved important factors could cause actual results differ materially plans estimates expectations include among others risk factors risk factors section part 1 item 1a form 10k set forth timetotime filings company sec documents available website secs electronic data gathering analysis retrieval edgar system httpwwwsecgov light risks uncertainties caution place undue reliance forwardlooking statements forwardlooking statements speak date annual report earlier date made intend disclaim obligation update revise forwardlooking statements unless required securities law item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations mda read conjunction consolidated financial statements included item 8 financial statements supplementary data contained herein managements discussion analysis financial condition results operations fiscal year 2019 compared fiscal year 2018 please refer part ii item 7 managements discussion analysis financial condition results operations form 10k fiscal year ended december 31 2019 filed sec february 13 2020 executive summary energy technology company broad diversified portfolio technologies services span energy industrial value chain operate four business segments oilfield services ofs oilfield equipment ofe turbomachinery process solutions tps digital solutions ds sell products services primarily global oil gas markets within upstream midstream downstream segments throughout 2020 industry experienced multiple factors drove expectations global oil gas related spending lower 2019 first covid19 pandemic lowered global demand hydrocarbons social distancing travel restrictions implemented across world second lifting organization petroleum exporting countries opec supply curtailments first quarter 2020 associated increase production drove global excess supply hydrocarbons higher second quarter 2020 opec reached supply curtailment agreement 10 million barrels per day drove expectations future hydrocarbon supply lower significant turmoil first half year industry downturn oil markets stabilized demand oil improved second half year lastly global gross domestic product gdp declined 2020 result impact covid19 pandemic since covid19 pandemic began health safety employees continued top priority taken critical steps company reduce risk exposure well mitigate impacts pandemic employees contractors partners adopted remote working possible onsite operations required masks mandatory employees adopted social distancing worked employees implement sitespecific precautionary measures reduce risk exposure collaborating closely customers suppliers vendors minimize operational disruption addition restricted nonessential business travel encouraged employees customers partners collaborate virtually goal throughout downturn 2020 remain disciplined allocating capital focus liquidity cash preservation preserve investment grade rating also maintaining current baker hughes dividend payout year took necessary actions rightsize business expected activity levels first quarter 2020 approved plan restructuring actions totaling 18 billion increased 03 billion took actions year address continuing industry challenges total restructuring costs 21 billion 2020 charges primarily related costs reductions work force product line exits certain geographies write inventory intangible assets actions took place across business corporate functions expect cash payback actions less one year addition first quarter 2020 baker hughes market capitalization declined significantly driven macroeconomic geopolitical conditions caused covid19 pandemic collapse oil prices based events concluded triggering event occurred performed interim quantitative impairment test march 31 2020 based upon results impairment test recognized goodwill impairment charge 147 billion first quarter 2020 goodwill impairments 2020 baker hughes holdings llc 2020 form 10k 24 2020 generated revenue 207 billion compared 238 billion 2019 decrease revenue driven declines four segments primarily due industry downturn loss income taxes 151 billion 2020 included goodwill impairment charges 147 billion restructuring impairment charges 19 billion inventory impairment charges 246 million separation merger related costs 134 million gain 14 billion related investment c3ai recorded nonoperating income 2019 income taxes 08 billion also included restructuring impairment charges 342 million separation merger related costs 184 million gain 14 billion related c3ai investment recorded fourth quarter 2020 invested c3ai formed partnership june 2019 december 2020 c3ai completed initial public offering requires us mark investment fair value investment strong partnership c3ai demonstrate commitment growth high potential segments develop market new ai solutions oil gas industry outlook business exposed number macro factors influence outlook expectations given current volatile conditions industry significant volatility first half 2020 oil markets stabilized second half year however still uncertainty global economic outlook impact oil gas markets wake covid19 pandemic •north america onshore activity 2020 experienced significant decline rig count compared 2019 driven lower commodity prices expect north american onshore activity improve 2021 compared second half 2020 •international onshore activity 2020 experienced decline rig count compared 2019 driven lower commodity prices expect onshore spending outside north america stabilize early 2021 see modest recovery second half year •offshore projects 2020 experienced significantly fewer offshore projects reaching positive final investment decisions due economic uncertainty lower oil gas prices 2021 expect offshore markets stabilize number tree awards market remain stable grow modestly compared 2020 levels •liquefied natural gas lng projects remain optimistic lng market long term view natural gas transition destination fuel continue view longterm economics lng industry positive segments portfolio correlated various industrial metrics including gdp digital solutions segment also segments within portfolio exposed new energy solutions specifically focused around decarbonization energy industry including hydrogen geothermal carbon capture utilization storage energy storage expect see continued growth segments new energy solutions become prevalent part broader energy mix overall believe portfolio well positioned compete across energy value chain deliver comprehensive solutions customers remain optimistic longterm economics industry continuing operate flexibility given expectations volatility changing activity levels near term governments may change discontinue incentives renewable energy additions anticipate significant impacts business foreseeable future time believe world’s demand energy continue rise hydrocarbons play major role meeting worlds energy needs foreseeable future remain focused delivering innovative costefficient solutions deliver step changes operating economic performance customers baker hughes holdings llc 2020 form 10k 25 business environment following discussion analysis summarizes significant factors affecting results operations financial condition liquidity position year ended december 31 2020 2019 read conjunction consolidated financial statements related notes company operate 120 countries helping customers find evaluate drill produce transport process hydrocarbon resources revenue predominately generated sale products services major national independent oil natural gas companies worldwide dependent spending customers oil natural gas exploration field development production spending driven number factors including customers forecasts future energy demand supply access resources develop produce oil natural gas ability fund capital programs impact new government regulations importantly expectations oil natural gas prices key driver cash flows oil natural gas prices oil natural gas prices summarized table averages daily closing prices periods indicated 1energy information administration eia europe brent spot price per barrel 2eia cushing ok wti west texas intermediate spot price 3eia henry hub natural gas spot price per million british thermal unit outside north america customer spending heavily influenced brent oil prices stable positive 2019 volatility increased sharply april 2020 oil prices dropped nearly 87 due lower demand brent oil prices decreased high 7025bbl january 2020 low 912bbl april 2020 average brent oil prices decreased 4196bbl 2020 6428bbl 2019 due lower prices majority year 2020 north america customer spending highly driven wti oil prices similarly brent oil prices average decreased 3916bbl 2020 5698bbl 2019 ranged high 6327bbl january 2020 low 3698bbl april 2020 north america natural gas prices measured henry hub natural gas spot price averaged 203mmbtu 2020 representing 21 decrease prior year throughout year henry hub natural gas spot prices ranged low 133mmbtu september 2020 high 314mmbtu october 2020 according us department energy doe working natural gas storage end 2020 3460 billion cubic feet bcf 77 268 bcf corresponding week 2019 baker hughes holdings llc 2020 form 10k 26 baker hughes rig count baker hughes rig counts important business barometer drilling industry suppliers drilling rigs active consume products services produced oil service industry rig count trends driven exploration development spending oil natural gas companies turn influenced current future price expectations oil natural gas counts may reflect relative strength stability energy prices overall market activity however counts solely relied specific pervasive conditions may exist affect overall energy prices market activity providing rig counts public since 1944 gather relevant data field service personnel obtain necessary data routine visits various rigs customers contractors outside sources necessary base classification well either oil natural gas primarily upon filings made operators relevant jurisdiction data compiled distributed various wire services trade associations published website believe counting process resulting data reliable however subject ability obtain accurate timely information rig counts compiled weekly us canada monthly international rigs published international rig counts include rigs drilling certain locations russia caspian region onshore china information readily available beginning second quarter 2019 ukraine added baker hughes international rig count company continue tracking active drilling rigs country going forward historical periods updated rigs us canada counted active day count taken well drilled started drilling completed well anticipated sufficient depth potential consumer drill bits international areas rigs counted weekly basis deemed active drilling activities occurred majority week weekly results averaged month published accordingly rig count include rigs transit one location another rigging used nondrilling activities including production testing completion workover expected significant consumers drill bits rig counts summarized table averages periods indicated 2020 compared 2019 overall rig count 1349 2020 decrease 38 compared 2019 due primarily north american activity rig count north america decreased 52 international rig count decreased 25 2020 compared 2019 result lower commodity prices exploration production capital expenditure reductions within north america decrease primarily driven us rig count 54 average compared period last year decrease canadian rig count 33 average internationally decrease rig count driven primarily decreases latin america region africa region europe region 44 34 24 respectively baker hughes holdings llc 2020 form 10k 27 results operations discussions relating significant line items consolidated statements income loss based available information represent analysis significant changes events impact comparability reported amounts appropriate identified specific events changes affect comparability trends reasonably practicable quantified impact items addition discussions revenue cost revenue total basis business drivers product sales services similar dollar amounts tabulations section millions dollars unless otherwise stated certain columns rows may add due use rounded numbers results operations evaluated chief executive officer consolidated basis well segment level performance operating segments evaluated based segment operating income loss defined income loss income taxes equity loss affiliate following net interest expense net nonoperating income loss corporate expenses restructuring impairment charges goodwill inventory impairments separationrelated costs certain gains losses allocated operating segments evaluating segment performance company uses following volume increase decrease products andor services sold periodoverperiod excluding impact foreign exchange price volume impact profit calculated multiplying prior period profit rate change revenue volume current prior period also includes price defined change sales price comparable product service periodoverperiod calculated periodoverperiod change sales prices comparable products services foreign exchange fx measures translational foreign exchange impact translation impact periodoverperiod change sales costs directly attributable change foreign exchange rate compared us dollar fx impact calculated multiplying functional currency amounts revenue profit periodoverperiod fx rate variance using average exchange rate respective period inflationdeflation defined increase decrease direct indirect costs type equal amount volume calculated yearoveryear change cost ie price paid direct material compensation benefits overhead costs productivity measured remaining variance profit adjusting periodoverperiod impact volume price foreign exchange inflationdeflation defined improved lower periodoverperiod cost productivity result cost efficiencies inefficiencies cost decreasing increasing volume cost increasing decreasing less volume changes sales mix among segments also includes periodoverperiod variance transactional foreign exchange aside foreign currency devaluations reported separately business evaluation purposes orders remaining performance obligations statement income loss displays sales costs sales accordance sec regulations “goods” required include sales tangible products “services” must include sales including services activities amounts shown distinguish “equipment” “product services” product services refers sales product services agreements including sales goods spare parts equipment upgrades related services monitoring maintenance repairs important part operations refer “product services” simply “services” within management’s discussion analysis financial condition results operations orders recognized orders 207 billion 270 billion 2020 2019 respectively 2020 equipment orders 27 service orders 20 compared 2019 remaining performance obligations rpo december 31 2020 2019 aggregate amount transaction price allocated unsatisfied partially unsatisfied performance obligations 234 billion 229 billion respectively baker hughes holdings llc 2020 form 10k 28 revenue segment operating income tax revenue segment operating income four operating segments provided 1inventory impairments reported cost goods sold consolidated statements income loss fiscal year 2020 fiscal year 2019 revenue 2020 20705 million decrease 3133 million 13 2019 decrease revenue largely result decreased activity ofs ds ofe partially offset increase tps ofs decreased 2749 million ds decreased 477 million ofe decreased 77 million tps increased 169 million total segment operating income 2020 1504 million decrease 531 million 26 2019 decrease primarily driven ofs decreased 430 million ofe decreased 36 million ds decreased 150 million partially offset tps increased 86 million oilfield services ofs 2020 revenue 10140 million decrease 2749 million 2019 result decreased activity north america international 2020 compared 2019 evidenced decline corresponding rig counts north america revenue 2802 million 2020 decrease 1794 million baker hughes holdings llc 2020 form 10k 29 2019 international revenue 7338 million 2020 decrease 955 million 2019 driven declines regions primarily middle east latin america regions ofs 2020 segment operating income 487 million compared 917 million 2019 decrease primarily driven lower volume lesser extent unfavorable business mix partially offset restructuring productivity initiatives oilfield equipment ofe 2020 revenue 2844 million decrease 77 million 3 2019 decrease primarily driven lower volume services business mostly driven impact covid19 pandemic partially offset higher volume subsea production systems flexible pipe businesses decrease also impacted sale surface pressure control flow business october 2020 ofe 2020 segment operating income 19 million compared 55 million 2019 decrease primarily driven unfavorable business mix lesser extent lower volume turbomachinery process solutions tps 2020 revenue 5705 million increase 169 million 3 2019 increase primarily driven higher equipment projects revenue partially offset lower services volume well business dispositions occurred 2019 equipment revenue 2020 represented 44 service revenue represented 56 total revenue equipment revenue 27 yearoveryear services revenue 10 yearoveryear partially due mobility restrictions related covid19 pandemic tps 2020 segment operating income 805 million compared 719 million 2019 increase profitability driven primarily higher cost productivity lesser extent higher volume partially offset unfavorable business mix digital solutions ds 2020 revenue 2015 million decrease 477 million 19 2019 driven volume declines across ds segments largely driven lower economic activity related covid19 disruptions ds 2020 segment operating income 193 million compared 343 million 2019 decrease profitability primarily driven lower volume corporate 2020 corporate expenses 464 million increase 31 million compared 2019 primarily additional expenses related separation ge inventory impairment 2020 recorded inventory impairments 246 million primarily related oilfield services segment result certain restructuring activities initiated company inventory impairments recorded 2019 charges inventory impairments reported cost goods sold caption consolidated statements income loss goodwill impairment first quarter 2020 baker hughes market capitalization declined significantly driven current macroeconomic geopolitical conditions including decrease demand caused covid19 pandemic collapse oil prices driven surplus production supply based events concluded triggering event occurred performed interim quantitative impairment test march 31 2020 based upon results impairment test recognized goodwill impairment charge 14717 million first quarter 2020 goodwill impairments 2020 baker hughes holdings llc 2020 form 10k 30 restructuring impairment 2020 recognized 1866 million restructuring impairment charges compared 342 million 2019 charges primarily relate restructuring plan announced first quarter 2020 include product line rationalization actions headcount reductions certain geographical locations initiatives rightsize operations anticipated activity levels market conditions separation merger related recorded 134 million separation related costs 2020 decrease 50 million prior year costs 2020 relate ongoing activities separation ge including costs buildout certain information technology infrastructures result separation nonoperating income loss net 2020 recorded 1040 million net nonoperating income included amount unrealized gain 1417 million related marking investment c3ai fair value partially offset losses 353 million sale rod lift systems business ofs sale surface pressure control flow business ofe interest expense net 2020 incurred net interest expense 264 million increase 27 million prior year primarily driven lower interest income taxes 2020 income tax expense increased 174 million 476 million 2019 650 million 2020 increase primarily due valuation allowances deferred tax assets geographical mix earnings addition since partnership us federal tax purposes tax benefits associated us losses recognized members reflected tax expense compliance conduct activities committed maintaining core values company well high safety ethical quality standards also reported quality management system qms believe commitment integral running sound successful sustainable business devote significant resources maintain comprehensive global ethics compliance program compliance program designed prevent detect appropriately respond potential violations law code conduct company policies procedures highlights compliance program include following •comprehensive internal policies areas antibribery travel entertainment gifts charitable donations government officials parties payments commercial sales representatives use nonus police military organizations security purposes addition policies procedures address customs requirements visa processing risks export reexport controls economic sanctions antimoney laundering antiboycott laws •global independent structure chief compliance officer compliance professionals providing compliance advice customized training governance well investigating concerns across regions countries business •comprehensive employee compliance training program combines instructorled webbased training modules tailored key risks employees face ongoing basis baker hughes holdings llc 2020 form 10k 31 •due diligence procedures third parties conduct business behalf including channel partners sales representatives distributors resellers administrative service providers well enhanced riskbased process classifying channel partners suppliers •due diligence procedures merger acquisition activities •specifically tailored compliance risk assessments audits focused country third party risk •compliance review board comprised senior officers company meets quarterly monitor effectiveness compliance program well product company regional compliance committees meet quarterly •technology monitor report compliance matters including internal investigations management system webbased antiboycott reporting tool global trade management systems comprehensive watch list screening •data privacy compliance policies procedures ensure compliance applicable data privacy requirements •a compliance program designed create “open reporting environment” employees encouraged report ethics compliance matter without fear retaliation including global network trained employee ombudspersons worldwide 24hour business helpline operated third party available approximately 200 languages •centralized finance organization companywide policies •anticorruption audits highrisk countries well riskbased compliance audits third parties •we regionspecific processes procedures management hr related issues including prehire screening employees process screen existing employees prior promotion select roles may exposed finance andor corruptionrelated risks implementation global new hire compliance training module employees liquidity capital resources objective financing business maintain sufficient liquidity adequate financial resources financial flexibility order fund requirements business despite challenging dynamics 2020 continue maintain solid financial strength liquidity december 31 2020 cash equivalents 41 billion compared 32 billion december 31 2019 liquidity supported revolving credit facility 3 billion access commercial paper uncommitted lines credit december 31 2020 borrowings outstanding revolving credit facility uncommitted lines credit £600 million 801 million commercial paper outstanding next debt maturity december 2022 cash equivalents includes 44 million 162 million cash held behalf ge december 31 2020 2019 respectively excluding cash held behalf ge us subsidiaries held approximately 1 billion 04 billion foreign subsidiaries held approximately 31 billion 27 billion cash equivalents december 31 2020 2019 respectively substantial portion cash held foreign subsidiaries december 31 2020 reinvested active nonus business operations decide later date repatriate funds us generally free us federal tax may incur taxes withholding state taxes 3 billion committed unsecured revolving credit facility 2019 credit agreement commercial banks maturing december 2024 2019 credit agreement contains certain customary representations warranties certain customary affirmative covenants certain customary negative covenants upon occurrence certain events default obligations 2019 credit agreement may accelerated baker hughes holdings llc 2020 form 10k 32 events default include payment defaults lenders 2019 credit agreement customary defaults events default occurred borrowings 2019 credit agreement addition commercial paper program may issue time commercial paper maturities 397 days second quarter 2020 established £600 million commercial paper facility bank england may invest covid corporate financing facility program increased total commercial paper program 30 billion approximately 38 billion may 2020 issued £600 million commercial paper program matures april 2021 repaid prior additional cost certain senior notes contain covenants restrict ability take certain actions see note 10 borrowings notes consolidated financial statements annual report details december 31 2020 compliance debt covenants continuously review liquidity capital resources market conditions change instance due uncertainty created covid19 pandemic significant decline oil gas prices revenue reduced significantly operating costs increase significantly cash flows liquidity could negatively impacted additionally could cause rating agencies lower credit ratings triggers would accelerate maturity borrowings committed credit facility however downgrade credit ratings could increase cost borrowings credit facility could also limit preclude ability issue commercial paper occur could seek alternative sources funding including borrowing credit facility year ended december 31 2020 dispersed cash fund variety activities including certain working capital needs restructuring ge separation related costs capital expenditures distributions members believe cash hand cash flows generated operating financing activities available credit facility provide sufficient liquidity manage global cash needs cash flows cash flows provided used type activity follows years ended december 31 fiscal year 2020 fiscal year 2019 operating activities largest source operating cash payments customers largest component collecting cash related sales products services including advance payments progress collections work performed primary use operating cash pay suppliers employees tax authorities others wide range goods services cash flows operating activities generated cash 1301 million 2168 million years ended december 31 2020 2019 respectively year ended december 31 2020 cash generated operating activities primarily driven net losses adjusted certain noncash items primarily depreciation amortization impairments loss sale businesses unrealized gain equity security working capital includes contract deferred assets working capital generated 212 million cash 2020 primarily due receivables positive progress collections partially offset accounts payable continue improve working capital processes 2019 working capital generated 627 million cash primarily due net positive progress collections receivables tps equipment contracts included cash flows operating activities 2020 2019 payments 670 million 307 million respectively made primarily employee severance result baker hughes holdings llc 2020 form 10k 33 restructuring activities separationrelated costs including buildout information technology infrastructure result ge separation activities investing activities cash flows investing activities used cash 618 million 1045 million years ended december 31 2020 2019 respectively principal recurring investing activity funding capital expenditures ensure appropriate levels types machinery equipment place generate revenue operations expenditures capital assets totaled 974 million 1240 million 2020 2019 respectively partially offset cash flows sale property plant equipment 187 million 264 million 2020 2019 respectively proceeds disposal assets related primarily equipment lostinhole property machinery equipment longer used operations sold throughout period 2020 received proceeds 187 million primarily sale rod lift systems surface pressure control flow businesses 2019 received 77 million sale highspeed reciprocating compression business financing activities cash flows financing activities generated cash 225 million used cash 1534 million years ended december 31 2020 2019 respectively net repayments shortterm debt 204 million 542 million 2020 2019 respectively repayments longterm debt 42 million 2020 570 million 2019 primarily driven repayment certain senior notes 2020 proceeds issuance commercial paper £600 million 737 million date issuance addition proceeds issuance 500 million aggregate principal amount 4486 senior notes due may 2030 pay interest notes may november 2019 proceeds issuance 525 million aggregate principal amount 3138 senior notes due november 2029 pay interest notes may november used proceeds offering repurchase outstanding 32 senior notes due august 2021 2020 2019 made distributions 744 million 745 million members respectively additionally september 2019 repurchased 119 million units ge cash consideration 250 million cash requirements 2021 believe cash hand cash flows operating activities available revolving credit facility availability existing shelf registrations debt provide us sufficient capital resources liquidity manage working capital needs meet contractual obligations fund capital expenditures distributions support development shortterm longterm operating strategies necessary issue commercial paper shortterm debt fund cash needs us excess cash generated us capital expenditures adjusted managed us match market demand activity levels based current market conditions capital expenditures net proceeds disposal assets 2021 expected 2020 levels expenditures expected used primarily normal recurring items necessary support business also anticipate making income tax payments range 450 million 550 million 2021 baker hughes holdings llc 2020 form 10k 34 contractual obligations table set forth contractual obligations december 31 2020 certain amounts included table based estimates assumptions obligations including duration anticipated actions third parties factors contractual obligations actually pay future periods may vary reflected table estimates assumptions subjective 1amounts represent expected cash payments principal amounts related debt including finance lease obligations amounts debt include deferred issuance costs unamortized discounts premiums including step value debt acquisition bhi expected cash payments interest excluded amounts total debt finance lease obligations includes 45 million payable ge affiliates fixed payment schedule amount payable ge affiliates classified payable less one year 2amounts represent expected cash payments interest longterm debt finance lease obligations 3amounts represent future minimum payments operating leases initial terms one year lease terms may include options extend terminate lease reasonably certain exercise option 4purchase obligations include expenditures capital assets 2020 well agreements purchase goods services licenses enforceable legally binding specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction due uncertainty respect timing potential future cash outflows associated uncertain tax positions unable make reasonable estimates period cash settlement respective taxing authorities therefore 572 million uncertain tax positions including interest penalties excluded contractual obligations table see note 12 income taxes notes consolidated financial statements item 8 herein information certain defined benefit pension postretirement benefit plans covering certain us international employees 2020 made contributions paid direct benefits approximately 39 million connection plans anticipate funding approximately 30 million 45 million 2021 amounts pension funding obligations based assumptions subject change therefore currently able reasonably estimate contribution figures 2021 see note 11 employee benefit plans notes consolidated financial statements item 8 herein information offbalance sheet arrangements normal course business customers vendors others entered offbalance sheet arrangements surety bonds performance letters credit bank issued guarantees totaled approximately 41 billion december 31 2020 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements december 31 2020 material offbalance sheet financing arrangements discussed materially exposed financing liquidity market credit risk could arise engaged financing arrangements baker hughes holdings llc 2020 form 10k 35 factors affecting liquidity registration statements november 2018 baker hughes filed universal shelf registration statement form s3asr automatic shelf registration sec ability sell various types securities including debt securities class common stock preferred stock guarantees debt securities purchase contracts units specific terms securities sold would described supplemental filings sec registration statement expire 2021 december 2020 bhh llc baker hughes netherlands funding company bv baker hughes coobligor inc filed shelf registration statement form s3 sec ability sell 3 billion debt securities amounts determined time offering occur may happen one transactions specific terms debt securities sold would described supplemental filings sec registration statement expire december 2023 customer receivables line industry practice may bill customers services provided arrears dependent upon contractual terms challenging economic environment may experience delays payment invoices due customers lower cash flow operations limited access credit markets historically material nonpayment events attempt mitigate risk working customers restructure debts customers failure delay payment could material adverse effect shortterm liquidity results operations december 31 2020 16 gross trade receivables customers us country single customer accounted 10 gross trade receivables date december 31 2019 19 gross trade receivables customers us international operations cash held outside us 76 total cash balance december 31 2020 may able use cash quickly efficiently due exchange cash controls could make challenging result cash balance may represent ability quickly efficiently use cash supply chain finance programs supply chain finance programs administered third party suppliers given opportunity sell receivables us participating financial institutions sole discretion rate leverages credit rating thus might beneficial suppliers responsibility limited making payment terms originally negotiated supplier regardless whether supplier sells receivable financial institution range payment terms negotiate suppliers consistent irrespective whether supplier participates program liabilities continue presented accounts payable condensed consolidated statements financial position reflected cash flow operating activities settled believe changes availability supply chain financing programs would material impact liquidity critical accounting estimates accounting estimates assumptions discussed section considered critical understanding financial statements involve significant judgments uncertainties many estimates include determining fair value estimates reflect best judgment current estimates future economic market conditions potential effects based information available date financial statements conditions change expected reasonably possible judgments estimates described could change may result future impairments goodwill intangibles longlived assets increases reserves contingencies establishment valuation allowances deferred tax assets increased tax liabilities among effects also see note 1 summary significant accounting policies notes consolidated financial statements item 8 herein discusses significant accounting policies defined critical accounting estimate one important portrayal either financial condition results operations requires us make difficult subjective complex judgments estimates matters uncertain audit committee board directors reviewed critical accounting estimates disclosure presented past three fiscal years made material changes methodology used establish critical accounting estimates believe baker hughes holdings llc 2020 form 10k 36 following critical accounting estimates used preparation consolidated financial statements items within consolidated financial statements require estimation judgment deemed critical defined revenue recognition longterm product services agreements longterm service agreements customers predominately within tps segment agreements typically require us maintain assets sold customer defined contract term agreements average contract terms greater 10 years time contract terms may extended contract modifications amendments may result revisions future billing cost estimates revenue recognition longterm product services agreements requires estimates customer payments costs perform required maintenance services contract term recognize revenue overtime basis using input method measure progress toward completion estimated margin rate contract develop billings estimates consider number billable events occur based estimated utilization asset contract life contract term estimated utilization consider historical market conditions asset retirements new product introductions applicable develop cost estimates consider timing extent maintenance overhaul events including amount cost labor spare parts resources required perform services developing cost estimates utilize combination historical cost experience expected cost improvements cost improvements included future cost estimates savings observed actual results proven effective extensive regulatory engineering approval process routinely review estimates used product services agreements regularly revise adjust changes revisions based objectively verifiable information available time review difference timing revenue recognition cash received customers results either contract asset revenue excess billings contract liability billings excess revenue see note 7 contract deferred assets note 8 progress collections deferred income notes consolidated financial statements item 8 herein information regularly assess customer credit risk inherent carrying amounts receivables contract assets estimated earnings including risk contractual penalties may sufficient offset accumulated investment event customer termination gain insight expected future utilization cost trends well credit risk knowledge equipment installed close interaction customers supplying critical services parts extended periods revisions cost billing estimates may affect product services agreement’s total estimated profitability resulting adjustment earnings adjustments generated earnings 17 million 1 million 26 million three years ended december 31 2020 2019 2018 respectively provide probable losses become evident december 31 2020 longterm product service agreements net related billings excess revenues 03 billion represent approximately 29 total estimated life contract billings 112 billion cash billings collected contracts approximately 06 billion years ended december 31 2020 2019 contracts average approximately 18 complete based costs incurred date estimate future costs revisions estimates future revenue costs increase decrease total estimated contract profitability 1 would increase decrease longterm product service agreements balance 004 billion goodwill identified intangible assets perform annual impairment test goodwill qualitative quantitative basis reporting units july 1 frequently circumstances indicate impairment may exist reporting unit level process evaluating potential impairment goodwill highly subjective requires significant judgment performing annual impairment test option first performing qualitative baker hughes holdings llc 2020 form 10k 37 assessment determine existence events circumstances would lead determination likely fair value reporting unit less carrying amount conclusion reached would required perform quantitative impairment assessment goodwill however assessment leads determination likely fair value reporting unit greater carrying amount assessments required quantitative assessment determination impairment made comparing carrying amount reporting unit fair value generally calculated using combination market comparable transaction discounted cash flow approaches assess valuation methodology based upon relevance availability data time valuation performed pension assumptions pension benefits calculated using significant inputs actuarial models measure pension benefit obligations related effects operations two assumptions discount rate expected return assets important elements plan expense assetliability measurement evaluate critical assumptions least annually plan country specific basis periodically evaluate assumptions involving demographic factors retirement age mortality turnover update reflect experience expectations future actual results given year often differ actuarial assumptions economic factors projected benefit obligations measured present value expected payments discounted using weighted average market observed yields high quality fixed income securities maturities correspond payment benefits lower discount rates increase present values subsequent year pension expense higher discount rates decrease present values subsequent year pension expense discount rates used determine benefit obligations principal pension plans december 31 2020 2019 166 234 respectively reflecting market interest rates expected return assets december 31 2020 2019 420 548 respectively income taxes operate 120 countries effective tax rate based income statutory tax rates differences tax laws us gaap various jurisdictions tax laws complex subject different interpretations taxpayer respective governmental taxing authorities rate impacted extent earnings indefinitely reinvested repatriation foreign earnings would incur additional taxes withholding income taxes indefinite reinvestment determined management’s judgment intentions concerning future operations company cases repatriation would otherwise incur significant withholding income taxes foreign earnings indefinitely reinvested active nonus business operations computation potential deferred tax liability associated undistributed earnings basis differences practicable deferred income tax assets represent amounts available reduce income taxes payable future years evaluate recoverability future tax deductions credits assessing adequacy future taxable income sources including reversal taxable temporary differences forecasted operating earnings available tax planning strategies sources income rely heavily estimates use historical experience short long range business forecasts provide insight record valuation allowance likely portion deferred tax assets realized tax filings routinely subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved tax authorities courts provided amounts believe ultimately result proceedings settlements issues raised audits may affect tax rate 454 million gross unrecognized tax benefits excluding interest penalties december 31 2020 able reasonably estimate future periods amounts ultimately settled baker hughes holdings llc 2020 form 10k 38 loss contingencies loss contingencies uncertain unresolved matters arise ordinary course business result events actions others potential result future loss contingencies include limited environmental obligations litigation regulatory proceedings product quality losses resulting events developments preparation consolidated financial statements requires us make estimates judgments affect reported amounts assets liabilities revenue expenses related disclosures well disclosures contingent assets liabilities base estimates judgments historical experience assumptions information believed reasonable circumstances estimates assumptions future events effects subject uncertainty accordingly estimates may change new events occur experience acquired additional information obtained business environment operate changes allowance credit losses estimation anticipated credit losses may incurred work invoice collection process customers requires us make judgments estimates regarding customers ability pay amounts due us monitor customers payment history current credit worthiness determine collectability reasonably assured also consider overall business climate customers operate accounts receivable loss allowance matrix utilized measure lifetime expected credit losses matrix contemplates historical credit losses age receivables adjusted forwardlooking information management expectations december 31 2020 2019 allowance credit losses totaled 373 million 323 million total gross accounts receivable respectively believe allowance credit losses adequate cover anticipated credit losses current conditions however uncertainties regarding changes financial condition customers either adverse positive could impact amount timing additional credit losses may required inventory reserves inventory significant component current assets stated lower cost net realizable value requires us record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments estimates forecasts inherently include uncertainties require us make judgments regarding potential future outcomes december 31 2020 2019 inventory reserves totaled 421 million 429 million gross inventory respectively believe reserves adequate properly value potential excess slow moving obsolete inventory current conditions significant unanticipated changes estimates forecasts could impact amount timing additional provisions excess slow moving obsolete inventory may required new accounting standards adopted see note 1 summary significant accounting policies notes consolidated financial statements item 8 herein discussion accounting standards adopted related party transactions see note 16 related party transactions notes consolidated financial statements item 8 herein discussion related party transactions baker hughes holdings llc 2020 form 10k 39 forwardlooking statements form 10k including mda certain statements notes consolidated financial statements contains forwardlooking statements within meaning section 27a securities act 1933 amended section 21e exchange act 1934 amended forwardlooking statement forwardlooking statements concern future circumstances results statements historical facts sometimes identified words may potential intend expect endeavor seek anticipate estimate overestimate underestimate believe could project predict continue target similar words expressions forwardlooking statements based upon current plans estimates expectations subject risks uncertainties assumptions one risks uncertainties materialize underlying assumptions prove incorrect actual results may vary materially indicated anticipated forwardlooking statements inclusion statements regarded representation plans estimates expectations achieved important factors could cause actual results differ materially plans estimates expectations include among others risk factors risk factors section part 1 item 1a form 10k set forth timetotime filings company sec documents available website secs electronic data gathering analysis retrieval edgar system httpwwwsecgov light risks uncertainties caution place undue reliance forwardlooking statements forwardlooking statements speak date annual report earlier date made intend disclaim obligation update revise forwardlooking statements unless required securities law item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations “mda” read conjunction “item 8 financial statements supplementary data” contained herein executive summary leading provider drilling formation evaluation completion production products services worldwide oil natural gas industry compete one three largest diversified oilfield services companies oilfield segment comprised seven product line focused divisions baker hughes drilling fluids drilling fluids hughes christensen oilfield drill bits inteq drilling measurementwhiledrilling provide products services used drill oil natural gas wells baker atlas wireline formation evaluation inteq formation evaluation drilling provide formation evaluation services baker atlas tubing conveyed perforating baker oil tools completion equipment provide completion systems baker petrolite oilfield specialty chemicals centrilift electric submersible pumps progressing cavity pumps baker oil tools workover completion equipment provide equipment services used production phase oil natural gas wells headquarters houston texas significant manufacturing operations various countries including limited united states texas oklahoma louisiana scotland aberdeen germany celle northern ireland belfast venezuela maracaibo operate 90 countries around world employ approximately 26900 employees onehalf work outside us revenue 2004 excess 6 billion approximately 35 came providing products services oil natural gas companies operating us customers products services include supermajor major integrated oil natural gas companies independent oil natural gas companies stateowned national oil companies “nocs” ability compete oilfield services market dependent ability differentiate product service offerings technology service price paid value deliver primary competitors include two large diversified oilfield service companies schlumberger halliburton well number smaller competitors including smith weatherford grant prideco primary driver business customers’ capital operating expenditures dedicated exploring drilling developing producing oil natural gas business cyclical dependent upon customers’ forecasts future oil natural gas prices future economic growth hydrocarbon demand estimates future oil natural gas production 2004 customers’ spending directed worldwide oil north american oil natural gas projects increased increases driven perceived multiyear requirement produce hydrocarbons meet growth demand offset production declines increase inventory levels rebuild excess productive capacity increases supported historically high oil natural gas prices customers’ spending oil projects expected continue grow 2005 near future bias towards projects middle east russia caspian region africa spending north america dominated spending natural gas projects north america customer activity expected grow modestly 2005 compared 2004 levels highest two decades 2004 reported revenues 61038 million 162 increase compared 2003 income continuing operations 2004 5282 million compared 1779 million 2003 included income continuing operations 2003 charges net tax 1059 million related share westerngeco restructuring charge 453 million related impairment investment westerngeco revenues operating profits set time records 2004 baker hughes rig count rose highest level since 1986 oil natural gas companies around world recognized need increase productive capacity meet growing demand hydrocarbons oil natural gas prices historic highs 2004 reflecting strong demand relatively low inventories lack excess productive capacity several geopolitical weather events also contributed higher volatile commodity prices 2004 revenues increased 162 compared 2003 outpacing 101 increase worldwide average rig count 2004 compared 2003 north america 2004 revenues increased 144 compared 2003 rig count increased 109 2004 compared 2003 driven primarily landbased drilling natural gas outside north america 2004 revenues increased 175 compared 2003 rig count increased 86 2004 compared 2003 revenue growth particularly noteworthy russia caspian region latin america middle east africa asia european revenues 2004 modestly compared 2003 despite 152 drop north sea rig count critical success factors business embodied longterm strategy call strategic framework strategy includes development maintenance high performance culture founded core values keys success product line focused organization focus bestinclass opportunities maintaining financial flexibility financial discipline execution strategies product development commercialization manufacturing quality service quality ongoing effort develop maintain high performance culture starts core values integrity teamwork performance learning keys success employ succession planning efforts develop leaders across businesses embody core values represent diversity customer base hire train employees around world ensure welltrained workforce place support business plans focus bestinclass opportunities starts product line focused organization structure believe product line focused divisions develop technologies deliver bestinclass value customers enterprise also focused markets believe provide bestinclass opportunities growth management team identified markets immediate focus including russia caspian region nocs focus financial flexibility financial discipline backbone effort deliver differential growth superior margins earning acceptable return investments throughout business cycle investments given priority funded depending ability provide riskadjusted returns excess cost capital effort obtain best price products services begins approach capital discipline past years invested growth business repaid debt paid dividends repurchased stock expect maintain flexibility able undertake activities future last element strategic framework focuses ability identify develop commercialize new products services lead differential growth superior margins business effort extends every phase operations including continuous improvement programs manufacturing facilities field operations support goal flawless execution well site execution 2005 business plan ability meet 2005 financial objectives dependent number factors include limited ability manage raw material component costs especially steel alloys copper chemicals expected increase 2005 compared 2004 continue make ongoing improvements productivity manufacturing organization recruit train retain skilled diverse workforce necessary meet business needs expand business areas growing rapidly russia caspian region customers whose spending expected increase rapidly nocs areas underrepresented middle east realize price increases commensurate value provide customers full discussion risk factors forwardlooking statements please see “risk factors related worldwide oil natural gas industry” “risk factors related business” “forwardlooking statements” sections contained herein business environment business environment corresponding operating results significantly affected level energy industry spending exploration production “ep” oil natural gas reserves indicator spending rig count drilling workover rigs active many products services provided oilfield services industry required products services used drilling workover phases completion oil natural gas wells actual production hydrocarbons ep spending oil natural gas companies turn influenced strongly expectations supply demand oil natural gas products current expected prices oil natural gas rig counts therefore generally reflect relative strength stability energy prices rig counts providing rig counts public since 1944 gather relevant data field service personnel obtain necessary data routine visits various rigs customers contractors outside sources data compiled distributed various wire services trade associations published website rig counts compiled weekly us canada monthly international us workover rigs published international rig counts include rigs drilling certain locations russia onshore china information extremely difficult obtain north american rigs counted active day count taken well drilled started drilling completed well anticipated sufficient depth potential consumer drill bits international areas rigs counted active drilling operations taken place least 15 days month rig count include rigs transit one location another rigging used nondrilling activities including production testing completion workover significant consumers drill bits active international areas better data available weekly daily average active rigs taken rig counts summarized table averages periods indicated us land inland waters rig count increased 185 2004 compared 2003 due increase drilling natural gas us offshore rig count decreased 102 2004 compared 2003 primarily related reduced level spending major diversified oil natural gas companies continued redirect portion spending towards larger international projects canadian rig count decreased 19 primarily result unusually wet weather summer fall 2004 outside north america rig count increased 86 2004 compared 2003 rig count latin america increased 189 2004 compared 2003 driven primarily spending increases mexico venezuela argentina north sea rig count decreased 152 2004 compared 2003 primarily driven continued declines drilling activity uk norwegian sectors increases spending north sea independent oil natural gas companies large enough offset decreases spending major diversified oil natural gas companies continue redirect spending towards larger international projects especially russia caspian region rig count africa declined 93 2004 compared 2003 primarily due project delays west africa activity middle east continued rise steadily 90 increase rig count 2004 compared 2003 rig count asia pacific region 113 2004 compared 2003 primarily due activity increases india indonesia australia offshore china oil natural gas prices generally changes current price expected future prices oil natural gas drive customers’ expectations prospects oil natural gas sales expenditures explore produce oil natural gas accordingly changes expenditures normally result increased decreased demand products services oil bloomberg west texas intermediate wti cushing crude oil spot price natural gas bloomberg henry hub natural gas spot price prices summarized table averages daily closing prices periods indicated oil prices averaged historic high 4151bbl 2004 prices increased low 30sbbl january 2004 high 5617bbl late october 2004 moderating ending year low 40sbbl inventories crude petroleum products relatively low throughout year supporting high prices worldwide demand hydrocarbons driven strong worldwide economic growth particularly strong china developing asia worldwide excess productive capacity lowest level 30 years disruptions potential disruptions oil supply resulted volatile oil prices throughout year events 2004 either disrupted potential disrupt oil supplies included august recall elections venezuela sabotage iraqi oil production assets actions taken russian government regarding yukos tax obligations terrorism middle east including possibility disruption oil supply saudi arabia labor strikes norway labor strikes violence nigeria weather especially impact hurricanes gulf mexico end year number issues resolved without significant disruptions oil supply led oil prices 40bbl addition events weakness us dollar relative many worldwide currencies contributed high us dollardenominated oil prices 2004 natural gas prices averaged historic high 590mmbtu throughout year tight balance supply demand supported prices 5mmbtu 7mmbtu weather related spikes outside range high natural gas drilling activity 2004 combined increasing depletion rates resulted limited production growth began year us natural gas storage levels slightly greater fiveyear average storage levels natural gas prices peaked 7mmbtu january result colder normal winter weather prices fell 5mmbtu late february winter weather moderated storage remained fiveyear average however end winter heating season natural gas inventories fell fiveyear average first half summer market required natural gas prices excess 6mmbtu order limit consumption natural gas allow storage refill july august average summer temperatures allowed storage fill rapidly storage increased fiveyear average prices fell low 440mmbtu early september high oil prices hurricanedriven supply disruptions start winter heating season resulted peak price 814mmbtu late october prices fell 5mmbtu november beginning winter milder normal storage fiveyear average late december cold snap resulted natural gas price excess 7mmbtu prices ended year approximately 6mmbtu worldwide oil natural gas industry outlook section read conjunction factors described “risk factors related worldwide oil natural gas industry” “risk factors related business” “forwardlooking statements” sections contained herein factors could impact either positively negatively expectation oil natural gas demand oil natural gas prices drilling activity oil prices 2005 expected trade 35bbl 55bbl continuing trend 2004 low inventories crude oil products combined strong worldwide economic growth expected support prices could average 40bbl growth oil demand expected slow 2005 compared 2004 worldwide economic growth particular economic growth china moderates extraordinarily strong growth exhibited 2004 ongoing lack excess productive capacity leave energy markets susceptible price volatility disruptions threat disruptions oil supplies factors could lead prices lower end range include limited significant expected slowing worldwide economic growth particularly economic growth china greater planned growth russian oil exports organization petroleum exporting countries “opec” exports excess stated goals factors result oil inventories increasing significantly historically low levels factors could lead prices top range include limited rapid planned expansion worldwide economy particularly economy china significant slowing exports russia factors result oil inventories remain historically low levels factors could lead disruptions threat disruptions oil supply volatility oil prices include limited terrorist attacks targeting oil production saudi arabia key producers labor strikes key oil producing areas nigeria potential military actions middle east adverse weather conditions especially gulf mexico potential events cause volatility mitigated degree opec particular saudi arabia able increase excess productive capacity natural gas natural gas prices 2005 expected remain volatile trading 4mmbtu 7mmbtu natural gas prices could trade top range weather colder normal us economy particularly industrial sector exhibits greater expected growth continued levels customer spending sufficient support production growth required meet growth natural gas demand natural gas prices could move bottom range us economic recovery weaker expected weather milder expected summer natural gas prices expected trade level necessary curtail price sensitive demand allow storage refill customer spending based upon discussions major customers review published industry reports outlook oil natural gas prices described anticipated customer spending trends follows drilling activity based upon outlook oil natural gas prices customer spending described outlook drilling activity measured baker hughes rig count follows risk factors related worldwide oil natural gas industry business focused providing products services worldwide oil natural gas industry therefore risk factors centered factors impact either positively negatively markets oil natural gas key risk factors currently influencing worldwide oil natural gas markets discussed • excess productive capacity impact supply demand disruptions oil prices oil price volatility tempered size disruption relative excess productive capacity key measures include estimates worldwide productive capacity compared worldwide demand • supply disruptions loss production inability export andor delay activity key oil exporting countries including limited iraq saudi arabia middle eastern countries nigeria norway russia venezuela due political instability civil unrest labor issues military activity addition adverse weather hurricanes could impact production facilities causing supply disruptions • energy prices price volatility impact widely fluctuating commodity prices stability market subsequent impact customer spending current energy prices important contributors positive cash flow ep companies expectations future prices price volatility generally important determining future ep spending higher commodity prices generally lead higher levels ep spending sustained high energy prices impediment economic growth • global economic growth particularly impact us western european economies economic activity japan china south korea developing areas asia correlation economic growth energy demand strong strength us economy economic growth developing asia particularly china continue important 2005 key measures include us international economic output global energy demand forecasts future demand governments private organizations • oil natural gas storage inventory levels indicator balance supply demand key measure us natural gas inventories storage level reported weekly us department energy compared historic levels key measures oil inventories include us inventory levels reported us department energy american petroleum institute worldwide estimates reported international energy agency • production control degree individual opec nations large oil natural gas producing countries including limited mexico norway russia willing able control production exports oil decrease increase supply support targeted oil price meeting market share objectives key measures production control include actual production levels compared target quota production levels oil prices compared targeted oil prices changes country’s market share • ability produce natural gas amount natural gas produced function number productivity new wells drilled completed connected pipelines well rate production resulting depletion existing wells advanced technologies horizontal drilling improve total recovery also result rapid production decline key measures include government private surveys natural gas production company reported production estimates reservoir depletion rates drilling completion activity • impact energy prices price volatility demand hydrocarbons shortterm price changes result companies switching economic sources fuel prompting temporary curtailment demand longterm price changes lead permanent changes demand changes demand result oilfield services industry cyclical nature key indicators include hydrocarbon prices btu equivalent basis indicators hydrocarbon demand electricity generation industrial production • access prospects ability oil natural gas companies develop economically attractive projects based expectations future energy prices required investments resulting returns access prospects may limited host governments allow access reserves another oil natural gas company owns rights develop prospect • weather impact variations temperatures compared normal weather patterns related effect demand oil natural gas key measure impact weather energy demand populationweighted heating cooling degree days reported us department energy forecasts warmer normal cooler normal temperatures weather also impact production example north sea gulf mexico canada • access capital ability oil natural gas companies access funds necessary carry ep plans access capital particularly important smaller independent oil natural gas companies key measures access capital include cash flow interest rates analysis oil natural gas company leverage equity offering activity • technological progress design application new products allow oil natural gas companies drill fewer wells drill complete produce wells faster recover hydrocarbons andor lower costs key measures also include overall level research engineering spending oilfield services companies pace new technology introduced commercially accepted customers • pace new investment oil natural gas companies emerging markets impact spending areas already established presence • maturity resource base growing necessity increased levels investment activity support production area longer developed key measures include changes undeveloped hydrocarbon reserves mature areas like north sea us canada latin america • government regulations costs incurred oil natural gas companies conform comply government regulations including environmental regulations may limit quantity oil natural gas may economically produced additional risk factors cautions regarding forwardlooking statements see “risk factors related business” “forwardlooking statements” sections contained herein list risk factors intended inclusive business outlook 2005 took account factors described herein expect 2005 stronger year 2004 revenues increasing 9 11 line expected increase customer spending expect growth revenues primarily due increased activity lesser extent price improvement assumptions regarding overall growth customer spending assume strong economic growth us china opec discipline resulting average oil price exceeding 35bbl assumptions regarding customer spending north america assume strong economic growth us natural gas prices exceeding average 5mmbtu north america expect revenues increase 11 13 2005 compared 2004 majority increase occurring second half 2005 expect spending landbased projects continue increase 2005 driven demand natural gas following trend evident 2004 also expect offshore spending gulf mexico increase modestly 2005 compared 2004 normal weatherdriven seasonal decline us canadian spending first half year result sequentially softer revenues first second quarters 2005 2004 2003 2002 revenues outside north america 584 577 599 total revenues respectively 2005 expect revenues outside north america continue 55 60 total revenues expect revenues increase 7 9 2005 compared 2004 continuing multiyear trend modest growth customer spending large projects nocs reflect established seasonality trends resulting softer revenues first half year stronger revenues second half addition customer spending affected weatherrelated reductions north sea first second quarters 2005 middle east africa latin america expected grow modestly 2005 compared 2004 expectations spending revenue growth could decrease average prices fall 35bbl oil 5mmbtu natural gas disruptions key oil natural gas production markets venezuela nigeria 2004 westerngeco contributed 345 million equity income affiliates compared equity loss affiliates 99 million 2003 excludes 1357 million related portion certain restructuring impairment charges taken westerngeco third quarter 2003 recorded “equity income loss affiliates” consolidated statement operations expect trend improving operating results westerngeco continue throughout 2005 however based historical trend operating losses weakness seismic industry prior years uncertainty regarding future operating results westerngeco information regarding westerngeco’s profitability 2005 based information westerngeco provided us information accurate forecasts profitability could impacted either positively negatively 2005 modified stock award program provide combination restricted stock option awards restricted stock awards stock option awards granted january stock option awards may also granted july required current accounting rules awards restricted stock expensed vesting period based fair value granted begin expensing fair value stock option awards stock issued employee stock purchase plan july 2005 adopt revised statement financial accounting standards 123 sharebased payment “sfas 123r” currently process evaluating different option pricing models impact sfas 123r consolidated financial statements adopt sfas 123r july 2005 using prospective application expect income continuing operations per diluted share reduced approximately 003 2005 information see note 1 notes consolidated financial statements item 8 herein based forecasts believe income continuing operations per diluted share 2005 range 180 195 includes impact expensing restricted stock awards excludes impact expensing stock option awards stock issued employee stock purchase plan significant price increases significantly better expected results westerngeco could cause earnings per share reach upper end range conversely significant price decreases significantly worse expected results westerngeco could result earnings per share bottom range ability improve pricing dependent demand products services competitors strategies managing capacity commercial introduction new technology important factor realizing price improvement without pricing discipline throughout industry whole meaningful improvements prices likely realized additionally significant changes drilling activity outside expectations well changes expected costs raw materials could impact operating results positively negatively business approximately 90 countries including onehalf 35 countries lowest scores indicates high levels corruption transparency international’s corruption perception index “cpi” survey 2004 devote significant resources development maintenance enforcement business code conduct policy foreign corrupt practices act “fcpa” policy internal control processes procedures compliance related policies notwithstanding devotion resources part consequence thereof time discover receive information alleging potential violations laws regulation including fcpa policies processes procedures conduct internal investigations potential violations take appropriate action depending upon outcome investigation addition us government agencies authorities conducting investigations allegations potential violations laws anticipate devotion significant resources compliance related issues including necessity investigations continue aspect business number countries oil natural gas exploration development production take place requested conduct operations compliance related issues could limit ability business countries order provide products services countries may future utilize ventures third parties sell products distributors otherwise modify business approach order improve ability conduct business accordance laws regulations business code conduct risk factors related business expectations regarding business outlook including changes revenue pricing capital spending profitability forecasts regarding matters forecasts may substantially different actual results affected following risk factors timing risk factors • oil gas market conditions level petroleum industry ep expenditures drilling rig oil natural gas industry manpower equipment availability price demand crude oil natural gas drilling activity risks operating hazards seasonal weather conditions affect demand energy severe weather conditions hurricanes affect exploration production activities opec policy adherence opec nations opec production quotas war military action terrorist activities extended period international conflict particularly involving us middle east major petroleumproducing consuming regions civil unrest security conditions operate expropriation assets governmental action • pricing market share contract terms ability implement affect price increases products services receipt license fees effect level sources profitability tax rate ability competitors capture market share ability retain increase market share changes strategic direction ability negotiate acceptable terms conditions customers especially nocs ability manage warranty claims improve performance quality ability effectively manage commercial agents • costs availability resources ability manage rising costs availability sufficient raw materials components especially steel alloys copper chemicals ability recruit train retain skilled diverse workforce necessary meet business needs manufacturing capacity subcontracting capacity forecasted costs meet revenue goals availability essential electronic components used products effect competition particularly ability introduce new technology forecasted schedule forecasted costs potential impairment longlived assets accuracy estimates regarding capital spending requirements unanticipated changes levels capital expenditures need replace unanticipated losses capital assets development technology us competitors lowers overall finding development costs laborrelated actions including strikes slowdowns facility occupations • litigation changes laws regulatory conditions potential unexpected litigation proceedings legislative regulatory business environment us countries operate outcome government internal investigations legal proceedings new laws regulations policies could significant impact future operations conduct businesses changes export control laws exchange control laws additional restrictions business countries subject sanctions changes laws russia countries identified management immediate focus changes accounting standards changes tax laws tax rates jurisdictions operate resolution audits various tax authorities ability fully utilize tax loss carryforwards tax credits • economic conditions worldwide economic growth foreign currency exchange fluctuations changes capital markets international locations operate condition capital equity markets general ability estimate size changes worldwide oil natural gas industry • environmental matters unexpected adverse outcomes material increases liability respect environmental remediation sites named potentially responsible party discovery new environmental remediation sites changes environmental regulations discharge hazardous materials hydrocarbons environment see also “environmental matters” section item 1 contained herein information additional risk factors cautions regarding forwardlooking statements see “risk factors related worldwide oil natural gas industry” “forwardlooking statements” sections contained herein list risk factors intended inclusive critical accounting estimates preparation consolidated financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosures contingent assets liabilities base estimates judgments historical experience assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained business environment operate changes defined critical accounting estimate one important portrayal financial condition results operations requires us make difficult subjective complex judgments estimates matters uncertain discussed development selection critical accounting estimates auditethics committee board directors auditethics committee reviewed disclosure presented past three fiscal years made material changes accounting methodology used establish critical accounting estimates discussed believe following critical accounting estimates used preparation consolidated financial statements addition items within consolidated financial statements require estimation deemed critical defined allowance doubtful accounts determination collectibility amounts due customers requires us use estimates make judgments regarding future events trends including monitoring customers’ payment history current credit worthiness determine collectibility reasonably assured well consideration overall business climate customers operate inherently uncertainties require us make frequent judgments estimates regarding customers’ ability pay amounts due us order determine appropriate amount valuation allowances required doubtful accounts provisions doubtful accounts recorded becomes evident customer make required payments either contractual due dates future december 31 2004 2003 reserves doubtful accounts totaled 505 million 36 618 million 51 total accounts receivable reserves respectively believe reserve doubtful accounts adequate cover anticipated losses current conditions however uncertainties regarding changes financial condition customers either adverse positive could impact amount timing additional provisions doubtful accounts may required five percent change reserve would pretax impact approximately 25 million 2004 inventory reserves inventory significant component current assets stated lower cost market requires us record provisions maintain reserves excess obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments estimates forecasts inherently include uncertainties require us make judgments regarding potential outcomes december 31 2004 2003 inventory reserves totaled 2211 million 176 2325 million 187 gross inventory respectively believe reserves adequate cover anticipated losses current conditions significant unanticipated changes estimates forecasts either adverse positive could impact amount timing additional provisions excess obsolete inventory may required five percent difference reserve would pretax impact approximately 111 million 2004 impairment longlived assets longlived assets include property goodwill intangible assets investments affiliates certain assets comprise significant amount total assets review carrying values assets impairment periodically least annually goodwill whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make judgments regarding longterm forecasts future revenues costs related assets subject review turn forecasts uncertain require assumptions demand products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period given nature evaluations application specific assets specific times possible reasonably quantify impact changes assumptions however based upon evaluation current business climate operate currently anticipate significant asset impairment losses necessary income taxes liability method used determining income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered valuation allowances established reduce deferred tax assets likely portion deferred tax assets realized determining need valuation allowances considered made judgments estimates regarding estimated future taxable income ongoing prudent feasible tax planning strategies estimates judgments include degree uncertainty changes estimates assumptions could require us adjust valuation allowances deferred tax assets historically changes valuation allowances caused major changes business cycle certain countries changes local country law ultimate realization deferred tax assets depends generation sufficient taxable income applicable taxing jurisdictions operate 90 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenues rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability taxing jurisdiction could impact amount income taxes provide given year tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings resulting change tax liability dependent numerous factors difficult estimate include among others amount nature additional taxes potentially asserted local tax authorities willingness local tax authorities negotiate fair settlement administrative process impartiality local courts sheer number countries business potential changes tax paid one country either produce fail produce offsetting tax change countries experience estimates assumptions used provide future tax assessments proven appropriate however past experience guide potential exists however limited tax resulting resolution current potential future tax controversies may differ materially amount accrued provided taxes believe ultimately payable result assessments aggregate assessments approximately 340 million excess taxes provided consolidated financial statements addition aforementioned assessments received various taxing authorities provide taxes certain situations assessments received situations consider probable taxes ultimately payable exceed amounts reflected filed tax returns accordingly taxes provided situations guidance statement financial accounting standards “sfas” 5 accounting contingencies pensions postretirement benefit obligations pensions postretirement benefit obligations related plan expenses calculated using actuarial models methods involves use two critical assumptions discount rate expected rate return assets important elements determining plan expenses measuring plan assets liabilities evaluate critical assumptions least annually less critical assumptions used determining benefit obligations plan expenses demographic factors like retirement age mortality turnover also evaluated periodically updated accordingly reflect actual experience discount rate enables us state expected future cash flows present value measurement date lower discount rate increases present value benefit obligations increases plan expenses used discount rate 625 2004 675 2003 700 2002 determine plan expenses 75 basis point reduction discount rate would increased plan expenses 2004 62 million determine expected rate return plan assets consider current expected asset allocations well historical expected returns various categories plan assets lower rate return increases plan expenses assumed rates return plan investments 850 2004 2003 900 2002 50 basis point decrease expected rate return assets principal plans would increased plan expenses 2004 18 million discontinued operations september 2004 completed sale baker hughes mining tools “bhmt” product line group within oilfield segment manufactured rotary drill bits used mining industry 315 million recorded gain sale 02 million net tax 36 million consisted gain disposal 68 million offset loss 66 million related recognition cumulative foreign currency translation adjustments earnings october 2003 signed definitive agreement sale bird machine “bird” remaining division former process segment recorded charges totaling 374 million net tax 109 million consisted loss 135 million writedown bird fair value 62 million severance warranty accruals loss 177 million related recognition cumulative foreign currency translation adjustments earnings january 2004 completed sale bird recorded additional loss sale 05 million tax benefit received 56 million proceeds subject postclosing adjustments purchase price retained certain accounts receivable inventories assets second quarter 2004 made net payment 68 million buyer settlement final purchase price adjustments result changes value assets sold liabilities assumed buyer date initial sales price negotiated closing sale december 2002 entered exclusive negotiations sale interest oil producing operations west africa 320 million proceeds transaction effective january 1 2003 resulted gain sale 41 million net tax benefit 02 million received 100 million deposit 2002 remaining 220 million april 2003 november 2002 sold eimco process equipment “eimco” division former process segment recorded loss disposal 223 million net tax 12 million consisted loss 23 million writedown fair value loss 200 million related recognition cumulative foreign currency translation adjustments earnings received total proceeds 489 million 49 million held escrow pending completion final adjustments purchase price 2003 purchase price adjustments completed resulting release escrow balance received 20 million 29 million returned buyer 2003 also recorded additional loss sale due purchase price adjustments 25 million net tax 13 million reclassified consolidated financial statements prior periods presented reflect operations discontinued see note 2 notes consolidated financial statements item 8 herein additional information regarding discontinued operations results operations discussions relating significant line items represent analysis significant changes events impact comparability reported amounts appropriate identified specific events changes affect comparability trends possible practical quantified impact items table details certain consolidated statement operations data percentage revenues 2004 2003 2002 respectively revenues 2004 increased 162 compared 2003 reflecting 101 increase worldwide rig count revenues north america accounted 416 total revenues increased 144 compared 2003 increase reflects increased drilling activity us canada evidenced 109 increase north american rig count 248 million related intellectual property license fees expected recur magnitude future revenues outside north america accounted 584 total revenues increased 175 compared 2003 increase reflects improvement international drilling activity evidenced 86 increase rig count outside north america primarily latin america asia pacific partially offset decreased drilling activity north sea africa 2004 revenue growth primarily due increases activity lesser extent pricing improvements revenues 2003 increased 81 compared 2002 reflecting 191 increase worldwide rig count revenues north america accounted 423 total revenues increased 140 compared 2002 increase reflects increased drilling activity us canada evidenced 284 increase north american rig count revenues outside north america accounted 577 total revenues increased 41 compared 2002 increase reflects improvement international drilling activity evidenced 52 increase rig count outside north america primarily latin america middle east partially offset decreased drilling activity north sea africa 2003 pricing significant contributor revenue growth deterioration prices certain product lines inteq division partially offset pricing improvement realized product lines cost revenues cost revenues 2004 increased 143 compared 2003 cost revenues percentage revenues 716 727 2004 2003 respectively decrease cost revenues percentage revenues primarily related limited pricing improvement certain markets product lines improved cost control measures including lower repair maintenance costs inteq division partially offset increased material costs higher employee bonus expense change geographic product mix sale products services also contributed decrease cost revenues percentage revenues 2004 revenue increases came predominantly outside north america margins revenues generated outside north america typically higher margins generated north america cost revenues 2003 increased 95 compared 2002 cost revenues percentage revenues 727 718 2003 2002 respectively increase cost revenues percentage revenues primarily related inteq division 2003 inteq experienced highest revenue growth divisions however margins deteriorated impacted increased downward pricing trends increased repair maintenance costs newly developed downhole rental tools nonrecurring costs change geographic product mix sale products services also contributed increase cost revenues percentage revenues 2003 revenue increases came predominantly north america margins revenues generated north america typically lower margins generated outside north america selling general administrative selling general administrative “sga” expenses 2004 increased 107 compared 2003 increase primarily due higher marketing administrative expenses result increased activity including higher annual employee bonus expense increased costs related continued focus compliance including legal investigations increased staffing legal compliance audit groups increase also due implementation programs procedures result requirements sarbanesoxley act 2002 sga expenses 2003 increased 24 compared 2002 increase primarily due 89 million increase net costs related corporate activities increase approximately 170 million costs related self insurance programs offset improvement impact foreign currency exchange activity 183 million reversal restructuring charge 2000 board directors approved plan substantially exit oil natural gas exploration business recorded restructuring charge 295 million included restructuring charge 11 million contractual obligation related oil natural gas property angola property subsequently sold 2003 reversed liability related contractual obligation impairment investment affiliate 2003 result continued weakness seismic industry evaluated carrying value investment westerngeco recorded impairment loss 453 million writedown investment fair value fair value determined using combination market capitalization discounted cash flows approach assisted determination fair value third party although anticipated declines fair value investment westerngeco would result additional impairments equity income loss affiliates equity income affiliates 363 million 2004 compared equity loss affiliates 21 million 2003 excludes 1357 million related portion restructuring impairment charge taken westerngeco third quarter 2003 operating results westerngeco continued adversely affected weakness seismic industry result weakness westerngeco recorded certain impairment restructuring charges 4520 million impairment multiclient seismic library rationalization marine seismic fleet operating results westerngeco expected continue improve 2005 however based trend operating losses weakness seismic industry prior years uncertainty regarding future operating performance westerngeco interest expense interest expense 2004 decreased 195 million compared 2003 primarily due lower total debt levels effect interest rate swap agreement entered april 2004 lower total debt levels result repayment 3500 million longterm debt second quarter 2004 decreased interest expense 160 million 2004 compared 2003 additionally interest rate swap agreement decreased interest expense 41 million 2004 compared 2003 interest expense 2003 decreased 80 million compared 2002 due lower total debt levels lower weighted average interest rates commercial paper money market borrowings increased amortization deferred gains related terminated interest rate swap agreements lower total debt levels result repayment 1000 million longterm debt february 2003 approximate weighted average interest rate commercial paper money market borrowings 12 2003 compared 18 2002 amortization deferred gains related terminated interest rate swap agreements reduced interest expense 99 million 2003 compared 60 million 2002 income taxes effective tax rates differ us statutory income tax rate 35 due state income taxes differing rates tax international operations higher taxes within westerngeco venture 2003 recognized incremental effect 363 million additional taxes attributable portion operations westerngeco amount 159 million related reduction carrying value equity investment westerngeco tax benefit remaining 204 million arose operations venture due venture taxed certain foreign jurisdictions based deemed profit basis percentage revenues rather profits ii unbenefitted foreign losses venture operating losses impairment restructuring charges certain foreign jurisdictions current tax benefit deferred tax asset recorded due uncertainty realization 2002 amount additional taxes resulting operations venture 402 million 2003 benefit 33 million recognized result various refund claims filed us 2002 144 million benefit recognized result settlement irs examination related september 30 1996 september 30 1998 tax years tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law received tax assessments various taxing authorities currently varying stages appeals andor litigation regarding matters provided amounts believe ultimately result proceedings believe substantial defenses questions raised pursue legal remedies unfavorable outcome result however resolution matters involves uncertainties assurances outcomes favorable cumulative effect accounting change january 1 2003 adopted sfas 143 accounting asset retirement obligations sfas 143 requires fair value liability associated asset retirement obligation “aro” recognized period incurred reasonable estimate made liability aro revised subsequent period due passage time changes estimates associated retirement costs capitalized part carrying amount longlived asset subsequently depreciated estimated useful life asset adoption sfas 143 2003 resulted charge 56 million net tax 28 million recorded cumulative effect accounting change consolidated statement operations conjunction adoption recorded aro liabilities 114 million primarily anticipated costs obligations associated future disposal power source units certain divisions refurbishment costs associated certain leased facilities europe fleet leased railcars tanks january 1 2002 adopted sfas 142 goodwill intangible assets adoption sfas 142 required us cease amortizing goodwill perform transitional impairment test goodwill reporting units january 1 2002 reporting units based organizational reporting structure corporate assets liabilities allocated reporting units extent related operations reporting units valuations reporting units performed third party goodwill eimco bird operating divisions former process segment determined impaired using combination market value discounted cash flows approach estimate fair value accordingly recognized transitional impairment losses 425 million net tax 204 million 2002 cumulative effect accounting change consolidated statement operations liquidity capital resources objective financing business maintain adequate financial resources access additional liquidity 2004 cash flows operations shortterm borrowings principal sources funding anticipate cash flows operations cover liquidity needs 2005 also 5000 million committed revolving credit facility provides backup liquidity event unanticipated significant demand cash flows could funded operations shortterm borrowings facility expires july 2006 capital planning process focused utilizing cash flows generated operations ways enhance value company 2004 used cash variety activities including working capital needs payment dividends repayments indebtedness capital expenditures cash flows cash flows provided used continuing operations type activity follows years ended december 31 statements cash flows entities international operations local currency functional exclude effects changes foreign currency exchange rates occur given year considered noncash changes result changes reflected certain accounts consolidated statements cash flows may reflect changes corresponding accounts consolidated balance sheets operating activities cash flows operating activities steadily increasing last three years expect trend continue 2005 attribute increases cash flows successful management working capital increasing levels income continuing operations adjusted noncash items cash flows operating activities continuing operations increased 1320 million 2004 compared 2003 increase primarily due increased operating performance directly related increased revenues addition changes working capital primarily consisting changes accounts receivable inventories accounts payable current liabilities provided 127 million less cash flows 2004 compared 2003 underlying drivers changes working capital follows pension contributions 2004 approximately 1100 million increase approximately 820 million compared 2003 due decision improve funded status certain pension plans provide us increased flexibility future funding pension plans cash flows operating activities continuing operations increased 315 million 2003 compared 2002 primarily due increased operating performance attributable increased revenues addition working capital decreased effect increasing cash flows operating activities underlying drivers changes working capital follows investing activities principal recurring investing activity funding capital expenditures ensure appropriate levels types rental tools place generate revenues operations expenditures capital assets totaled 3483 million 4043 million 3559 million 2004 2003 2002 respectively majority expenditures rental tools including wireline machinery equipment december 2004 paid 10 million cash remaining 60 interest luna energy llc “luna” venture entered 2002 2004 also paid 56 million settlement final purchase price related acquisition completed prior year invested additional 71 million certain investments affiliates 2003 made two acquisitions aggregate purchase price 169 million 95 million paid cash addition 2003 invested 381 million affiliates 301 million related 50 interest quantx wellbore instrumentation venture engaged permanent inwell monitoring market 2002 made three acquisitions aggregate cash purchase price 397 million net cash acquired addition 2002 invested 165 million luna 2004 received 587 million net proceeds sale businesses interest affiliate january completed sale bird received 56 million proceeds subject postclosing adjustments purchase price second quarter made net payment 68 million buyer settlement final purchase price adjustments february completed sale minority interest petreco international venture entered 2001 received proceeds 358 million 74 million held escrow pending outcome potential indemnification obligations pursuant sales agreement portion escrow released may 2005 remainder released february 2006 september also completed sale bhmt received proceeds 315 million 2003 completed sale interest oil producing property west africa 320 million proceeds received deposit 100 million 2002 remaining 220 million 2003 2002 also disposed eimco division 489 million proceeds received 440 million proceeds 2002 remainder sales price held escrow pending completion final adjustments purchase price 2003 purchase price adjustments completed resulting release escrow balance received 20 million 29 million returned buyer proceeds disposal assets 1069 million 668 million 777 million 2004 2003 2002 respectively disposals relate rental tools lostinhole well machinery rental tools equipment longer used operations sold throughout year included proceeds 2004 122 million related sale certain real estate properties held sale financing activities net borrowings repayments commercial paper shortterm debt 355 million 112 million 1624 million 2004 2003 2002 respectively 2004 repaid 1000 million 80 notes due may 2004 2500 million 7875 notes due june 2004 2003 repaid 1000 million 58 notes due february 2003 repayments funded cash hand cash flows operations issuance commercial paper total debt outstanding december 31 2004 11623 million decrease 3221 million compared december 31 2003 total debt total capitalization defined total debt plus stockholders’ equity ratio 023 december 31 2004 031 december 31 2003 different times 2003 entered three separate interest rate swap agreements notional amount 3250 million associated 625 notes due january 2009 agreements designated qualified fair value hedging instruments due outlook interest rates terminated three agreements received payments totaling 269 million three agreements terminated prior entering new agreement deferred gains amortized reduction interest expense remaining life underlying debt security matures january 2009 2002 terminated two interest rate swap agreements entered prior years agreements designated qualified fair value hedging instruments upon termination received proceeds 48 million 110 million deferred gain 48 million amortized reduction interest expense remaining life underlying debt security matured june 2004 deferred gain 110 million amortized reduction interest expense remaining life underlying debt security matures january 2009 received proceeds 1159 million 618 million 383 million 2004 2003 2002 respectively issuance common stock exercise stock options employee stock purchase plan 2002 authorized board directors repurchase 2750 million common stock 2003 repurchased 63 million shares average price 2878 per share total 1814 million 2002 repurchased 18 million shares average price 2752 per share total 491 million upon repurchase shares retired repurchase shares 2004 paid dividends 1536 million 1543 million 1549 million 2004 2003 2002 respectively available credit facilities december 31 2004 8974 million credit facilities commercial banks 5000 million committed revolving credit facility “facility” expires july 2006 facility contains certain covenants among things require maintenance funded indebtedness total capitalization ratio defined formula per facility less equal 050 limit amount subsidiary indebtedness restrict sale significant assets defined 10 total consolidated assets december 31 2004 compliance facility covenants direct borrowings facility year ended december 31 2004 however extent outstanding commercial paper ability borrow facility reduced december 31 2004 outstanding commercial paper money market borrowings market conditions change revenues significantly reduced operating costs increase cash flows liquidity could reduced additionally could cause rating agencies lower credit rating ratings triggers facility would accelerate maturity borrowings facility however downgrade credit ratings could increase cost borrowings facility also downgrade credit ratings could limit preclude ability issue commercial paper occur would seek alternative sources funding including borrowing facility cash requirements 2005 believe operating cash flows provide us sufficient capital resources liquidity manage working capital needs meet contractual obligations fund capital expenditures pay dividends repurchase common stock support development shortterm longterm operating strategies currently expect 2005 capital expenditures 4400 million 4600 million excluding acquisitions expenditures expected used primarily normal recurring items necessary support growth business operations 2005 expect make interest payments approximately 800 million 900 million based current expectations debt levels 2005 authorization remaining repurchase 445 million common stock may continue repurchase common stock 2005 depending price common stock liquidity considerations 2005 anticipate paying dividends 046 per share common stock however board directors free change dividend policy time 2005 estimate contribute approximately 120 million 190 million pension plans make benefit payments related postretirement welfare plans approximately 163 million also estimate contribute approximately 700 million 800 million defined contribution plans anticipate making income tax payments approximately 2300 million 2600 million 2005 believe material trends demands commitments events uncertainties would reasonably likely material impact financial condition liquidity previously discussed currently information would create reasonable likelihood reported levels revenues cash flows operations 2004 indicative expect future contractual obligations table set forth enforceable legally binding obligations december 31 2004 figures include table based estimates assumptions obligations including duration anticipated actions third parties factors enforceable legally binding obligations actually pay future periods may vary reflected table estimates assumptions subjective 1 amounts represent expected cash payments total debt include unamortized discounts deferred issuance costs fair market valuation current interest rate swap agreement deferred gains terminated interest rate swap agreements 2 amounts represent expected cash payments interest fixed rate longterm debt 3 enter operating leases normal course business lease agreements provide us option renew lease future operating lease payments would change exercised renewal options entered additional operating lease agreements 4 purchase obligations include agreements purchase goods services enforceable legally binding specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations exclude agreements cancelable anytime without penalty 5 amounts represent longterm liabilities including current portion reflected consolidated balance sheet timing amount payment streams known amounts include payments certain environmental remediation liabilities payments deferred compensation payouts acquisition agreements payments certain asset retirement obligations amounts include payments pension contributions payments various postretirement welfare benefit plans postemployment benefit plans payments deferred taxes tax liabilities amounts determined beyond 2005 offbalance sheet arrangements normal course business customers vendors others entered offbalance sheet arrangements letters credit bank issued guarantees totaled approximately 3123 million december 31 2004 addition december 31 2004 guaranteed debt obligations third parties maximum potential exposure 74 million none offbalance sheet arrangements either likely material effect current future financial condition results operations liquidity capital resources normal operating leases offbalance sheet financing arrangements securitization agreements liquidity trust vehicles synthetic leases special purpose entities materially exposed financing liquidity market credit risk could arise engaged financing arrangements new accounting standards january 2003 financial accounting standards board “fasb” issued fasb interpretation 46 “fin 46” consolidation variable interest entities entity subject consolidation rules fin 46 referred variable interest entity “vie” entity’s equity investors lack characteristics controlling financial interest sufficient equity risk entity finance operations without additional financial support december 2003 fasb issued modifications fin 46 “fin 46r” resulting multiple effective dates based nature well creation date vie adoption fin 46 fin 46r 2004 impact consolidated financial statements may 2004 fasb issued fasb staff position 1062 “fsp 1062” accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 provides guidance accounting effects medicare prescription drug improvement modernization act 2003 employers sponsor postretirement health care plans provide prescription drug benefits adopted provisions fsp 1062 third quarter 2004 resulting reduction accumulated postretirement benefit obligation 188 million recognized reduction net periodic postretirement benefit costs 20 million 2004 result adoption fsp 1062 november 2004 fasb issued sfas 151 inventory costs amendment arb 43 chapter 4 amends guidance arb 43 clarify accounting abnormal amounts idle facility expense freight handling costs wasted material sfas 151 requires items recognized current period charges addition sfas 151 requires allocation fixed production overheads inventory based normal capacity production facilities sfas 151 effective inventory costs incurred fiscal years beginning june 15 2005 currently evaluating provisions sfas 151 adopt sfas 151 january 1 2006 december 2004 fasb issued sfas 153 exchanges nonmonetary assets amendment apb opinion 29 address measurement exchanges nonmonetary assets sfas 153 eliminates exception fair value measurement nonmonetary exchanges similar productive assets replaces general exception exchanges nonmonetary assets commercial substance nonmonetary exchange commercial substance future cash flows entity expected change significantly result exchange sfas 153 effective nonmonetary exchanges occurring june 30 2005 adopt sfas 153 july 1 2005 december 2004 fasb revised sfas 123 sharebased payment “sfas 123r” sfas 123r revision sfas 123 accounting stockbased compensation supersedes accounting principles board opinion 25 accounting stock issued employees sfas 123r requires public entity measure cost employee services received exchange award equity instruments based grantdate fair value award cost recognized period employee required provide service exchange award sfas 123r also requires public entity initially measure cost employee services rendered exchange award liability instruments current fair value fair value award remeasured subsequently reporting date settlement date changes fair value required service period recognized compensation cost period currently process evaluating different option pricing models impact sfas 123r consolidated financial statements adopt sfas 123r july 1 2005 december 2004 fasb issued fasb staff position 1091 “fsp 1091” application fasb statement 109 “accounting income taxes” “sfas 109” tax deduction qualified production activities provided american jobs creation act 2004 provides guidance recently enacted american jobs creation act 2004 “act” act provides tax deduction income qualified domestic production activities fsp 1091 provides treatment deduction special deduction described sfas 109 deduction effect existing deferred tax assets liabilities impact deduction reported period deduction claimed us tax return expect deduction material impact effective tax rate future years fsp 1091 effective prospectively january 1 2005 december 2004 fasb issued fasb staff position 1092 “fsp 1092” accounting disclosure guidance foreign repatriation provision within american jobs creation act 2004 provides guidance sfas 109 respect recording potential impact repatriation provisions act company’s income tax expense deferred tax liability fsp 1092 states company allowed time beyond financial reporting period enactment evaluate effect act plan reinvestment repatriation foreign earnings purposes applying sfas 109 yet decided whether extent might elect repatriate foreign earnings provisions act repatriation act must occur december 31 2005 accordingly consolidated financial statements reflect provision taxes related election maximum amount could elect repatriate 500 million prescribed act evaluation effect election expected completed end second quarter 2005 related party transactions conjunction formation westerngeco november 2000 entered agreement schlumberger whereby cash trueup payment made either parties based formula comparing ratio net present value sales revenue party’s contributed multiclient seismic data libraries fouryear period ending november 30 2004 ratio net book value libraries november 30 2000 maximum payment either party required make result adjustment 1000 million currently estimate schlumberger make payment us range 90 million 115 million pending final determination adjustment received payment recorded reduction carrying value investment westerngeco payment taxable paid tax effect recorded current income tax expense november 2000 also entered agreement westerngeco whereby westerngeco subleased facility us period ten years current market rates 2004 2003 2002 received payments 55 million 50 million 55 million respectively westerngeco related lease december 1 2005 either party westerngeco master formation agreement may offer sell entire interest venture party cash purchase price per percentage interest specified offer notice offer sell accepted offering party obligated purchase entire interest party price per percentage interest price specified offer notice cannot predict schlumberger may exercise right december 31 2004 2003 net accounts payable receivable affiliates totaled 11 million 07 million respectively significant related party transactions forwardlooking statements mda certain statements notes consolidated financial statements include forwardlooking statements within meaning section 27a securities act 1933 amended section 21e securities exchange act 1934 amended “forwardlooking statement” words “anticipate” “believe” “ensure” “expect” “if” “intend” “estimate” “project” “forecasts” “predict” “outlook” “aim” “will” “could” “should” “would” “may” “likely” similar expressions negative thereof intended identify forwardlooking statements undertake obligation publicly update revise forwardlooking statement expectations regarding business outlook including changes revenue pricing capital spending profitability oil natural gas market conditions market share contract terms costs availability resources economic regulatory conditions environmental matters forecasts regarding matters forecasts may substantially different actual results affected risk factors timing risk factors identified “environmental matters” section item 1 herein “risk factors related worldwide oil natural gas industry” “risk factors related business” sections contained herein item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations “mda” read conjunction consolidated financial statements “item 8 financial statements supplementary data” contained herein executive summary organization leading provider drilling formation evaluation completion production products services worldwide oil natural gas industry report results three segments drilling evaluation completion production westerngeco drilling evaluation segment completion production segment aligned product line based upon types products services provided customers upon business characteristics divisions business cycles • drilling evaluation segment consists baker hughes drilling fluids drilling fluids hughes christensen oilfield drill bits inteq drilling measurementwhiledrilling loggingwhiledrilling baker atlas wireline formation evaluation wireline completion services divisions drilling evaluation segment provides products services used drill evaluate oil natural gas wells • completion production segment consists baker oil tools workover fishing completion equipment baker petrolite oilfield specialty chemicals centrilift electric submersible pumps progressing cavity pumps divisions completion production segment also includes productionquest formerly production optimization business unit completion production segment provides equipment services used completion phase productive life oil natural gas wells westerngeco segment consisted 30 interest westerngeco seismic venture jointly owned schlumberger limited “schlumberger” april 28 2006 sold 30 interest westerngeco schlumberger 24 billion recorded pretax gain 17435 million 10352 million net tax business operations divisions organized around four primary geographic regions north america latin america middle east asia pacific europe africa russia caspian region council comprised regional vice presidents division well representatives various functions human resources legal marketing health safety environmental regional vice presidents report directly division president structure placed management close customer improving customer relationships allowing us react quickly local market conditions needs corporate headquarters houston texas significant manufacturing operations various countries including limited united states texas oklahoma louisiana uk aberdeen east kilbride belfast germany celle venezuela maracaibo operate 90 countries around world employ approximately 34600 employees onehalf work outside us 2006 baker hughes worldwide rig count continued increase oil natural gas companies around world recognized need build productive capacity meet growing demand hydrocarbons offset depletion existing developed reserves oil natural gas prices historic highs 2006 reflecting continued strong demand relatively low spare productive capacity reported revenues 90274 million 2006 256 increase compared 2005 exceeding 132 increase worldwide average rig count 2006 compared 2005 addition growth revenues increased activity revenues impacted pricing improvements changes market share certain product lines net income 2006 24190 million includes 10352 million aftertax gain sale interest westerngeco compared 8784 million 2005 customers products services include supermajor major integrated oil natural gas companies independent oil natural gas companies stateowned national oil companies “nocs” ability compete oilfield services market dependent ability differentiate product service offerings technology service price paid value deliver primary driver business customers’ capital operating expenditures dedicated exploring drilling developing producing oil natural gas business cyclical dependent upon customers’ forecasts future oil natural gas prices future economic growth hydrocarbon demand estimates future oil natural gas production 2006 customers’ spending directed worldwide oil north american natural gas projects increased compared 2005 increase spending driven multiyear requirement find develop produce hydrocarbons meet growth demand offset production declines increase inventory levels increase spare productive capacity additionally increase supported historically high oil natural gas prices critical success factors business embodied longterm strategy call strategic framework strategy includes development maintenance high performance culture founded core values product line focused organization focus bestinclass opportunities maintaining financial flexibility financial discipline execution strategies product development commercialization manufacturing quality service quality ongoing effort develop maintain high performance culture starts core values integrity teamwork performance learning employ succession planning efforts develop leaders across businesses embody core values represent diversity customer base hire train employees around world ensure welltrained workforce place support business plans focus bestinclass opportunities starts product line focused organization structure believe product line focused divisions develop technologies deliver bestinclass value customers enterprise also focused markets believe provide bestinclass opportunities growth management team identified markets immediate focus including middle east russia caspian region india nocs focus financial discipline backbone effort deliver differential growth superior margins earning acceptable return investments throughout business cycle investments given priority funded depending ability provide riskadjusted returns excess cost capital effort obtain best price products services begins approach capital discipline past years invested growth business repaid debt paid dividends repurchased stock expect maintain financial flexibility needed undertake activities future last element strategic framework focuses ability identify develop commercialize new products services lead differential growth superior margins business effort extends every phase operations including continuous improvement programs manufacturing facilities field operations support goal flawless execution well site execution 2007 business plan ability meet 2007 financial objectives dependent number factors foremost overall strength global oilfield services market particular strength north american natural gas driven oilfield service market factors include limited ability recruit train retain skilled diverse workforce necessary meet business needs realize price increases commensurate value provide customers excess increase raw material labor costs expand business areas growing rapidly customers whose spending expected increase substantially nocs areas market share opportunities middle east russia caspian region india manage increasing raw material component costs especially steel alloys copper carbide chemicals electronic components continue make ongoing improvements productivity manufacturing organization manage spending north american market depending relative strength weakness market full discussion risk factors forwardlooking statements please see “risk factors related worldwide oil natural gas industry” “risk factors related business” item 1a risk factors “forwardlooking statements” section item 7 contained herein business environment business environment corresponding operating results significantly affected level energy industry spending exploration development production oil natural gas reserves spending oil natural gas exploration production companies dependent upon forecasts regarding expected future supply future demand oil natural gas products estimates riskadjusted costs find develop produce reserves changes oil natural gas exploration production spending normally result increased decreased demand products services reflected rig count measures oil natural gas prices generally changes current price expected future price oil natural gas drive customers’ expectations prospects oil natural gas sales expenditures explore produce oil natural gas accordingly changes expenditures normally result increased decreased demand products services oil bloomberg west texas intermediate wti cushing crude oil spot price natural gas bloomberg henry hub natural gas spot price prices summarized table averages daily closing prices periods indicated oil prices averaged nominal historic high 6609bbl year 2006 prices reached high 77bbl july 2006 declining low 56bbl late november concerns slowing worldwide demand growth response production cuts announced opec fourth quarter prices recovered ending year slightly 61bbl throughout year worldwide demand hydrocarbons driven worldwide economic growth particularly strong china developing asia worldwide spare productive capacity remained historically low levels potential supply disruptions contributed price volatility natural gas prices averaged 673mmbtu year 2006 early january 2006 tight balance supply demand resulted gas prices 10mmbtu however warmer normal 20052006 winter required lower withdrawals gas storage meet heating demand 2006 injection season began record levels natural gas storage throughout year inventories continued increase historically high levels response natural gas prices dropped 4mmbtu late september prices rebounded november expectations cooler weather moderating ending year 6mmbtu rig counts providing rig counts public since 1944 gather relevant data field service personnel obtain necessary data routine visits various rigs customers contractors outside sources data compiled distributed various wire services trade associations published website rig counts compiled weekly us canada monthly international us workover rigs published international rig counts include rigs drilling certain locations russia caspian onshore china information cannot readily obtained rigs us counted active day count taken well drilled started drilling completed well anticipated sufficient depth may change time may vary region potential consumer drill bits rigs canada counted active data obtained canadian association oilwell drillers contractors indicates drilling operations occurred week able verify information international areas rigs counted active drilling operations taken place least 15 days month active international areas better data available weekly daily average active rigs taken international areas poor availability data rig counts estimated third party data rig count include rigs transit one location another rigging used nondrilling activities including production testing completion workover significant consumers drill bits rig counts summarized table averages periods indicated us land inland waters rig count increased 209 2006 compared 2005 due increased natural gas drilling activity us offshore rig count decreased 32 2006 compared 2005 reflecting activity disruptions caused hurricanes gulf mexico third quarter 2005 canadian rig count increased 35 2005 levels due higher natural gas drilling activity outside north america rig count increased 87 2006 compared 2005 rig count latin america increased 25 2006 compared 2005 driven primarily activity increases venezuela colombia brazil north sea rig count increased 140 2006 compared 2005 rig count africa increased 160 2006 compared 2005 activity 2006 middle east increased 253 compared 2005 driven primarily activity increases saudi arabia egypt pakistan yemen rig count asia pacific region 13 2006 compared 2005 primarily due activity increases india indonesia offshore china thailand worldwide oil natural gas industry outlook section read conjunction factors described “risk factors related worldwide oil natural gas industry” “risk factors related business” item 1a risk factors “forwardlooking statements” section item 7 contained herein factors could impact either positively negatively expectation oil natural gas demand oil natural gas prices drilling activity outlook based upon expectations customer spending expectations customer spending turn driven perception industry expectations energy prices likely impact customer capital operating budgets forecasts based information provided customers well market research analyst reports including short term energy outlook “steo” published energy information administration us department energy “doe” oil market report published international energy agency “iea” monthly oil market report published organization petroleum exporting countries “opec” oil january 2007 steo doe forecasted oil prices average 64bbl 2007 doe forecasted high case approximately 75bbl low case approximately 55bbl doe expects oil prices within band 95 time inventories spare productive capacity increased recently lack spare productive capacity buffers market supply disruptions remains relatively low indicator supply demand remain relatively tightly balanced increase spare productive capacity driven planned cuts opec production aimed supporting nearterm oil prices allowing nonopec production increases believe doe’s forecasts similar forecasts customers using plan current spending levels prices averaging 55bbl 75bbl customers continue execute capital budgets planned customers likely reduce capital budgets oil price expected trade 55bbl extended period time risks oil prices falling significantly 55bbl include 1 significant economic recession either us andor china 2 increases russian oil exports nonopec production 3 significant disruption worldwide demand 4 reduced geopolitical tensions 5 poor opec quota discipline 6 factors result spare productive capacity higher oil inventory levels decreased demand prices rise significantly 75bbl risk high energy price environment could destroy demand significantly slow economic growth economic growth slow customers would likely decrease capital spending current levels primary risk oil prices exceeding 75bbl supply disruption major oil exporting country including iran saudi arabia iraq venezuela nigeria norway natural gas january 2007 steo doe forecasted natural gas prices expected average 705mmbtu 2007 monthly averages varying 640mmbtu 870mmbtu depending seasonality doe also publishes high low case expects gas trade two cases 95 time low case varies 410mmbtu 540mmbtu depending seasonality high case varies 860mmbtu 1290mmbtu depending seasonality prices expected remain volatile 2007 weatherdriven demand storage levels playing significant roles determining prices weatherdependent demand strong enough bring storage inline historical norms expect natural gas trade upper half doe’s forecast range weatherrelated demand insufficient bring storage inline historic norms believe natural gas prices could approach bottom doe’s forecast range based industry data regarding decline rates believe significant reduction drilling activity would result decreased production within one two quarters helping rebalance supply demand quickly prices would move bottom doe’s range middle top range believe customers’ forecasts similar doe’s recognize longterm positive fundamentals natural gas remain intact customer spending based upon discussions major customers review published industry reports outlook oil natural gas prices described anticipated customer spending trends follows • outside north america customer spending primarily directed developing oil supplies expected increase approximately 17 19 2007 compared 2006 • north america customer spending north america primarily towards developing natural gas supplies expected remain uncertain customers analyze end winter natural gas storage levels drilling activity based upon outlook oil natural gas prices customer spending described outlook drilling activity measured baker hughes rig count follows risk factors related worldwide oil natural gas industry discussion risk factors cautions regarding forwardlooking statements see “risk factors related worldwide oil natural gas industry” item 1a risk factors “forwardlooking statements” section item 7 contained herein risk factors discussed intended inclusive business outlook section read conjunction factors described “risk factors related business” “risk factors related worldwide oil natural gas industry” “forwardlooking statements” sections contained herein factors could impact either positively negatively expectation oil natural gas demand oil natural gas prices drilling activity outlook 2007 took account factors described herein 2006 2005 2004 revenues outside north america 557 576 585 total revenues respectively 2007 expect revenues outside north america increase approximately 17 19 compared 2006 continuing multiyear trend growth customer spending large projects nocs expected reflect established seasonality trends resulting softer revenues first half year stronger revenues second half addition customer spending could affected weatherrelated reductions north sea first second quarters 2007 middle east africa latin america regions expected grow significantly 2007 compared 2006 expectations spending revenue growth could decrease disruptions key oil natural gas production markets venezuela nigeria assumptions regarding overall growth customer spending outside north america assume strong economic growth united states china balance world outside north america resulting average oil price exceeding 50bbl pricing improvement 2007 expected contribute onehalf contribution made 2006 compared 2005 first quarter 2007 earnings per diluted share expected range 108 110 per diluted share 2006 2005 2004 north american revenues 443 424 415 total revenues respectively revenue growth 2007 north america remains uncertain given dependence impact weatherdriven demand natural gas storage levels 2006 westerngeco contributed 587 million equity income affiliates compared 967 million equity income affiliates 2005 sold 30 interest westerngeco april 2006 factors could significant positive impact profitability include increasing prices products services lower expected raw material labor costs andor higher planned activity conversely less expected price increases price deterioration higher expected raw material labor costs andor lower expected activity would negative impact profitability ability improve pricing dependent demand products services competitors’ strategies managing capacity commercial introduction new technology important factor realizing pricing improvement without capital discipline throughout industry whole meaningful improvements prices likely realized business approximately 90 countries including onehalf 30 countries lowest scores indicates high levels corruption transparency international’s corruption perception index “cpi” survey 2006 devote significant resources development maintenance enforcement business code conduct policy foreign corrupt practices act “fcpa” policy internal control processes procedures compliance related policies notwithstanding devotion resources part consequence thereof time discover receive information alleging potential violations laws regulations including fcpa policies processes procedures conduct internal investigations potential violations take appropriate action depending upon outcome investigation addition us government agencies authorities conducting investigations allegations potential violations laws anticipate devotion significant resources compliance related issues including necessity investigations continue aspect business number countries oil natural gas exploration development production take place requested conduct operations compliance related issues could limit ability business countries order provide products services countries may future utilize ventures third parties sell products distributors otherwise modify business approach order improve ability conduct business accordance laws regulations business code conduct third quarter 2005 independent foreign subsidiaries initiated process prohibit business activity directly indirectly involves facilitates transactions iran sudan governments including governmentcontrolled companies operating outside countries implementation process substantially completed december 31 2006 material impact consolidated financial statements risk factors related business discussion risk factors cautions regarding forwardlooking statements see “risk factors related business” item 1a risk factors “forwardlooking statements” section contained herein list risk factors intended inclusive critical accounting estimates preparation consolidated financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosures contingent assets liabilities base estimates judgments historical experience assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained business environment operate changes defined critical accounting estimate one important portrayal either financial condition results operations requires us make difficult subjective complex judgments estimates matters uncertain discussed development selection critical accounting estimates auditethics committee board directors auditethics committee reviewed disclosure presented past three fiscal years made material changes methodology used establish critical accounting estimates discussed believe following critical accounting estimates used preparation consolidated financial statements addition items within consolidated financial statements require estimation deemed critical defined allowance doubtful accounts determination collectibility amounts due customers requires us use estimates make judgments regarding future events trends including monitoring customers’ payment history current credit worthiness determine collectibility reasonably assured well consideration overall business climate customers operate inherently uncertainties require us make frequent judgments estimates regarding customers’ ability pay amounts due us order determine appropriate amount valuation allowances required doubtful accounts provisions doubtful accounts recorded becomes evident customer make required payments either contractual due dates future december 31 2006 2005 allowance doubtful accounts totaled 505 million 24 514 million 30 total gross accounts receivable respectively believe allowance doubtful accounts adequate cover potential bad debt losses current conditions however uncertainties regarding changes financial condition customers either adverse positive could impact amount timing additional provisions doubtful accounts may required five percent change allowance doubtful accounts would impact income continuing operations income taxes approximately 25 million 2006 inventory reserves inventory significant component current assets stated lower cost market requires us record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments estimates forecasts inherently include uncertainties require us make judgments regarding potential outcomes december 31 2006 2005 inventory reserves totaled 2117 million 122 2013 million 152 gross inventory respectively believe reserves adequate properly value potential excess slow moving obsolete inventory current conditions significant unanticipated changes estimates forecasts either adverse positive could impact amount timing additional provisions excess obsolete inventory may required five percent change inventory reserve balance would impact income continuing operations income taxes approximately 106 million 2006 impairment longlived assets longlived assets include property goodwill intangible assets investments affiliates certain assets comprise significant amount total assets review carrying values assets impairment periodically least annually goodwill whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make judgments regarding longterm forecasts future revenues costs related assets subject review turn forecasts uncertain require assumptions demand products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period given nature evaluations application specific assets specific times possible reasonably quantify impact changes assumptions however based upon evaluation current business climate operate currently anticipate significant asset impairment losses necessary foreseeable future income taxes liability method used determining income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered valuation allowances established reduce deferred tax assets likely portion deferred tax assets realized determining need valuation allowances considered made judgments estimates regarding estimated future taxable income ongoing prudent feasible tax planning strategies estimates judgments include degree uncertainty changes estimates assumptions could require us adjust valuation allowances deferred tax assets historically changes valuation allowances caused major changes business cycle certain countries changes local country law ultimate realization deferred tax assets depends generation sufficient taxable income applicable taxing jurisdictions operate 90 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenues rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability taxing jurisdiction could impact amount income taxes provide given year tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings resulting change tax liability dependent numerous factors difficult estimate include among others amount nature additional taxes potentially asserted local tax authorities willingness local tax authorities negotiate fair settlement administrative process impartiality local courts sheer number countries business potential changes tax paid one country either produce fail produce offsetting tax change countries experience estimates assumptions used provide future tax assessments proven appropriate however past experience guide potential exists however limited tax resulting resolution current potential future tax controversies may differ materially amount accrued although provided taxes believe ultimately payable result assessments aggregate assessments approximately 362 million excess taxes provided consolidated financial statements addition aforementioned assessments received various tax authorities frequently provide taxes situations assessments received consider probable taxes ultimately payable exceed amounts reflected filed tax returns provide additional taxes guidance statement financial accounting standards “sfas” 5 accounting contingencies future events changes facts tax law judicial decisions regarding application existing law favorable audit outcome may later indicate assertion additional taxes longer probable circumstance possible taxes previously provided would released pensions postretirement benefit obligations pensions postretirement benefit obligations related plan expenses calculated using actuarial models methods involves use two critical assumptions discount rate expected rate return assets important elements determining plan expenses measuring plan assets liabilities evaluate critical assumptions least annually although considered less critical assumptions used determining benefit obligations plan expenses demographic factors like retirement age mortality turnover also evaluated periodically updated reflect actual expected experience discount rate enables us state expected future cash flows present value measurement date development discount rate us plans based bond matching model whereby hypothetical bond portfolio highquality fixedincome securities selected match cash flows underlying projected benefit obligation discount rate assumption nonus plans reflects market rate highquality fixedincome securities lower discount rate increases present value benefit obligations increases plan expenses used discount rate 55 2006 60 2005 63 2004 determine plan expenses 50 basis point reduction discount rate would impact income continuing operations income taxes approximately 15 million 2006 determine expected rate return plan assets consider current expected asset allocations well historical expected returns various categories plan assets lower rate return increases plan expenses assumed rates return plan investments 85 2006 2005 2004 50 basis point reduction expected rate return assets principal plans would impact income continuing operations income taxes approximately 20 million 2006 discontinued operations fourth quarter 2005 management initiated board directors approved plan sell baker supply products division “baker spd” product line group within completion production segment distributes basic supplies products small tools drilling industry march 2006 completed sale baker spd received cash proceeds 425 million recorded gain sale 192 million net tax 110 million consisted aftertax gain disposal 169 million 23 million related recognition cumulative foreign currency translation adjustments earnings september 2004 completed sale baker hughes mining tools “bhmt” product line group within drilling evaluation segment manufactured rotary drill bits used mining industry 315 million recorded gain sale 02 million net tax 36 million consisted aftertax gain disposal 68 million offset loss 66 million related recognition cumulative foreign currency translation adjustments earnings january 2004 completed sale bird machine “bird” recorded loss sale 05 million tax benefit received 56 million proceeds subject postclosing adjustments purchase price retained certain accounts receivable inventories assets second quarter 2004 made net payment 68 million buyer settlement final purchase price adjustments result changes value assets sold liabilities assumed buyer date initial sales price negotiated closing sale reclassified consolidated financial statements prior periods presented reflect operations discontinued see note 2 notes consolidated financial statements item 8 herein additional information regarding discontinued operations results operations discussions relating significant line items consolidated statements operations based available information represent analysis significant changes events impact comparability reported amounts appropriate identified specific events changes affect comparability trends possible practical quantified impact items discussions based consolidated financial results individual segments contribute disproportionately revenues profitability cash requirements addition discussions revenues cost revenues combined basis business drivers individual components product sales service rentals similar table details certain consolidated statement operations data percentage revenues 2006 2005 2004 dollar amounts millions revenues 2006 increased 256 compared 2005 primarily due increases activity evidenced 132 increase worldwide average rig count pricing improvements seven nine percent introduction new products net increases decreases market share selected product lines geographic areas revenues north america accounted 443 total revenues increased 312 2006 compared 2005 increase reflects continued broad based increase drilling activity us evidenced 153 increase north american rig count activity dominated landbased gasdirected drilling revenues outside north america accounted 557 total revenues increased 215 2006 compared 2005 increase reflects improvement international drilling activity evidenced 87 increase rig count outside north america particularly middle east africa north sea coupled pricing improvements certain markets product lines revenues 2005 increased 182 compared 2004 primarily due increases activity evidenced 148 increase worldwide rig count pricing improvements four six percent increases market share selected product lines geographic areas increases partially offset impact hurricanes gulf mexico 2005 revenues north america accounted 424 total revenues increased 209 2005 compared 2004 despite unfavorable impact us offshore revenues approximately 680 million hurricanerelated disruptions increase reflects increased activity us evidenced 180 increase north american rig count activity dominated landbased gasdirected drilling revenues outside north america accounted 576 total revenues increased 163 2005 compared 2004 increase reflects improvement international drilling activity 2005 evidenced 86 increase rig count outside north america particularly latin america middle east asia pacific coupled price increases certain markets product lines cost revenues cost revenues 2006 increased 172 compared 2005 cost revenues percentage revenues 603 646 2006 2005 respectively decrease cost revenues percentage consolidated revenues primarily result overall average price increases seven nine percent continued high utilization rental tool fleet personnel change geographic product mix sale products services also contributed decrease cost revenues percentage revenues increase partially offset higher raw material costs employee compensation costs addition factors fourth quarter 2006 revised accounting procedures related certain inventory baker atlas division resulting one time reduction cost revenues 2006 approximately 212 million cost revenues 2005 increased 138 compared 2004 cost revenues percentage revenues 646 671 2005 2004 respectively decrease cost revenues percentage consolidated revenues primarily result overall average price increases four six percent high utilization rental tool fleet personnel increase partially offset higher raw material costs employee compensation expenses research engineering research engineering expenses increased 131 2006 compared 2005 103 2005 compared 2004 increase years reflect commitment developing commercializing new technologies well investing core product offerings selling general administrative selling general administrative expenses increased 298 2006 compared 2005 increase corresponds increased activity resulted primarily higher marketing employee compensation costs including stockbased compensation increased 260 million due adoption statement financial accounting standard 123r shared based payment using modified prospective application method increase also results financial charge 461 million recorded fourth quarter 2006 connection settlement negotiations sec doj selling general administrative expenses increased 107 2005 compared 2004 increase corresponds increased activity resulted primarily higher marketing employee compensation expenses equity income affiliates equity income affiliates decreased 397 million 2006 compared 2005 decrease equity income affiliates 2006 primarily due sale 30 interest westerngeco significant equity method investment april 28 2006 equity income affiliates increased 638 million 2005 compared 2004 increase primarily due increase equity income westerngeco 2005 westerngeco’s revenue profitability continued improve result ongoing favorable market conditions seismic industry gain sale interest affiliate april 28 2006 sold 30 interest westerngeco 24 billion cash recorded pretax gain 17435 million 10352 million net tax interest expense interest dividend income interest expense decreased 34 million 2006 compared 2005 decrease primarily due lower total debt levels interest dividend income 2006 increased 495 million 2005 primarily due interest dividends earned invested cash received sale interest westerngeco interest expense decreased 113 million 2005 compared 2004 decrease primarily due lower total debt levels partially offset impact interest rate swap agreement place april 2004 june 2005 lower total debt levels result repayment 3500 million longterm debt second quarter 2004 interest dividend income 2005 increased 112 million 2004 due significantly higher cash balances shortterm investments year resulting primarily higher cash flows operations income taxes effective tax rate 2006 higher us statutory income tax rate 35 due taxes related sale interest westerngeco venture state income taxes offset lower rates tax international operations 2006 provided 7083 million taxes related sale interest westerngeco included estimate taxes related future repatriation nonus proceeds 2005 reflected 106 million reduction tax expense attributable recognition deferred tax asset associated supplemental retirement plan “srp” tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law received tax assessments various tax authorities currently varying stages appeals andor litigation regarding matters provided amounts believe ultimately result proceedings believe substantial defenses questions raised pursue legal remedies unfavorable outcome result however resolution matters involves uncertainties assurances outcomes favorable cumulative effect accounting change december 31 2005 adopted financial accounting standards board “fasb” interpretation 47 conditional asset retirement obligations “fin 47” fin 47 clarifies term “conditional asset retirement obligation” used sfas 143 accounting asset retirement obligations refers legal obligation perform asset retirement activity timing andor method settlement conditional future event may within control entity adoption fin 47 resulted charge 09 million net tax 05 million recorded cumulative effect accounting change consolidated statement operations conjunction adoption recorded conditional asset retirement obligations 16 million fair value costs associated special handling asbestos related materials certain facilities liquidity capital resources objective financing business maintain adequate financial resources access additional liquidity 2006 cash flows operations proceeds sale interest westerngeco principal sources funding anticipate cash flows operations sufficient fund liquidity needs 2007 also 5000 million committed revolving credit facility provides backup liquidity event unanticipated significant demand cash flows could funded operations capital planning process focused utilizing cash flows generated operations ways enhance value company 2006 used cash variety activities including working capital needs payment dividends repurchase common stock capital expenditures cash flows cash flows provided used continuing operations type activity follows years ended december 31 millions statements cash flows entities international operations local currency functional exclude effects changes foreign currency exchange rates occur given year noncash changes result changes reflected certain accounts consolidated statements cash flows may reflect changes corresponding accounts consolidated balance sheets operating activities cash flows operating activities continuing operations provided 5897 million year ended december 31 2006 compared 9496 million year ended december 31 2005 cash flows operating activities 2006 reduced 5551 million income tax payments related gain sale interest westerngeco excluding income tax payments cash flows operating activities 11448 million increase 1952 million prior year increase primarily due increase income continuing operations partially offset change net operating assets liabilities used cash flows cash flows operating activities excluding westerngeco transaction 2006 steadily increasing last three years expect trend continue 2007 underlying drivers changes operating assets liabilities follows contributions defined benefit pension plans 2006 approximately 340 million decrease approximately 140 million compared 2005 primarily due reduced contributions 2006 anticipation merger two us pension plans january 1 2007 cash flows operating activities continuing operations increased 1678 million 2005 compared 2004 increase primarily due increase income continuing operations 3491 million partially offset change net operating assets liabilities used 1806 million cash flows 2005 compared 2004 underlying drivers changes operating assets liabilities follows contributions defined benefit pension plans 2005 approximately 480 million decrease approximately 620 million compared 2004 management made decision fund higher levels reduce underfunded status certain pension plans investing activities principal recurring investing activity funding capital expenditures ensure appropriate levels types rental tools place generate revenues operations expenditures capital assets totaled 9222 million 4783 million 3482 million 2006 2005 2004 respectively majority expenditures rental tools including wireline tools machinery equipment increase capital assets 2006 result increased demand products services 2006 paid 662 million acquisitions businesses net cash acquired first quarter 2006 acquired nova technology corporation “nova” 554 million net cash acquired 30 million plus assumed debt second third quarters 2006 made three acquisitions 108 million net cash acquired 07 million 2005 paid 468 million acquisitions businesses net cash acquired december purchased zeroth technology limited “zertech” 203 million november paid 255 million net cash acquired 17 million remaining 50 interest quantx wellbore instrumentation “quantx” 2005 also made smaller acquisitions aggregate purchase price 10 million 2004 paid 66 million acquisition businesses net cash acquired purchased remaining 60 interest luna energy llc “luna” venture entered 2002 10 million also paid 56 million settlement final purchase price related acquisition completed prior year invested additional 71 million certain investments affiliates 2006 purchased 38829 million received proceeds 36062 million maturing auction rate securities highly liquid variablerate debt securities 2005 purchased 770 million auction rate securities underlying security longterm maturity interest rate reset dutch auctions typically held every 7 28 35 days creating shortterm liquidity shortterm investments classified availableforsale securities recorded cost approximates market value proceeds disposal assets 1354 million 901 million 1069 million 2006 2005 2004 respectively disposals relate rental tools lostinhole well machinery rental tools equipment longer used operations sold throughout year included proceeds 2006 2004 104 million 122 million respectively related sale certain real estate properties held sale april 28 2006 sold 30 interest westerngeco 24 billion cash westerngeco also made cash distribution 596 million prior closing 2005 received distributions 300 million westerngeco recorded reduction carrying value investment also received 133 million schlumberger related westerngeco trueup payment 130 million recorded reduction carrying value investment 03 million interest income 2006 received 463 million net proceeds sale certain businesses interest affiliate specifically march 2006 completed sale baker spd received 425 million proceeds received 38 million release remaining amount held escrow related sale petreco international may 2005 received 37 million initial release escrow 2004 received 587 million net proceeds sale certain businesses interest affiliate specifically january 2004 completed sale bird received 56 million proceeds subject postclosing adjustments purchase price june 2004 made net payment 68 million buyer bird settlement final purchase price adjustments february 2004 completed sale minority interest petreco international venture entered 2001 received proceeds 358 million 74 million placed escrow pending outcome potential indemnification obligations pursuant sales agreement september 2004 also completed sale bhmt received proceeds 315 million routinely evaluate potential acquisitions businesses third parties may enhance current operations expand operations new markets product lines may also time sell business operations considered part core business financing activities net repayments borrowings commercial paper shortterm debt 88 million 711 million 355 million 2006 2005 2004 respectively 2004 repaid 1000 million 80 notes due may 2004 2500 million 7875 notes due june 2004 repayments funded cash hand cash flows operations issuance commercial paper total debt outstanding december 31 2006 10751 million decrease 128 million compared december 31 2005 total debt total capitalization defined total debt plus stockholders’ equity ratio 017 december 31 2006 019 december 31 2005 april 2004 entered interest rate swap agreement notional amount 3250 million associated 625 notes due january 2009 interest rate swap agreement designated qualified fair value hedging instrument due outlook interest rates terminated interest rate swap agreement june 2005 required us make payment 55 million amount deferred amortized increase interest expense remaining life underlying debt security received proceeds 925 million 2281 million 1159 million 2006 2005 2004 respectively issuance common stock exercise stock options employee stock purchase plan october 27 2005 board directors authorized us repurchase 4555 million common stock addition balance 445 million remaining board directors’ september 2002 authorization resulting authorization repurchase total 5000 million common stock 2005 repurchased 17 million shares common stock average price 5817 per share total 985 million april 2006 board directors authorized repurchase additional 18 billion common stock 2006 repurchased 243 million shares common stock average price 7650 per share total 18560 million december 31 2006 authorization remaining repurchase total 3455 million common stock paid dividends 1726 million 1611 million 1536 million 2006 2005 2004 respectively beginning fourth quarter 2005 authorized board directors increased quarterly dividend 013 per share compared 0115 per share paid prior quarters available credit facilities december 31 2006 10578 million credit facilities commercial banks 5000 million committed revolving credit facility “facility” expires july 2011 facility provides two oneyear extensions subject approval acceptance lenders among conditions addition facility contains provision allow increase facility amount additional 5000 million subject approval acceptance lenders among conditions facility contains certain covenants among things require maintenance funded indebtedness total capitalization ratio defined formula per facility less equal 060 restrict certain merger transactions sale substantially assets company significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations facility may accelerated events default include payment defaults lenders facility covenant defaults customary defaults december 31 2006 compliance facility covenants direct borrowings facility year ended december 31 2006 however extent outstanding commercial paper ability borrow facility reduced december 31 2006 outstanding commercial paper market conditions change revenues significantly reduced operating costs increase cash flows liquidity could reduced additionally could cause rating agencies lower credit ratings triggers facility would accelerate maturity borrowings facility however downgrade credit ratings could increase cost borrowings facility could also limit preclude ability issue commercial paper occur would seek alternative sources funding including borrowing facility believe credit ratings relationships major commercial investment banks would allow us obtain interim financing existing credit facilities currently unforeseen significant needs growth opportunities also believe interim financings could funded subsequent issuances longterm debt equity necessary cash requirements 2007 believe operating cash flows provide us sufficient capital resources liquidity manage working capital needs meet contractual obligations fund capital expenditures pay dividends repurchase common stock support development shortterm longterm operating strategies 2007 expect capital expenditures 10 billion 12 billion excluding acquisitions expenditures expected used primarily normal recurring items necessary support growth business operations 2007 expect make interest payments 730 million 750 million based current expectations debt levels 2007 anticipate making income tax payments 8750 million 9250 million 2007 december 31 2006 authorization remaining repurchase 3455 million common stock may repurchase common stock depending market conditions applicable legal requirements liquidity considerations anticipate paying dividends 1650 million 1700 million 2007 however board directors change dividend policy anytime us merged two pension plans effective january 1 2007 resulting one taxqualified us pension plan baker hughes incorporated pension plan “bhipp” result merger plans bhipp overfunded therefore required intend make pension contributions bhipp 2007 currently estimate required make contributions bhipp five eight years thereafter expect contribute 20 million 30 million nonqualified us pension plans 130 million 150 million nonus pension plans also make benefit payments related postretirement welfare plans 130 million 150 million estimate contribute 1150 million 1250 million defined contribution plans previously discussed believe material trends demands commitments events uncertainties would reasonably likely material impact financial condition liquidity previously discussed currently information would create reasonable likelihood reported levels revenues cash flows operations 2006 indicative expect near term contractual obligations table set forth contractual cash obligations december 31 2006 certain amounts included table based estimates assumptions obligations including duration anticipated actions third parties factors contractual cash obligations actually pay future periods may vary reflected table estimates assumptions subjective 1 amounts represent expected cash payments total debt include unamortized discounts deferred issuance costs net deferred gains terminated interest rate swap agreements 2 amounts represent expected cash payments interest fixed rate longterm debt 3 enter operating leases normal course business lease agreements provide us option renew lease future operating lease payments would change exercised renewal options entered additional operating lease agreements 4 purchase obligations include agreements purchase goods services enforceable legally binding specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations exclude agreements cancelable anytime without penalty 5 amounts represent longterm liabilities including current portion reflected consolidated balance sheet timing amount payment streams known amounts include payments certain environmental remediation liabilities payments deferred compensation payouts acquisition agreements payments certain asset retirement obligations amounts include payments pension contributions payments various postretirement welfare benefit plans postemployment benefit plans payments deferred taxes tax liabilities offbalance sheet arrangements normal course business customers vendors others entered offbalance sheet arrangements letters credit bank issued guarantees totaled approximately 3769 million december 31 2006 also commitments outstanding purchase obligations related capital expenditures inventory purchase orders contracts approximately 2537 million december 31 2006 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements normal operating leases offbalance sheet financing arrangements securitization agreements liquidity trust vehicles synthetic leases special purpose entities materially exposed financing liquidity market credit risk could arise engaged financing arrangements new accounting standards february 2006 financial accounting standards board “fasb” issued sfas 155 accounting certain hybrid financial instruments amendment fasb statements 133 140 “sfas 155” sfas 155 amends sfas 133 required derivative embedded host contract meet definition derivative accounted separately certain conditions sfas 155 effective financial instruments acquired issued subject remeasurement event following start entity’s first fiscal year beginning september 15 2006 adopted sfas 155 january 1 2007 impact consolidated financial statements july 2006 fasb issued fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” fin 48 clarifies accounting uncertainty income taxes recognized entity’s financial statements accordance sfas 109 accounting income taxes prescribes recognition threshold measurement attribute financial statement disclosure tax positions taken expected taken tax return fin 48 effective fiscal years beginning december 15 2006 adopted fin 48 january 1 2007 currently estimate cumulative effect adopting fin 48 reduction consolidated retained earnings january 1 2007 range 450 million 600 million september 2006 fasb issued sfas 157 fair value measurements “sfas 157” intended increase consistency comparability fair value measurements defining fair value establishing framework measuring fair value expanding disclosures fair value measurements sfas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years adopt sfas 157 january 1 2008 yet determined impact consolidated financial statements september 2006 fasb issued sfas 158 employers’ accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r “sfas 158” sfas 158 requires employer recognize overfunded underfunded status defined benefit postretirement plan asset liability statement financial position recognize changes funded status year changes occur comprehensive income additionally requires employer measure funded status plan date year end statement financial position limited exceptions sfas 158 effective end fiscal year ending december 15 2006 however requirement measure plan assets benefit obligations date employer’s fiscal year end statement financial position effective fiscal years ending december 15 2008 adopted requirements sfas 158 december 31 2006 except funded status measurement date requirement adopted december 31 2008 allowed sfas 158 see note 14 incremental effect applying sfas 158 consolidated balance sheet december 31 2006 september 2006 securities exchange commission issued staff accounting bulletin 108 considering effects prior year misstatements quantifying misstatements current year financial statements “sab 108” sab 108 requires public companies utilize “dualapproach” assessing quantitative effects financial misstatements dual approach includes income statement focused assessment balance sheet focused assessment sab 108 effective fiscal years ending november 15 2006 adopted sab 108 december 31 2006 impact consolidated financial statements september 2006 fasb issued fasb staff position aug air1 “fsp aug air1” addresses accounting planned major maintenance activities fsp aug air1 prohibits use accrueinadvance method accounting planned major maintenance activities annual interim financial reporting periods adopted fsp aug air1 january 1 2007 applying retrospective application financial statements presented currently expect material impact consolidated financial statements result adoption february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities including amendment fasb statement 115 “sfas 159” sfas 159 permits entities measure eligible assets liabilities fair value unrealized gains losses items fair value option elected reported earnings sfas 159 effective fiscal years beginning november 15 2007 adopt sfas 159 january 1 2008 yet determined impact consolidated financial statements related party transactions april 28 2006 sold 30 interest westerngeco 24 billion cash recorded pretax gain 17435 million 10352 million net tax november 2000 entered agreement westerngeco whereby westerngeco subleases facility us period ten years current market rates 2006 entered extension sublease five additional years rent determined based market rates 2010 2006 2005 2004 received payments 56 million 65 million 55 million respectively westerngeco related lease 2006 2005 received distributions 596 million 300 million respectively westerngeco recorded reductions carrying value investment 2005 received 133 million schlumberger related trueup payment associated revenues earned westerngeco four year period ending november 2004 party’s contributed multiclient seismic data libraries recorded 130 million reduction carrying value investment westerngeco 03 million interest income tax effect 33 million related payment included provision income taxes year ended december 31 2005 significant related party transactions forwardlooking statements mda certain statements notes consolidated financial statements include forwardlooking statements within meaning section 27a securities act section 21e exchange act “forwardlooking statement” words “anticipate” “believe” “ensure” “expect” “if” “intend” “estimate” “probable” “project” “forecasts” “predict” “outlook” “aim” “will” “could” “should” “would” “may” “likely” similar expressions negative thereof intended identify forwardlooking statements forwardlooking statements based assumptions believe reasonable may prove accurate statements include potential impact future transactions acquisition disposition merger joint venture transaction could occur undertake obligation publicly update revise forwardlooking statement expectations regarding business outlook including changes revenue pricing capital spending profitability strategies operations impact common stock repurchases final resolution pending government investigations oil natural gas market conditions market share contract terms costs availability resources economic regulatory conditions environmental matters forecasts regarding matters forwardlooking information subject risks uncertainties could cause actual results differ materially results expected although possible identify factors risks uncertainties include risk factors timing risk factors identified “risk factors related worldwide oil natural gas industry” “risk factors related business” sections contained item 1a risk factors set forth time filings sec documents available web site sec’s electronic data gathering analysis retrieval system “edgar” httpwwwsecgov item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations mda read conjunction consolidated financial statements included item 8 financial statements supplementary data contained herein executive summary baker hughes leading supplier oilfield services products technology systems used worldwide oil natural gas industry referred oilfield operations manage oilfield operations four geographic segments consisting north america latin america europeafricarussia caspian middle eastasia pacific industrial services businesses reported fifth segment december 31 2016 baker hughes approximately 33000 employees compared approximately 43000 employees december 31 2015 within oilfield operations primary driver businesses customers capital operating expenditures dedicated oil natural gas exploration field development production main products services provided oilfield operations fall one two categories drilling evaluation completion production classification based two major phases constructing oil andor natural gas well drilling phase completion phase products services utilized phase also provide products services downstream chemicals process pipeline services referred industrial services 2016 continued face difficult industry conditions commodity prices deteriorated levels seen decade activity declined across globe reflected worldwide rig count decreased 32 compared 2015 average customers continued reduce spending cope challenging lowcommodity price environment resulting price deterioration products services steady decline us oil production along production cuts announced fourth quarter 2016 opec certain nonopec countries drove oil prices higher resulting 11 increase comparing fourth quarter closing price west texas intermediate cushing crude 5372bbl third quarter closing price 4824bbl increase stimulated improvement activity north america market evidenced 29 growth rig count fourth quarter 2016 compared third quarter 2016 despite improvement yet meaningful increase prices able charge products services thus impact profitability minimal international deep water activity continued decline fourth quarter operators awaiting sustainable rebalancing oil market increasing activity backdrop another difficult year industry achieved significant progress commitment improve financial performance reducing costs simplifying operational structure optimizing capital structure strengthening commercial strategy specifically generated 423 billion cash flows operations includes 35 billion halliburton merger termination fee paid 10 billion debt repurchased 763 million shares accelerated innovation 100 new product introductions built new sales channels take products technology market faster efficiently executed strategy strengthen profitability return invested capital rationalized underperforming product lines select markets based objectives profitable growth reductions minimal impact revenue positive impact operating profitability addition contributed north american onshore pressure pumping business new venture better positioned participate efficiently costeffectively anticipated growth market segment 2016 generated revenue 984 billion decrease 590 billion 37 compared 2015 net loss attributable baker hughes 274 billion 2016 compared 197 billion 2015 steep decline activity evidenced 32 decline average global rig count yearoveryear price deterioration experienced across segments main drivers decline revenue profitability continued restructure adjust operations cost structure reflect reduced activity levels result restructuring activities recorded charges totaling 117 billion 2016 included workforce reductions contract terminations facility closures writedown excess machinery equipment addition restructuring activities result downturn energy market impact business outlook determined carrying amount certain assets exceeded respective fair values therefore recorded impairment charge 567 million recorded goodwill impairment charges primarily related north america reporting unit totaling 186 billion charges excluded results operating segments outlook oil prices started rebound fourth quarter 2016 result announced supply cut agreements opec 11 nonopec producers modest increase forecasted demand oil however north american production remains uncertain due unpredictable actions north american shale operators bring production impact commodity prices much quickly peers operating environments since details opec’s plans surfaced october rig counts fourth quarter 2016 increased 23 us compared third quarter 2016 corresponding increase us shale production already materializing therefore operators ability quickly get resources ground production could limit nearterm commodity price gains north america dynamic combined questions opecs ability implement sustain cuts leave room skepticism agreedupon production cuts could lead sustainable improvement oil prices turn material increase spending exploration production companies optimistic prospects nearterm recovery continue believe oil prices sustained midtohigh 50s required confidence customer community improve investment accelerate also activity needs increase meaningfully excess service capacity substantially absorbed meaningful pricing recovery takes place seeing first signs select product lines north american basins still believe remains fair amount capacity must absorbed service pricing become tightly correlated higher commodity prices increased activity believe recovery paths vary depending location operating environment north american market onshore activity continues climb upward expect trend continue 2017 conversely offshore markets around world full cycle lifting costs higher particularly deepwater expect activity remain challenging declines expected 2017 overall internationally expect market flat slightly first half 2017 continued activity declines pricing pressure nearterm partially offset pockets moderate growth onshore result expected continued market variability believe tax rate continue volatile despite nearterm volatility longterm outlook industry remains strong believe world’s demand energy continue rise supply energy continue increase complexity requiring greater service intensity advanced technology oilfield service companies remain focused delivering innovative costefficient solutions deliver step changes operating economic performance customers halliburton terminated merger agreement november 16 2014 baker hughes halliburton company halliburton entered definitive agreement plan merger agreement halliburton would acquire outstanding shares baker hughes stock cash transaction merger accordance provisions section 91 merger agreement baker hughes halliburton agreed terminate merger agreement april 30 2016 result failure merger occur april 30 2016 due inability obtain certain specified antitrust related approvals halliburton paid 35 billion baker hughes may 4 2016 representing antitrust termination fee required paid pursuant merger agreement information merger see note 2 halliburton terminated merger agreement notes consolidated financial statements item 8 herein general electric transaction agreement october 30 2016 baker hughes ge newco merger sub entered transaction agreement plan merger pursuant among things ge’s oil gas business baker hughes combined operate name baker hughes ge company ge transaction subject approval baker hughes’ stockholders regulatory approvals customary closing conditions baker hughes ge expect ge transaction close mid2017 however baker hughes cannot predict certainty ge transaction completed completion ge transaction subject conditions beyond control baker hughes information transaction see note 3 general electric transaction agreement notes consolidated financial statements item 8 herein newco operate public company business environment conduct business 80 countries helping customers find evaluate drill produce transport process hydrocarbon resources revenue predominately generated sale products services major national independent oil natural gas companies worldwide dependent spending customers oil natural gas exploration field development production spending dependent number factors including customers forecasts future energy demand supply access resources develop produce oil natural gas ability fund capital programs impact new government regulations importantly expectations oil natural gas prices key driver cash flows oil natural gas prices oil natural gas prices summarized table averages daily closing prices periods indicated 1 bloomberg dated 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 heavily influenced brent oil prices fluctuated significantly throughout year ranging low 2639bbl january 2016 high 5557bbl december 2016 oil prices bottomed early 2016 due impending production increases iran economic sanctions lifted 2016 opec considered production cuts fourth quarter announced first agreement since 2008 cut production along opecs agreedupon production cuts nonopec countries similarly agreed reduce production result fourth quarter brent oil prices shifted meaningfully higher addition demand oil higher expected due robust consumption north america revisions chinese russian european demand growth expectations north america customer spending highly driven wti oil prices similar brent oil prices fluctuated significantly throughout year highest prices recorded towards end year overall wti oil prices ranged low 2621bbl february 2016 high 5406bbl december 2016 although oil prices rebounded 100 previous twelveyear low 26bbl reached earlier year near 55bbl end year yet material change customer behavior certain us basins suggest nearterm broader recovery activity levels north america natural gas prices measured henry hub natural gas spot price averaged 249mmbtu 2016 representing 5 decrease prior year warmerthanaverage winter start 2016 significantly reduced demand storage inventories hit record highs late 2016 production drilling activity tapered seasonal demand picked spot prices improved according us department energy doe working natural gas storage end 2016 3311 billion cubic feet bcf 99 364 bcf corresponding week 2015 baker hughes rig count baker hughes rig counts important business barometer drilling industry suppliers drilling rigs active consume products services produced oil service industry rig count trends driven exploration development spending oil natural gas companies turn influenced current future price expectations oil natural gas therefore counts may reflect relative strength stability energy prices overall market activity however counts solely relied specific pervasive conditions may exist affect overall energy prices market activity baker hughes providing rig counts public since 1944 gather relevant data field service personnel obtain necessary data routine visits various rigs customers contractors outside sources necessary base classification well either oil natural gas primarily upon filings made operators relevant jurisdiction data compiled distributed various wire services trade associations published website believe counting process resulting data reliable however subject ability obtain accurate timely information rig counts compiled weekly us canada monthly international rigs published international rig counts include rigs drilling certain locations russia caspian region iran onshore china information readily available rigs us canada counted active day count taken well drilled started drilling completed well anticipated sufficient depth potential consumer drill bits international areas rigs counted weekly basis deemed active drilling activities occurred majority week weekly results averaged month published accordingly rig count include rigs transit one location another rigging used nondrilling activities including production testing completion workover expected significant consumers drill bits rig counts summarized table averages periods indicated 2016 compared 2015 rig count north america decreased 46 2016 compared 2015 primarily driven 44 decline oildirected rigs result reduced spending customers adapt lower oil price environment oildirected rig count decreased 45 us lower wti prices forced operators reduce exploration development spending order protect cash flows focus production optimization opportunities canada oildirected rig count decreased 28 many operators curtailed drilling plans heavy oil sands projects economical current oil prices natural gasdirected rig count north america declined 50 2016 natural gas well productivity improved natural gasdirected drilling declining 56 us 38 canada outside north america rig count decreased 18 2016 compared 2015 also driven reduced customer spending lower oil price environment rig count latin america decreased 38 result customer budgetary constraints across region primarily argentina mexico brazil colombia north sea rig count decreased 24 largely due decline drilling activity united kingdom rig count continental europe decreased 15 result reduced drilling across area largest decline seen romania africa rig count decreased 20 predominantly due reduced customer spending across majority region particularly nigeria angola chad gabon rig count middle east decreased 4 2016 due reduced activity egypt iraq partially offset increased activity abu dhabi rig count asia pacific decreased 15 consequence reduced drilling activity primarily indonesia australia 2015 compared 2014 rig count north america decreased 47 2015 compared 2014 primarily driven 52 decline oildirected rigs result reduced spending customers adapt lower oil price environment oildirected rig count decreased 51 us lower wti prices forced operators reduce exploration development spending order protect cash flows focus production optimization opportunities canada oildirected rig count decreased 61 many operators curtailed drilling plans heavy oil sands projects economical current oil prices natural gasdirected rig count north america declined 32 2015 natural gas prices deteriorated 40 compared 2014 average natural gasdirected drilling declining 32 us 33 canada outside north america rig count decreased 13 2015 compared 2014 also driven reduced customer spending lower oil price environment rig count latin america decreased 20 result customer budgetary constraints across region primarily mexico colombia ecuador one exception emerging unconventional plays argentina activity remained relatively stable 2015 north sea rig count decreased 7 largely due decline drilling activity netherlands rig count continental europe decreased 24 mainly result reduced drilling turkey romania africa rig count decreased 21 predominantly due reduced customer spending across majority region particularly libya chad angola nigeria 2015 rig count middle east remained unchanged 2014 activity declines iraq egypt offset increased activity saudi arabia oman abu dhabi kuwait rig count asia pacific decreased 13 consequence reduced drilling activity primarily india indonesia australia new zealand results operations discussions relating significant line items consolidated statements income loss based available information represent analysis significant changes events impact comparability reported amounts appropriate identified specific events changes affect comparability trends reasonably practicable quantified impact items addition discussions revenue cost revenue total basis business drivers product sales services similar dollar amounts tabulations section millions dollars unless otherwise stated revenue profit tax revenue operating profit loss tax five operating segments provided performance operating segments evaluated based operating profit loss tax defined income loss income taxes following net interest expense corporate expenses impairment restructuring charges goodwill impairment charges merger termination fee loss sale business interest loss early extinguishment debt certain gains losses allocated operating segments beginning 2016 excluded merger related costs terminated halliburton proposed ge transactions operating segments costs presented separate line item consolidated statement income loss prior year merger related costs reclassified conform current year presentation 2016 compared 2015 nm represents meaningful north america north america revenue 2016 294 billion decrease 307 billion 51 compared 2015 primarily result steep drop activity reflected 46 yearoveryear average rig count decline lesser extent deteriorating pricing conditions operators reduced spending levels 2016 product lines unfavorably impacted drop activity addition onshore pressure pumping business incurred share reductions driven efforts reduce losses improve cash flow market pricing unsustainable conversely production chemicals reflected smallest decrease activity revenue product line highly correlated production rig count addition deepwater operations artificial lift also showed signs resilience north america operating loss tax 687 million 2016 decrease 48 million 8 compared 639 million operating loss 2015 although operating results negatively impacted sharp reduction activity increasingly unfavorable pricing environment actions taken past year reduce workforce close consolidate facilities improve commercial terms vendors resulted significantly lower operating costs actions restructure north america operations operate lower activity pricing environment combined reduction depreciation amortization expense asset impairments helped mitigate impact ongoing decline revenue experienced since early 2015 operating results 2016 include 230 million costs related writing certain excess inventory compared costs 181 million 2015 due lower cost market adjustments december 30 2016 contributed north american onshore pressure pumping business newly formed venture retained 467 interest accounted equity method investment related earnings excluded operating segments information see note 5 acquisitions dispositions notes consolidated financial statements item 8 herein latin america latin america revenue 2016 980 million decrease 819 million 46 compared 2015 reduction segment attributed activity declines across region evident 38 drop rig count activity declined across entire segment across product lines largest yearoveryear declines pressure pumping argentina artificial lift andean area drilling services brazil mexico latin america operating loss tax 276 million 2016 decrease 420 million 292 compared operating profit tax 144 million 2015 reduction profitability mainly attributed decline activity lesser extent price exacerbated increase 96 million provisions doubtful accounts yearoveryear almost entirely ecuador additionally incurred costs 84 million 2016 write carrying value certain excess inventory compared 13 million 2015 reduction profitability partially mitigated lower operating costs depreciation amortization expense resulting efforts structurally align segment reflect current expected nearterm activity levels also benefited reduced foreign exchanges losses europeafricarussia caspian earc revenue 2016 220 billion decrease 108 billion 33 compared 2015 decrease attributed primarily activity reductions across markets product lines largest decline experienced north sea west africa notably drilling services completion systems product lines addition reduced activity north sea region also negatively impacted labor union strikes fourth quarter 2016 lesser extent unfavorable pricing also impacted revenue addition 2016 unfavorable exchange rates mainly british pound nigerian naira russian ruble angolan kwanza norwegian krone accounted 10 decline revenue despite activity reductions see resiliency production chemicals product line result increased share africa earc operating loss tax 273 million 2016 decrease 456 million 249 compared operating profit tax 183 million 2015 decline operating profit lower activity levels unfavorable pricing compounded valuation allowances indirect taxes africa addition incurred costs 143 million write certain excess inventory 2016 reductions profitability partially offset benefit implemented cost reduction measures lower depreciation amortization expense reduced foreign exchange losses middle eastasia pacific meap revenue 2016 271 billion decrease 736 million 21 compared 2015 revenue decline segment driven lower activity across region lesser extent regionwide pricing pressure noticeable reductions occurred completion systems pressure pumping drilling services across asia pacific particularly australia malaysia vietnam across product lines iraq deepwater operations india reductions partially offset activity growth kuwait mainly artificial lift drilling services pressure pumping meap operating profit tax decreased 160 million 70 2016 compared 2015 reduction profitability driven largely lower activity levels unfavorable pricing partially offset operating cost reductions lower depreciation amortization expense asset impairments 2016 incurred costs 117 million write certain excess inventory 2015 incurred charges iraq related integrated operations industrial services industrial services revenue 102 billion decrease 196 million 16 compared 2015 decline revenue segment driven activity reductions customers reduced spending delayed projects including several major pipeline construction maintenance projects revenue negatively impacted pricing deterioration industrial services operating loss tax 2016 6 million decrease 106 compared operating profit tax 108 million 2015 reduction profitability resulting lower activity levels pricing deterioration partially offset operating cost reductions lower depreciation amortization expense asset impairments 2016 incurred costs 43 million write certain excess inventory 2015 compared 2014 north america north america revenue 2015 601 billion decrease 607 billion 50 compared 2014 steep reduction commodity prices experienced industry 2015 severely impacted onshore north america exploration production companies result higher lifting cost per barrel many producers operators addressed cash constraints reducing drilling activity less economical unconventional plays delaying well completion activities driving price discounts service providers await higher commodity prices lower activity levels evident 47 rig count drop deteriorating pricing conditions main drivers revenue decline segment product lines unfavorably impacted drop activity production chemicals deepwater operations artificial lift showing resilience additionally reduced activity well completion delays created oversupply hydraulic fracturing equipment caused price deterioration onshore pressure pumping product line severe lost market share product line 2015 worked maintain cash flow positive operations despite oversupplied market north america operating loss tax 639 million 2015 decrease 211 billion 144 compared operating profit tax 147 billion 2014 reduction profitability primarily due sharp decline activity increasingly unfavorable pricing environment additionally result industry downturn impact business incurred costs 181 million 2015 write carrying value certain inventory impact unfavorable market conditions partially mitigated actions taken year reduce workforce close consolidate facilities improve commercial terms vendors ultimately resulted lower operating costs latin america latin america revenue 2015 180 billion decrease 437 million 20 compared 2014 reduction segment attributed activity declines across region result customer budgetary constraints predominately andean area rig count declined 46 venezuela restructured operational footprint late 2014 reduction partially offset revenue growth brazil share gains drilling services product line latin america operating profit tax decreased 146 million 50 2015 compared 2014 reduction profitability mainly attributed decline activity foreign exchange losses primarily argentina increase expense related reserves doubtful accounts additionally incurred costs 13 million 2015 write carrying value certain inventory partially offset improvements made operational cost structure europeafricarussia caspian earc revenue 2015 328 billion decrease 114 billion 26 compared 2014 decrease driven mainly activity declines unfavorable pricing across region revenue also negatively impacted unfavorable change foreign exchange rates accounted approximately one third revenue reduction 2015 deconsolidation joint venture north africa late last year also contributed decline revenue product lines unfavorably impacted drop activity price production chemicals drilling services showing resilience earc operating profit tax decreased 438 million 71 2015 compared 2014 unfavorable impact profitability pricing deterioration lower activity levels change foreign exchange rates increased costs related reserves doubtful accounts partially offset savings recent cost reduction measures addition 2015 unfavorable exchange rates mainly russian ruble euro british pound accounted approximately 40 decline profitability also 2014 included 58 million charge associated restructuring operations north africa impairment certain assets repeat 2015 middle eastasia pacific meap revenue 2015 344 billion decrease 102 billion 23 compared 2014 revenue decline segment driven primarily lower activity across asia particular china australia vietnam reduced revenue iraq revenue drop iraq attributed reduced activity evident 34 decline rig count rationalization operational footprint country including completing integrated operations activities revenue also impacted unfavorable pricing across region meap operating profit tax decreased 446 million 66 2015 compared 2014 reduction profitability driven largely lower activity levels unfavorable pricing current year also includes charges related reducing operations iraq reductions partially offset benefit recent costsaving actions industrial services industrial services revenue 122 billion decrease 149 million 11 compared 2014 decline revenue segment driven primarily reduced activity unfavorable change foreign exchange rates industrial services operating profit tax decreased 9 2015 compared 2014 reduction profitability resulting lower activity levels partially offset costsaving efforts however industrial services profit tax prior year included integration costs related pipeline services business acquired 2014 incur 2015 costs expenses table details certain data consolidated statements income loss percentage revenue cost revenue cost revenue percentage revenue 101 92 2016 2015 respectively increase cost revenue percentage revenue due mainly deteriorating pricing conditions operators reduced spending partially offset benefit implemented cost reduction measures lower depreciation amortization expense asset impairments despite actions restructure global operations operate lower price activity environment decline revenue outpaced benefit cost saving measures additionally product lines significantly impacted downturn rig activity also capitalintensive accordingly fixed costs associated product lines lessened positive impact cost reduction efforts 2016 2015 cost revenue 2016 also negatively impacted charge 617 million write dispose certain excess inventory compared writedown 194 million prior year due lower cost market adjustments cost revenue percentage revenue 92 80 2015 2014 respectively result steep decline activity customer spending experienced significant pricing pressure decline demand products services cost revenue 2015 also negatively impacted charge 194 million adjust carrying value certain inventory due industrywide market decline research engineering research engineering expenses decreased 18 2016 compared 2015 decreased 24 2015 compared 2014 declines driven cost reduction measures light severe decline activity resulting lower revenues profitability marketing general administrative marketing general administrative mga expenses decreased 154 million 16 2016 compared 2015 reduction mga costs mainly result workforce reductions lower discretionary spending reduced foreign exchange losses 23 million investment gain partially offset legal settlement costs 44 million mga expenses decreased 364 million 27 2015 compared 2014 reduction mga costs mainly result workforce reductions lower discretionary spending impairment restructuring charges 2016 recorded impairment restructuring charges 174 billion consisting 272 million workforce reduction costs 192 million contract termination costs 127 billion asset impairments related excess machinery equipment facilities intangible assets total cash paid 2016 related workforce reductions contract terminations 419 million 2015 recorded impairment restructuring charges 830 million consisting 436 million workforce reduction costs 121 million contract termination costs 273 million asset impairments related excess machinery equipment facilities total cash paid 2015 related charges 446 million addition restructuring activities response downturn energy market impact business outlook determined carrying amount number assets exceeded respective fair values therefore recorded impairment charge 116 billion charges excluded results operating segments discussion impairment restructuring charges see note 4 impairment restructuring charges notes consolidated financial statements item 8 herein reduction costs eliminated depreciation reduced employee expenses reduced interest expense longterm debt 2016 approximately 550 million expected approximately 900 million annualized basis 700 million related actions taken post halliburton merger goodwill impairment second quarter 2016 determined fair value reporting units using combination techniques including discounted cash flows derived longterm plans market approach provides value indications comparison guideline public companies based results impairment test determined goodwill two reporting units impaired performed second step goodwill impairment test substantially completed actions necessary determination implied fair value goodwill second quarter 2016 however estimated fair values allocations subject adjustment valuations computations completed accordingly second quarter 2016 recorded estimate goodwill impairment loss 184 billion consisted 153 billion north america segment 311 million industrial services segment third quarter 2016 finalized valuations computations adjusted final goodwill impairment loss first nine months 2016 186 billion consisting 155 billion north america segment 309 million industrial services segment goodwillrelated impairments recorded fourth quarter 2016 merger related costs merger termination fee incurred costs related terminated merger halliburton 180 million 295 million 2016 2015 respectively costs included certain expenses retention programs obligations minimum incentive compensation costs based meeting eligibility criteria treated merger related costs april 30 2016 merger agreement halliburton terminated result halliburton paid us 35 billion may 4 2016 represents termination fee required paid pursuant merger agreement 2016 also incurred costs related pending transaction ge 19 million interest expense net interest expense net interest income 33 million 178 million 2016 decrease 39 million compared 217 million net interest income 20 million 2015 decrease due primarily bond buy back occurred june 2016 lesser extent growth interest income earned higher cash balances shortterm investments interest expense net interest income 217 million 2015 decreased 15 million compared 232 million net interest income 13 million 2014 reduction due primarily lower shortterm borrowings latin america increase interest income taxes total income tax expense 696 million 2016 compared income tax benefit 639 million 2015 income tax expense 896 million 2014 effective tax rate operating profits losses 2016 2015 2014 341 245 341 respectively 2016 negative effective tax rate due primarily geographical mix earnings losses taxes certain jurisdictions including withholding deemed profit taxes exceed tax benefit losses jurisdictions due valuation allowances provided jurisdictions goodwill impairments tax benefit 2015 effective tax rate lower us statutory income tax rate 35 due losses foreign jurisdictions tax benefit adjustments prior years tax positions partially offset favorable amended returns return accrual adjustments 2014 effective tax rate lower us statutory income tax rate 35 due lower rates certain international operations partially offset state income taxes adjustments prior years tax positions result geographic mix earnings losses including goodwill impairment asset impairment restructuring charges discrete tax items rate continue volatile market stabilizes compliance conduct business 80 countries including approximately 15 countries lowest scores transparency internationals corruption perception index survey 2016 indicates high levels corruption devote significant resources development maintenance communication enforcement business code conduct antibribery compliance policies internal control processes procedures numerous compliance related policies notwithstanding devotion resources part consequence thereof time discover receive information alleging potential violations laws regulations including fcpa policies processes procedures conduct timely internal investigations potential violations take appropriate action depending upon outcome investigation anticipate devotion significant resources compliancerelated issues including necessity investigations continue aspect business number countries oil natural gas exploration development production take place conduct operations compliancerelated issues time limited ability business raised cost operating countries order provide products services countries may future utilize ventures third parties sell products distributors otherwise modify business approach order improve ability conduct business accordance applicable laws regulations business code conduct bestinclass global ethics compliance program compliance program based core values integrity performance teamwork learning courage ii standards contained business code conduct iii laws countries operate compliance program referenced within company c2 completely compliant completely compliant theme intended establish proper toneatthetop throughout company employees consistently reminded play crucial role ensuring company always conducts business ethically legally safely highlights compliance program include following • comprehensive internal policies areas facilitating payments travel entertainment gifts charitable donations connected nonus government officials payments nonus commercial sales representatives use nonus police military organizations security purposes addition countryspecific guidance customs standards visa processing export reexport controls economic sanctions antiboycott laws • comprehensive employee compliance training program covering substantially employees • due diligence procedure commercial sales processing professional agents enhanced riskbased process classifying distributors suppliers • continued reduction use commercial sales representatives processing agents including reduction customs agents • compliance governance committee includes senior officers company reviews effectiveness compliance processes controls companys global compliance program including areas covered business code conduct • special compliance committee made senior officers meets less year review oversight reports active commercial sales representatives • compliance committees formed operating successfully companys geomarkets • use technology monitor report compliance matters including internal investigations management software webbased antiboycott reporting tool global trade management software tool • compliance program designed encourage reporting ethics compliance matter without fear retaliation including worldwide business helpline operated third party currently available tollfree 150 languages ensure helpline easily accessible employees language • centralized finance organization including enterprisewide accounting system companywide policies addition corporate audit function incorporated anticorruption procedures audits certain countries also conduct fcpa risk assessments legal audit procedures relating higher risk third parties nonus jurisdictions • continue work ensure adequate legal compliance coverage around world including coordination compliance advice customized training across regions countries business • centralized human resources function including among things consistent standards prehire screening employees screening existing employees prior promoting positions may exposed corruptionrelated risks uniform policy new hire training compliance component liquidity capital resources objective financing business maintain sufficient liquidity adequate financial resources financial flexibility order fund requirements business december 31 2016 cash equivalents 457 billion compared 232 billion cash equivalents december 31 2015 may 4 2016 halliburton paid us 35 billion represents termination fee required paid pursuant merger agreement part proceeds received used purchase 10 billion face value longterm notes debentures included portions tranche notes debentures 763 million common stock december 31 2016 approximately 292 billion cash equivalents held foreign subsidiaries compared approximately 201 billion december 31 2015 substantial portion cash held foreign subsidiaries december 31 2016 reinvested international operations current intent use cash among things fund operations foreign subsidiaries decide later date repatriate funds us may required provide taxes certain funds based applicable us tax rates net foreign tax credits committed revolving credit facility credit facility commercial banks related commercial paper program maximum combined borrowing time credit facility commercial paper program 25 billion december 31 2016 commercial paper outstanding therefore amount available borrowing credit facility december 31 2016 25 billion 2016 used cash fund variety activities including certain working capital needs restructuring costs capital expenditures repurchases longterm debt common stock payment dividends believe cash hand cash flows generated operations available credit facility including issuance commercial paper provide sufficient liquidity manage global cash needs cash flows cash flows provided used type activity follows years ended december 31 operating activities cash flows operating activities provided cash 423 billion 180 billion year ended december 31 2016 2015 respectively cash flows operating activities increased 243 billion 2016 primarily due receipt 35 billion merger termination fee changes components working capital receivables inventories accounts payable result lower activity provided cash 695 million income tax refund us approximately 415 million cash inflows partially offset increase net loss adjusted noncash items included cash flows operating activities 2016 2015 payments 419 million 446 million respectively made employee severance contract termination costs result restructuring activities initiated year cash flows operating activities provided cash 180 billion 295 billion year ended december 31 2015 2014 respectively cash flows operating activities decreased 116 billion 2015 primarily due decrease net income adjusted noncash items partially offset changes components working capital due lower activity levels provided cash 2015 compared 2014 investing activities principal recurring investing activity funding capital expenditures ensure appropriate levels types machinery equipment place generate revenue operations expenditures capital assets totaled 332 million 965 million 179 billion 2016 2015 2014 respectively decline capital expenditures past two years result lower demand products services continued focus capital discipline proceeds disposal assets 283 million 388 million 437 million 2016 2015 2014 respectively disposals related equipment lostinhole property machinery equipment longer used operations sold throughout year 2016 purchased shortterm longterm investment securities totaling 349 million received proceeds 453 million maturities various investment securities fourth quarter 2016 contributed north american onshore pressure pumping business new venture received 142 million cash net 8 million direct transaction fees 467 interest new venture result transaction deconsolidated business recognized 97 million loss sale majority interest business see note 5 acquisitions dispositions notes consolidated financial statements item 8 herein discussion financing activities net repayments commercial paper shortterm debt 60 million 45 million 248 million 2016 2015 2014 respectively total debt outstanding december 31 2016 302 billion decrease 102 billion compared december 31 2015 total debttocapital defined total debt plus equity ratio 019 december 31 2016 020 december 31 2015 june 2016 purchased 10 billion aggregate outstanding principal amount associated longterm outstanding notes debentures included portions tranche notes debentures pursuant cash tender offer purchases resulted payment earlytender premium including various fees 135 million pretax loss early extinguishment debt 142 million includes premium writeoff portion remaining original debt issue costs debt discounts premiums bond purchases result 55 million annualized interest savings 632 million interest savings life bonds received proceeds 91 million 116 million 216 million 2016 2015 2014 respectively issuance common stock exercise stock options employee stock purchase plan paid dividends 293 million 297 million 279 million 2016 2015 2014 respectively beginning may 2016 following termination merger halliburton september 30 2016 repurchased 162 million shares common stock average price 4709 per share total 763 million authorization remaining repurchase approximately 124 billion common stock december 31 2016 stock repurchases fourth quarter 2016 2015 2014 repurchased 91 million shares common stock average price 6575 per share total 600 million transaction agreement ge entered october 30 2016 described note 3 general electric transaction agreement notes consolidated financial statements item 8 herein generally agreed repurchase shares common stock increase quarterly dividend transaction pending available credit facility july 13 2016 entered new fiveyear 25 billion committed revolving credit facility 2016 credit agreement commercial banks maturing july 2021 replaced existing credit facility 25 billion maintained existing commercial paper program previous credit facility maturity date september 2016 maximum combined borrowing time 2016 credit agreement commercial paper program 25 billion 2016 credit agreement contains certain covenants among things require maintenance total debttototal capitalization ratio restrict certain merger transactions sale substantially assets significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations 2016 credit agreement may accelerated events default include payment defaults lenders 2016 credit agreement covenant defaults customary defaults compliance credit facilitys covenants direct borrowings credit facility 2016 commercial paper program may issue time 25 billion commercial paper maturities 270 days amount available borrow credit facility reduced amount commercial paper outstanding december 31 2016 outstanding borrowings commercial paper program market conditions change revenue reduced significantly operating costs increase cash flows liquidity could reduced additionally could cause rating agencies lower credit rating ratings triggers would accelerate maturity borrowings committed credit facility however downgrade credit ratings could increase cost borrowings credit facility could also limit preclude ability issue commercial paper occur would seek alternative sources funding including borrowing credit facility believe current credit ratings would allow us obtain interim financing existing credit facility currently unforeseen significant needs cash requirements 2017 believe cash hand cash flows operating activities available credit facility provide us sufficient capital resources liquidity manage working capital needs meet contractual obligations fund capital expenditures dividends support development shortterm longterm operating strategies necessary may issue commercial paper shortterm debt fund cash needs us excess cash generated us capital expenditures adjusted managed us match market demand activity levels light current market conditions capital expenditures 2017 made appropriate rate estimate would equal 450 million 500 million annualized basis expenditures expected used primarily normal recurring items necessary support business also anticipate making income tax payments range 225 million 275 million 2017 defined benefit defined contribution postretirement plans expect contribute 205 million 222 million plans 2017 see note 14 employee benefit plans notes consolidated financial statements item 8 herein discussion anticipate paying dividends range 140 million 160 million first half 2017 prior expected closing ge transaction contractual obligations table set forth contractual cash obligations december 31 2016 certain amounts included table based estimates assumptions obligations including duration anticipated actions third parties factors contractual cash obligations actually pay future periods may vary reflected table estimates assumptions subjective 1 amounts represent expected cash payments principal amounts related debt including capital lease obligations amounts debt include unamortized discounts deferred issuance costs expected cash payments interest excluded amounts 2 amounts represent expected cash payments interest longterm debt capital lease obligations 3 amounts represent future minimum payments noncancelable operating leases initial remaining terms one year enter operating leases include renewal options however excluded renewal options table unless anticipated exercise renewals 4 purchase obligations include capital improvements well agreements purchase goods services enforceable legally binding specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction 5 estimated income tax liabilities uncertain tax positions settled result expiring statutes audit activity competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate timing particular settlement depend length tax audit related appeals process expiration statute liability settled due statute expiring favorable audit result settlement tax liability would result cash payment 6 amounts include expected contributions pension postretirement defined benefit plans 70 million 80 million 2017 majority contributions amounts excess minimum funding requirements would considered contractual obligation offbalance sheet arrangements normal course business customers vendors others entered offbalance sheet arrangements surety bonds performance letters credit bank issued guarantees totaled approximately 10 billion december 31 2016 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements december 31 2016 material offbalance sheet financing arrangements normal operating leases discussed materially exposed financing liquidity market credit risk could arise engaged financing arrangements critical accounting estimates preparation consolidated financial statements requires us make estimates judgments affect reported amounts assets liabilities revenue expenses related disclosures well disclosures contingent assets liabilities base estimates judgments historical experience assumptions information believed reasonable circumstances estimates assumptions future events effects subject uncertainty accordingly estimates may change new events occur experience acquired additional information obtained business environment operate changes defined critical accounting estimate one important portrayal either financial condition results operations requires us make difficult subjective complex judgments estimates matters uncertain auditethics committee board directors reviewed critical accounting estimates disclosure presented past three fiscal years made material changes methodology used establish critical accounting estimates believe following critical accounting estimates used preparation consolidated financial statements items within consolidated financial statements require estimation judgment deemed critical defined allowance doubtful accounts determination collectability amounts due customers requires us make judgments estimates regarding customers ability pay amounts due us order determine amount valuation allowances required doubtful accounts monitor customers payment history current credit worthiness determine collectability reasonably assured also consider overall business climate customers operate provisions doubtful accounts recorded based aging status customer accounts becomes evident customer make required payments either contractual due dates future december 31 2016 2015 allowance doubtful accounts totaled 509 million 18 383 million 11 total gross accounts receivable respectively believe allowance doubtful accounts adequate cover potential bad debt losses current conditions however uncertainties regarding changes financial condition customers either adverse positive could impact amount timing additional provisions doubtful accounts may required five percent change allowance doubtful accounts would impact income loss income taxes approximately 25 million 2016 inventory reserves inventory significant component current assets stated lower cost net realizable value requires us record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments estimates forecasts inherently include uncertainties require us make judgments regarding potential future outcomes december 31 2016 2015 inventory reserves totaled 188 million 9 278 million 9 gross inventory respectively 2016 wrote carrying value certain excess inventory resulting charges 583 million amount net existing reserves 272 million believe reserves adequate properly value potential excess slow moving obsolete inventory current conditions significant unanticipated changes estimates forecasts could impact amount timing additional provisions excess slow moving obsolete inventory may required five percent change inventory reserve balance would impact income loss income taxes approximately 9 million 2016 goodwill longlived assets purchase price acquired businesses allocated identifiable assets liabilities based upon estimated fair values acquisition date goodwill excess purchase price fair value tangible identifiable intangible assets liabilities acquired business acquisition goodwill december 31 2016 2015 totaled 408 billion 607 billion respectively perform annual impairment test goodwill qualitative quantitative basis reporting units october 1 year frequently circumstances indicate impairment may exist reporting unit level reporting units five reportable segments performing annual impairment test option performing qualitative quantitative assessment determine impairment occurred qualitative assessment indicates likely fair value reporting unit less carrying amount would required perform quantitative impairment test goodwill tested impairment using twostep approach first step fair value reporting unit determined compared reporting units carrying value including goodwill fair value reporting unit less carrying value second step goodwill impairment test performed measure amount impairment second step fair value reporting unit allocated assets liabilities reporting unit acquired business combination purchase price equivalent fair value reporting unit excess fair value reporting unit amounts assigned assets liabilities referred implied fair value goodwill implied fair value reporting units goodwill compared actual carrying value goodwill implied fair value goodwill less carrying value goodwill impairment loss recognized difference determining carrying amount reporting units corporate assets liabilities allocated extent relate operations reporting units necessary calculate fair value reporting unit using various valuation techniques including market approach comparable transactions approach discounted cash flow dcf methodology market approach comparable transactions approach provide value indications company comparison guideline public companies guideline transactions respectively entail selecting relevant financial information subject company capitalizing amounts using valuation multiples based empirical market observations dcf methodology includes limited assumptions regarding matters discount rates anticipated growth rates expected profitability rates timing expected future cash flows unanticipated changes including even small revisions assumptions could result provision impairment future period addition decline stock price could result impairment given nature evaluations application specific assets timeframes possible reasonably quantify impact changes assumptions second quarter 2016 result termination merger agreement halliburton concluded necessary conduct quantitative assessment potential goodwill impairment determined goodwill two reporting units impaired quantitative assessment calculated using combination market discounted cash flow approaches result recorded impairment charge 186 billion 155 billion pertained north america reporting unit 309 million pertained industrial services see note 12 goodwill intangible assets notes consolidated financial statements item 8 herein description addition quantitative assessment performed second quarter 2016 consistent policy stated also performed annual goodwill impairment test reporting units october 1 2016 assessment performed qualitative basis included consideration changes industry market conditions since performance quantitative analysis second quarter 2016 based assessment determined additional impairment goodwill necessary fourth quarter 2016 2015 2014 performed qualitative assessment annual goodwill impairment test determined impairments goodwill necessary 2015 2014 longlived assets include property equipment intangible assets goodwill certain assets comprise significant amount total assets review carrying values assets impairment periodically least annually certain intangible assets whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make judgments regarding longterm forecasts future revenue costs cash flows related assets subject review forecasts uncertain require assumptions demand products services future market conditions technological developments see note 4 impairment restructuring charges notes consolidated financial statements item 8 herein discussion impairment certain property equipment intangible assets recorded 2016 2015 income taxes liability method used determining income tax provisions current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered valuation allowances established reduce deferred tax assets likely portion deferred tax assets realized determining need valuation allowances considered made judgments estimates regarding estimated future taxable income ongoing prudent feasible tax planning strategies estimates judgments include degree uncertainty changes estimates assumptions could require us adjust valuation allowances deferred tax assets historically changes valuation allowances caused major changes business cycle certain countries changes local country law ultimate realization deferred tax assets depends generation sufficient taxable income applicable taxing jurisdictions conduct business 80 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different jurisdictions taxed various bases including actual income taxes deemed profits generally determined using percentage revenue rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability taxing jurisdiction could impact amount income taxes provide given year tax filings various periods subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings resulting change tax liability dependent numerous factors including among others amount nature additional taxes potentially asserted local tax authorities willingness local tax authorities negotiate fair settlement administrative process impartiality local courts number countries business potential changes tax paid one country either produce fail produce offsetting tax change countries experience estimates assumptions used provide future tax assessments proven appropriate however past experience guide potential exists tax resulting resolution current potential future tax controversies may differ materially amount accrued addition aforementioned assessments received various tax authorities also provide taxes uncertain tax positions formal assessments received determination liabilities requires use estimates assumptions regarding future events established adjust amounts information available future event occurs necessitating change reserves changes facts law judicial decisions regarding application existing law favorable audit outcome believe resolution tax matters material effect consolidated financial condition company although resolution could material impact consolidated statements income loss particular period effective tax rate period resolution occurs pensions postretirement benefit obligations pensions postretirement benefit obligations related expenses calculated using actuarial models methods involves use two critical assumptions discount rate expected rate return assets important elements determining pension expense measuring plan liabilities evaluate critical assumptions least annually necessary utilize thirdparty actuarial firms assist us although considered less critical assumptions used determining benefit obligations related expenses demographic factors like retirement age mortality turnover also evaluated periodically updated reflect actual expected experience discount rate enables us determine expected future cash flows present value measurement date development discount rate largest plans based bond matching model whereby cash flows underlying projected benefit obligation matched yield curve constructed bond portfolio highquality fixedincome securities use lower discount rate would increase present value benefit obligations increase pension expense used weighted average discount rate 39 2016 36 2015 45 2014 determine pension expense 50 basis point reduction weighted average discount rate would increased pension expense principal pension plans approximately 1 million 2016 determine expected rate return plan assets consider current target asset allocations well historical expected future returns various categories plan assets lower rate return would decrease plan assets results higher pension expense assumed weighted average expected rate return plan assets 59 2016 68 2015 67 2014 50 basis point reduction weighted average expected rate return assets principal pension plans would increased pension expense approximately 6 million 2016 new accounting standards see note 1 summary significant accounting policies notes consolidated financial statements item 8 herein discussion accounting standards adopted related party transactions significant related party transactions three years ended december 31 2016 forwardlooking statements form 10k including mda certain statements notes consolidated financial statements contains forwardlooking statements within meaning section 27a securities act 1933 amended section 21e exchange act 1934 amended forwardlooking statement words anticipate believe ensure expect intend estimate probable project forecasts predict outlook aim could would potential may likely similar expressions negative thereof intended identify forwardlooking statements forwardlooking statements based assumptions believe reasonable may prove accurate statements include potential impact future transactions acquisition disposition merger joint venture transaction could occur including pending merger ge undertake obligation publicly update revise forwardlooking statement expectations regarding business outlook including changes revenue pricing capital spending profitability strategies operations impact common stock repurchases oil natural gas market conditions business plans customers market share contract terms costs availability resources legal economic regulatory conditions environmental matters forecasts regarding matters forwardlooking information subject risks uncertainties could cause actual results differ materially results expected although possible identify risk factors risks uncertainties include factors timing factors identified annual report item 1a risk factors item 7 managements discussion analysis financial condition results operations set forth time filings sec documents available website secs electronic data gathering analysis retrieval edgar system httpwwwsecgov light risks uncertainties caution place undue reliance forwardlooking statements forwardlooking statements speak date annual report earlier date made intend disclaim obligation update revise forwardlooking statements unless required securities law item 7a nannannanitem 7a quantitative qualitative disclosures market risk information set forth subcaption quantitative qualitative market risk disclosures mda incorporated herein reference item 8nanitem 7a quantitative qualitative disclosures market risk company exposed certain market risks inherent companys financial instruments arise normal course business company may enter derivative financial instrument transactions manage reduce market risk company enter derivative financial instrument transactions speculative purposes discussion companys primary market risk exposure financial instruments presented longterm debt company subject interest rate risk longterm fixed interest rate debt commercial paper borrowings shortterm borrowings variable rate longterm debt give rise significant interest rate risk borrowings either maturities less three months variable interest rates things equal fair market value companys debt fixed interest rate increase amount required retire debt today increase interest rates fall fair market value decrease interest rates rise exposure interest rate risk managed borrowing money variable interest rate using interest rate swaps change fixed interest rate borrowings variable interest rate borrowings generally company maintains 50 65 total borrowings variable interest rates december 31 1999 company fixed rate debt aggregating 20 billion variable rate debt aggregating 08 billion following table sets forth december 31 1999 1998 companys principal cash flows longterm debt obligations bear fixed rate interest denominated us dollars related weighted average effective interest rates expected maturity dates additionally table sets forth notional amounts weighted average interest rates companys interest rate swaps expected maturity dollar amounts millions 1 includes liquid yield option notes accreted value 2857 million 2755 million december 31 1999 1998 respectively 2 sixmonth libor plus 201 settled semiannually swap matured january 2000 3 average sixmonth libor japanese yen euro swiss franc plus 316 4 fair market value longterm debt 17969 million 11148 million december 31 1999 1998 respectively 5 fair market value interest rate swaps 138 million payable 16 million receivable december 31 1999 1998 respectively included table thereafter column companys liquid yield option notes lyons convertible company common stock option holder fair value lyons determined addition changes interest rates changes market price companys common stock holding interest rates constant 20 decline market price companys common stock would cause fair value lyons december 31 1999 decrease comparable percentage amount lyons currently trade like debt instrument equity instrument occurs market price companys common stock december 31 1999 2106 significantly lyons conversion price 4024 investments companys investment common stock common stock warrants tuboscope inc tuboscope subject equity price risk common stock tuboscope traded new york stock exchange warrants buy shares tuboscope common stock derive value part market value tuboscope common stock company intends sell holdings tuboscope accordingly securities held company investment classified trading securities reported fair market value unrealized gains losses included earnings december 31 1999 1998 fair market value companys investment common stock common stock warrants tuboscope 587 million 269 million respectively tuboscope common stock valued closing price december 31 1999 1998 respectively reported new york stock exchange warrants valued using blackscholes optionpricing model actions taken company hedge market risk exposure 20 decline market price tuboscope common stock would cause fair market value investment common stock common stock warrants tuboscope decrease 139 million december 31 1999 foreign currency companys operations conducted around world number different currencies future earnings subject change due changes foreign currency exchange rates transactions denominated currencies companys functional currencies primary currencies company conducts business various jurisdictions general rule company hedges part future earnings exposure believes risk loss greater cost associated hedge december 31 1999 company norwegian krone denominated commitments 393 million related purchase seismic vessel december 31 1998 company norwegian krone denominated commitments 814 million related purchase two seismic vessels company entered forward exchange contracts notional amounts 395 million december 31 1999 889 million december 31 1998 hedge commitments december 31 1999 fair market value contracts 393 million resulting unrealized loss 02 million addition december 31 1999 company australian dollar denominated commitments 75 million primarily related longterm equipment purchase commitment company entered forward exchange contracts notional amounts 71 million hedge substantially commitment unrealized gain forward exchange contracts december 31 1999 04 million december 31 1999 company japanese yen denominated accounts receivable 08 million related sales agreement december 31 1999 company entered forward exchange contract fair market value 07 million hedge collection notional amounts used express volume transactions represent exposure loss carrying value contracts significant foreign currency gains losses purchases deferred become part basis assets counterparties companys forward contracts major financial institutions credit ratings concentration risk financial institutions monitored continuing basis managements opinion present significant credit risk company unlikely event counterparties fail meet terms foreign currency contract companys exposure limited foreign currency spot rate differential certain borrowings company denominated currencies functional currency december 31 1999 nonfunctional currency borrowings totaled 19 million primary exposure us dollar danish krone 10 appreciation us dollar currencies would significant effect future earnings company item 8item 7a quantitative qualitative disclosures market risk company exposed certain market risks inherent companys financial instruments arise normal course business company may enter derivative financial instrument transactions manage reduce market risk company enter derivative financial instrument transactions speculative purposes discussion companys primary market risk exposure financial instruments presented longterm debt company subject interest rate risk longterm fixed interest rate debt commercial paper borrowings shortterm borrowings variable rate longterm debt give rise significant interest rate risk borrowings either maturities less three months variable interest rates things equal fair market value companys debt fixed interest rate increase amount required retire debt today increase interest rates fall fair market value decrease interest rates rise exposure interest rate risk managed borrowing money variable interest rate using interest rate swaps change fixed interest rate borrowings variable interest rate borrowings december 31 2000 company fixed rate debt aggregating 18 billion variable rate debt aggregating 03 billion following table sets forth december 31 2000 1999 companys principal cash flows longterm debt obligations bear fixed rate interest denominated us dollars related weighted average effective interest rates expected maturity dates additionally table sets forth notional amounts weighted average interest rates companys interest rate swaps expected maturity dollar amounts millions 1 fair market value longterm debt 18743 million 18015 million december 31 2000 1999 respectively 2 fair market value interest rate swaps 96 million liability 138 million liability december 31 2000 1999 respectively 3 sixmonth libor plus 201 settled semiannually swap matured january 2000 4 includes liquid yield option notes accreted value 2962 million 2857 million december 31 2000 1999 respectively 5 average sixmonth libor japanese yen euro swiss franc plus 316 included table thereafter column companys liquid yield option notes lyons convertible companys common stock option holder lyons may redeemed cash may 5 2003 redemption price equal issue price plus accrued original issue discount date redemption company expect holders redeem lyons cash may 2003 long companys common stock trades levels conversion price market price companys common stock december 31 2000 4156 lyons conversion price 4180 investments 2000 company sold investment common stock common stock warrants varco average price 1870 per share total proceeds sale companys investment common stock warrants 727 million crude oil hedges september 15 2000 company entered two crude oil contracts costless collars hedge price risk associated companys interest oil producing property nigeria contracts use wtinymex reference commodity establish cap 3500 floor 2700 three month period ending march 31 2001 cap 3300 floor 2700 three month period ending june 30 2001 respectively fair value contracts december 31 2000 results 31 million asset foreign currency companys operations conducted number different countries around world future earnings subject change due changes foreign currency exchange rates transactions denominated currencies companys functional currencies primary currencies company conducts business various jurisdictions december 31 2000 company entered foreign currency forward contract notional amount 500 million hedge exposure currency fluctuations british pound december 31 2000 fair market value forward contract based yearend quoted market prices contracts similar terms maturity dates 15 million asset foreign currency gains losses hedges exposure currency fluctuations marked market changes fair value included current period income counterparties companys forward contracts major financial institutions credit ratings concentration risk financial institutions monitored continuing basis managements opinion present significant credit risk company unlikely event counterparties fail meet terms foreign currency contract companys exposure limited foreign currency spot rate differential certain borrowings company denominated currencies functional currency december 31 2000 nonfunctional currency borrowings totaled 74 million exposures us dollar british pound saudi riyal malaysian ringgit 10 movement us dollar currencies would significant effect future earnings company item 8item 7a quantitative qualitative disclosures market risk company exposed certain market risks inherent companys financial instruments arise normal course business company may enter derivative financial instrument transactions manage reduce market risk company enter derivative financial instrument transactions speculative purposes discussion companys primary market risk exposure financial instruments presented longterm debt company subject interest rate risk longterm fixed interest rate debt commercial paper borrowings shortterm borrowings variable rate longterm debt give rise significant interest rate risk borrowings either maturities less three months variable interest rates things equal fair market value companys debt fixed interest rate increase interest rates fall fair market value decrease interest rates rise exposure interest rate risk managed borrowing money variable interest rate using interest rate swaps change fixed interest rate borrowings variable interest rate borrowings december 31 2001 company fixed rate debt aggregating 15249 million variable rate debt aggregating 1697 million following table sets forth december 31 2001 2000 companys principal cash flows longterm debt obligations bear fixed rate interest denominated us dollars related weighted average effective interest rates expected maturity dates additionally table sets forth notional amounts weighted average interest rates companys interest rate swaps expected maturity dollar amounts millions 1 fair market value longterm debt 15769 million 18743 million december 31 2001 2000 respectively 2 fair market value interest rate swaps 13 million asset 96 million liability december 31 2001 2000 respectively 3 includes liquid yield options notes lyons accreted value 2962 million december 31 2000 lyons redeemed cash may 2001 4 average sixmonth libor japanese yen euro swiss franc plus 316 5 threemonth libor plus 27625 investments 2000 company sold investment common stock common stock warrants varco average price 1870 per share total proceeds sale companys investment common stock warrants 727 million crude oil contracts year ended december 31 2001 company entered two crude oil contracts mitigate price risk associated production companys interest oil producing property nigeria based companys outlook crude oil prices company elected terminate contracts prior maturity dates accordingly contracts terminated october 3 2001 company received cash payment 44 million accordance sfas 133 net gain recognized earnings 2001 crude oil contracts 31 million reported revenue consolidated statements operations year ended december 31 2000 company entered two contracts mitigate price risk associated companys interest oil producing property nigeria fair value contracts december 31 2000 31 million unrecorded asset foreign currency foreign currency forward contracts companys operations conducted around world number different currencies majority companys foreign subsidiaries designated local currency functional currency future earnings subject change due changes foreign currency exchange rates transactions denominated currencies companys functional currencies minimize need foreign currency contracts company generally able manage foreign currency exposure maintaining minimal consolidated net asset net liability position currency functional currency december 31 2001 company entered foreign currency forward contracts notional amounts 85 million 10 million 07 million hedge exposure currency fluctuations canadian dollar indonesian rupiah euro respectively contracts cash flow hedges based yearend quoted market prices contracts similar terms maturity dates asset liability recorded forward price substantially contract price december 31 2000 company entered foreign currency forward contracts notional amounts 500 million 03 million 02 million hedge exposure fluctuations british pound south african rand euro respectively fair market value forward contracts 15 million unrecorded asset counterparties companys forward contracts major financial institutions credit ratings concentration risk financial institutions monitored continuing basis unlikely event counterparties fail meet terms foreign currency contract companys exposure limited foreign currency rate differential certain borrowings company denominated currencies functional currency december 31 2001 nonfunctional currency borrowings totaled 148 million exposures us dollar euro saudi riyal brazilian real thai baht malaysian ringgit 10 depreciation us dollar currencies would material adverse effect future earnings company item 8item 7a quantitative qualitative disclosures market risk company exposed certain market risks inherent companys financial instruments arise normal course business company may enter derivative financial instrument transactions manage reduce market risk company enter derivative financial instrument transactions speculative purposes discussion companys primary market risk exposure financial instruments presented longterm debt company subject interest rate risk longterm fixed interest rate debt commercial paper borrowings shortterm borrowings variable rate longterm debt give rise significant interest rate risk borrowings either maturities less three months variable interest rates things equal fair market value companys debt fixed interest rate increase interest rates fall decrease interest rates rise exposure interest rate risk managed borrowing money variable interest rate using interest rate swaps change fixed interest rate borrowings variable interest rate borrowings december 31 2002 company fixed rate debt aggregating 15246 million variable rate debt aggregating 232 million following table sets forth december 31 2002 2001 companys principal cash flow requirements longterm debt obligations bear fixed rate interest denominated us dollars related weighted average effective interest rates expected maturity dates additionally table sets forth notional amounts weighted average effective interest rates companys interest rate swaps expected maturity dollar amounts millions 1 fair market value longterm debt 16799 million december 31 2002 15769 million december 31 2001 2 fair market value interest rate swaps 13 million asset december 31 2001 3 threemonth libor plus 27625 4 average sixmonth libor japanese yen euro swiss franc plus 316 interest rate swap agreements company two interest rate swap agreements designated qualified fair value hedging instruments due companys outlook interest rates company terminated two agreements received payments totaling 158 million upon cancellation 2002 deferred gains 48 million 110 million agreements amortized reduction interest expense remaining lives underlying debt securities mature june 2004 january 2009 respectively crude oil contracts year ended december 31 2002 company entered two crude oil contracts mitigate price risk associated production companys interest oil producing property west africa gain loss recognized contracts expired december 31 2002 year ended december 31 2001 company entered two crude oil contracts mitigate price risk associated production west african oil property based companys outlook crude oil prices company elected terminate contracts prior maturity dates accordingly contracts terminated october 3 2001 company received cash payment 44 million net gain recognized earnings 2001 crude oil contracts 31 million reported part discontinued operations consolidated statements operations foreign currency foreign currency forward contracts companys operations conducted around world number different currencies majority companys significant foreign subsidiaries designated local currency functional currency future earnings subject change due changes foreign currency exchange rates transactions denominated currencies companys functional currencies minimize need foreign currency contracts companys objective manage foreign currency exposure maintaining minimal consolidated net asset net liability position currency functional currency december 31 2002 company entered foreign currency hedge notional amount 200 million hedge exposure fluctuations british pound sterling contract cash flow hedge based yearend quoted market prices contracts similar terms maturity dates asset liability recorded forward price substantially contract price december 31 2001 company entered foreign currency forward contracts notional amounts 85 million 10 million 07 million hedge exposure currency fluctuations canadian dollar indonesian rupiah euro respectively contracts cash flow hedges based yearend quoted market prices contracts similar terms maturity dates asset liability recorded forward prices substantially contract prices counterparties companys forward contracts major financial institutions credit ratings concentration risk financial institutions monitored continuing basis unlikely event counterparties fail meet terms foreign currency contract companys exposure limited foreign currency rate differential item 8item 7a quantitative qualitative disclosures market risks exposed certain market risks inherent financial instruments arise normal course business may enter derivative financial instrument transactions manage reduce market risk enter derivative financial instrument transactions speculative purposes discussion primary market risk exposure financial instruments presented indebtedness subject interest rate risk longterm fixed interest rate debt commercial paper borrowings shortterm borrowings variable rate longterm debt give rise significant interest rate risk borrowings either maturities less three months variable interest rates things equal fair market value debt fixed interest rate increase interest rates fall decrease interest rates rise exposure interest rate risk managed borrowing money variable interest rate using interest rate swaps change fixed interest rate borrowings variable interest rate borrowings december 31 2003 fixed rate debt aggregating 14256 million variable rate debt aggregating 384 million following table sets forth december 31 2003 2002 principal cash flow requirements indebtedness bear fixed rate interest denominated us dollars related weighted average effective interest rates expected maturity dates dollar amounts millions interest rate swap agreements different times 2003 entered three separate interest rate swap agreements notional amount 3250 million associated 625 notes due january 2009 agreements designated qualified fair value hedging instruments due outlook interest rates terminated three agreements received payments totaling 269 million three agreements terminated prior entering new agreement deferred gains amortized reduction interest expense remaining life underlying debt security matures january 2009 2002 terminated two interest rate swap agreements entered prior years agreements designated qualified fair value hedging instruments upon termination received proceeds totaling 158 million deferred gains 48 million 110 million amortized reduction interest expense remaining lives underlying debt securities mature june 2004 january 2009 respectively foreign currency foreign currency forward contracts conduct operations around world number different currencies majority significant foreign subsidiaries designated local currency functional currency future earnings subject change due changes foreign currency exchange rates transactions denominated currencies functional currencies minimize need foreign currency forward contracts hedge exposure objective manage foreign currency exposure maintaining minimal consolidated net asset net liability position currency functional currency december 31 2003 entered several foreign currency forward contracts notional amounts aggregating 625 million hedge exposure currency fluctuations various foreign currencies including british pound sterling norwegian krone euro brazilian real argentine peso contracts designated qualify fair value hedging instruments based quoted market prices december 31 2003 contracts similar terms maturity dates recorded gain 15 million adjust foreign currency forward contracts fair market value gain offsets designated foreign exchange losses resulting underlying exposures included selling general administrative expense consolidated statement operations december 31 2002 entered foreign currency forward contract notional amount 200 million hedge exposure fluctuations british pound sterling contract cash flow hedge based yearend quoted market prices contracts similar terms maturity dates asset liability recorded forward price substantially contract price counterparties forward contracts major financial institutions credit ratings concentration risk financial institutions monitored continuing basis unlikely event counterparties fail meet terms foreign currency contract exposure limited foreign currency rate differential item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks inherent financial instruments arise normal course business may enter derivative financial instrument transactions manage reduce market risk enter derivative financial instrument transactions speculative purposes discussion primary market risk exposure financial instruments presented indebtedness subject interest rate risk longterm fixed interest rate debt commercial paper borrowings shortterm borrowings variable rate longterm debt give rise significant interest rate risk borrowings either maturities less three months variable interest rates things equal fair market value debt fixed interest rate increase interest rates fall decrease interest rates rise exposure interest rate risk managed borrowing money variable interest rate using interest rate swaps change fixed interest rate borrowings variable interest rate borrowings december 31 2005 2004 fixed rate debt aggregating 10750 million 10752 million respectively following table sets forth required cash payments indebtedness bear fixed rate interest denominated us dollars related weighted average effective interest rates expected maturity dates december 31 2005 2004 dollar amounts millions interest rate swap agreements december 31 2005 interest rate swap agreements effect due outlook interest rates june 2 2005 terminated interest rate swap agreement entered april 2004 agreement designated qualified fair value hedging instrument upon termination required pay 55 million amount amortized increase interest expense remaining life underlying debt security matures january 2009 april 2004 entered interest rate swap agreement notional amount 3250 million associated 625 notes due january 2009 agreement received interest fixed rate 625 paid interest floating rate sixmonth libor plus spread 2741 interest rate swap agreement designated qualified fair value hedging instrument interest rate swap agreement fully effective resulting gain loss recorded consolidated statement operations recorded fair value interest rate swap agreement 23 million liability december 31 2004 based quoted market prices contracts similar terms maturity dates foreign currency foreign currency forward contracts conduct operations around world number different currencies many significant foreign subsidiaries designated local currency functional currency future earnings subject change due fluctuations foreign currency exchange rates transactions denominated currencies functional currencies minimize need foreign currency forward contracts hedge exposure objective manage foreign currency exposure maintaining minimal consolidated net asset net liability position currency functional currency december 31 2005 entered several foreign currency forward contracts notional amounts aggregating 650 million hedge exposure currency fluctuations various foreign currency payables receivables including british pound sterling norwegian krone euro brazilian real contracts designated qualify fair value hedging instruments based quoted market prices december 31 2005 contracts similar terms maturity dates recorded gain 01 million adjust foreign currency forward contracts fair market value gain offsets designated foreign exchange losses resulting underlying exposures included selling general administrative expense consolidated statement operations december 31 2004 entered several foreign currency forward contracts notional amounts aggregating 780 million hedge exposure currency fluctuations various foreign currency payables receivables including british pound sterling norwegian krone euro brazilian real contracts designated qualified fair value hedging instruments based quoted market prices december 31 2004 contracts similar terms maturity dates recorded loss 04 million adjust foreign currency forward contracts fair market value loss offsets designated foreign exchange gains resulting underlying exposures included selling general administrative expense consolidated statement operations december 31 2004 also entered several foreign currency forward contracts notional amounts aggregating 1224 million hedge exposure currency fluctuations various foreign currencies including british pound sterling canadian dollar exposures arise local currency operating expenses balance local currency revenue collections funding imbalances supported shortterm intercompany borrowing commitments definitive amounts funding dates funding took place december 31 2005 foreign currency forward contracts designated cash flow hedging instruments fully effective based quoted market prices december 31 2004 contracts similar terms maturity dates recorded loss 01 million adjust foreign currency forward contracts fair market value loss recorded comprehensive income consolidated balance sheet counterparties forward contracts major financial institutions credit ratings concentration risk financial institutions monitored continuing basis unlikely event counterparties fail meet terms foreign currency contract exposure limited foreign currency rate differential item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks inherent financial instruments arise changes interest rates foreign currency exchange rates may enter derivative financial instrument transactions manage reduce market risk enter derivative financial instrument transactions speculative purposes discussion primary market risk exposure financial instruments presented interest rate risk indebtedness subject interest rate risk longterm fixed interest rate debt commercial paper borrowings shortterm borrowings variable rate longterm debt give rise significant interest rate risk borrowings either maturities less three months variable interest rates similar interest rates receive shortterm investments things equal fair market value debt fixed interest rate increase interest rates fall decrease interest rates rise exposure interest rate risk managed borrowing money variable interest rate using interest rate swaps change fixed interest rate borrowings variable interest rate borrowings december 31 2007 december 31 2006 interest rate swap agreements effect fixed rate debt aggregating 10750 million december 31 2007 2006 following table sets forth required cash payments indebtedness bear fixed rate interest denominated us dollars related weighted average effective interest rates expected maturity dates december 31 2007 2006 dollar amounts millions foreign currency foreign currency forward contracts conduct operations around world number different currencies number significant foreign subsidiaries designated local currency functional currency future earnings subject change due fluctuations foreign currency exchange rates transactions denominated currencies functional currencies minimize need foreign currency forward contracts hedge exposure objective manage foreign currency exposure maintaining minimal consolidated net asset net liability position currency functional currency extent market conditions andor local regulations prevent us maintaining minimal consolidated net asset net liability position may enter foreign currency forward contracts option contracts december 31 2007 entered several foreign currency forward contracts notional amounts aggregating 1150 million hedge exposure currency fluctuations various foreign currency denominated accounts payable accounts receivable including british pound sterling norwegian krone euro brazilian real contracts designated qualify fair value hedging instruments based quoted market prices december 31 2007 contracts similar terms maturity dates recorded gain 11 million adjust foreign currency forward contracts fair market value gain offsets designated foreign currency exchange losses resulting underlying exposures included marketing general administrative expense consolidated statement operations december 31 2007 entered option contracts notional amounts aggregating 200 million hedge fluctuations russian ruble exchange rate contracts designated hedging instruments based quoted market prices december 31 2007 contracts similar terms maturity dates recorded loss 03 million adjust carrying value contracts fair market value loss included marketing general administrative expense consolidated statement operations december 31 2006 entered several foreign currency forward contracts notional amounts aggregating 1050 million hedge exposure currency fluctuations various foreign currency payables receivables including british pound sterling norwegian krone euro indonesian rupiah brazilian real contracts designated qualified fair value hedging instruments based quoted market prices december 31 2006 contracts similar terms maturity dates recorded loss 02 million adjust foreign currency forward contracts fair market value loss offsets designated foreign currency exchange gains resulting underlying exposures included marketing general administrative expense consolidated statement operations counterparties foreign currency forward contracts major financial institutions credit ratings concentration risk financial institutions monitored continuing basis unlikely event counterparties fail meet terms foreign currency contract exposure limited foreign currency exchange rate differential item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks inherent financial instruments arise changes interest rates foreign currency exchange rates may enter derivative financial instrument transactions manage reduce market risk enter derivative financial instrument transactions speculative purposes discussion primary market risk exposure financial instruments presented interest rate risk indebtedness subject interest rate risk longterm fixed interest rate debt commercial paper borrowings shortterm borrowings variable rate longterm debt give rise significant interest rate risk borrowings either maturities less three months variable interest rates similar interest rates receive shortterm investments things equal fair market value debt fixed interest rate increase interest rates fall decrease interest rates rise exposure interest rate risk managed borrowing money variable interest rate using interest rate swaps change fixed interest rate borrowings variable interest rate borrowings december 31 2008 december 31 2007 interest rate swap agreements effect fixed rate debt aggregating 2325 million december 31 2008 1075 million december 31 2007 following table sets forth required cash payments indebtedness bear fixed rate interest denominated us dollars related weighted average effective interest rates expected maturity dates december 31 2008 2007 dollar amounts millions foreign currency foreign currency forward contracts conduct operations around world number different currencies number significant foreign subsidiaries designated local currency functional currency future earnings subject change due fluctuations foreign currency exchange rates transactions denominated currencies subsidiaries respective functional currencies minimize need foreign currency forward contracts hedge exposure objective manage foreign currency exposure maintaining minimal consolidated net asset net liability position currency functional currency extent market conditions andor local regulations prevent us maintaining minimal consolidated net asset net liability position may enter foreign currency forward contracts option contracts december 31 2008 entered several foreign currency forward contracts notional amounts aggregating 125 million hedge exposure currency fluctuations various foreign currency denominated accounts payable accounts receivable including british pound sterling norwegian krone euro brazilian real contracts designated qualify fair value hedging instruments based quoted market prices december 31 2008 contracts similar terms maturity dates recorded loss 05 million adjust foreign currency forward contracts fair market value loss offsets designated foreign currency exchange gains resulting underlying exposures included mga expenses consolidated statement operations december 31 2007 entered several foreign currency forward contracts notional amounts aggregating 115 million hedge exposure currency fluctuations various foreign currency denominated accounts payable accounts receivable including british pound sterling norwegian krone euro brazilian real contracts designated qualify fair value hedging instruments based quoted market prices december 31 2007 contracts similar terms maturity dates recorded gain 1 million adjust foreign currency forward contracts fair market value gain offsets designated foreign currency exchange losses resulting underlying exposures included mga expenses consolidated statement operations december 31 2007 entered option contracts notional amounts aggregating 20 million hedge fluctuations russian ruble exchange rate contracts designated hedging instruments based quoted market prices december 31 2007 contracts similar terms maturity dates recorded loss 03 million adjust carrying value contracts fair market value loss included mga expenses consolidated statement operations counterparties foreign currency forward contracts major financial institutions credit ratings concentration risk financial institutions monitored continuing basis event counterparties fail meet terms foreign currency contract exposure limited foreign currency exchange rate differential item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks inherent financial instruments arise changes interest rates foreign currency exchange rates may enter derivative financial instrument transactions manage reduce market risk enter derivative financial instrument transactions speculative purposes discussion primary market risk exposure financial instruments presented interest rate risk indebtedness subject interest rate risk longterm fixed interest rate debt commercial paper borrowings shortterm borrowings variable rate longterm debt give rise significant interest rate risk borrowings either maturities less three months variable interest rates similar interest rates receive shortterm investments things equal fair market value debt fixed interest rate increase interest rates fall decrease interest rates rise exposure interest rate risk managed borrowing money variable interest rate using interest rate swaps change fixed interest rate borrowings variable interest rate borrowings interest rate swap agreements june 2009 entered two interest rate swap agreements “the swap agreements” notional amount 250 million order hedge changes fair market value 500 million 65 senior notes maturing november 15 2013 swap agreements receive interest fixed rate 65 pay interest floating rate onemonth libor plus spread 367 one swap threemonth libor plus spread 354 second swap november 15 2013 swap agreements designated qualifies fair value hedging instrument fair value swap agreements december 31 2009 7 million asset based quoted market prices contracts similar terms maturity dates financial institutions counterparties swap agreements primarily lenders credit facilities terms credit support documents governing swap agreements relevant party post collateral event party’s longterm debt rating falls investment grade longer rated indebtedness fixed rate debt aggregating 1800 million december 31 2009 2325 million december 31 2008 following table sets forth required cash payments indebtedness bear fixed rate interest denominated us dollars related weighted average effective interest rates expected maturity dates december 31 2009 2008 dollar amounts millions foreign currency foreign currency forward contracts conduct operations around world number different currencies majority significant foreign subsidiaries designated local currency functional currency future earnings subject change due fluctuations foreign currency exchange rates transactions denominated currencies functional currencies minimize need foreign currency forward contracts hedge exposure objective manage foreign currency exposure maintaining minimal consolidated net asset net liability position currency functional currency january 2010 venezuela’s currency devalued new currency exchange rate system announced new rate 43 venezuelan bolivars fuertes per us dollar apply local currency denominated balances transactions although functional currency us dollar venezuela certain balances transactions denominated local currency estimate impact devaluation loss 8 million 10 million recorded first quarter 2010 going forward although devaluation result reduction us dollar reported amount local currency denominated revenues expenses believe impact material consolidated financial statements foreign currency forward contracts december 31 2009 outstanding foreign currency forward contracts notional amounts aggregating 153 million hedge exposure currency fluctuations various foreign currencies contracts designated qualify fair value hedging instruments based quoted market prices december 31 2009 contracts similar terms maturity dates recorded loss 1 million adjust foreign currency forward contracts fair market value loss offsets designated foreign currency exchange gains resulting underlying exposures included mga expenses consolidated statement operations december 31 2008 outstanding foreign currency forward contracts notional amounts aggregating 125 million hedge exposure currency fluctuations various foreign currencies contracts designated qualify fair value hedging instruments based quoted market prices december 31 2008 contracts similar terms maturity dates recorded loss 1 million adjust foreign currency forward contracts fair market value loss offsets designated foreign currency exchange gains resulting underlying exposures included mga expenses consolidated statement operations item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks inherent financial instruments arise changes interest rates foreign currency exchange rates may enter derivative financial instrument transactions manage reduce market risk enter derivative financial instrument transactions speculative purposes discussion primary market risk exposure financial instruments presented interest rate risk indebtedness subject interest rate risk longterm fixed interest rate debt commercial paper borrowings shortterm borrowings variable rate longterm debt give rise significant interest rate risk borrowings either maturities less three months variable interest rates similar interest rates receive shortterm investments things equal fair market value debt fixed interest rate increase interest rates fall decrease interest rates rise exposure interest rate risk managed borrowing money variable interest rate using interest rate swaps change fixed interest rate borrowings variable interest rate borrowings interest rate swap agreements june 2009 entered two interest rate swap agreements “swap agreements” notional amount 250 million order hedge changes fair market value 500 million 65 senior notes maturing november 15 2013 swap agreements receive interest fixed rate 65 pay interest floating rate onemonth libor plus spread 367 one swap threemonth libor plus spread 354 second swap november 15 2013 swap agreements designated qualifies fair value hedging instrument fair value swap agreements december 31 2010 24 million asset based quoted market prices contracts similar terms maturity dates financial institutions counterparties swap agreements primarily lenders credit facilities terms credit support documents governing swap agreements relevant party post collateral event party’s longterm debt rating falls investment grade longer rated indebtedness fixed rate debt aggregating 3800 million december 31 2010 1800 million december 31 2009 following table sets forth required cash payments indebtedness bear fixed rate interest denominated us dollars related weighted average effective interest rates expected maturity dates december 31 2010 2009 foreign currency foreign currency forward contracts conduct operations around world number different currencies many significant foreign subsidiaries designated local currency functional currency future earnings subject change due fluctuations foreign currency exchange rates transactions denominated currencies functional currencies minimize need foreign currency forward contracts hedge exposure objective manage foreign currency exposure maintaining minimal consolidated net asset net liability position currency functional currency foreign currency forward contracts december 31 2010 outstanding foreign currency forward contracts notional amounts aggregating 156 million hedge exposure currency fluctuations various foreign currencies contracts designated qualify fair value hedging instruments based quoted market prices december 31 2010 contracts similar terms maturity dates recorded loss 2 million adjust foreign currency forward contracts fair market value loss offsets designated foreign currency exchange gains resulting underlying exposures included mga expenses consolidated statement operations december 31 2009 outstanding foreign currency forward contracts notional amounts aggregating 153 million hedge exposure currency fluctuations various foreign currencies contracts designated qualify fair value hedging instruments based quoted market prices december 31 2009 contracts similar terms maturity dates recorded loss 1 million adjust foreign currency forward contracts fair market value loss offsets designated foreign currency exchange gains resulting underlying exposures included mga expenses consolidated statement operations item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks inherent financial instruments arise changes interest rates foreign currency exchange rates may enter derivative financial instrument transactions manage reduce market risk enter derivative financial instrument transactions speculative purposes discussion primary market risk exposure financial instruments presented interest rate risk indebtedness subject interest rate risk longterm fixed interest rate debt commercial paper borrowings shortterm borrowings variable rate longterm debt give rise significant interest rate risk borrowings either maturities less three months variable interest rates similar interest rates receive shortterm investments things equal fair market value debt fixed interest rate increase interest rates fall decrease interest rates rise exposure interest rate risk managed borrowing money variable interest rate using interest rate swaps change fixed interest rate borrowings variable interest rate borrowings interest rate swap agreements subject interest rate risk debt investment cash equivalents arising normal course business engage speculative trading strategies maintain interest rate management strategy primarily uses mix fixed variable rate debt intended mitigate exposure changes interest rates aggregate investment portfolio may use interest rate swaps manage economic effect fixed rate obligations associated certain debt september 2011 redeemed full 500 million 65 fixed rate senior notes maturing november 2013 consequently terminated two related interest rate swap agreements resulting net gain swap agreements 25 million two swap agreements entered june 2009 notional amount 250 million order hedge changes fair market value debt swap agreements designated qualified fair value hedging instrument indebtedness fixed rate debt aggregating 38 billion december 31 2011 december 31 2010 following table sets forth required cash payments indebtedness bear fixed rate interest denominated us dollars related weighted average interest rates expected maturity dates december 31 2011 2010 1 amounts include unamortized discounts deferred issuance costs 2 fair market value fixed rate longterm debt 4611 million december 31 2011 4218 million december 31 2010 foreign currency forward contracts conduct operations around world number different currencies many significant foreign subsidiaries designated local currency functional currency future earnings subject change due fluctuations foreign currency exchange rates transactions denominated currencies functional currencies minimize need foreign currency forward contracts hedge exposure objective manage foreign currency exposure maintaining minimal consolidated net asset net liability position currency functional currency december 31 2011 2010 outstanding foreign currency forward contracts notional amounts aggregating 117 million 156 million respectively hedge exposure currency fluctuations various foreign currencies contracts designated qualify fair value hedging instruments based quoted market prices december 31 2011 2010 contracts similar terms maturity dates recorded loss 1 million 2 million respectively adjust foreign currency forward contracts fair market value losses offset designated foreign currency exchange gains resulting underlying exposures included mga expenses consolidated statement operations item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks inherent financial instruments arise changes interest rates foreign currency exchange rates may enter derivative financial instrument transactions manage reduce market risk enter derivative financial instrument transactions speculative purposes discussion primary market risk exposure financial instruments presented interest rate risk subject interest rate risk debt investment portfolio maintain interest rate risk management strategy primarily uses mix fixed variable rate debt intended mitigate risk exposure changes interest rates aggregate may use interest rate swaps manage economic effect fixed rate obligations associated certain debt september 2011 redeemed full 500 million 65 fixed rate senior notes maturing november 2013 consequently terminated two related interest rate swap agreements resulting net gain swap agreements 25 million two swap agreements entered june 2009 notional amount 250 million order hedge changes fair market value debt swap agreements designated qualified fair value hedging instrument fixed rate longterm debt aggregating 38 billion december 31 2012 december 31 2011 following table sets forth fixed rate longterm debt related weighted average interest rates expected maturity dates december 31 2012 2011 1 amounts include unamortized discounts deferred issuance costs 2 fair market value fixed rate longterm debt 4684 million december 31 2012 4611 million december 31 2011 foreign currency exchange risk conduct operations around world number different currencies exposed market risks resulting fluctuations foreign currency exchange rates many significant foreign subsidiaries designated local currency functional currency future earnings subject change due fluctuations foreign currency exchange rates transactions denominated currencies functional currencies minimize need foreign currency forward contracts hedge exposure objective manage foreign currency exposure maintaining minimal consolidated net asset net liability position currency functional currency december 31 2012 2011 outstanding foreign currency forward contracts notional amounts aggregating 207 million 117 million respectively hedge exposure currency fluctuations various foreign currencies notional amounts foreign exchange contracts generally represent amounts exchanged parties thus measure cash requirements related contracts possible loss exposure amounts actually exchanged calculated reference notional amounts terms derivative contracts exchange rates based quoted market prices december 31 2012 2011 contracts similar terms maturity dates recorded loss 1 million year adjust foreign currency forward contracts fair market value losses offset designated foreign currency exchange gains resulting underlying exposures included mga expenses consolidated statements income item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks inherent financial instruments arise changes interest rates foreign currency exchange rates may enter derivative financial instrument transactions manage reduce market risk enter derivative financial instrument transactions speculative purposes discussion primary market risk exposure financial instruments presented interest rate risk debt fixed floating rate instruments subject interest rate risk debt investment portfolio maintain interest rate risk management strategy primarily uses mix fixed variable rate debt intended mitigate risk exposure changes interest rates aggregate may use interest rate swaps manage economic effect fixed rate obligations associated certain debt outstanding interest rate swap agreements december 31 2013 2012 fixed rate longterm debt including capital lease obligations aggregating 39 billion 38 billion december 31 2013 2012 respectively following table sets forth fixed rate longterm debt related weighted average interest rates expected maturity dates december 31 2013 2012 1 amounts include unamortized discounts deferred issuance costs fixed rate longterm debt 2 fair market value fixed rate longterm debt 436 billion december 31 2013 468 billion december 31 2012 foreign currency exchange risk conduct operations around world number different currencies exposed market risks resulting fluctuations foreign currency exchange rates many significant foreign subsidiaries designated local currency functional currency future earnings subject change due fluctuations foreign currency exchange rates transactions denominated currencies functional currencies minimize need foreign currency forward contracts hedge exposure objective manage foreign currency exposure maintaining minimal consolidated net asset net liability position currency functional currency december 31 2013 2012 outstanding foreign currency forward contracts notional amounts aggregating 486 million 207 million respectively hedge exposure currency fluctuations various foreign currencies notional amounts foreign currency forward contracts generally represent amounts exchanged parties thus measure cash requirements related contracts possible loss exposure amounts actually exchanged calculated reference notional amounts terms derivative contracts exchange rates based quoted market prices december 31 2013 2012 contracts similar terms maturity dates recorded gain 2 million loss 1 million respectively adjust foreign currency forward contracts fair market value gains losses offset designated foreign currency exchange gains losses resulting underlying exposures included mga expenses consolidated statements income item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks inherent financial instruments arise changes interest rates foreign currency exchange rates may enter derivative financial instrument transactions manage reduce market risk enter derivative financial instrument transactions speculative purposes discussion primary market risk exposure financial instruments presented interest rate risk debt fixed floating rate instruments subject interest rate risk debt investment portfolio maintain interest rate risk management strategy primarily uses mix fixed variable rate debt intended mitigate risk exposure changes interest rates aggregate may use interest rate swaps manage economic effect fixed rate obligations associated certain debt outstanding interest rate swap agreements december 31 2014 2013 fixed rate longterm debt including capital lease obligations aggregating 39 billion december 31 2014 2013 following table sets forth fixed rate longterm debt related weighted average interest rates expected maturity dates december 31 2014 2013 1 amounts include unamortized discounts premiums deferred issuance costs fixed rate longterm debt 2 fair market value fixed rate longterm debt 444 billion december 31 2014 436 billion december 31 2013 3 amounts represent principal value longterm debt outstanding related weighted average interest rates end respective period foreign currency exchange risk conduct operations around world number different currencies exposed market risks resulting fluctuations foreign currency exchange rates many significant foreign subsidiaries designated local currency functional currency future earnings subject change due fluctuations foreign currency exchange rates transactions denominated currencies functional currencies minimize need foreign currency forward contracts hedge exposure objective manage foreign currency exposure maintaining minimal consolidated net asset net liability position currency functional currency december 31 2014 2013 outstanding foreign currency forward contracts notional amounts aggregating 580 million 486 million respectively hedge exposure currency fluctuations various foreign currencies contracts either undesignated hedging instruments designated qualify fair value hedging instruments notional amounts foreign currency forward contracts generally represent amounts exchanged parties thus measure cash requirements related contracts possible loss exposure amounts actually exchanged calculated reference notional amounts terms derivative contracts exchange rates based quoted market prices december 31 2014 2013 contracts similar terms maturity dates recorded loss 11 million gain 2 million respectively adjust foreign currency forward contracts fair market value gains losses offset designated foreign currency exchange gains losses resulting underlying exposures included mga expenses consolidated statements income item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks inherent financial instruments arise changes interest rates foreign currency exchange rates may enter derivative financial instrument transactions manage reduce market risk enter derivative financial instrument transactions speculative purposes discussion primary market risk exposure financial instruments presented interest rate risk debt fixed floating rate instruments subject interest rate risk debt investment portfolio maintain interest rate risk management strategy primarily uses mix fixed variable rate debt intended mitigate risk exposure changes interest rates aggregate may use interest rate swaps manage economic effect fixed rate obligations associated certain debt outstanding interest rate swap agreements december 31 2015 2014 following table sets forth fixed rate longterm debt related weighted average interest rates expected maturity dates 1 amounts include unamortized discounts premiums deferred issuance costs fixed rate longterm debt 2 fair market value fixed rate longterm debt 417 billion december 31 2015 444 billion december 31 2014 3 amounts represent principal value longterm debt outstanding related weighted average interest rates end respective period foreign currency exchange risk conduct operations around world number different currencies exposed market risks resulting fluctuations foreign currency exchange rates many significant foreign subsidiaries designated local currency functional currency future earnings subject change due fluctuations foreign currency exchange rates transactions denominated currencies functional currencies minimize need foreign currency forward contracts hedge exposure objective manage foreign currency exposure maintaining minimal consolidated net asset net liability position currency functional currency december 31 2015 2014 outstanding foreign currency forward contracts notional amounts aggregating 499 million 580 million respectively hedge exposure currency fluctuations various foreign currencies contracts either undesignated hedging instruments designated qualify fair value hedging instruments notional amounts foreign currency forward contracts generally represent amounts exchanged parties thus measure cash requirements related contracts possible loss exposure amounts actually exchanged calculated reference notional amounts terms derivative contracts exchange rates based quoted market prices december 31 2015 2014 contracts similar terms maturity dates recorded losses 1 million 11 million respectively adjust foreign currency forward contracts fair market value losses offset designated foreign currency exchange gains resulting underlying exposures included mga expenses consolidated statements income loss item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks inherent financial instruments arise changes interest rates foreign currency exchange rates may enter derivative financial instrument transactions manage reduce market risk enter derivative financial instrument transactions speculative purposes discussion primary market risk exposure financial instruments presented bhge llc 2017 form 10k 42 interest rate risk majority debt comprised fixed rate instruments subject interest rate risk debt investment portfolio may use interest rate swaps manage economic effect fixed rate obligations associated certain debt outstanding interest rate swap agreements december 31 2017 following table sets forth fixed rate longterm debt excluding capital leases related weighted average interest rates expected maturity dates 1 fair market value fixed rate longterm debt excluding capital leases 70 billion december 31 2017 2 amounts represent principal value longterm debt outstanding related weighted average interest rates end respective period foreign currency exchange risk conduct operations around world number different currencies exposed market risks resulting fluctuations foreign currency exchange rates many significant foreign subsidiaries designated local currency functional currency future earnings subject change due fluctuations foreign currency exchange rates transactions denominated currencies functional currencies additionally buy manufacture sell components products across global markets activities expose us changes foreign currency exchange rates commodity prices interest rates adversely affect revenue earned costs operating businesses currency equipment sold differs primary currency legal entity exchange rate fluctuates affect revenue earned sale sales purchase transactions also create receivables payables denominated foreign currencies exposure foreign currency gains losses based changes exchange rates changes price raw materials used manufacturing affect cost manufacturing use derivatives mitigate eliminate exposures appropriate use cash flow hedging primarily reduce eliminate effects foreign currency exchange rate changes purchase sale contracts accordingly derivative activity category consists currency exchange contracts outstanding foreign currency forward contracts net notional amounts aggregating 33 billion 06 billion hedge exposure currency fluctuations various foreign currencies december 31 2017 2016 respectively december 31 2017 company estimates 1 appreciation depreciation us dollar would result impact approximately 10 million pretax earnings however company generally able mitigate foreign exchange exposure liquid financial markets use foreign currency derivative transactions also see note 14 financial instruments notes consolidated combined financial statements item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks inherent financial instruments arise changes interest rates foreign currency exchange rates may enter derivative financial instrument transactions manage reduce market risk enter derivative financial instrument transactions speculative purposes discussion primary market risk exposure financial instruments presented interest rate risk longterm debt comprised fixed rate instruments subject interest rate risk debt investment portfolio may use interest rate swaps manage economic effect fixed rate obligations associated certain debt outstanding interest rate swap agreements december 31 2018 following table sets forth fixed rate longterm debt excluding capital leases related weighted average interest rates expected maturity dates 1 fair market value fixed rate longterm debt excluding capital leases 56 billion december 31 2018 2 amounts represent principal value longterm debt outstanding related weighted average interest rates end respective period foreign currency exchange risk conduct operations around world number different currencies exposed market risks resulting fluctuations foreign currency exchange rates many significant foreign subsidiaries designated local currency functional currency future earnings subject change due fluctuations foreign currency exchange rates transactions denominated currencies functional currencies bhge llc 2018 form 10k 43 additionally buy manufacture sell components products across global markets activities expose us changes foreign currency exchange rates commodity prices interest rates adversely affect revenue earned costs operating businesses currency equipment sold differs primary currency legal entity exchange rate fluctuates affect revenue earned sale sales purchase transactions also create receivables payables denominated foreign currencies exposure foreign currency gains losses based changes exchange rates changes price raw materials used manufacturing affect cost manufacturing use derivatives mitigate eliminate exposures appropriate use cash flow hedging primarily reduce eliminate effects foreign currency exchange rate changes purchase sale contracts accordingly derivative activity category consists currency exchange contracts outstanding foreign currency forward contracts net notional amounts aggregating 28 billion 33 billion hedge exposure currency fluctuations various foreign currencies december 31 2018 2017 respectively december 31 2018 company estimates 1 appreciation depreciation us dollar would result impact less 5 million pretax earnings however company generally able mitigate foreign exchange exposure liquid financial markets use foreign currency derivative transactions also see note 14 financial instruments notes consolidated combined financial statements item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks inherent financial instruments arise changes interest rates foreign currency exchange rates may enter derivative financial instrument transactions manage reduce market risk enter derivative financial instrument transactions speculative purposes discussion primary market risk exposure financial instruments presented bhge llc 2019 form 10k 38 interest rate risk longterm debt comprised fixed rate instruments subject interest rate risk debt investment portfolio may use interest rate swaps manage economic effect fixed rate obligations associated certain debt outstanding interest rate swap agreements december 31 2019 following table sets forth fixed rate longterm debt excluding finance leases related weighted average interest rates expected maturity dates 1 fair market value fixed rate longterm debt excluding finance leases 64 billion december 31 2019 2 amounts represent principal value longterm debt outstanding related weighted average interest rates end respective period foreign currency exchange risk conduct operations around world number different currencies exposed market risks resulting fluctuations foreign currency exchange rates many significant foreign subsidiaries designated local currency functional currency future earnings subject change due fluctuations foreign currency exchange rates transactions denominated currencies functional currencies additionally buy manufacture sell components products across global markets activities expose us changes foreign currency exchange rates commodity prices interest rates adversely affect revenue earned costs operating businesses currency equipment sold differs primary currency legal entity exchange rate fluctuates affect revenue earned sale sales purchase transactions also create receivables payables denominated foreign currencies exposure foreign currency gains losses based changes exchange rates changes price raw materials used manufacturing affect cost manufacturing use derivatives mitigate eliminate exposures appropriate use cash flow hedging primarily reduce eliminate effects foreign currency exchange rate changes purchase sale contracts accordingly derivative activity category consists currency exchange contracts outstanding foreign currency forward contracts net notional amounts aggregating 18 billion 28 billion hedge exposure currency fluctuations various foreign currencies december 31 2019 2018 respectively december 31 2019 company estimates 1 appreciation depreciation us dollar would result impact less 5 million pretax earnings however company generally able mitigate foreign exchange exposure liquid financial markets use foreign currency derivative transactions also see note 15 financial instruments notes consolidated combined financial statements item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks inherent financial instruments arise changes interest rates foreign currency exchange rates may enter derivative financial instrument transactions manage reduce market risk enter derivative financial instrument transactions speculative purposes discussion primary market risk exposure financial instruments presented interest rate risk longterm debt comprised fixed rate instruments subject interest rate risk debt investment portfolio may use interest rate swaps manage economic effect fixed rate obligations associated certain debt outstanding interest rate swap agreements december 31 2020 following table sets forth fixed rate longterm debt excluding finance leases related weighted average interest rates expected maturity dates 1fair market value fixed rate longterm debt excluding finance leases 75 billion december 31 2020 2amounts represent principal value longterm debt outstanding related weighted average interest rates end respective period foreign currency exchange risk conduct operations around world number different currencies exposed market risks resulting fluctuations foreign currency exchange rates many significant foreign subsidiaries designated local currency functional currency future earnings subject change due fluctuations foreign currency exchange rates transactions denominated currencies functional currencies baker hughes holdings llc 2020 form 10k 40 additionally buy manufacture sell components products across global markets activities expose us changes foreign currency exchange rates commodity prices interest rates adversely affect revenue earned costs operating businesses currency equipment sold differs primary currency legal entity exchange rate fluctuates affect revenue earned sale sales purchase transactions also create receivables payables denominated foreign currencies exposure foreign currency gains losses based changes exchange rates changes price raw materials used manufacturing affect cost manufacturing use derivatives mitigate eliminate exposures appropriate use cash flow hedging primarily reduce eliminate effects foreign currency exchange rate changes purchase sale contracts accordingly derivative activity category consists currency exchange contracts outstanding foreign currency forward contracts notional amounts aggregating 68 billion 53 billion hedge exposure currency fluctuations various foreign currencies december 31 2020 2019 respectively notional amount derivative instruments generally represent cash amounts exchanged us counterparties rather nominal amount upon changes value derivatives measured december 31 2020 company estimates 1 appreciation depreciation us dollar would result impact less 5 million pretax earnings however company generally able mitigate foreign exchange exposure liquid financial markets use foreign currency derivative transactions also see note 14 financial instruments notes consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks inherent financial instruments arise normal course business may enter derivative financial instrument transactions manage reduce market risk enter derivative financial instrument transactions speculative purposes discussion primary market risk exposure financial instruments presented indebtedness subject interest rate risk longterm fixed interest rate debt commercial paper borrowings shortterm borrowings variable rate longterm debt give rise significant interest rate risk borrowings either maturities less three months variable interest rates things equal fair market value debt fixed interest rate increase interest rates fall decrease interest rates rise exposure interest rate risk managed borrowing money variable interest rate using interest rate swaps change fixed interest rate borrowings variable interest rate borrowings december 31 2004 2003 fixed rate debt aggregating 10752 million 14256 million respectively following table sets forth required cash payments indebtedness bear fixed rate interest denominated us dollars related weighted average effective interest rates expected maturity dates december 31 2004 2003 dollar amounts millions interest rate swap agreements april 2004 entered interest rate swap agreement notional amount 3250 million associated 625 notes due january 2009 agreement receive interest fixed rate 625 pay interest floating rate sixmonth libor plus spread 2741 interest rate swap agreement designated qualifies fair value hedging instrument interest rate swap agreement fully effective resulting gain loss recorded consolidated statement operations recorded fair value interest rate swap agreement 23 million liability december 31 2004 based quoted market prices contracts similar terms maturity dates different times 2003 entered three separate interest rate swap agreements notional amount 3250 million associated 625 notes due january 2009 agreements designated qualified fair value hedging instruments due outlook interest rates terminated three agreements received payments totaling 269 million three agreements terminated prior entering new agreement deferred gains amortized reduction interest expense remaining life underlying debt security matures january 2009 2002 terminated two interest rate swap agreements entered prior years agreements designated qualified fair value hedging instruments upon termination received proceeds 48 million 110 million deferred gain 48 million amortized reduction interest expense remaining life underlying debt security matured june 2004 deferred gain 110 million amortized reduction interest expense remaining life underlying debt security matures january 2009 foreign currency foreign currency forward contracts conduct operations around world number different currencies majority significant foreign subsidiaries designated local currency functional currency future earnings subject change due changes foreign currency exchange rates transactions denominated currencies functional currencies minimize need foreign currency forward contracts hedge exposure objective manage foreign currency exposure maintaining minimal consolidated net asset net liability position currency functional currency december 31 2004 entered several foreign currency forward contracts notional amounts aggregating 780 million hedge exposure currency fluctuations various foreign currencies including british pound sterling norwegian krone euro brazilian real contracts designated qualify fair value hedging instruments based quoted market prices december 31 2004 contracts similar terms maturity dates recorded loss 04 million adjust foreign currency forward contracts fair market value loss offsets designated foreign exchange gains resulting underlying exposures included selling general administrative expense consolidated statement operations december 31 2004 also entered several foreign currency forward contracts notional amounts aggregating 1224 million hedge exposure currency fluctuations various foreign currencies including british pound sterling canadian dollar exposures arise local currency operating expenses balance local currency revenue collections funding imbalances supported shortterm intercompany borrowing commitments definitive amounts funding dates fundings scheduled take place december 31 2005 foreign currency forward contracts designated cash flow hedging instruments fully effective based quoted market prices december 31 2004 contracts similar terms maturity dates recorded loss 01 million adjust foreign currency forward contracts fair market value loss recorded comprehensive income consolidated balance sheet december 31 2003 entered several foreign currency forward contracts notional amounts aggregating 625 million hedge exposure currency fluctuations various foreign currencies including british pound sterling norwegian krone euro brazilian real argentine peso contracts designated qualify fair value hedging instruments based quoted market prices december 31 2003 contracts similar terms maturity dates recorded gain 15 million adjust foreign currency forward contracts fair market value gain offsets designated foreign exchange losses resulting underlying exposures included selling general administrative expense consolidated statement operations counterparties forward contracts major financial institutions credit ratings concentration risk financial institutions monitored continuing basis unlikely event counterparties fail meet terms foreign currency contract exposure limited foreign currency rate differential item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks inherent financial instruments arise changes interest rates foreign currency exchange rates may enter derivative financial instrument transactions manage reduce market risk enter derivative financial instrument transactions speculative purposes discussion primary market risk exposure financial instruments presented interest rate risk indebtedness subject interest rate risk longterm fixed interest rate debt commercial paper borrowings shortterm borrowings variable rate longterm debt give rise significant interest rate risk borrowings either maturities less three months variable interest rates things equal fair market value debt fixed interest rate increase interest rates fall decrease interest rates rise exposure interest rate risk managed borrowing money variable interest rate using interest rate swaps change fixed interest rate borrowings variable interest rate borrowings december 31 2006 december 31 2005 interest rate swap agreements effect due outlook interest rates june 2 2005 terminated interest rate swap agreement entered april 2004 agreement designated qualified fair value hedging instrument upon termination required pay 55 million amount amortized increase interest expense remaining life underlying debt security matures january 2009 fixed rate debt aggregating 10750 million december 31 2006 2005 following table sets forth required cash payments indebtedness bear fixed rate interest denominated us dollars related weighted average effective interest rates expected maturity dates december 31 2006 2005 dollar amounts millions foreign currency foreign currency forward contracts conduct operations around world number different currencies number significant foreign subsidiaries designated local currency functional currency future earnings subject change due fluctuations foreign currency exchange rates transactions denominated currencies functional currencies minimize need foreign currency forward contracts hedge exposure objective manage foreign currency exposure maintaining minimal consolidated net asset net liability position currency functional currency extent market conditions andor local regulations prevent us maintaining minimal consolidated net asset net liability position may enter foreign currency forward contracts december 31 2006 entered several foreign currency forward contracts notional amounts aggregating 1050 million hedge exposure currency fluctuations various foreign currency payables receivables including british pound sterling norwegian krone euro indonesian rupiah brazilian real contracts designated qualify fair value hedging instruments based quoted market prices december 31 2006 contracts similar terms maturity dates recorded loss 02 million adjust foreign currency forward contracts fair market value loss offsets designated foreign currency exchange gains resulting underlying exposures included selling general administrative expense consolidated statement operations december 31 2005 entered several foreign currency forward contracts notional amounts aggregating 650 million hedge exposure currency fluctuations various foreign currency payables receivables including british pound sterling norwegian krone euro brazilian real contracts designated qualified fair value hedging instruments based quoted market prices december 31 2005 contracts similar terms maturity dates recorded gain 01 million adjust foreign currency forward contracts fair market value gain offsets designated foreign currency exchange losses resulting underlying exposures included selling general administrative expense consolidated statement operations counterparties foreign currency forward contracts major financial institutions credit ratings concentration risk financial institutions monitored continuing basis unlikely event counterparties fail meet terms foreign currency contract exposure limited foreign currency exchange rate differential item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks inherent financial instruments arise changes interest rates foreign currency exchange rates may enter derivative financial instrument transactions manage reduce market risk enter derivative financial instrument transactions speculative purposes discussion primary market risk exposure financial instruments presented interest rate risk debt fixed floating rate instruments subject interest rate risk debt investment portfolio maintain interest rate risk management strategy primarily uses mix fixed variable rate debt intended mitigate risk exposure changes interest rates aggregate may use interest rate swaps manage economic effect fixed rate obligations associated certain debt outstanding interest rate swap agreements december 31 2016 2015 following table sets forth fixed rate longterm debt related weighted average interest rates expected maturity dates 1 amounts include unamortized discounts premiums deferred issuance costs fixed rate longterm debt 2 fair market value fixed rate longterm debt 323 billion december 31 2016 417 billion december 31 2015 3 amounts represent principal value longterm debt outstanding related weighted average interest rates end respective period foreign currency exchange risk conduct operations around world number different currencies exposed market risks resulting fluctuations foreign currency exchange rates many significant foreign subsidiaries designated local currency functional currency future earnings subject change due fluctuations foreign currency exchange rates transactions denominated currencies functional currencies minimize need foreign currency forward contracts hedge exposure objective manage foreign currency exposure maintaining minimal consolidated net asset net liability position currency functional currency december 31 2016 2015 outstanding foreign currency forward contracts notional amounts aggregating 271 million 499 million respectively hedge exposure currency fluctuations various foreign currencies contracts either undesignated hedging instruments designated qualify fair value hedging instruments notional amounts foreign currency forward contracts generally represent amounts exchanged parties thus measure cash requirements related contracts possible loss exposure amounts actually exchanged calculated reference notional amounts terms derivative contracts exchange rates based quoted market prices december 31 2016 2015 contracts similar terms maturity dates recorded gain 1 million loss 1 million respectively adjust foreign currency forward contracts fair market value gains losses offset designated foreign currency exchange gains losses resulting underlying exposures included mga expenses consolidated statements income loss item 8 item 8 financial statements supplementary data following consolidated financial statements company independent auditors report set forth pages 26 48 1994 annual report stockholders incorporated herein reference independent auditors report consolidated statements operations three years period ended september 30 1994 consolidated statements financial position september 30 1994 1993 consolidated statements stockholders equity three years period ended september 30 1994 consolidated statements cash flows three years period ended september 30 1994 notes consolidated financial statements item 9item 8 financial statements supplementary data following consolidated financial statements company independent auditors report set forth 1995 annual report stockholders incorporated herein reference independent auditors report consolidated statements operations three years period ended september 30 1995 consolidated statements financial position september 30 1995 1994 consolidated statements stockholders equity three years period ended september 30 1995 consolidated statements cash flows three years period ended september 30 1995 notes consolidated financial statements item 9item 8 financial statements supplementary data following consolidated financial statements company independent auditors report set forth 1996 annual report stockholders incorporated herein reference independent auditors report consolidated statements operations three years period ended september 30 1996 consolidated statements financial position september 30 1996 1995 consolidated statements stockholders equity three years period ended september 30 1996 consolidated statements cash flows three years period ended september 30 1996 notes consolidated financial statements item 9item 8 financial statements supplementary data following consolidated financial statements company independent auditors report set forth 1997 annual report stockholders incorporated herein reference independent auditors report consolidated statements operations three years period ended september 30 1997 consolidated statements financial position september 30 1997 1996 consolidated statements stockholders equity three years period ended september 30 1997 consolidated statements cash flows three years period ended september 30 1997 notes consolidated financial statements item 9item 8 financial statements supplementary data following consolidated financial statements company independent auditors report set forth 1998 annual report stockholders incorporated herein reference independent auditors report consolidated statements operations year ended december 31 1998 three month period ended december 31 1997 two years period ended september 30 1997 consolidated statements financial position december 31 1998 1997 consolidated statements stockholders equity year ended december 31 1998 three month period ended december 31 1997 two years period ended september 30 1997 consolidated statements cash flows year ended december 31 1998 three month period ended december 31 1997 two years period ended september 30 1997 notes consolidated financial statements item 9item 8 financial statements supplementary data management report financial responsibilities management baker hughes incorporated responsible preparation integrity accompanying consolidated financial statements information contained annual report consolidated financial statements prepared conformity generally accepted accounting principles include amounts based managements informed judgments estimates fulfilling responsibilities integrity financial information management maintains relies companys system internal control system includes written policies organizational structure providing division responsibilities selection training qualified personnel program financial operational reviews professional staff corporate auditors system designed provide reasonable assurance assets safeguarded transactions executed accordance managements authorization accounting records reliable basis preparation consolidated financial statements management believes december 31 1999 companys internal control system provides reasonable assurance material errors irregularities prevented detected within timely period cost effective management recognizes responsibility fostering strong ethical climate companys affairs conducted according highest standards personal corporate conduct responsibility characterized reflected companys standards conduct distributed throughout company management maintains systematic program assess compliance policies included standards board directors auditethics committee composed solely nonemployee directors reviews companys financial reporting accounting ethical practices auditethics committee recommends board directors selection independent public accountants reviews fee arrangements meets periodically independent public accountants management corporate auditors review work propriety discharge responsibilities independent public accountants corporate auditors full free access auditethics committee without management present discuss auditing financial reporting matters joe b foster g stephen finley alan j keifer joe b foster g stephen finley alan j keifer chairman president senior vice president vice president chief executive officer finance administration controller chief financial officer independent auditors report stockholders baker hughes incorporated audited accompanying consolidated statements financial position baker hughes incorporated subsidiaries december 31 1999 1998 related consolidated statements operations stockholders equity cash flows years ended december 31 1999 1998 three month period ended december 31 1997 year ended september 30 1997 audits also included financial statement schedule ii valuation qualifying accounts financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position baker hughes incorporated subsidiaries december 31 1999 1998 results operations cash flows years ended december 31 1999 1998 three month period ended december 31 1997 year ended september 30 1997 conformity generally accepted accounting principles also opinion financial statement schedule ii considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein described note 2 consolidated financial statements company changed method accounting impairment longlived assets disposed effective october 1 1996 conform statement financial accounting standards 121 described note 19 accompanying consolidated statement financial position december 31 1998 related consolidated statement operations stockholders equity cash flows year ended december 31 1998 three month period ended december 31 1997 year ended september 30 1997 restated deloitte touche llp houston texas february 16 2000 baker hughes incorporated consolidated statements operations see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements continued see notes consolidated financial statements baker hughes incorporated consolidated statements stockholders equity see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements continued see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements continued note 1 basis presentation restatement consolidated financial statements include accounts baker hughes incorporated majority owned subsidiaries company baker hughes notes consolidated financial statements dollar amounts tabulations millions dollars unless otherwise indicated change yearend august 27 1998 board directors baker hughes approved change fiscal yearend company september 30 december 31 effective calendar year beginning january 1 1998 three month transition period october 1 1997 december 31 1997 transition period precedes start 1998 fiscal year 1997 refers year ended september 30 transition period refers three months ended december 31 1997 1998 1999 refers twelve months ended december 31 1998 1999 respectively restatement fully described note 19 restatement financial statements related disclosures periods ended december 31 1998 transition period year ended september 30 1997 restated correct accounting errors identified companys accounting records discontinued operations february 16 2000 companys board directors approved principle plan sell companys baker process division accordingly prior period consolidated financial statements related notes thereto restated present operations baker process separately accounted segment discontinued operation see note 3 discussion discontinued operations merger august 10 1998 baker hughes completed merger western atlas inc western atlas merger accounted pooling interests accordingly prior period consolidated financial statements baker hughes restated include results operations financial position cash flows western atlas certain amounts reclassified conform reporting practices baker hughes western atlas connection merger 1998 company recorded merger related costs summarized transaction costs 515 million include banking legal printing fees costs directly related merger employee related costs 872 million primarily consist payments made certain officers western atlas baker hughes pursuant change control provisions 603 million severance benefits paid terminated employees whose responsibilities deemed redundant result merger 154 million remaining accrued employee costs represent retirement benefits certain employees paid accordance terms agreements lives covered employees integration costs include costs changing legal registrations various jurisdictions terminating joint venture result merger changing signs logos companys major facilities around world integration costs noncash charge 582 million consists charge 453 million related triggering change control rights contained certain western atlas employee stock option plans converted baker hughes options concurrent merger charge 39 million issuance companys common stock pursuant certain stock plans result change control 90 million charge recorded writeoff carrying value product line discontinued result merger 1999 company reviewed remaining balances accruals cash merger charges made 16 million adjustments reflect current estimates remaining expenditures adjustments included reversals previously recorded accruals utilized adjustments related primarily integration costs company expects 148 million accrual december 31 1999 20 million spent june 2000 24 million spent december 31 2001 remaining accrual spent remaining life related contractual obligations note 2 summary significant accounting policies principles consolidation consolidated financial statements include company majority owned subsidiaries investments company owns 20 50 exercises significant influence operating financial policies accounted using equity method significant intercompany accounts transactions eliminated consolidation use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates revenue recognition revenue product sales recognized upon delivery products customer revenue services rentals recorded services rendered cash equivalents company considers highly liquid investments original maturity three months less time purchase cash equivalents inventories stated primarily lower average cost market property stated principally cost less accumulated depreciation generally provided using straightline method estimated useful lives individual items company manufactures substantial portion rental tools equipment cost items includes direct indirect manufacturing costs company developing implementing sap r3 enterprisewide software system external direct costs consulting services payroll related cost employees work fulltime implementation enterprisewide software system capitalized costs associated business process reengineering expensed incurred company uses fullcost method accounting investment oil gas properties method company capitalizes acquisition exploration development costs incurred purpose finding oil gas reserves depreciation depletion amortization oil gas properties computed using unitofproduction method based upon production estimates proved reserves due ceiling test limitations company writedowns 693 million 125 million 1998 1997 respectively multiclient seismic data costs incurred creation company owned multiclient seismic data capitalized amortized estimated revenue company expects receive licensing data cash prepayments received customers specific contracts included deferred revenue earned impairment assets company adopted statement financial accounting standards sfas 121 accounting impairment longlived assets longlived assets disposed effective october 1 1996 statement sets forth guidance recognize impairment longlived assets including goodwill measure impairment methodology set forth sfas 121 significantly different companys prior policy therefore adoption sfas 121 significant impact consolidated financial statements relates impairment baker hughes incorporated notes consolidated financial statements continued longlived assets used operations accounting longlived assets disposed requires assets carried lower cost fair market value determined discounted cash flow analysis rather lower cost net realizable value method previously used company recognized charge income 121 million 04 per sharediluted net tax benefit 60 million 1997 cumulative effect change accounting principle december 31 1999 company longlived assets held disposal approximately 50 real properties carrying value 375 million ranging size hundred square feet 200000 square feet located primarily united states portfolio real property includes land offices manufacturing repair warehouse space various locations oilfield activity takes place makeup portfolio changes time properties sold properties surplus operations needs added baker hughes employs two fulltime real estate professionals whose responsibilities include marketing leasing management sale facilities methodology used determining fair market value properties includes comparison recent sales listing similarly situated facilities discussions real estate brokers agents concerning expectations current future real property prices rental rates investments debt equity securities accounted equity method classified either trading securities reported fair value unrealized gains losses included earnings available sale reported fair value unrealized gains losses net tax recorded separate component accumulated comprehensive income within stockholders equity company currently holds equity securities tuboscope inc 1999 company announced intention dispose holdings tuboscope inc reclassified accordingly result decision company recognized pretax unusual gain 315 million 1999 goodwill intangibles goodwill arising acquisitions amortized using straightline method lesser expected useful life 40 years intangibles stated cost amortized straightline basis assets estimated useful life carrying amount unamortized goodwill intangibles reviewed potential impairment loss events changes circumstances indicate carrying amount may recoverable impairment loss recorded period determined carrying amount recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense business unit goodwill intangibles relate income taxes deferred income taxes determined utilizing asset liability approach method gives consideration future tax consequences associated differences financial accounting tax bases assets liabilities environmental matters remediation costs accrued based estimates known environmental remediation exposure accruals recorded even significant uncertainties exist ultimate cost remediation ongoing environmental compliance costs including maintenance monitoring costs expensed incurred company identified potentially responsible party federal superfund site company accrues share estimated remediation costs site based ratio estimated volume waste contributed site company bears total volume waste site stock based compensation intrinsic value method accounting used stock based employee compensation whereby compensation expense recognized exercise price employee stock option equal greater market price companys common stock grant date foreign currency translation gains losses resulting balance sheet translation foreign operations foreign currency functional currency included separate component comprehensive income within stockholders equity gains losses resulting balance sheet translation foreign operations us dollar functional currency included consolidated statements operations financial instruments company uses forward exchange contracts currency swaps hedge certain firm commitments transactions denominated foreign currencies gains losses forward contracts deferred offset foreign exchange gains losses underlying hedged item company uses interest rate swaps manage interest rate risk interest differentials interest rate swaps recognized adjustment interest expense companys policies permit financial instrument transactions speculative purposes note 3 discontinued operations february 16 2000 companys board directors approved principle plan sell companys baker process division baker process manufacturers sells process equipment separating solids liquids filtration sedimentation centrifugation flotation processes accordingly companys consolidated financial statements related notes thereto restated present operations baker process separately accounted segment discontinued operation company retained investmentbanking firm manage sale process income loss discontinued operations year ended december 31 1999 includes estimated results operations baker process 2000 14 million net 7 tax including allocated interest expense income loss discontinued operations respective periods presented includes interest expense allocated basis net assets baker process compared companys stockholders equity consolidated debt corporate general administrative costs company allocated baker process periods presented certain information respect discontinued operations baker process follows income loss income taxes discontinued operations includes merger unusual nonrecurring charges 40 million 1999 392 million 1998 1999 amount results adjustments remaining accrual balances items utilized adjustments relate primarily terminated leases severance costs 1998 amount consists integration costs 102 million severance 63 million impairment inventory 130 million impairment property equipment assets 81 million merger related costs 16 million net assets baker process follows may 1997 western atlas board directors approved principal plan distribute spinoff western atlas shareholders outstanding common stock unova inc unova wholly owned subsidiary western atlas organized conduct western atlas industrial automation systems business pursuant spinoff october 31 1997 western atlas shareholder received equivalent number shares unova common stock taxfree transaction explained note 1 fiscal year financial information baker hughes year ended september 30 1997 includes western atlas results calendar year 1997 hence statements consolidated stockholders equity spinoff unova included year ended september 30 1997 income loss discontinued operations includes interest expense allocated basis debt levels assumed spinoff corporate general administrative costs western atlas allocated unova periods presented concurrent spinoff unova repaid western atlas intercompany indebtedness totaling 2300 million baker hughes incorporated notes consolidated financial statements continued discontinued operations unova follows note 4 earnings per share reconciliation numerators denominators basic diluted earnings per share eps computations income loss continuing operations follows securities excluded computation diluted eps year ended december 31 1999 could potentially dilute basic eps future options purchase 102 million shares liquid yield option notes convertible 72 million shares note 5 inventories comprised following note 6 property goodwill intangibles property plant equipment comprised following goodwill intangibles follows note 7 acquisitions dispositions addition acquisitions discussed separately company made several smaller acquisitions respective year aggregate purchase price 1192 million 1998 743 million transition period 984 million 1997 significant acquisitions made 1999 acquisitions accounted using purchase method accounting accordingly cost acquisition allocated assets acquired liabilities assumed based estimated fair market values date acquisition operating results acquisitions included consolidated statements operations respective acquisition date pro forma results acquisitions presented pro forma revenue income accounting change earnings per share would materially different companys actual results wedge 3d april 1998 company acquired outstanding stock wedge dialog inc wedge 2185 million cash wedge specialized casedhole logging pipe recovery services also april 1998 company acquired 3d geophysical inc 3d 1175 million cash 3d supplier primarily landbased seismic data acquisition services purchase method accounting used record acquisitions pro forma results two acquisitions presented pro forma revenue net income earnings per share would materially different companys actual results baker hughes incorporated notes consolidated financial statements continued petrolite july 1997 company acquired petrolite corporation petrolite wm barnickel company barnickel holder 471 petrolites common stock 193 million shares companys common stock value 7302 million threeway business combination purchase method accounting used record acquisitions additionally company assumed petrolites outstanding vested unvested employee stock options converted right acquire 10 million shares companys common stock assumption petrolite options company fair market value 210 million resulting total consideration acquisitions 7512 million petrolite shares previously publicly traded manufacturer marketer specialty chemicals used petroleum process industries barnickel privately held company owned marketable securities sold acquisition addition investment petrolite acquisition petrolite 1997 accounted purchase accordingly purchase price allocated assets acquired liabilities assumed based estimated fair market values date acquisition accordance generally accepted accounting principles 1180 million allocated inprocess research development recorded charge consolidated statement operations acquisition date technological feasibility projects inprocess established alternative future use date twentysix individual research development projects development time acquisition classified inprocess research development products development valued using discounted cash flow analysis 14 discount factor cash flows projected 20 year period included additional research development capital expenditures required complete projects gross margins used products generally consistent products sold company 14 discount factor used considered time value money inflation risk inherent projects development aggregate remaining completion costs products projected exceed 72 million completion periods varying 90 days two years december 31 1999 seventeen products generated commercial sales five product sales trial basis four determined viable products 1999 revenues products totaled approximately 76 million company incurred certain liabilities part plan combine operations petrolite company liabilities relate petrolite operations include severance 138 million redundant marketing manufacturing administrative personnel relocation 58 million moving equipment transferring marketing technology personnel primarily st louis houston environmental remediation 165 million redundant properties facilities sold cash spent 1999 1998 transition period 1997 totaled 60 million 129 million 21 million 77 million respectively remaining accrual 74 million 68 million relates environmental remediation spent properties remediated drilex july 1997 company acquired drilex international inc drilex provider products services used directional horizontal drilling workover oil gas wells 27 million shares companys common stock acquisition accounted using pooling interests method accounting method accounting historical cost basis assets liabilities company drilex combined recorded amounts results operations combined companies 1997 included 1997 consolidated statement operations historical results separate companies years prior 1997 combined retained earnings results operations drilex material consolidated financial statements company norand united barcode industries company acquired norand corporation norand march 3 1997 united barcode industries ubi april 4 1997 companies integrated companys industrial automation systems operations included spinoff unova purchase method accounting used record acquisitions accordingly acquisition costs 2800 million 1070 million norand ubi respectively allocated net assets acquired based upon relative fair values accordance generally accepted accounting principles allocation assigned combined value two acquisitions 2030 million inprocess research development activities expensed 1997 technological feasibility established alternative future use date acquisition baker hughes incorporated notes consolidated financial statements continued note 8 unusual charges result continuing low activity levels predominantly companys seismic products services company recorded charges fourth quarter 1999 totaling 1228 million summarized employee groups terminated executive marketing field service support personnel approximately 200 terminated december 31 1999 amount accrued severance based upon positions eliminated companys written severance policy include portion employees salary severance dates based upon current estimates company estimates accrued severance december 31 1999 paid 2000 employees leave company accrued 360 million related expected costs settle contractual obligations based upon managements decision reduce abandon certain operations based terms applicable agreements costs consist primarily cost terminating leases certain marine vessels taken service removed fleet impairment property includes writeoff writedown certain assets utilized companys seismic business assets scrapped otherwise disposed consist 317 million land marine recording equipment 16 million data processing equipment 196 million marine vessels sold otherwise abandoned write amounts generally determined use internal appraisal techniques assess estimated fair value realized upon disposal annualized basis effect eliminating depreciation assets written approximately 194 million 1999 company realized nonrecurring gains totaling 548 million company sold two large excess real estate properties realized net gains totaling 395 million company received net proceeds 681 million addition company sold certain assets related previous divestiture joint venture realized net gain 153 million 1999 company reviewed remaining balances accruals cash charges made 74 million adjustments reflect current estimates remaining expenditures adjustments included reversals previously recorded accruals utilized adjustments related primarily severance accruals lease obligations addition accruals related certain terminated lease obligations revisions made increase previously recorded amounts based current information estimates expected cash flows related leases items reflected following captions consolidated statement operations company experienced high growth levels products services 1994 second quarter 1998 third fourth quarters 1998 company experienced decline demand products services result significant decrease price oil natural gas decline customer demand materialized quickly previous high growth rates result sharp decline demand adjust lower level activity company assessed overall operations recorded charges 5519 million summarized substantially charges originate companys oilfield operating segment charges reflected following captions consolidated statement operations employee groups terminated marketing manufacturing field service personnel engineering administrative support substantially employees terminated december 31 1999 amount accrued severance based upon companys written severance policy positions eliminated accrued severance include portion employees salaries severance dates based upon current severance dates company expects accrued severance remaining december 31 1999 substantially paid 2000 company accrued 298 million combine operations consolidate facilities accrual includes costs settle leases idled facilities based upon lease agreements shutdown oil gas operations certain countries based upon managements decision abandon operations terminate rig contract based upon terms agreement collocation costs based upon estimated exit costs approved plans accrual include portion costs actual abandonment facilities ceasing operations remaining accrual 59 million related abandoned leases spent according lease terms accrual environmental reserves relates additional costs remediate properties obtained july 1997 petrolite acquisition company completed thorough review substantially petrolite properties september 1998 determined additional costs would incurred remediating properties company started remediation 1999 expects substantially completed 2000 cash costs 214 million include costs settle certain litigation 109 million costs settle contractual obligations 29 million costs dispose obsolete inventory 29 million remaining accrual 101 million relates contractual obligations anticipated legal settlements company expects spend majority remaining accrual end 2000 impairment inventory rental tool assets 1602 million due advances technology obsoleted certain product lines well decline market demand resulted excess supply certain products virtually operating divisions recorded impairment charge product lines affected completion products drilling evaluation systems tools tricone diamond drill bits substantially obsolete slowmoving inventory rental tools completely writtenoff scrapped third quarter 1998 company recorded 832 million writedown petroalliance services company limited pas former consolidated joint venture operating former soviet union writedown joint venture based upon companys estimated value assets ultimately received consideration sale pas investment november 1998 company received consideration sale pas seismic vessel seismic welllogging assets certain pasassets kazakhstan turkmenistan certain customer receivables 330 million note purchasers writedown included 107 million equipment 220 million goodwill 505 million net current assets impairment property assets 757 million includes 181 million writedown reduce carrying value portion companys drilling equipment 126 million writeoff obsolete solid oilfilled streamer sections used seismic vessels 149 million writedown surplus welllogging equipment 95 million writeoff prepaid royalties abandoned product line 206 million assets written fair market value charges described writeoffs resulted carrying value items written zero charges described writedowns resulted carrying value items written estimated fair value estimated fair value generally determined discounting estimated future cash flows rate 12 appraisal techniques annualized basis effect eliminating depreciation properties assets written approximately 12 million writeoff intangible assets 178 million includes 27 million capitalized software costs product lines abandoned result recent acquisitions 53 million capitalized development costs software systems replaced companys implementation sap r3 98 million goodwill associated discontinued business subsidiary held sale goodwill resulted small acquisitions businesses suffered downturn market conditions resulting companys decision discontinue business sell subsidiary writeoff represented entirety goodwill acquisitions case subsidiary held sale writedown based discussions potential buyers impact results operations businesses 1999 significant writedown real estate held sale 170 million specific property charge reduces carrying value propertys appraised value september 1998 following merger company decided sell facility order generate cash pay debt prior decision sell property expected future rental income longterm lease expected recover carrying value property 1999 company sold property 107 million charge writeoff investments joint ventures russia indonesia due deteriorating market economic conditions two countries writeoff represents entire amount companys investment two joint ventures charge also includes 28 million loss sale tracor europa discontinued subsidiary year ended september 30 1997 company recognized 511 million unusual charge consisting following baker hughes incorporated notes consolidated financial statements continued connection acquisitions petrolite accounted purchase drilex accounted pooling interests company recorded unusual charges 345 million 71 million respectively combine acquired operations company charges include cost closing redundant facilities eliminating relocating personnel equipment rationalizing inventories required disposal amounts less cost 95 million charge recorded result decisions 1 discontinue low margin oilfield product line latin america 2 sell tracor europa subsidiary computer peripherals distributor written net realizable value cash provisions unusual charge totaled 185 million company spent 55 million 1997 16 million transition period substantially remaining 114 million 1998 note 9 indebtedness total debt consisted following december 31 1999 company 15129 million credit facilities commercial banks 10000 million committed facilities mature follows 2500 million 2001 7500 million 2003 companys policy classify commercial paper shortterm borrowings longterm debt extent committed facilities extent intent refinance shortterm obligations since company ability certain credit agreements intent maintain obligations longer one year baker hughes incorporated notes consolidated financial statements continued liquid yield option notes lyons convertible companys common stock conversion price 4024 per share calculated december 31 1999 increases annual rate 35 option company lyons may redeemed cash redemption price equal issue price plus accrued original issue discount date redemption option holder lyons may redeemed cash may 5 2003 redemption price equal issue price plus accrued original issue discount date redemption january 14 1999 company issued 400 million 6875 notes due january 2029 325 million 625 notes due january 2009 effective interest rates 708 638 respectively february 4 1999 company issued 200 million 60 notes due february 2009 february 10 1999 company issued 100 million 58 notes due 2003 effective interest rates 611 604 respectively proceeds used repay 7625 notes due february 1999 commercial paper shortterm borrowings accordingly amounts presented longterm accompanying consolidated statements financial position maturities debt december 31 1999 follows 20001081 million 20011642 million 200210 million 20038494 million 20043476 million 13438 million thereafter note 10 financial instruments interest rate swaps december 31 1999 company party interest rate swap agreement notional amount 930 million company paid interest rate libor plus 201 received interest rate 859 interest rate swap settled semiannually terminated january 27 2000 february 4 1999 company entered interest rate swap notional amount 3250 million company receives interest rate 625 pays interest rate equal average 6 month libor yen euro swiss franc plus 316 spread interest rate swap settles semiannually terminates january 2009 unlikely event counterparty fails meet terms interest rate swap agreement companys exposure limited interest rate differential foreign currency contracts december 31 1999 company entered foreign currency forward contracts notional amounts 395 million hedge commitment purchase seismic vessel 71 million hedge equipment purchases longterm purchase agreement 07 million hedge expected collection long term sales agreement fair value forward contracts based yearend quoted market prices contracts similar terms maturity dates 393 million 75 million 08 million respectively foreign currency gains losses purchases deferred become part cost assets counterparties companys forward contracts major financial institutions credit ratings concentration risk financial institutions monitored continuing basis managements opinion present significant credit risk company fair value financial instruments companys financial instruments include cash shortterm investments receivables investments payables debt interest rate foreign currency contracts except described estimated fair value financial instruments december 31 1999 1998 approximate carrying value reflected consolidated statements financial position fair value companys debt interest rate foreign currency contracts estimated based quoted market prices estimated fair value companys debt december 31 1999 1998 27239 million 28187 million respectively differs carrying amounts 28141 million 27707 million respectively included consolidated statements financial position fair value companys interest rate swap contracts december 31 1999 1998 138 million payable 16 million receivable respectively concentration credit risk company sells products services various companies oil gas industry although concentration could affect companys overall exposure credit risk management believes company exposed minimal risk since majority business conducted major companies within industry company performs periodic credit evaluations customers financial condition generally require collateral accounts receivables cases company require payment advance security form letter credit bank guarantee company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions believes risk loss minimal note 11 employee stock plans company stock option plans provide granting options purchase common stock officers key employees stock options may granted subject terms ranging one ten years price equal greater fair market value stock date grant stock option activity company follows merger western atlas triggered change control rights contained certain western atlas employee stock option plans conversion 98 million options change control rights resulted issuance 75 million shares companys common stock connection spinoff employee director options western atlas outstanding immediately prior spinoff adjusted increasing number shares subject option decreasing exercise price per share preserve difference aggregate exercise price option aggregate market value shares subject option baker hughes incorporated notes consolidated financial statements continued following table summarizes information stock options outstanding december 31 1999 shares thousands terms baker hughes western atlas stock option plans outstanding options august 10 1998 vested result merger december 31 1999 52 million shares available future option grants fair market value options granted 1999 1998 transition period 1997 1177 per option 779 per option 1447 per option 1118 per option respectively using following assumptions respective years blackscholes optionpricing model dividend yield 22 096 15 expected volatility 554 494 364 335 riskfree interest rate 65 42 56 62 expected life option 50 years 43 years 32 years 46 years following table summarizes pro forma disclosures assuming company used fair value method accounting stock based compensation plans effects applying fair market value method accounting pro forma disclosure may indicative future amounts since pro forma disclosure apply options granted prior 1996 additional awards future years anticipated note 12 income taxes geographic sources income loss continuing operations income taxes cumulative effect accounting changes follows provision income taxes comprised tax benefits 42 million 161 million 14 million 110 million associated exercise employee stock options allocated equity years ended december 31 1999 december 31 1998 transition period year ended september 30 1997 respectively provision income taxes differs amount computed applying us statutory income tax rate income taxes cumulative effect accounting changes reasons set forth effective tax rates merger related costs spinoff related costs unusual nonrecurring charges 347 354 378 353 periods ended december 31 1999 december 31 1998 december 31 1997 september 30 1997 respectively baker hughes incorporated notes consolidated financial statements continued deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting income tax purposes operating loss tax credit carryforwards tax effects companys temporary differences carryforwards follows valuation allowance recorded likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future company provided valuation allowance operating loss carryforwards certain nonus jurisdictions operations decreased currently ceased company withdrawn entirely provision made us additional foreign taxes anticipated repatriation certain earnings foreign subsidiaries company considers undistributed earnings foreign subsidiaries amount already provided permanently reinvested additional foreign earnings could become subject additional tax remitted deemed remitted dividend however additional amount taxes payable practicable estimate december 31 1999 company approximately 944 million foreign tax credits 409 million general business credits 97 million alternative minimum tax credits available offset future payments federal income taxes expiring varying amounts 2004 2020 alternative minimum tax credits may carried forward indefinitely current us law note 13 segment related information companys eight business units separate management teams infrastructures offer different products services business units aggregated one reportable segment oilfield since longterm financial performance eight business units affected similar economic conditions oilfield segment consolidated results evaluated regularly chief operating decision maker deciding allocate resources assessing performance oilfield segment consists following business units baker atlas baker hughes inteq baker oil tools baker petrolite centrilift ep solutions hughes christensen western geophysical manufacture sell equipment provide services used drilling completion production maintenance oil gas wells reservoir measurement evaluation principal markets segment include major oil gas producing regions world including north america latin america europe africa middle east far east customers include major multinational independent national stateowned oil companies accounting policies oilfield segment described note 2 notes consolidated financial statements company evaluates performance oilfield segment based income taxes accounting changes nonrecurring items interest income expense summarized financial information shown following table column includes corporate related items results insignificant operations relates segment profit loss income expense allocated reportable segments net assets discontinued operations excluded total assets table totaled 2783 million 2679 million 2050 million 1904 million 1999 1998 transition period 1997 respectively year ended december 31 1998 oilfield revenues attributable one customer totaled 6298 million 109 following table presents details segment profit loss following table presents consolidated revenues country based location use product service following table presents longlived assets country based location asset assets represent marine seismic vessels land crews related equipment mobile move frequently countries data processing centers land buildings included countries assets located note 14 employee benefit plans defined benefit pension plans postretirement benefits pensions company adopted sfas 132 employers disclosures pensions postretirement benefits effective company year ended december 31 1998 statement revised required disclosures pensions postretirement benefit plans company several noncontributory defined benefit pension plans covering various domestic foreign employees generally company makes annual contributions plans amounts necessary meet minimum governmental funding requirements company defined benefit postretirement plan provides certain health care life insurance benefits substantially us employees retire met certain age service requirements baker hughes incorporated notes consolidated financial statements continued projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 366 million 323 million 75 million december 31 1999 438 million 390 million 110 million december 31 1998 assumed health care cost trend rates significant effect amounts reported health care plan assumed health care cost trend rate used measuring accumulated benefit obligation postretirement benefits pensions december 31 1999 60 2000 declining gradually successive year reaches 5 2003 onepercentagepoint change assumed health care cost trend rates would following effects defined contribution plans periods reported generally baker hughes us employees 1 employees western atlas employed prior merger 2 covered one baker hughes pension plans eligible participate baker hughes sponsored thrift plan prior 1999 employees western atlas employed prior merger eligible participate separate western atlas defined contribution plan 1999 employees western atlas employed prior merger worked companys divisions western geophysical became eligible participate baker hughes sponsored thrift plan rather western atlas defined contribution plan baker hughes sponsored thrift plan allows eligible employees elect contribute 2 15 salaries investment trust employee contributions matched company rate 100 per 100 employee contribution first 2 50 per 100 employee contribution next 4 employees salary addition company contributes eligible employees 2 5 salary depending employees age january 1 year contributions become fully vested employee five years employment baker hughes contribution thrift plan defined contribution plans amounted 575 million 510 million 106 million 359 million 1999 1998 transition period 1997 respectively respect western atlas defined contribution plan baker hughes contributed amount based consolidated pretax earnings participating businesses accordance provisions plan includes voluntary savings feature intended qualify section 401k internal revenue code designed enhance retirement programs participating employees feature baker hughes matches 67 certain portion participants contributions employer contributions plan 1999 contributions plan 1998 transition period 1997 314 million 105 million 390 million respectively postemployment benefits periods reported company provided certain postemployment disability medical benefits substantially qualifying former inactive baker hughes us employees employed time western atlas following employment retirement starting january 1 1999 benefits provided substantially qualified former active western atlas employees disability income benefits disability benefits available date hire provided qualified plan funded contributions company employees primary asset plan guaranteed insurance contract insurance company currently earns interest 65 actuarially determined obligation calculated discount rate 725 disability benefits expense 13 million 29 million 5 million 11 million 1999 1998 transition period 1997 respectively continuation medical life insurance thrift plan benefits disability service related salary continuance benefits continuation benefits provided nonqualified unfunded plan april 1997 continuation medical benefit portion plan merged disability income benefits plan beginning april 1997 expense continuation benefits primarily interest cost projected benefit obligation 57 million 36 million 6 million 31 million 1999 1998 transition period 1997 respectively following table sets forth funded status amounts recognized companys consolidated statements financial position disability benefits continuation benefits health care cost assumptions used measure continuation benefits obligation similar assumptions used determining obligation postretirement health care benefits additional assumptions used accounting continuation benefits discount rate 725 1999 65 1998 increases compensation 5 periods presented note 15 litigation company sometimes named defendant litigation relating products services provides company insures risks extent deemed prudent management assurance given nature amount insurance every case fully indemnify company liabilities arising pending future legal proceedings relating ordinary business activities many policies contain self insured retentions amounts company deems prudent company named defendant number shareholder class action securities fraud suits following companys announcement december 8 1999 regarding accounting issues discovered inteq division see note 19 suits consolidated one lawsuit pursuant private securities litigation reform act 1995 company believes allegations suits without merit company intends vigorously defend suits even adverse outcome class action litigation could adverse effect companys results operations financial condition note 16 environmental matters companys past present operations include activities subject extensive federal state environmental regulations baker hughes incorporated notes consolidated financial statements continued company identified potentially responsible party prp remedial activities related various superfund sites applicable federal law imposes joint several liability prp cleanup sites leaving company uncertainty may responsible remediation cost attributable prps unable pay share remediation costs generally company estimated share total cost based ratio number gallons waste estimated contributed site company bears total number gallons waste estimated disposed site company accrued believes pro rata share total cost remediation superfund sites based upon volumetric calculation accrual made joint several liability concept since company believes probability pay material costs volumetric share remote company believes prps greater involvement volumetric calculation basis substantial assets may reasonably expected pay share cost remediation cases company insurance coverage contractual indemnities third parties cover ultimate liability december 31 1999 1998 company accrued 228 million 264 million respectively remediation costs including superfund sites referred measurement accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity utilized company believes likelihood material losses excess amounts recorded remote note 17 supplemental information supplemental consolidated statement operations information follows supplemental consolidated statement cash flows information follows note 18 commitments contingencies december 31 1999 company commitments outstanding capital expenditures purchase orders contracts approximately 1241 million amount 952 million related primarily construction seismic vessel cost vessel related equipment currently estimated 988 million excluding capitalized interest final completion vessel including installation related seismic equipment expected company determines market conditions allow opportunity achieve acceptable utilization rate normal course business customers vendors others company contingently liable performance letters credit financial guarantees totaling approximately 1368 million december 31 1999 addition december 31 1999 company guaranteed debt third parties totaling 892 million practicable estimate fair value financial instruments management expect material losses financial instruments december 31 1999 company longterm operating leases covering certain facilities equipment minimum annual rental commitments five years period ending december 31 2004 686 million 565 million 440 million 344 million 1081 million respectively 383 million aggregate thereafter company entered significant capital leases note 19 restatement december 1999 based internal review company became aware several accounting misstatements one operating divisions subsequent analysis determined misstatements amounted 310 million net taxes result company restated previously issued consolidated financial statements reflect adjustments required correct misstatements adjustments relate uncollectible accounts receivable inventory shortages recognition inventory pricing adjustments impairment various current longlived assets recognition certain previously unrecorded liabilities including trade accounts payable employee compensation benefits payable result companys 1998 transition period 1997 financial statements related disclosures restated amounts previously reported addition prior period adjustment 273 million related operating results periods prior 1997 decreased retained earnings september 30 1996 described note 1 basis presentation restatement company plans dispose baker process presented consolidated financial statements discontinued operations caption previously reported following summarized financial information reflects baker process discontinued operation periods presented principal effects adjustments accompanying financial statements set forth baker hughes incorporated notes consolidated financial statements continued note 20 quarterly data unaudited caption previously reported following summarized financial information reflects baker process discontinued operation periods presented see note 1 merger see note 2 accounting changes see note 3 discontinued operations see note 7 acquisitions dispositions see note 8 unusual charges see note 19 restatements represents revenues less costs revenues item 9item 8 financial statements supplementary data management report financial responsibilities management baker hughes incorporated responsible preparation integrity accompanying consolidated financial statements information contained annual report consolidated financial statements prepared conformity generally accepted accounting principles include amounts based managements informed judgments estimates fulfilling responsibilities integrity financial information management maintains relies companys system internal control system includes written policies organizational structure providing division responsibilities selection training qualified personnel program financial operational reviews professional staff corporate auditors system designed provide reasonable assurance assets safeguarded transactions executed accordance managements authorization accounting records reliable basis preparation consolidated financial statements management believes december 31 2000 companys internal control system provides reasonable assurance material errors irregularities prevented detected within timely period cost effective management recognizes responsibility fostering strong ethical climate companys affairs conducted according highest standards personal corporate conduct responsibility characterized reflected companys standards conduct distributed throughout company management maintains systematic program assess compliance policies included standards board directors auditethics committee composed solely nonemployee directors reviews companys financial reporting accounting ethical practices auditethics committee recommends board directors selection independent public accountants reviews fee arrangements meets periodically independent public accountants management corporate auditors review work propriety discharge responsibilities independent public accountants corporate auditors full free access auditethics committee without management present discuss auditing financial reporting matters independent auditors report stockholders baker hughes incorporated audited accompanying consolidated balance sheets baker hughes incorporated subsidiaries december 31 2000 1999 related consolidated statements operations stockholders equity cash flows three years period ended december 31 2000 audits also included financial statement schedule ii valuation qualifying accounts financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position baker hughes incorporated subsidiaries december 31 2000 1999 results operations cash flows three years period ended december 31 2000 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein deloitte touche llp houston texas february 14 2001 baker hughes incorporated consolidated statements operations millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated balance sheets millions except par value see notes consolidated financial statements baker hughes incorporated consolidated statements stockholders equity millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated statements cash flows millions see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements note 1 summary significant accounting policies basis presentation consolidated financial statements include accounts baker hughes incorporated majority owned subsidiaries company investments company owns 20 50 exercises significant influence operating financial policies accounted using equity method significant intercompany accounts transactions eliminated consolidation notes consolidated financial statements dollar share amounts tabulations millions dollars shares respectively unless otherwise indicated february 2000 companys board directors approved plan principle sell baker process division separately accounted segment accordingly companys consolidated financial statements related notes thereto year ended december 31 1999 segment accounted discontinued operation periods presented therein february 2001 company able divest baker process division entire business unit terms found acceptable accordance generally accepted accounting principles company reclassified consolidated financial statements related notes herein periods presented baker process discontinued operation future marketing efforts focus individual product lines net assets baker process totaled 2240 million december 31 2000 2783 million december 31 1999 use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates revenue recognition companys products services generally sold based upon purchase orders contracts customer include fixed determinable prices include right return similar provisions significant post delivery obligations revenue recognized products upon delivery title passes services rendered collectibility reasonably assured certain revenues companys baker process segment reported percentage completion method accounting using measurements progress towards completion appropriate products services provided provisions estimated warranty returns similar types items made time related revenue recognized cash equivalents company considers highly liquid investments original maturity three months less time purchase cash equivalents inventories stated primarily lower average cost market property stated cost less accumulated depreciation generally provided using straightline method estimated useful lives individual items company manufactures substantial portion rental tools equipment cost items includes direct indirect manufacturing costs company developing implementing sap r3 enterprisewide software system external direct costs consulting services payrollrelated cost employees work fulltime implementation enterprisewide software system capitalized costs associated business process reengineering expensed incurred company uses fullcost method accounting investment oil gas properties method company capitalizes acquisition exploration development costs incurred purpose finding oil gas reserves depreciation depletion amortization oil gas properties computed using unitofproduction method based upon production baker hughes incorporated notes consolidated financial statements continued estimates proved reserves goodwill intangibles goodwill arising acquisitions amortized using straightline method lesser expected useful life 40 years intangibles stated cost amortized straightline basis assets estimated useful life multiclient seismic data costs incurred creation company owned multiclient seismic data capitalized amortized estimated life revenue stream company expects receive licensing data cash prepayments received customers specific contracts included deferred revenue earned impairment longlived assets longlived assets goodwill intangibles reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable longlived assets fair value determined discounted cash flow analysis less carrying value asset loss recognized difference determination recoverability goodwill intangibles made based upon estimated undiscounted future net cash flows excluding interest expense division goodwill intangibles relate impairment loss recorded period determined carrying amount recoverable income taxes deferred income taxes determined utilizing asset liability approach method gives consideration future tax consequences associated differences financial accounting tax bases assets liabilities environmental matters remediation costs accrued based estimates known environmental remediation exposure accruals recorded even significant uncertainties exist ultimate cost remediation ongoing environmental compliance costs including maintenance monitoring costs expensed incurred company identified potentially responsible party united states federal superfund site company accrues share estimated remediation costs site based ratio estimated volume waste contributed site company total volume waste site stock based compensation intrinsic value method accounting used stock based employee compensation method compensation expense recognized exercise price employee stock option equal greater market price companys common stock grant date foreign currency translation gains losses resulting balance sheet translation foreign operations foreign currency functional currency included separate component accumulated comprehensive income within stockholders equity gains losses resulting balance sheet translation foreign operations us dollar functional currency included consolidated statements operations incurred financial instruments companys policies permit use derivative financial instruments speculative purposes company uses forward exchange contracts currency swaps hedge certain firm commitments transactions denominated foreign currencies gains losses forward contracts deferred offset foreign exchange gains losses underlying hedged item company uses interest rate swaps manage interest rate risk net amount paid received interest rate swaps recognized adjustment interest expense company also uses crude oil swaps collars hedge price risk associated companys crude oil production june 1998 financial accounting standards board issued statement 133 accounting derivative instruments baker hughes incorporated notes consolidated financial statements continued hedging activities sfas 133 company adopted sfas 133 effective january 1 2001 statement establishes accounting reporting standards derivative instruments hedging activities require entity recognize derivatives asset liability measured fair value depending intended use derivative changes fair value reported period change either component earnings component comprehensive income based companys derivative positions december 31 2000 company report gain cumulative effect adoption 09 million net tax gain accumulated comprehensive income 12 million net tax january 1 2001 reclassifications certain reclassifications made prior years consolidated financial statements conform current year presentation note 2 venture formation acquisitions venture formation november 30 2000 company schlumberger limited schlumberger certain wholly owned subsidiaries schlumberger signed agreement purpose creating venture operate name western geco company contributed certain assets western geophysical division net book value 11 billion consisting primarily multiclient seismic data property addition company contributed 150 million working capital western geco conjunction transaction company received 4934 million cash schlumberger exchange transfer portion companys ownership western geco additionally soon practicable november 30 2004 company schlumberger make cash trueup payment party based formula comparing ratio net present value sales revenue partys contributed multiclient seismic data libraries four year period ending november 30 2004 ratio net book value libraries november 30 2000 maximum payment either party required make result adjustment 1000 million company owns 30 western geco accounts ownership western geco using equity method company recognize gain loss resulting initial formation venture due companys material continued involvement operations western geco company incurred fees expenses approximately 166 million connection transaction total 106 million direct costs capitalized companys investment 60 million recorded unusual charge companys consolidated statement operations acquisitions significant acquisitions made 2000 1999 april 1998 company acquired outstanding stock wedge dialog inc wedge 3d geophysical inc 3d 2185 million cash 1175 million cash respectively wedge specializes casedhole logging pipe recovery services 3d supplier primarily landbased seismic data acquisition services 1998 company also made several smaller acquisitions aggregate purchase price 1216 million purchase method accounting used record acquisitions operating results acquisitions included consolidated statement operations respective acquisition dates pro forma results wedge 3d acquisitions made 1998 presented pro forma revenue net income earnings per share would materially different companys actual results baker hughes incorporated notes consolidated financial statements continued note 3 unusual items merger related costs 2000 company incurred items resulting net unusual charge 696 million unusual items included charges 1110 million offset credits 414 million table set forth summarizes transactions october 2000 companys board directors approved companys plan substantially exit oil gas exploration business resulting unusual charge totaling 1050 million recorded fourth quarter company sold interests china gulf mexico gabon oil gas properties recorded pretax loss sale properties 755 million net proceeds sales 534 million used repay outstanding indebtedness company also wroteoff remaining undeveloped exploration properties foreign jurisdictions resulting pretax loss 162 million company accrued cash charges 133 million costs resulting exiting business including severance employeerelated costs settle contractual obligations employee groups terminated executive engineering field service support personnel amount accrued severance based upon positions eliminated companys written severance policy include portion employees salary severance dates company paid 06 million accrued severance 2000 based current estimates company expects 29 million accrued severance paid 2001 employees leave company also expects contractual obligations paid 2001 2000 company recorded unusual credit 285 million net reductions unusual charge accruals recorded 1999 prior years reflect current estimates remaining expenditures net reductions primarily related severance accruals legal accruals lease obligations items reflected unusual credits consolidated statement operations company recognized pretax gains 129 million sale various product lines within oilfield process segments recorded unusual credits company received net proceeds sales 417 million baker hughes incorporated notes consolidated financial statements continued result continuing low activity levels predominantly companys seismic products services company recorded charges fourth quarter 1999 totaling 1228 million summarized employee groups terminated executive marketing field service support personnel substantially either terminated company transferred western geco december 31 2000 amount accrued severance based upon positions eliminated companys written severance policy include portion employees salary severance dates company accrued 360 million related expected costs settle contractual obligations based upon managements decision reduce abandon certain operations based terms applicable agreements costs consist primarily cost terminating leases certain marine vessels taken service removed fleet impairment property includes writeoff writedown certain assets utilized companys seismic business assets scrapped otherwise disposed consist 511 million land marine recording equipment 14 million data processing equipment 196 million marine vessels sold otherwise abandoned write amounts generally determined use internal appraisal techniques assess estimated fair value realized upon disposal 1999 company realized unusual gains totaling 548 million company sold two large excess real estate properties realized net gains totaling 395 million company received net proceeds 681 million addition company sold certain assets related previous divestiture joint venture realized net gain 153 million 1999 company reviewed remaining balances accruals merger unusual cash charges recorded 1998 prior years made 130 million net reductions reflect current estimates remaining expenditures net reductions included reversals previously recorded accruals utilized relate primarily severance accruals lease obligations addition accruals related certain terminated lease obligations revisions made increase previously recorded amounts based current information estimates expected cash flows related leases items reflected following captions consolidated statement operations year ended december 31 1999 baker hughes incorporated notes consolidated financial statements continued company experienced high growth levels products services 1994 second quarter 1998 third fourth quarters 1998 company experienced decline demand products services result significant decrease price oil natural gas decline customer demand materialized quickly previous high growth rates result sharp decline demand adjust lower level activity company assessed overall operations recorded charges 5895 million 1998 summarized employee groups terminated marketing manufacturing field service personnel engineering administrative support employees terminated december 31 2000 amount accrued severance based upon companys written severance policy positions eliminated accrued severance include portion employees salaries severance dates company accrued 400 million combine operations consolidate facilities accrual includes costs settle leases idled facilities based upon lease agreements shutdown oil gas operations certain countries based upon managements decision abandon operations terminate rig contract based upon terms agreement collocation costs based upon estimated exit costs approved plans accrual include portion costs actual abandonment facilities ceasing operations remaining accrual 37 million relates abandoned leases spent according lease terms accrual environmental reserves relates additional costs remediate properties obtained july 1997 petrolite acquisition company completed remediation 2000 cash costs 214 million include 109 million settle certain litigation 29 million settle contractual obligations 29 million costs dispose obsolete inventory remaining accrual 30 million relates contractual obligations anticipated legal settlements impairment inventory rental tool assets 1732 million recorded due advances technology obsoleted certain product lines well decline market demand resulted excess supply certain products third quarter 1998 company recorded 832 million writedown petroalliance services company limited pas former consolidated joint venture operating former soviet union writedown joint venture based upon companys estimated value assets ultimately received consideration sale pas investment november 1998 consideration sale pas company received seismic vessel seismic welllogging assets certain pas assets kazakhstan turkmenistan certain customer receivables 330 million note purchasers writedown included 107 million equipment 220 million goodwill 505 million net current assets impairment property assets 801 million recorded includes 181 million writedown reduce carrying value portion companys drilling equipment 126 million writeoff obsolete solid oilfilled streamer sections used seismic vessels 149 million writedown surplus welllogging equipment 95 million writeoff prepaid royalties abandoned product line 250 million assets written fair market value baker hughes incorporated notes consolidated financial statements continued writeoff intangible assets 215 million recorded includes 27 million capitalized software costs product lines abandoned result recent acquisitions 53 million capitalized development costs software systems replaced companys implementation sap r3 135 million goodwill associated discontinued business subsidiary held sale 693 million charge recorded related companys oil gas properties ceiling test charge consisted 258 million related properties united states 77 million related properties argentina remaining 358 million resulted writeoff unproven reserves foreign jurisdictions management company plans reduce amount future exploration capital writedown real estate held sale 170 million recorded specific property charge reduces carrying value propertys appraised value 107 million charge taken writeoff investments joint ventures russia indonesia due deteriorating market economic conditions two countries writeoff represents entire amount companys investment two joint ventures charge also includes 28 million loss sale tracor europa discontinued subsidiary charges reflected following captions consolidated statement operations year ended december 31 1998 merger related costs 1998 company completed merger western atlas inc western atlas connection merger company recorded merger related costs 2191 million summarized transaction costs 515 million include banking legal printing fees costs directly related merger employee related costs 877 million primarily consist 603 million payments made certain officers western atlas baker hughes pursuant change control provisions 154 million severance benefits paid terminated employees whose responsibilities deemed redundant result merger remaining accrued employee costs 83 million represent retirement benefits certain employees paid accordance terms agreements lives covered employees integration costs include costs changing legal registrations various jurisdictions terminating joint venture result merger changing signs logos companys major facilities around world integration costs noncash charge 582 million consists charge 453 million related triggering change control rights contained certain western atlas employee stock option plans converted baker hughes options concurrent merger charge 39 million issuance companys common stock pursuant certain stock plans result change control 90 million charge recorded writeoff carrying value product line discontinued result merger baker hughes incorporated notes consolidated financial statements continued note 4 income taxes provision income taxes comprised following years ended december 31 geographic sources income loss income taxes follows years ended december 31 tax benefits 58 million 42 million 161 million associated exercise employee stock options allocated equity years ended december 31 2000 1999 1998 respectively provision income taxes differs amount computed applying us statutory income tax rate income taxes years ended december 31 reasons set forth result repatriation proceeds formation western geco venture december 2000 company incurred 34 million foreign withholdings taxes provided 60 million additional us taxes addition formation venture reduces expected amount foreign source income available future utilize companys foreign tax credit carryover accordingly company provided 356 million additional us taxes respect future repatriation earnings necessary utilize foreign tax credit carryover amounts aggregating 450 million presented income tax rate reconciliation table caption formationrelated taxes western geco effective tax rates merger related costs unusual items 335 372 356 years ended december 31 2000 1999 1998 respectively baker hughes incorporated notes consolidated financial statements continued deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards tax effects companys temporary differences carryforwards follows december 31 valuation allowance recorded likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future company provided valuation allowance operating loss carryforwards certain nonus jurisdictions operations decreased currently ceased company withdrawn entirely provision made us additional foreign taxes anticipated repatriation certain earnings foreign subsidiaries company considers undistributed earnings foreign subsidiaries amount already provided permanently reinvested additional foreign earnings could become subject additional tax remitted deemed remitted dividend however additional amount taxes payable practicable estimate december 31 2000 company approximately 1153 million foreign tax credits 535 million general business credits available offset future payments federal income taxes expiring varying amounts 2004 2021 companys 97 million alternative minimum tax credits carryforward may carried forward indefinitely current us law operating loss carryforwards without valuation allowance expire varying amounts next twenty years note 5 earnings per share reconciliation number shares used basic diluted earnings per share eps computations follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued note 6 inventories comprised following december 31 note 7 investments affiliates company investments affiliates accounted using equity method significant affiliates western geco 30 owned included caption equity income losses affiliates companys consolidated statement operations 2000 95 million restructuring integration charges associated western geco december 31 2000 net accounts receivable affiliates totaled 114 million net accounts receivable affiliates december 31 1999 significant december 31 2000 excess companys investment companys equity affiliates 2674 million amount amortized 40 years amortization included companys equity income losses affiliates summarized unaudited combined financial information affiliates includes one month activity western geco follows december 31 note 8 property goodwill intangibles property plant equipment comprised following december 31 baker hughes incorporated notes consolidated financial statements continued goodwill intangibles follows december 31 baker hughes incorporated notes consolidated financial statements continued note 9 indebtedness total debt consisted following december 31 december 31 2000 company 12285 million credit facilities commercial banks 7505 million committed facilities mature follows 2125 million 2002 5380 million 2003 companys policy classify commercial paper shortterm borrowings longterm debt extent committed facilities company ability credit agreements intent maintain obligations longer one year liquid yield option notes lyons convertible companys common stock conversion price 4180 per share calculated december 31 2000 increases annual rate 35 option company lyons may redeemed cash redemption price equal issue price plus accrued original issue discount date redemption baker hughes incorporated notes consolidated financial statements continued option holder lyons may redeemed cash may 5 2003 redemption price equal issue price plus accrued original issue discount date redemption maturities debt december 31 2000 follows 2001 133 million 2002 10 million 2003 3452 million 2004 3482 million 2005 00 million 13552 million thereafter note 10 financial instruments fair value financial instruments companys financial instruments include cash shortterm investments receivables payables debt interest rate swaps crude swaps foreign currency contracts except described estimated fair value financial instruments december 31 2000 1999 approximate carrying value reflected consolidated balance sheets fair value companys debt interest rate swaps crude oil hedges foreign currency contracts estimated based quoted market prices estimated fair value companys debt december 31 2000 1999 21315 million 27284 million respectively differs carrying amounts 20629 million 28186 million respectively included consolidated balance sheets interest rate swaps december 31 2000 company party interest rate swap agreement notional amount 3250 million company receives interest rate 625 pays interest rate equal average 6month libor yen euro swiss franc plus 316 spread interest rate swap settles semiannually terminates january 2009 unlikely event counterparty fails meet terms interest rate swap agreement companys exposure limited interest rate differential december 31 1999 company party interest rate swap agreement notional amount 930 million company paid interest rate libor plus 201 received interest rate 859 interest rate swap settled semiannually terminated january 27 2000 fair value contracts december 31 2000 1999 96 million liability 138 million liability respectively crude oil hedges september 15 2000 company entered two crude oil contracts costless collars hedge price risk associated companys interest oil producing property nigeria contracts use wtinymex reference commodity establish cap 3500 floor 2700 three month period ending march 31 2001 cap 3300 floor 2700 three month period ending june 30 2001 respectively fair value contracts december 31 2000 31 million asset foreign currency forward contracts december 31 2000 company entered foreign currency forward contract notional amount 500 million hedge exposure currency fluctuations british pound foreign currency gains losses hedges exposure currency fluctuations marked market changes fair value included current period income counterparties companys forward contracts major financial institutions credit ratings concentration risk financial institutions monitored continuing basis managements opinion present significant credit risk company december 31 1999 company entered foreign currency forward contracts notional amounts 395 million hedge commitment purchase seismic vessel 71 million hedge equipment purchases longterm purchase agreement 07 million hedge expected collection longterm sales agreement fair value contracts december 31 2000 1999 15 million asset 07 million asset respectively baker hughes incorporated notes consolidated financial statements continued concentration credit risk company sells products services various companies oil gas industry although concentration could affect companys overall exposure credit risk management believes company exposed minimal risk since majority business conducted major companies within industry company performs periodic credit evaluations customers financial condition generally require collateral accounts receivables cases company require payment advance security form letter credit bank guarantee company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions believes risk loss minimal note 11 segment related information company currently seven divisions separate management teams infrastructures offer different products services divisions aggregated two reportable segments oilfield process oilfield segment currently consists six divisions baker atlas baker hughes inteq baker oil tools baker petrolite centrilift hughes christensen manufacture sell equipment provide services used drilling completion production maintenance oil gas wells reservoir measurement evaluation aggregated longterm financial performance divisions affected similar economic conditions consolidated results evaluated regularly chief operating decision maker deciding allocate resources assessing performance principal markets segment include major oil gas producing regions world including north america latin america europe africa middle east far east customers include major multinational independent national stateowned oil companies oilfield segment also includes companys interest oil gas property nigeria process segment consists one division baker process manufactures sells process equipment separating solids liquids filtration sedimentation centrifugation flotation processes principal markets segment include regions world significant industrial municipal wastewater applications base metals activity customers include municipalities contractors engineering companies pulp paper minerals industrial oil gas producers accounting policies segment described note 1 notes consolidated financial statements company evaluates performance segments based income taxes accounting changes unusual items interest income expense baker hughes incorporated notes consolidated financial statements continued summarized financial information shown following table column includes corporate related items results insignificant operations relates segment profit loss income expense allocated reportable segments years ended december 31 2000 1999 oilfield revenues attributable one customer 10 total oilfield revenues year ended december 31 1998 oilfield revenues attributable one customer totaled 6298 million 109 following table presents details segment loss years ended december 31 baker hughes incorporated notes consolidated financial statements continued following table presents consolidated revenues country based location use product service years ended december 31 following table presents net property country based location asset december 31 assets represent marine seismic vessels land crews related equipment mobile move frequently countries data processing centers land buildings included countries assets located note 12 employee stock plans company stock option plans provide granting options purchase common stock officers key employees stock options may granted subject terms ranging one ten years price equal greater fair market value stock date grant stock option activity company follows shares thousands december 31 2000 67 million shares available future option grants baker hughes incorporated notes consolidated financial statements continued following table summarizes information stock options outstanding december 31 2000 shares thousands following table summarizes pro forma disclosures assuming company used fair value method accounting stock based compensation plans effects applying fair market value method accounting pro forma disclosure may indicative future amounts since pro forma disclosure apply options granted prior 1996 additional awards future years anticipated fair market value options granted 2000 1999 1998 determined using blackscholes optionpricing model assumptions resulting fair market values follows note 13 employee benefit plans defined benefit pension plans postretirement benefits pensions company various noncontributory defined benefit pension plans covering various domestic foreign employees generally company makes annual contributions plans amounts necessary meet minimum governmental funding requirements company provides certain postretirement health care life insurance benefits pensions postretirement benefits substantially us employees retire met certain age service requirements baker hughes incorporated notes consolidated financial statements continued reconciliation beginning ending balances benefit obligations fair value plan assets funded status plans follows years ended december 31 amounts recognized consolidated balance sheet follows december 31 actuarial assumptions used determine costs benefit obligation plans follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued components net pension postretirement costs follows years ended december 31 projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 1093 million 999 million 668 million december 31 2000 366 million 323 million 75 million december 31 1999 companys postretirement benefit plan funded assumed health care cost trend rates significant effect amounts reported postretirement benefits plan assumed health care cost trend rate used measuring accumulated benefit obligation postretirement benefits adjusted 2000 december 31 2000 health care cost trend rate 76 employees age 65 88 participants age 65 declining gradually successive year reaches 54 employees age 65 52 employees age 65 2007 onepercentagepoint change assumed health care cost trend rates would following effects defined contribution plans periods reported generally companys us employees 1 employees western atlas employed prior merger 2 covered one baker hughes pension plans eligible participate company sponsored thrift plan prior 1999 employees western atlas employed prior merger eligible participate separate western atlas defined contribution plan 1999 employees western atlas employed prior merger worked companys divisions western geophysical became eligible participate company sponsored thrift plan rather western atlas defined contribution plan company sponsored thrift plan allows eligible employees elect contribute 1 15 salaries investment trust employee contributions matched company rate 100 per 100 employee contribution first 3 050 per 100 employee contribution next 2 employees salary addition company contributes eligible employees 2 5 salary depending employees age january 1 year contributions become fully vested employee five years employment companys contribution thrift plan defined contribution plans amounted 567 million 575 million 510 million 2000 1999 1998 respectively respect western atlas defined contribution plan company contributed amount based consolidated pretax earnings participating businesses accordance provisions plan includes voluntary savings feature intended qualify section 401k internal revenue code designed enhance retirement programs participating employees feature company matches 67 certain portion participants contributions plan 2000 1998 23 million 314 million respectively employer contributions plan 1999 baker hughes incorporated notes consolidated financial statements continued post employment benefits periods reported company provided certain postemployment disability medical benefits substantially qualifying former inactive us employees employed time western atlas following employment retirement starting january 1 1999 benefits provided substantially qualified former active western atlas employees disability income benefits disability benefits available date hire provided qualified plan funded contributions company employees primary asset plan guaranteed insurance contract insurance company asset currently earns interest 59 actuarially determined obligation calculated discount rate 775 disability benefits expense 04 million 13 million 29 million 2000 1999 1998 respectively continuation medical life insurance thrift plan benefits disability service related salary continuance benefits continuation benefits also provided qualified plan expense continuation benefits primarily interest cost projected benefit obligation 26 million 59 million 38 million 2000 1999 1998 respectively 2000 company changed salary continuance benefits nonservice related plan following table sets forth funded status amounts recognized companys consolidated balance sheets disability benefits continuation benefits december 31 health care cost assumptions used measure continuation benefits obligation similar assumptions used determining obligation postretirement health care benefits additional assumptions used accounting continuation benefits discount rate 725 2000 1999 increases compensation 5 periods presented note 14 commitments contingencies leases december 31 2000 company longterm operating leases covering certain facilities equipment minimum annual rental commitments five years period ending december 31 2005 561 million 497 million 399 million 294 million 211 million respectively 1523 million aggregate thereafter company entered significant capital leases september 2000 company sold four facilities approximately 1177 million proceeds used repay outstanding indebtedness facilities leased back purchaser period 15 years current market rates litigation company sometimes named defendant litigation relating products services provides company insures risks extent deemed prudent management assurance given nature amount insurance every case fully indemnify company liabilities arising pending future legal proceedings relating ordinary business activities many policies contain self insured retentions amounts company deems prudent company named defendant number shareholder class action securities fraud suits filed purported shareholders shortly companys announcement december 8 1999 regarding accounting issues discovered baker hughes inteq division suits seek unspecified monetary damages consolidated one lawsuit federal district court southern district texas pursuant private securities litigation reform act 1995 company believes allegations suits without merit company intends vigorously defend suits even adverse outcome class action litigation could adverse effect companys results operations financial condition baker hughes incorporated notes consolidated financial statements continued environmental matters companys past present operations include activities subject extensive federal state environmental regulations company identified potentially responsible party prp remedial activities related various superfund sites applicable united states federal law imposes joint several liability prp cleanup sites leaving company uncertainty may responsible remediation cost attributable prps unable pay share remediation costs generally company estimated share total cost based ratio number gallons waste estimated contributed site company bears total number gallons waste estimated disposed site company accrued believes pro rata share total cost remediation superfund sites based upon volumetric calculation accrual made joint several liability concept since company believes probability pay material costs volumetric share remote company believes prps greater involvement volumetric calculation basis substantial assets may reasonably expected pay share cost remediation cases company insurance coverage contractual indemnities third parties cover ultimate liability december 31 2000 1999 company accrued 141 million 229 million respectively remediation costs including superfund sites referred measurement accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity utilized company believes likelihood material losses excess amounts recorded remote normal course business customers vendors others company contingently liable performance letters credit financial guarantees totaling approximately 1940 million december 31 2000 addition december 31 2000 company guaranteed debt third parties totaling 578 million practicable estimate fair value financial instruments management expect material losses financial instruments note 15 supplemental information supplemental consolidated statement operations information follows years ended december 31 supplemental consolidated statement cash flows information follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued formation western geco included following cash noncash amounts year ended december 31 note 16 quarterly data unaudited see note 3 unusual charges represents revenues less costs revenues item 9item 8 financial statements supplementary data management report financial responsibilities management baker hughes incorporated responsible preparation integrity accompanying consolidated financial statements information contained annual report consolidated financial statements prepared conformity generally accepted accounting principles include amounts based managements informed judgments estimates fulfilling responsibilities integrity financial information management maintains relies companys system internal control system includes written policies organizational structure providing division responsibilities selection training qualified personnel program financial operational reviews professional staff corporate auditors system designed provide reasonable assurance assets safeguarded transactions executed accordance managements authorization accounting records reliable basis preparation consolidated financial statements management believes december 31 2001 companys internal control system provides reasonable assurance material errors irregularities prevented detected within timely period cost effective management recognizes responsibility fostering strong ethical climate companys affairs conducted according highest standards personal corporate conduct responsibility characterized reflected companys standards conduct distributed throughout company management maintains systematic program assess compliance policies included standards board directors auditethics committee composed solely nonemployee directors reviews companys financial reporting accounting ethical practices auditethics committee recommends board directors selection independent public accountants reviews fee arrangements meets periodically independent public accountants management corporate auditors review work propriety discharge responsibilities independent public accountants corporate auditors full free access auditethics committee without management present discuss auditing financial reporting matters michael e wiley g stephen finley alan j keifer michael e wiley g stephen finley alan j keifer chairman president senior vice president vice president chief executive officer finance administration controller chief financial officer independent auditors report stockholders baker hughes incorporated audited accompanying consolidated balance sheets baker hughes incorporated subsidiaries december 31 2001 2000 related consolidated statements operations stockholders equity cash flows three years period ended december 31 2001 audits also included financial statement schedule ii valuation qualifying accounts financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position baker hughes incorporated subsidiaries december 31 2001 2000 results operations cash flows three years period ended december 31 2001 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein described note 1 consolidated financial statements effective january 1 2001 company adopted statement financial accounting standards nos 133 137 138 established new accounting reporting standards derivative instruments hedging activities deloitte touche llp houston texas february 13 2002 baker hughes incorporated consolidated statements operations millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated balance sheets millions except par value see notes consolidated financial statements baker hughes incorporated consolidated statements stockholders equity millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated statement cash flows millions see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements note 1 summary significant accounting policies basis presentation consolidated financial statements include accounts baker hughes incorporated majority owned subsidiaries company investments company owns 20 50 exercises significant influence operating financial policies accounted using equity method accounting significant intercompany accounts transactions eliminated consolidation notes consolidated financial statements dollar share amounts tabulations millions dollars shares respectively unless otherwise indicated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period future events effects cannot perceived certainty accordingly companys accounting estimates require exercise judgment management believes estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts inventory valuation reserves recoverability longlived assets useful lives used depreciation amortization income taxes related valuation allowances insurance environmental legal restructuring accruals accounting estimates used preparation consolidated financial statements may change new events occur experience acquired additional information obtained companys operating environment changes revenue recognition companys products services generally sold based upon purchase orders contracts customer include fixed determinable prices include right return similar provisions significant post delivery obligations revenue recognized products upon delivery title passes services rendered collectibility reasonably assured certain revenues companys process segment reported percentage completion method accounting using measurements progress towards completion appropriate products services provided provisions estimated warranty returns similar types items made time related revenue recognized cash equivalents company considers highly liquid investments original maturity three months less time purchase cash equivalents inventories stated lower cost market cost primarily determined average cost method includes cost materials labor manufacturing overhead property depreciation property stated cost less accumulated depreciation generally provided using straightline method estimated useful lives individual assets company manufactures substantial portion rental tools equipment cost items includes direct indirect manufacturing costs capitalized carried inventory tool completed transferred rental tool fleet baker hughes incorporated notes consolidated financial statements continued significant improvements betterments capitalized extend useful life asset routine repairs maintenance expensed incurred company substantially completed development implementation sap r3 enterprisewide software system external direct costs consulting services payrollrelated cost employees worked fulltime implementation system capitalized classified machinery equipment costs associated business process reengineering expensed incurred amortization prorata amount capitalized costs began system implemented companys operations company uses fullcost method accounting investment oil gas properties method company capitalizes acquisition exploration development costs incurred purpose finding oil gas reserves depreciation depletion amortization oil gas properties computed using unitofproduction method based upon production estimates proved reserves goodwill intangibles amortization goodwill arising acquisitions amortized using straightline method lesser expected useful life 40 years intangibles stated cost amortized straightline basis assets estimated useful life impairment longlived assets longlived assets includes property plant equipment goodwill intangibles certain assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable impairment loss recorded period determined carrying amount recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets income taxes company uses liability method reporting income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered future tax benefits recognized extent realization benefits likely deferred income taxes provided estimated income tax effect temporary differences financial tax bases assets liabilities deferred tax assets also provided certain tax credit carryforwards valuation allowance reduce deferred tax assets established likely portion deferred tax assets realized company intends indefinitely reinvest earnings certain nonus subsidiaries operations outside united states accordingly company provide us income taxes earnings company operates many legal forms 70 countries result company subject many domestic foreign tax jurisdictions many tax agreements treaties among various taxing authorities determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events changes tax laws regulations agreements treaties foreign currency exchange restrictions companys level operations profitability taxing jurisdiction could impact upon amount income taxes company provides given year baker hughes incorporated notes consolidated financial statements continued environmental matters remediation costs accrued based estimates known environmental remediation exposure using currently available facts existing environmental permits technology presently enacted laws regulations companys estimates costs developed based internal evaluations necessary recommendations external environmental consultants accruals recorded probable company obligated pay amounts environmental site evaluation remediation related costs amounts reasonably estimated obligation estimated within range company accrues minimum amount range accruals recorded even significant uncertainties exist ultimate cost remediation ongoing environmental compliance costs including maintenance monitoring costs expensed incurred company identified potentially responsible party united states federal superfund site company accrues share estimated remediation costs site based ratio estimated volume waste contributed site company total volume waste site stock based compensation company accounts stock based compensation using intrinsic value method accounting accordance accounting principles board opinion 25 accounting stock issued employees apb 25 method compensation expense recognized number shares granted known exercise price employee stock option equal greater market price companys common stock grant date foreign currency translation majority companys foreign subsidiaries designated local currency functional currency gains losses resulting balance sheet translation foreign operations included separate component accumulated comprehensive loss within stockholders equity foreign subsidiaries designated us dollar functional currency gains losses resulting balance sheet translation foreign operations included consolidated statements operations incurred derivative financial instruments company monitors exposure various business risks including commodity price foreign exchange rate interest rate risks occasionally uses derivative financial instruments manage impact certain risks companys policies permit use derivative financial instruments speculative purposes company uses forward exchange contracts currency swaps hedge certain firm commitments transactions denominated foreign currencies company uses interest rate swaps manage interest rate risk company also uses crude oil swaps collars hedge price risk associated companys crude oil production january 1 2001 company adopted statement financial accounting standards sfas 133 accounting derivative instruments hedging activities amended sfas nos 137 138 sfas 133 establishes accounting reporting standards derivative instruments hedging activities require entity recognize derivatives asset liability measured fair value depending intended use derivative effectiveness changes fair value reported period change either component earnings component accumulated comprehensive loss adoption sfas 133 january 1 2001 resulted gain 08 million net tax recorded cumulative effect accounting change consolidated statement operations gain 12 million net tax recorded accumulated comprehensive loss 2001 12 million gain reclassified earnings upon maturity contracts qualify hedge accounting derivative must qualify either fair value hedge cash flow hedge net investment foreign operations fair value hedge recognized asset liability unrecognized firm commitment effective ineffective portions changes fair value baker hughes incorporated notes consolidated financial statements continued derivative along gain loss hedged item recorded earnings reported consolidated statements operations line hedged item cash flow hedge forecasted transaction variability cash flows received paid future related recognized asset liability effective portion changes fair value derivative recorded accumulated comprehensive loss hedged item realized gain loss included accumulated comprehensive loss reported line consolidated statements operations hedged item addition fair value changes excluded companys effectiveness assessments ineffective portion changes fair value derivatives used cash flow hedges immediately recognized earnings company currently hedging net investments foreign operations inception new derivative company designates derivative cash flow hedge fair value hedge company documents relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions company assesses whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item inception hedge ongoing basis new accounting pronouncements june 2001 financial accounting standards board fasb issued sfas 141 business combinations sfas 141 requires business combinations initiated june 30 2001 accounted purchase method accounting addresses initial recognition measurement goodwill intangible assets acquired business combination business combinations accounted pooling interests method prior june 30 2001 changed adoption sfas 141 company impact consolidated financial statements company june 2001 fasb issued sfas 142 goodwill intangible assets sfas 142 addresses initial recognition measurement intangible assets acquired business combination accounting goodwill intangible assets subsequent acquisition sfas 142 provides intangible assets finite useful lives amortized goodwill intangible assets indefinite lives amortized rather tested least annually impairment sfas 142 requires transitional impairment test performed within six months adoption transitional impairment loss recognized cumulative effect change accounting principle company adopt sfas 142 effective january 1 2002 cessation amortization expense related goodwill associated equity method investments guidelines sfas 142 result reduction approximately 525 million annual amortization expense 2002 company completed analysis impact adoption sfas 142 relates possible impairment goodwill june 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 addresses financial accounting reporting obligations associated retirement longlived assets associated asset retirement costs sfas 143 requires fair value liability associated asset retirement recognized period incurred reasonable estimate fair value made associated retirement costs capitalized part carrying amount longlived asset subsequently depreciated life asset company completed analysis impact adoption sfas 143 consolidated financial statements company adopt sfas 143 fiscal year beginning january 1 2003 august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets sfas 144 addresses financial accounting reporting impairment disposal longlived assets sfas 144 replaces sfas 121 accounting impairment longlived assets longlived assets disposed sfas 144 provides updated guidance concerning recognition measurement impairment loss certain types longlived assets modifies accounting reporting discontinued operations sfas 144 expected materially change methods used company measure impairment losses longlived assets may result future dispositions reported discontinued operations greater extent currently permitted company adopt sfas 144 fiscal year beginning january 1 2002 baker hughes incorporated notes consolidated financial statements continued reclassifications certain reclassifications made prior years consolidated financial statements conform current year presentation note 2 unusual items 2001 company incurred items resulting net unusual charge 16 million unusual items included charges 92 million offset credits 76 million table set forth summarizes transactions severance relates restructuring german operations bird machine division process segment employee groups terminated engineering field service support personnel amount accrued severance based upon positions eliminated companys specific statutory severance plans place operations include portion employees salary severance dates based current estimates company expects remainder accrued severance paid 2002 employees leave company 2001 company recorded unusual credit 42 million reduction unusual charge accrual recorded 2000 reflect current estimate remaining expenditures reduction related adjustments estimated costs settle contractual obligations based new events information company recognized gain 34 million disposition interest joint venture within oilfield segment received net proceeds 60 million transaction items reflected unusual credits consolidated statement operations baker hughes incorporated notes consolidated financial statements continued 2000 company incurred items resulting net unusual charge 696 million unusual items included charges 1110 million offset credits 414 million table set forth summarizes transactions october 2000 companys board directors approved companys plan substantially exit oil gas exploration business company sold interests china gulf mexico gabon oil gas properties recorded loss 755 million sale properties net proceeds sales 534 million used repay outstanding indebtedness company also wrote remaining undeveloped exploration properties foreign jurisdictions resulting loss 162 million company accrued cash charges 133 million costs resulting exiting business including severance employeerelated costs settle contractual obligations employee groups terminated executive engineering field service support personnel amount accrued severance based upon positions eliminated companys specific statutory plans place operations include portion employees salary severance dates based current estimates company expects remainder accrued severance paid 2002 employees leave company contractual obligations paid company settles various counterparties company incurred fees 60 million connection formation western geco venture formed company 2000 company recorded unusual credit 285 million net reductions unusual charge accruals recorded 1999 prior years reflect current estimates remaining expenditures net reductions primarily related severance accruals legal accruals lease obligations addition company recognized gains 129 million sale various product lines within oilfield process segments company received net proceeds sales 417 million items reflected unusual credits consolidated statement operations baker hughes incorporated notes consolidated financial statements continued result continuing low activity levels predominantly companys seismic products services company recorded charges fourth quarter 1999 totaling 1228 million summarized employee groups terminated executive marketing field service support personnel substantially either terminated company transferred december 31 2000 western geco amount accrued severance based upon positions eliminated companys specific statutory severance plans place operations include portion employees salary severance dates company accrued 360 million related expected costs settle contractual obligations based upon managements decision reduce abandon certain operations based terms applicable agreements costs consisted primarily cost terminating leases certain marine vessels taken service removed fleet impairment property included writeoff writedown certain assets utilized companys seismic business assets scrapped otherwise disposed consisted 511 million land marine recording equipment 14 million data processing equipment 196 million marine vessels sold otherwise abandoned writedown amounts generally determined use internal appraisal techniques assess estimated fair value realized upon disposal 1999 company realized unusual gains totaling 548 million company sold two large excess real estate properties realized net gains totaling 395 million company received net proceeds 681 million addition company sold certain assets related previous divestiture joint venture realized net gain 153 million 1999 company reviewed remaining balances accruals merger unusual cash charges recorded 1998 prior years made net reductions 130 million reflect current estimates remaining expenditures net reductions included reversals previously recorded accruals utilized relate primarily severance accruals lease obligations addition accruals related certain terminated lease obligations revisions made increase previously recorded amounts based current information estimates expected cash flows related leases unusual items described reflected following captions consolidated statement operations year ended december 31 1999 baker hughes incorporated notes consolidated financial statements continued note 3 income taxes provision income taxes comprised following years ended december 31 geographic sources income taxes extraordinary loss cumulative effect accounting changes follows years ended december 31 tax benefits 55 million 58 million 42 million associated exercise employee stock options allocated equity recorded capital excess par value years ended december 31 2001 2000 1999 respectively provision income taxes differs amount computed applying us statutory income tax rate income taxes extraordinary loss cumulative effect accounting changes reasons set forth years ended december 31 2001 incremental taxes 148 million western geco venture arose due unbenefitted foreign losses due taxes assessed jurisdictions deemed profit basis addition current year benefit 235 million recognized result settlement internal revenue service irs examination certain 1994 1997 preacquisition tax returns related refund claims western atlas inc company recognized interest income 54 million associated settlement 2000 result repatriation proceeds formation western geco venture company incurred 34 million foreign withholdings taxes provided 60 million additional us taxes addition formation venture reduced expected amount foreign source income available future utilize companys foreign tax credit carryover accordingly company provided 356 million additional us taxes respect future repatriation earnings necessary utilize foreign tax credit carryover amounts aggregating 450 million presented income tax rate reconciliation table caption formationrelated taxes western geco baker hughes incorporated notes consolidated financial statements continued 1999 company recognized tax benefit 181 million reversal previously provided deferred taxes settling irs examination 1994 1995 us tax years deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards tax effects companys temporary differences carryforwards follows december 31 valuation allowance recorded likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions company provided valuation allowance operating loss carryforwards certain nonus jurisdictions operations decreased currently ceased company withdrawn entirely provision made us additional foreign taxes anticipated repatriation certain earnings foreign subsidiaries company considers undistributed earnings foreign subsidiaries amount already provided indefinitely reinvested additional foreign earnings could become subject additional tax remitted deemed remitted dividend however additional amount taxes payable practicable estimate december 31 2001 company approximately 1041 million foreign tax credits 613 million general business credits available offset future payments federal income taxes expiring varying amounts 2004 2022 companys 215 million alternative minimum tax credits carryforward may carried forward indefinitely current us law operating loss carryforwards without valuation allowance expire varying amounts next twenty years baker hughes incorporated notes consolidated financial statements continued note 4 earnings per share reconciliation number shares used basic diluted earnings per share eps computations follows years ended december 31 note 5 inventories comprised following december 31 note 6 investments affiliates company investments affiliates accounted using equity method accounting significant affiliates western geco formed november 30 2000 company schlumberger limited schlumberger certain wholly owned subsidiaries schlumberger company schlumberger owning 30 70 venture respectively company contributed certain assets western geophysical division net book value 11 billion consisting primarily multiclient seismic data property 150 million working capital western geco company recognize gain loss resulting initial formation venture due companys material continued involvement operations western geco company incurred fees expenses approximately 166 million connection transaction total 106 million direct costs capitalized companys investment 60 million recorded unusual charge companys consolidated statement operations year ended december 31 2000 conjunction transaction company received 4934 million cash schlumberger exchange transfer portion companys ownership western geco additionally soon practicable november 30 2004 company schlumberger make cash trueup payment party based formula comparing ratio net present value sales revenue partys contributed multiclient seismic data libraries fouryear period ending november 30 2004 ratio net book value libraries november 30 2000 maximum payment either party required make result adjustment 1000 million conjunction formation western geco company transferred venture lease seismic vessel company sole guarantor lease obligation however schlumberger indemnified company 70 total lease obligation december 31 2001 remaining commitment lease 964 million company also entered agreement western geco whereby western geco subleased facility company period ten years current market rates 2001 company received 59 million rental income western geco included caption equity income loss affiliates companys consolidated statement operations 2001 2000 103 million asset impairment charges associated western geco 95 million restructuring integration charges associated western geco respectively baker hughes incorporated notes consolidated financial statements continued october 30 2001 company sequel holdings inc sequel created entity operate name petreco international petreco company contributed 166 million net assets refining production product line process segment petreco consisting primarily intangible assets accounts receivable inventories conjunction transaction company received 90 million cash two promissory notes totaling 100 million petreco profits shared company sequel 49 51 interests respectively sequel entitled liquidation preference upon liquidation sale petreco company accounts ownership petreco using equity method accounting recognize gain loss initial formation entity due companys material continued involvement operations petreco summarized unaudited combined financial information equity method affiliates follows december 31 december 31 2001 2000 net accounts receivable affiliates totaled 335 million 114 million respectively december 31 2001 2000 excess companys investment companys equity affiliates 3034 million 2915 million respectively amount amortized 40 years amortization included companys equity income loss affiliates note 7 property goodwill intangibles property plant equipment comprised following december 31 baker hughes incorporated notes consolidated financial statements continued goodwill intangibles follows december 31 note 8 indebtedness total debt consisted following december 31 december 31 2001 company 12899 million credit facilities commercial banks 8005 million committed facilities mature september 2003 companys policy classify commercial paper shortterm borrowings longterm debt extent committed facilities company ability credit agreements intent maintain obligations baker hughes incorporated notes consolidated financial statements continued longer one year borrowings credit facilities years ended december 31 2001 2000 may 25 2001 company redeemed outstanding lyons redemption price 78613 per 1000 principal amount total 3018 million redemption funded issuance commercial paper connection early extinguishment debt company recorded extraordinary loss 23 million 15 million tax represents writeoff remaining debt issuance costs maturities debt december 31 2001 follows 2002 122 million 2003 2726 million 2004 3478 million 2005 01 million 2006 00 million 10619 million thereafter note 9 financial instruments fair value financial instruments companys financial instruments include cash shortterm investments receivables payables debt interest rate swaps crude oil contracts foreign currency contracts except described estimated fair value financial instruments december 31 2001 2000 approximate carrying value reflected consolidated balance sheets fair value companys debt interest rate swaps crude oil contracts foreign currency contracts estimated based yearend quoted market prices estimated fair value companys debt december 31 2001 2000 17617 million 21315 million respectively differs carrying amounts 16946 million 20629 million respectively included consolidated balance sheets interest rate swaps company entered interest rate swap agreement february 1999 notional amount 3250 million company receives interest rate 625 pays interest rate equal average 6month libor yen euro swiss franc plus 316 spread interest rate swap settles semiannually terminates january 2009 company entered second interest rate swap agreement june 2001 notional amount 1000 million company receives interest rate 7875 pays interest rate threemonth libor plus spread 27625 interest rate swap settles semiannually terminates june 2004 accordance sfas 133 two interest rate swap agreements designated qualified fair value hedging instruments fully effective resulting net gain loss recorded consolidated statement operations 2001 unlikely event counterparty fails meet terms interest rate swap agreements companys exposure limited interest rate differentials fair value contracts december 31 2001 2000 13 million recognized asset sfas 133 96 million unrecorded liability respectively crude oil contracts year ended december 31 2001 company entered two crude oil contracts mitigate price risk associated production companys interest oil producing property nigeria based companys outlook crude oil prices company elected terminate contracts prior maturity date accordingly contracts terminated october 3 2001 company received cash payment 44 million accordance sfas 133 net gain recognized earnings 2001 crude oil contracts 31 million reported revenue consolidated statement operations baker hughes incorporated notes consolidated financial statements continued year ended december 31 2000 company entered two crude oil contracts mitigate price risk associated companys interest oil producing property nigeria fair value contracts december 31 2000 31 million unrecorded asset foreign currency forward contracts december 31 2001 company entered foreign currency forward contracts notional amounts 85 million 10 million 07 million hedge exposure currency fluctuations canadian dollar indonesian rupiah euro respectively contracts cash flow hedges based yearend quoted market prices contracts similar terms maturity dates asset liability recorded forward price substantially contract price december 31 2000 company entered foreign currency forward contracts notional amounts 500 million 03 million 02 million hedge exposure fluctuations british pound south african rand euro respectively fair value forward contracts december 31 2000 15 million unrecorded asset counterparties companys forward contracts major financial institutions credit ratings concentration risk financial institutions monitored continuing basis unlikely event counterparties fail meet terms foreign currency contract companys exposure limited foreign currency rate differential 2001 company entered several foreign currency contracts hedge exposure currency fluctuations specific transactions balances impact consolidated statement operations significant contracts either individually aggregate concentration credit risk company sells products services numerous companies oil gas industry although concentration could affect companys overall exposure credit risk management believes company exposed minimal risk since majority business conducted major companies within industry company performs periodic credit evaluations customers financial condition generally require collateral accounts receivable cases company require payment advance security form letter credit bank guarantee company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions believes risk loss minimal note 10 segment related information company currently eight operating divisions separate management teams infrastructures offer different products services divisions aggregated two reportable segments oilfield process oilfield segment consists six operating divisions baker atlas baker hughes inteq baker oil tools baker petrolite centrilift hughes christensen manufacture sell equipment provide services used drilling completion production maintenance oil gas wells reservoir measurement evaluation aggregated longterm financial performance divisions affected similar economic conditions consolidated results evaluated regularly chief operating decision maker deciding allocate resources assessing performance principal markets segment include major oil gas producing regions world including north america latin america europe africa middle east far east customers include major multinational independent national stateowned oil companies oilfield segment also includes companys interest oil gas property nigeria investment western geco less significant equity method investments baker hughes incorporated notes consolidated financial statements continued process segment consists two operating divisions eimco process equipment bird machine manufacture sell process equipment separating solids liquids filtration sedimentation centrifugation flotation processes principal markets segment include regions world significant industrial municipal wastewater applications base metals activity customers include municipalities contractors engineering companies pulp paper minerals industrial oil gas producers process segment also includes companys investment petreco accounting policies segment described note 1 notes consolidated financial statements company evaluates performance segments based income taxes accounting changes unusual items interest income expense intersegment sales transfers significant summarized financial information shown following table column includes corporate related items results insignificant operations relates segment profit loss income expense allocated reportable segments years ended december 31 2001 2000 1999 revenues attributable one customer accounted 10 total revenues segment following table presents details segment loss years ended december 31 baker hughes incorporated notes consolidated financial statements continued following table presents details total assets december 31 following table presents consolidated revenues country based location use product service years ended december 31 following table presents net property country based location asset december 31 assets represent marine seismic vessels land crews related equipment mobile move frequently countries data processing centers land buildings included countries assets located note 11 employee stock plans company stock option plans provide issuance incentive nonqualified stock options directors officers key employees exercise price equal greater fair market value stock date grant stock options generally vest three years vested options exercisable part full time prior expiration date ten years date grant december 31 2001 76 million shares available future option grants baker hughes incorporated notes consolidated financial statements continued following table summarizes activity companys stock option plans shares thousands following table summarizes information stock options outstanding december 31 2001 shares thousands company also employee stock purchase plan whereby eligible employees may purchase shares companys common stock price equal 85 lower closing price companys common stock first last trading day companys fiscal year total 15 million shares remaining issuance plan employees purchased 06 million shares 2001 11 million shares 2000 15 million shares 1999 allowed sfas 123 company elected continue follow apb 25 accounting employee stock plans apb 25 company recognize compensation expense upon issuance stock options option terms fixed exercise price equal greater market price underlying stock grant date baker hughes incorporated notes consolidated financial statements continued sfas 123 requires disclosure pro forma net income eps company adopted fair value method january 1 1995 sfas 123 fair value stock based awards employees calculated use option pricing models also require subjective assumptions including future stock price volatility expected time exercise greatly affect calculated values companys calculations made using blackscholes option pricing model following weighted average assumptions weighted average fair values options granted 2001 2000 1999 1504 1115 1177 per share respectively company recognized compensation expense based values companys net income eps would reduced pro forma amounts indicated pro forma calculations may indicative future amounts since pro forma disclosure apply options granted prior 1996 additional awards future years anticipated note 12 employee benefit plans defined benefit pension plans postretirement benefits pensions company various noncontributory defined benefit pension plans covering various domestic foreign employees generally company makes annual contributions plans amounts necessary meet exceed minimum governmental funding requirements company also provides certain postretirement health care life insurance benefits pensions postretirement benefits substantially us employees retire met certain age service requirements 2001 company approved amendments postretirement benefits plan certain employees enhance health care benefits effective january 1 2002 baker hughes incorporated notes consolidated financial statements continued reconciliation beginning ending balances benefit obligations fair value plan assets funded status plans follows years ended december 31 amounts recognized consolidated balance sheet follows december 31 actuarial assumptions used determine costs benefit obligation plans follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued components net pension postretirement costs follows years ended december 31 projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 1167 million 1124 million 723 million respectively december 31 2001 1093 million 999 million 668 million respectively december 31 2000 companys postretirement benefit plan funded assumed health care cost trend rates significant effect amounts reported postretirement benefits plan december 31 2001 health care cost trend rate 73 employees age 65 83 participants age 65 declining gradually successive year reaches 50 employees age 65 age 65 2007 assumed health care cost trend rate used measuring accumulated benefit obligation postretirement benefits adjusted 2000 onepercentagepoint change assumed health care cost trend rates would following effects defined contribution plans periods reported generally companys us employees eligible participate company sponsored thrift plan 401k plan internal revenue code 1986 amended company sponsored thrift plan allows eligible employees elect contribute 1 15 salaries investment trust employee contributions matched cash company rate 100 per 100 employee contribution first 3 050 per 100 employee contribution next 2 employees salary contributions vest immediately addition company makes cash contribution eligible employees 2 5 salary depending employees age contributions become fully vested employee five years employment thrift plan provides nine different investment options employee sole discretion determining employer employee contributions invested companys contribution thrift plan defined contribution plans amounted 637 million 575 million 555 million 2001 2000 1999 respectively certain nonus employees eligible participate thrift plan company provides nonqualified defined contribution plan provides basically benefits thrift plan addition company provides nonqualified supplemental retirement plan srp certain officers employees whose benefits thrift plan limited federal tax law srp also allows eligible employees defer portion eligible compensation provides employer matching base contributions pursuant limitations nonqualified plans fully funded invested trusts assets included companys consolidated balance sheet companys contributions nonqualified plans 42 million 24 million 20 million 2001 2000 1999 respectively baker hughes incorporated notes consolidated financial statements continued post employment benefits periods reported company provided certain postemployment disability medical benefits substantially qualifying former inactive us employees disability income benefits disability benefits available date hire provided qualified plan funded contributions company employees primary asset plan guaranteed insurance contract insurance company asset currently earns interest 57 actuarially determined obligation calculated discount rate 725 disability benefits income expense 19 million 04 million 13 million 2001 2000 1999 respectively continuation medical life insurance thrift plan benefits disability service related salary continuance benefits continuation benefits also provided qualified plan expense continuation benefits primarily interest cost projected benefit obligation 27 million 26 million 59 million 2001 2000 1999 respectively 2000 company changed salary continuance benefits nonservice related plan following table sets forth funded status amounts recognized companys consolidated balance sheets disability benefits continuation benefits december 31 health care cost assumptions used measure continuation benefits obligation similar assumptions used determining obligation postretirement health care benefits discount rate 650 2001 725 2000 used accounting continuation benefits note 13 commitments contingencies leases december 31 2001 company longterm noncancelable operating leases covering certain facilities equipment minimum annual rental commitments net amounts due subleases five years period ending december 31 2006 545 million 478 million 342 million 231 million 165 million respectively 1099 million aggregate thereafter company entered significant capital leases september 2000 company sold four facilities approximately 1177 million proceeds used repay outstanding indebtedness facilities leased back purchaser period 15 years current market rates one facilities subsequently subleased western geco current market rates period 10 years conjunction formation venture litigation company subsidiaries involved litigation proceedings arisen companys ordinary business activities company insures risks extent deemed prudent management assurance given nature amount insurance sufficient fully indemnify company liabilities arising pending future legal proceedings many insurance policies contain selfinsured retentions amounts company deems prudent company named defendant number shareholder class action suits filed purported shareholders shortly companys december 8 1999 announcement regarding accounting issues discovered inteq division suits seek unspecified monetary damages consolidated baker hughes incorporated notes consolidated financial statements continued federal district court southern district texas pursuant private securities litigation reform act 1995 company filed motions dismiss shareholder derivative suit class action federal district court granted companys motions actions appeal filed shareholder derivative suit class action case currently appeal u fifth circuit court appeals company believes allegations suits without merit company intends vigorously defend lawsuits even adverse outcome class action litigation could adverse effect companys results operations financial condition environmental matters companys past present operations include activities subject extensive federal state environmental regulations company identified potentially responsible party prp remedial activities related various superfund sites applicable united states federal law imposes joint several liability prp cleanup sites leaving company uncertainty may responsible remediation cost attributable prps unable pay share remediation costs generally company estimated share total cost based ratio estimated volume waste contributed site company bears total estimated volume waste disposed site company accrued believes pro rata share total estimated cost remediation superfund sites based upon volumetric calculation accrual made joint several liability concept since company believes probability pay material costs volumetric share remote company believes prps greater involvement volumetric calculation basis substantial assets may reasonably expected pay share cost remediation cases company insurance coverage contractual indemnities third parties cover ultimate liability december 31 2001 2000 company accrued 176 million 141 million respectively remediation costs including superfund sites referred measurement accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity utilized company believes likelihood material losses excess amounts recorded remote normal course business customers vendors others company contingently liable performance letters credit bank issued guarantees totaling approximately 1878 million december 31 2001 company also commitments outstanding purchase obligations related capital expenditures inventory purchase orders contracts approximately 1382 million december 31 2001 addition december 31 2001 company guaranteed debt third parties totaling 369 million practicable estimate fair value financial instruments management expect material losses financial instruments conjunction formation western geco company transferred venture lease seismic vessel company sole guarantor lease obligation however schlumberger indemnified company 70 total lease obligation december 31 2001 remaining commitment lease 964 million note 14 supplemental information supplemental consolidated statement operations information follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued supplemental consolidated statement cash flows information follows years ended december 31 formation petreco 2001 western geco 2000 included following cash noncash amounts year ended december 31 note 15 quarterly data unaudited see note 2 unusual charges represents revenues less cost revenues item 9item 8 financial statements supplementary data management report financial responsibilities management baker hughes incorporated responsible preparation integrity accompanying consolidated financial statements information contained annual report consolidated financial statements prepared conformity generally accepted accounting principles include amounts based managements informed judgments estimates fulfilling responsibilities integrity financial information management maintains relies companys system internal control system includes written policies organizational structure providing division responsibilities selection training qualified personnel program financial operational reviews professional staff corporate auditors system designed provide reasonable assurance assets safeguarded transactions executed accordance managements authorization accounting records reliable basis preparation consolidated financial statements concept reasonable assurance based recognition inherent limitations systems internal control cost systems exceed benefits derived management believes december 31 2002 companys internal control system provides reasonable assurance material errors irregularities prevented detected within timely period cost effective management also established maintains system disclosure controls designed provide reasonable assurance information required disclosed accumulated reported accurate timely manner disclosure control internal control committee place oversee process management believes controls effective management recognizes responsibility fostering strong ethical climate companys affairs conducted according highest standards personal corporate conduct responsibility characterized reflected companys business code conduct distributed throughout company management maintains systematic program assess compliance policies included business code conduct board directors auditethics committee composed solely nonemployee directors reviews companys financial reporting accounting ethical practices 2002 auditethics committee approved selection companys independent public accountants deloitte touche llp fee arrangements meets periodically independent public accountants management corporate auditors review work propriety discharge responsibilities independent public accountants corporate auditors full free access auditethics committee without management present discuss auditing financial reporting matters independent auditors report stockholders baker hughes incorporated audited accompanying consolidated balance sheets baker hughes incorporated subsidiaries december 31 2002 2001 related consolidated statements operations stockholders equity cash flows three years period ended december 31 2002 audits also included financial statement schedule ii valuation qualifying accounts financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position baker hughes incorporated subsidiaries december 31 2002 2001 results operations cash flows three years period ended december 31 2002 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein described note 1 consolidated financial statements effective january 1 2002 company adopted statement financial accounting standards 142 established new accounting reporting standards recording amortization impairment goodwill intangibles effective january 1 2001 company adopted statement financial accounting standards nos 133 137 138 established new accounting reporting standards derivative instruments hedging activities deloitte touche llp houston texas february 12 2003 baker hughes incorporated consolidated statements operations millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated balance sheets millions except par value see notes consolidated financial statements baker hughes incorporated consolidated statements stockholders equity millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated statements cash flows millions see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements note 1 summary significant accounting policies nature operations baker hughes incorporated baker hughes engaged primarily oilfield services industry baker hughes major supplier wellbore related products technology services systems oil gas industry worldwide basis provides products services drilling formation evaluation completion production oil gas wells baker hughes also participates continuous process industry manufactures markets broad range continuous batch centrifuges specialty filters basis presentation consolidated financial statements include accounts baker hughes majority owned subsidiaries company investments company owns 20 50 exercises significant influence operating financial policies accounted using equity method accounting significant intercompany accounts transactions eliminated consolidation notes consolidated financial statements dollar share amounts tabulations millions dollars shares respectively unless otherwise indicated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period company bases estimates judgments historical experience various assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained companys operating environment changes management believes estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts inventory valuation reserves recoverability longlived assets useful lives used depreciation amortization income taxes related valuation allowances insurance environmental legal restructuring accruals revenue recognition companys products services generally sold based upon purchase orders contracts customer include fixed determinable prices include right return similar provisions significant post delivery obligations revenue recognized products upon delivery title passes services tool rentals rendered collectibility reasonably assured certain revenues companys process segment reported percentage completion method accounting using measurements progress towards completion appropriate products services provided provisions estimated warranty returns similar types items made time related revenue recognized cash equivalents company considers highly liquid investments original maturity three months less time purchase cash equivalents inventories stated lower cost market cost primarily determined average cost method includes cost materials labor manufacturing overhead property depreciation property stated cost less accumulated depreciation generally provided using straightline method estimated useful lives individual assets company manufactures substantial portion rental tools equipment cost items includes direct indirect manufacturing costs capitalized carried inventory tool baker hughes incorporated notes consolidated financial statements continued completed transferred rental tool fleet significant improvements betterments capitalized extend useful life asset 2001 company substantially completed development implementation sap r3 enterprisewide software system external direct costs consulting services payrollrelated cost employees worked fulltime implementation system capitalized classified machinery equipment costs associated business process reengineering expensed incurred amortization prorata amount capitalized costs began system implemented companys operations company currently interest oil producing property west africa classified discontinued operation company uses fullcost method accounting property method company capitalizes acquisition exploration development costs incurred purpose finding oil gas reserves accordance full cost accounting rules company performs ceiling test carrying value oil gas properties 2001 company recorded charge 22 million related ceiling test 2002 2000 ceiling test charges recorded depreciation depletion amortization oil gas properties computed using unitofproduction method based upon production estimates proved reserves totaled 166 million 165 million 257 million 2002 2001 2000 respectively costs excluded full cost amortization pool december 31 2002 2001 companys cost center related properties west africa goodwill intangible assets amortization january 1 2002 company adopted statement financial accounting standards sfas 142 goodwill intangible assets goodwill including goodwill associated equity method investments intangible assets indefinite lives amortized tested impairment annually frequently circumstances indicate impairment may exist intangible assets finite useful lives amortized either straightline basis assets estimated useful life basis reflects pattern economic benefits intangible assets consumed 2001 2000 goodwill amortized using straightline method lesser expected useful life 40 years impairment longlived assets longlived assets includes property intangible assets certain assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable impairment loss recorded period determined carrying amount recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets january 1 2002 company adopted sfas 144 accounting impairment disposal longlived assets sfas 144 addresses financial accounting reporting impairment disposal longlived assets replaces sfas 121 accounting impairment longlived assets longlived assets disposed sfas 144 provides updated guidance concerning recognition measurement impairment loss certain types longlived assets modifies accounting reporting discontinued operations adoption sfas 144 resulted company reflecting eimco process equipment eimco companys oil producing operations west africa discontinued operations years presented income taxes company uses liability method reporting income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered future tax benefits recognized extent realization benefits likely deferred income taxes provided estimated income tax effect temporary differences financial tax bases assets liabilities deferred tax assets also provided certain tax credit carryforwards valuation allowance reduce deferred tax assets established likely portion deferred tax assets realized baker hughes incorporated notes consolidated financial statements continued company intends indefinitely reinvest earnings certain nonus subsidiaries operations outside united states accordingly company provide us income taxes earnings company operates 70 countries many legal forms result company subject many domestic foreign tax jurisdictions many tax agreements treaties among various taxing authorities companys operations different jurisdictions taxed various bases income taxes deemed profits generally determined using percentage revenues rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events changes tax laws regulations agreements treaties foreign currency exchange restrictions companys level operations profitability taxing jurisdiction could impact upon amount income taxes company provides given year companys subsidiaries tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts company believes assessments may occasionally based erroneous even arbitrary interpretations local tax law situations company provides amounts company believes ultimately result proceedings product warranties company sells certain products customers product warranty provides customers return defective product specified warranty period following purchase exchange replacement product repair cost customer issuance credit customer company accrues estimated exposure warranty claims based upon current historical product sales data warranty costs incurred environmental matters remediation costs accrued based estimates known environmental remediation exposure using currently available facts existing environmental permits technology presently enacted laws regulations sites company primarily responsible remediation companys estimates costs developed based internal evaluations discounted accruals recorded probable company obligated pay amounts environmental site evaluation remediation related costs amounts reasonably estimated obligation estimated within range company accrues minimum amount range accruals recorded even significant uncertainties exist ultimate cost remediation ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred company identified potentially responsible party united states federal state superfund site company accrues share estimated remediation costs site based ratio estimated volume waste contributed site company total volume waste site foreign currency translation majority companys significant foreign subsidiaries designated local currency functional currency gains losses resulting balance sheet translation foreign operations included separate component accumulated comprehensive loss within stockholders equity foreign subsidiaries designated us dollar functional currency gains losses resulting balance sheet translation foreign operations included consolidated statements operations incurred derivative financial instruments company monitors exposure various business risks including commodity price foreign exchange rate interest rate risks occasionally uses derivative financial instruments manage impact certain risks companys policies permit use derivative financial instruments speculative purposes company uses forward exchange contracts currency swaps hedge certain firm commitments transactions denominated foreign currencies company uses interest rate swaps manage interest rate risk company also used crude oil swaps collars hedge price risk associated companys crude oil production west africa baker hughes incorporated notes consolidated financial statements continued january 1 2001 company adopted sfas 133 accounting derivative instruments hedging activities amended sfas nos 137 138 collectively referred sfas 133 sfas 133 establishes accounting reporting standards derivative instruments hedging activities require entity recognize derivatives asset liability measured fair value depending intended use derivative effectiveness changes fair value reported period change either component earnings component accumulated comprehensive loss adoption sfas 133 january 1 2001 resulted gain 08 million net tax recorded cumulative effect accounting change consolidated statement operations gain 12 million net tax recorded accumulated comprehensive loss 2001 12 million gain reclassified earnings upon maturity contracts inception new derivative company designates derivative cash flow hedge fair value hedge company documents relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions company assesses whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item inception hedge ongoing basis stockbased compensation company elected account stockbased compensation using intrinsic value method accounting accordance accounting principles board opinion 25 accounting stock issued employees method compensation expense recognized number shares granted known exercise price stock option equal greater market price companys common stock grant date company stockbased compensation associated stock options reflected consolidated statements operations december 2002 financial accounting standards board fasb issued sfas 148 accounting stockbased compensation transition disclosure statement amends sfas 123 accounting stockbased compensation provide alternative methods transition voluntary change fair value based method accounting stockbased compensation addition statement amends disclosure requirements sfas 123 require revised disclosures annual interim financial statements method accounting stockbased compensation effect method used reported results company adopted new disclosure requirements fiscal year ended december 31 2002 reflected sfas 123 fair value stockbased awards calculated use option pricing models also require subjective assumptions including future stock price volatility expected time exercise greatly affect calculated values companys calculations made using blackscholes option pricing model following weighted average assumptions weighted average fair values options granted 2002 2001 2000 1024 1504 1115 per share respectively baker hughes incorporated notes consolidated financial statements continued company recognized compensation expense fair value based method applied awards provided sfas 123 companys pro forma net income earnings per share eps stockbased compensation cost would follows pro forma calculations may indicative future amounts since pro forma disclosure apply options granted prior 1996 additional awards future years anticipated accounting standards adopted 2003 june 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 addresses financial accounting reporting obligations associated retirement longlived assets associated asset retirement costs sfas 143 requires fair value liability associated asset retirement recognized period incurred reasonable estimate fair value made associated retirement costs capitalized part carrying amount longlived asset subsequently depreciated life asset company adopt sfas 143 fiscal year beginning january 1 2003 company fully completed analysis impact adoption sfas 143 expect adoption significant impact companys financial position results operations july 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 requires companies recognize costs associated exit disposal activities incurred rather date commitment exit disposal plan provisions sfas 146 apply exit disposal activities initiated company december 31 2002 november 2002 fasb issued fasb interpretation 45 fin 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 elaborates required disclosures guarantor financial statements obligations certain guarantees issued requires guarantor recognize inception certain guarantees liability fair value obligation undertaken issuing guarantee company reviewing provisions fin 45 relating initial recognition measurement guarantor liabilities effective qualifying guarantees entered modified december 31 2002 expect adoption material impact consolidated financial statements company adopted new disclosure requirements fiscal year ended december 31 2002 reclassifications certain reclassifications made prior years consolidated financial statements conform current year presentation note 2 discontinued operations november 2002 company sold eimco division process segment received total proceeds 489 million 49 million held escrow pending completion final adjustments purchase price december 2002 company entered exclusive negotiations sale companys interest oil producing operations west africa received baker hughes incorporated notes consolidated financial statements continued 100 million deposit sale subject execution definitive sale agreement expected close first quarter 2003 accordance generally accepted accounting principles company reclassified consolidated financial statements prior periods present operations discontinued summarized financial information discontinued operations follows years ended december 31 assets liabilities discontinued operations follows years ended december 31 note 3 acquisitions 2002 company made three small acquisitions within oilfield segment aggregate cash purchase price 397 million net cash acquired result acquisitions company recorded approximately 284 million goodwill purchase prices allocated based fair values acquisitions may subject change based final determination baker hughes incorporated notes consolidated financial statements continued purchase price allocations pro forma results operations presented effects acquisitions material companys consolidated financial statements either individual aggregate basis note 4 restructuring charges items restructuring charges comprised following years ended december 31 german operations bird machine 2001 company initiated restructuring german operations bird machine division process segment restructuring consisted downsizing german operations full manufacturing facility assembly repair facility result company recorded charge 60 million relating severance approximately 100 employees employee groups terminated comprised engineering field service support personnel amount accrued severance based upon positions eliminated companys specific statutory severance plans place operations include portion employees salary severance dates company terminated 67 employees paid 41 million accrued severance remaining accrual 19 million reversed second quarter 2002 due unanticipated voluntary terminations favorable separation payments originally estimated oil gas exploration business october 2000 companys board directors approved companys plan substantially exit oil gas exploration business companys oil gas exploration business included various small producing working interests undeveloped properties around world also included working interest west africa accounted substantially companys revenue oil gas operations interest reflected discontinued operation company determined future capital requirements company willing commit business consistent longterm plans result company recorded restructuring charges 295 million consisting 55 million severance 78 million costs settle contractual obligations 162 million loss writeoff companys undeveloped exploration properties certain foreign jurisdictions severance charges approximately 50 employees 24 employees terminated december 31 2002 employee groups terminated executive engineering field service support personnel amount accrued severance based upon positions eliminated companys specific statutory plans place operations include portion employees salary severance dates company paid 26 million accrued severance 2002 based current estimates company expects remainder accrued severance paid 2003 employees leave company included costs settle contractual obligations 45 million minimum amount companys share project costs relating companys interest oil gas property colombia unsuccessful attempts negotiate settlement joint venture partner company decided abandon involvement project subsequently 2001 third party approached company agreed assume remaining obligations exchange companys interest project accordingly company reversed 42 million related obligation company paid 25 million accrued contractual obligations 2002 remaining contractual obligations paid company settles various counterparties westerngeco formation 2000 company recorded expense 60 million connection formation westerngeco consisted compensation cost 30 million stock options retained certain employees became employees westerngeco 30 million vacation costs accrued part agreement companys venture partner compensation cost options measured using intrinsic value method baker hughes incorporated notes consolidated financial statements continued seismic operations 1999 result decline oil prices seismic industry experienced low activity levels marine land acquisition markets however buildup marine acquisition capacity continued several companys competitors seismic industry also upgraded existing fleets resulting significant excess operational capacity seismic market company determined market activity levels seismic industry would depressed extended period time company recognized need address capacity problem industry developed plan downsize seismic operations accordingly company recorded restructuring charge fourth quarter 1999 totaling 1150 million ensuing six months seismic industry continued deteriorate resulting consolidations industry may 2000 company announced formation westerngeco result venture formation original restructuring plan modified resulted 176 million reversal original charge reversal included 75 million retention venture approximately 400 employees identified termination lower expected moving derigging costs certain marine vessels reversal also included 90 million related companys successful negotiation favorable terms related final termination 10 marine vessel leases may june 2000 reversals 2000 also included 109 million primarily related 40 million recovery receivable originally written restructuring charge 1998 42 million favorable settlements related litigation originally accrued restructuring charges 1998 1997 gain loss disposal assets 2001 company recognized gain 34 million disposition interest joint venture within oilfield segment received net proceeds 60 million transaction company also recognized loss 10 million sale product line within oilfield segment 2000 conjunction companys plan substantially exit oil gas exploration business company sold interests china gulf mexico gabon oil gas properties recorded loss 755 million sale properties net proceeds sales 534 million used repay outstanding indebtedness addition company recognized gains 76 million sale various product lines within oilfield segment note 5 income taxes provision income taxes comprised following years ended december 31 geographic sources income continuing operations income taxes follows years ended december 31 tax benefits 14 million 55 million 58 million associated exercise employee stock options allocated equity recorded capital excess par value years ended december 31 2002 2001 2000 respectively baker hughes incorporated notes consolidated financial statements continued provision income taxes differs amount computed applying us statutory income tax rate income continuing operations income taxes reasons set forth years ended december 31 2002 company recognized incremental effect 402 million additional taxes attributable portion operations westerngeco amount 282 million related companys portion restructuring charge tax benefit remaining 120 million arose operations venture due venture taxed certain foreign jurisdictions based deemed profit basis percentage revenues rather profits ii unbenefitted foreign losses venture operating losses certain foreign jurisdictions current tax benefit deferred tax asset recorded due uncertainty realization 2001 2000 amount additional taxes resulting operations venture 148 million 22 million respectively also 2002 company recognized current year benefit 144 million result settlement internal revenue service irs examination related companys september 30 1996 september 30 1998 tax years 2001 benefit 235 million recognized result settlement irs examination certain 1994 1997 preacquisition tax returns related refund claims western atlas inc company received tax assessments various taxing authorities currently varying stages appeals litigation regarding matters company believes substantial defenses questions raised pursue legal defenses unfavorable outcome result company provided amounts believes ultimately result proceedings 2000 result repatriation proceeds formation westerngeco venture company incurred 34 million foreign withholdings taxes provided 60 million additional us taxes addition formation venture reduced expected amount foreign source income available future utilize companys foreign tax credit carryover accordingly company provided 356 million additional us taxes respect future repatriation earnings necessary utilize foreign tax credit carryover amounts aggregating 450 million presented income tax rate reconciliation table caption formationrelated taxes westerngeco baker hughes incorporated notes consolidated financial statements continued deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards tax effects companys temporary differences carryforwards follows december 31 valuation allowance recorded likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions company provided valuation allowance operating loss carryforwards certain nonus jurisdictions operations decreased currently ceased company withdrawn entirely provision made us additional foreign taxes anticipated repatriation certain earnings foreign subsidiaries company considers undistributed earnings foreign subsidiaries amount already provided indefinitely reinvested additional foreign earnings could become subject additional tax remitted deemed remitted dividend however additional amount taxes payable practicable estimate december 31 2002 company approximately 87 million foreign tax credits 615 million general business credits available offset future payments federal income taxes expiring varying amounts 2005 2023 companys 256 million alternative minimum tax credits may carried forward indefinitely current us law operating loss carryforwards without valuation allowance expire varying amounts next twenty years note 6 earnings per share reconciliation number shares used basic diluted eps computations follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued note 7 inventories comprised following december 31 note 8 investments affiliates company investments affiliates accounted using equity method accounting significant affiliates westerngeco seismic venture formed november 30 2000 company schlumberger limited schlumberger company schlumberger 30 70 venture respectively company contributed certain assets western geophysical division net book value 11 billion consisting primarily multiclient seismic data property 150 million working capital westerngeco company recognize gain loss resulting initial formation venture due companys material continued involvement operations westerngeco company incurred fees expenses approximately 166 million connection transaction total 106 million direct costs capitalized companys investment 60 million recorded restructuring charge companys consolidated statement operations year ended december 31 2000 conjunction transaction company received 4934 million cash schlumberger exchange transfer portion companys ownership westerngeco additionally soon practicable november 30 2004 company schlumberger make cash trueup payment party based formula comparing ratio net present value sales revenue partys contributed multiclient seismic data libraries fouryear period ending november 30 2004 ratio net book value libraries november 30 2000 maximum payment either party required make result adjustment 1000 million event future sales contributed libraries continue relative percentages incurred december 31 2002 payment made either party expected significant payment received paid company recorded adjustment carrying value investment westerngeco conjunction formation westerngeco company transferred venture lease seismic vessel company sole guarantor lease obligation however schlumberger indemnified company 70 total lease obligation december 31 2002 remaining commitment lease 927 million november 2000 company also entered agreement westerngeco whereby westerngeco subleased facility company period ten years current market rates 2002 2001 company recorded 52 million 59 million respectively rental income westerngeco included caption equity income loss affiliates companys consolidated statement operations 2002 902 million companys share 3007 million restructuring charge taken westerngeco charge related impairment westerngecos multiclient library well reducing westerngeco workforce closing landbased seismic operations us lower 48 states canada reducing marine seismic fleet included caption equity income loss affiliates 2001 2000 103 million asset impairment charges 95 million restructuring integration charges respectively associated westerngeco october 30 2001 company sequel holdings inc sequel created entity operate name petreco international petreco company contributed 166 million net assets refining production product line process segment petreco consisting primarily intangible assets accounts receivable inventories conjunction transaction company received 90 million cash two promissory notes totaling 100 million subsequently exchanged preferred stock petreco 2002 profits shared company sequel 49 51 interests respectively sequel entitled liquidation preference upon liquidation sale petreco company accounts ownership petreco using equity method accounting recognize gain loss initial formation entity due companys material continued involvement operations petreco baker hughes incorporated notes consolidated financial statements continued 2002 company invested 165 million 40 interest luna energy llc luna energy venture formed develop manufacture commercialize sell market distribute hole fiber optic sensors oil gas exploration production transportation refining applications summarized unaudited combined financial information equity method affiliates follows december 31 december 31 2002 2001 net accounts receivable unconsolidated affiliates totaled 161 million 335 million respectively december 31 2002 2001 excess companys investment companys equity affiliates 3102 million 2944 million respectively conjunction adoption sfas 142 company discontinued amortization goodwill associated equity method investments effective january 1 2002 amortization expense years ended december 31 2001 2000 79 million 19 million respectively included companys equity income loss affiliates note 9 property comprised following december 31 note 10 goodwill intangible assets adoption sfas 142 required company perform transitional impairment test goodwill reporting units january 1 2002 companys reporting units based organizational reporting structure corporate assets liabilities allocated reporting units extent related operations reporting units valuations reporting units performed independent third party goodwill eimco bird machine operating divisions companys process segment determined impaired using combination market value discounted cash flows approach estimate fair value accordingly company recognized transitional impairment losses 425 million net income taxes 204 million transitional baker hughes incorporated notes consolidated financial statements continued impairment losses recorded first quarter 2002 cumulative effect accounting change consolidated statement operations company elected perform annual impairment test october 1 impairments 2002 related annual impairment test goodwill 121 million associated eimco included assets discontinued operations december 31 2001 changes carrying amount goodwill net accumulated amortization year ended december 31 2002 follows intangible assets continue amortized comprised following years ended december 31 adoption sfas 142 also required company reevaluate remaining useful lives intangible assets determine whether remaining useful lives appropriate company also reevaluated amortization methods intangible assets determine whether amortization reflects pattern economic benefits intangible assets consumed performing evaluations company reduced remaining life one marketingrelated intangibles changed method amortization one technologybased intangibles amortization expense years ended december 31 2002 2001 2000 100 million 543 million 623 million respectively estimated amortization expense subsequent five fiscal years expected within range 80 million 131 million baker hughes incorporated notes consolidated financial statements continued accordance sfas 142 company discontinued amortization goodwill associated equity method investments effective january 1 2002 pro forma results operations company giving effect sfas 142 adopted january 1 2000 follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued note 11 indebtedness total debt consisted following december 31 december 31 2002 company 9662 million credit facilities commercial banks 5940 million committed facilities expire september 2003 56 million october 2003 538 million 2001 company classified commercial paper shortterm debt longterm debt extent committed facilities company ability credit agreements intent maintain obligations longer one year direct borrowings credit facilities 2002 2001 company two interest rate swap agreements designated qualified fair value hedging instruments due companys outlook interest rates company terminated two agreements received payments totaling 158 million upon cancellation 2002 deferred gains 48 million 110 million agreements amortized reduction interest expense remaining lives underlying debt securities mature june 2004 january 2009 respectively may 25 2001 company redeemed outstanding lyons redemption price 78613 per 1000 principal amount total 3018 million redemption funded issuance commercial paper connection early extinguishment debt company recorded extraordinary loss 23 million 15 million tax represents writeoff remaining debt issuance costs baker hughes incorporated notes consolidated financial statements continued maturities debt december 31 2002 follows 2003 1235 million 2004 3534 million 2005 01 million 2006 02 million 2007 00 million 10706 million thereafter note 12 financial instruments fair value financial instruments companys financial instruments include cash shortterm investments receivables payables debt interest rate swaps crude oil contracts foreign currency contracts except described estimated fair value financial instruments december 31 2002 2001 approximate carrying value reflected consolidated balance sheets fair value companys debt interest rate swaps crude oil contracts foreign currency contracts estimated based yearend quoted market prices estimated fair value companys debt december 31 2002 2001 17030 million 17617 million respectively differs carrying amounts 15478 million 16946 million respectively included consolidated balance sheets interest rate swaps company entered interest rate swap agreement february 1999 notional amount 3250 million agreement company received interest rate 625 paid interest rate equal average sixmonth libor yen euro swiss franc plus 316 spread interest rate swap settled semiannually scheduled terminate january 2009 due companys outlook interest rates company terminated swap position september 2002 received proceeds 110 million upon cancellation deferred gain amortized reduction interest expense remaining life underlying debt security company entered second interest rate swap agreement june 2001 notional amount 1000 million company received interest rate 7875 paid interest rate threemonth libor plus spread 27625 interest rate swap settled semiannually scheduled terminate june 2004 due companys outlook interest rates company terminated swap position september 2002 received proceeds 48 million upon cancellation deferred gain amortized reduction interest expense remaining life underlying debt security two interest rate swap agreements designated qualified fair value hedging instruments fully effective resulting net gain loss recorded consolidated statement operations fair value contracts december 31 2001 13 million recognized asset crude oil contracts year ended december 31 2002 company entered two crude oil contracts mitigate price risk associated oil operations west africa gain loss recognized contracts expired december 31 2002 year ended december 31 2001 company entered two crude oil contracts mitigate price risk associated production west african oil property based companys outlook crude oil prices company elected terminate contracts prior maturity dates accordingly contracts terminated october 3 2001 company received cash payment 44 million net gain recognized earnings 2001 crude oil contracts 31 million reported part discontinued operations consolidated statements operations foreign currency forward contracts december 31 2002 company entered foreign currency forward contract notional amount 200 million hedge exposure currency fluctuations british pound sterling contract cash flow hedge based yearend quoted market prices contract similar terms maturity date asset liability recorded forward price substantially contract price baker hughes incorporated notes consolidated financial statements continued december 31 2001 company entered foreign currency forward contracts notional amounts 85 million 10 million 07 million hedge exposure currency fluctuations canadian dollar indonesian rupiah euro respectively contracts cash flow hedges based yearend quoted market prices contracts similar terms maturity dates asset liability recorded forward prices substantially contract price 2002 2001 company entered foreign currency contracts hedge exposure currency fluctuations specific transactions balances impact consolidated statements operations significant contracts either individually aggregate counterparties companys forward contracts major financial institutions credit ratings concentration risk financial institutions monitored continuing basis unlikely event counterparties fail meet terms foreign currency contract companys exposure limited foreign currency rate differential concentration credit risk company sells products services numerous companies oil gas industry although concentration could affect companys overall exposure credit risk management believes company exposed minimal risk since majority business conducted major companies within industry company performs periodic credit evaluations customers financial condition generally require collateral accounts receivable cases company require payment advance security form letter credit bank guarantee company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions believes risk loss minimal note 13 segment related information company currently seven operating divisions separate management teams engaged oilfield services continuous process industries divisions aggregated two reportable segments oilfield process consolidated results segments evaluated regularly chief operating decision maker deciding allocate resources assessing performance oilfield segment consists six operating divisions baker atlas baker oil tools baker petrolite centrilift hughes christensen inteq aggregated one reportable segment similar economic characteristics longterm financial performance divisions affected similar economic conditions six operating divisions manufacture sell products provide services used oil gas exploration industry including drilling completion production maintenance oil gas wells reservoir measurement evaluation also operate markets substantially customers principal markets segment include major oil gas producing regions world including north america south america europe africa middle east far east customers include major multinational independent national stateowned oil companies oilfield segment also includes companys investment westerngeco venture process segment consists one operating division bird machine companys investment petreco venture bird machine manufactures sells broad range continuous batch centrifuges specialty filters separating dewatering classifying process waste streams principal markets segment include regions world significant industrial municipal chemical wastewater applications customers include municipalities contractors pharmaceuticals industrial companies accounting policies segment described note 1 notes consolidated financial statements company evaluates performance oilfield process segments based income following income taxes accounting changes restructuring charges interest income expense intersegment sales transfers significant baker hughes incorporated notes consolidated financial statements continued summarized financial information shown following table column includes corporaterelated items results insignificant operations relates segment profit loss income expense allocated reportable segments column also includes assets discontinued operations years ended december 31 2002 2001 2000 revenues attributable one customer accounted 10 total revenues oilfield segment year ended december 31 2002 process revenues attributable one customer totaled 195 million 165 following table presents details segment loss years ended december 31 following table presents details total assets december 31 baker hughes incorporated notes consolidated financial statements continued following table presents consolidated revenues country based location use products services years ended december 31 following table presents net property country based location asset december 31 note 14 employee stock plans company stock option plans provide issuance incentive nonqualified stock options directors officers key employees exercise price equal greater fair market value stock date grant stock options generally vest three years vested options exercisable part full time prior expiration date ten years date grant december 31 2002 221 million shares available future option grants following table summarizes activity companys stock option plans shares thousands baker hughes incorporated notes consolidated financial statements continued following table summarizes information stock options outstanding december 31 2002 shares thousands company also employee stock purchase plan whereby eligible employees may purchase shares companys common stock price equal 85 lower closing price companys common stock first last trading day companys fiscal year total 07 million shares remaining issuance plan employees purchased 08 million shares 2002 06 million shares 2001 11 million shares 2000 note 15 employee benefit plans defined benefit pension plans postretirement benefits pensions company various noncontributory defined benefit pension plans pension benefits covering various domestic foreign employees including new qualified defined benefit pension plan pension plan substantially us employees effective january 1 2002 generally company makes annual contributions plans amounts necessary meet exceed minimum governmental funding requirements company also provides certain postretirement health care life insurance benefits pensions postretirement benefits substantially us employees retire met certain age service requirements 2001 company approved amendments postretirement benefits plan certain employees enhance health care benefits effective january 1 2002 measurements plan assets obligations pension postretirement benefits october 1 year presented baker hughes incorporated notes consolidated financial statements continued reconciliation beginning ending balances benefit obligations fair value plan assets funded status plans follows years ended december 31 company reports prepaid benefit cost assets accrued benefit minimum liabilities longterm liabilities consolidated balance sheet amounts recognized consolidated balance sheet follows december 31 actuarial assumptions used determine costs benefit obligation plans follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued components net pension postretirement costs follows years ended december 31 projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 2323 million 2182 million 1040 million respectively december 31 2002 1640 million 1591 million 1090 million respectively december 31 2001 companys postretirement benefit plan funded assumed health care cost trend rates significant effect amounts reported postretirement benefits plan assumed health care cost trend rate used measuring accumulated benefit obligation postretirement benefits adjusted 2002 2000 december 31 2002 health care cost trend rate 91 employees age 65 143 participants age 65 declining gradually successive year reaches 50 employees age 65 age 65 2008 one percentage point change assumed health care cost trend rates would following effects defined contribution plans periods reported generally companys us employees eligible participate company sponsored thrift plan 401k plan internal revenue code 1986 amended thrift plan allows eligible employees elect contribute 1 50 salaries investment trust employee contributions matched cash company rate 100 per 100 employee contribution first 3 050 per 100 employee contribution next 2 employees salary contributions vest immediately addition company makes cash contribution eligible employees 2 5 salary depending employees age contributions become fully vested employee five years employment thrift plan provides nine different investment options employee sole discretion determining employer employee contributions invested companys contributions thrift plan several nonus defined contribution plans amounted 628 million 637 million 575 million 2002 2001 2000 respectively certain nonus employees eligible participate thrift plan company provides nonqualified defined contribution plan provides basically benefits thrift plan addition company provides nonqualified supplemental retirement plan srp certain officers employees whose benefits thrift plan pension plan limited federal tax law srp also allows eligible employees defer portion eligible compensation provides employer matching base contributions pursuant limitations nonqualified plans fully funded invested trusts assets included companys consolidated balance sheet companys contributions nonqualified plans 60 million 42 million 24 million 2002 2001 2000 respectively postemployment benefits company provides certain postemployment disability income medical benefits substantially qualifying former inactive us employees 2001 part 2002 income benefits longterm disability benefits provided qualified selfinsured plan funded contributions company employees effective july 1 2002 company converted fullyinsured plan future longterm disability benefits disability benefits employees disabled july 1 2002 sold disability insurance company continuation medical life baker hughes incorporated notes consolidated financial statements continued insurance benefits disability continuation benefits provided qualified selfinsured plan accrued postemployment liability continuation benefits december 31 2002 2001 303 million 295 million respectively included longterm liabilities consolidated balance sheet note 16 commitments contingencies leases december 31 2002 company longterm noncancelable operating leases covering certain facilities equipment minimum annual rental commitments net amounts due subleases five years period ending december 31 2007 618 million 479 million 361 million 239 million 133 million respectively 1103 million aggregate thereafter company entered significant capital leases september 2000 company sold four facilities approximately 1177 million facilities leased back purchaser period 15 years current market rates november 2000 one facilities subsequently subleased westerngeco current market rates period 10 years conjunction formation venture litigation company subsidiaries involved litigation proceedings arisen companys ordinary business activities company insures risks extent deemed prudent management assurance given nature amount insurance sufficient fully indemnify company liabilities arising pending future legal proceedings many insurance policies contain deductibles selfinsured retentions amounts company deems prudent determining amount selfinsurance companys policy selfinsure losses predictable measurable recurring nature automobile liability claims general liability workers compensation claims company records accruals uninsured portion losses related types claims accruals losses calculated estimating losses claims using historical claim data specific loss development factors information necessary march 25 2002 former employee alleging improper activities relating nigeria filed civil complaint company 281st district court harris county texas seeking back pay damages including future lost wages august 2 2002 former employee filed substantially complaint company federal district court southern district texas discovery civil suits preliminary stages march 29 2002 company announced advised securities exchange commission sec department justice doj conducting investigations allegations violations law relating nigeria related matters sec issued formal order investigation possible violations provisions foreign corrupt practices act fcpa regarding antibribery books records internal controls doj asked interview current former employees prior filing former employees complaint company independently initiated investigation regarding operations nigeria ongoing company providing documents cooperating fully sec doj companys ongoing internal investigation identified apparent deficiencies respect certain operations nigeria books records internal controls potential liabilities governmental authorities nigeria investigation substantially completed first quarter 2003 based upon current information company expect potential liabilities material adverse effect companys results operations financial condition environmental matters companys past present operations include activities subject domestic including us federal state local international extensive federal state environmental regulations companys environmental policies practices designed ensure compliance existing laws regulations minimize possibility significant environmental damage baker hughes incorporated notes consolidated financial statements continued company involved voluntary remediation projects present former manufacturing facilities majority due acquisitions made company sites company longer actively uses operations estimate remediation costs voluntary remediation projects developed using currently available facts existing permits technology presently enacted laws regulations remediation cost estimates include direct costs related investigation external consulting costs governmental oversight fees treatment equipment costs associated longterm maintenance monitoring remediation project company also identified potentially responsible party prp remedial activities related various superfund sites company participates process set joint participation defense agreement negotiate government agencies identify prps determine prps allocation estimate remediation costs company accrued believes pro rata share total estimated cost remediation superfund sites based upon ratio estimated volume waste contributed site company bears total estimated volume waste disposed site applicable united states federal law imposes joint several liability prp cleanup sites leaving company uncertainty may responsible remediation cost attributable prps unable pay share remediation costs accrual made joint several liability concept superfund sites companys participation minor since company believes probability pay material costs volumetric share remote company believes prps greater involvement volumetric calculation basis substantial assets may reasonably expected pay share cost remediation superfund sites company major prp remediation costs estimated include recalcitrant parties cases company insurance coverage contractual indemnities third parties cover ultimate liability december 31 2002 2001 companys total accrual environmental remediation 177 million 176 million respectively including 43 million 38 million respectively remediation costs various superfund sites measurement accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity utilized company believes likelihood material losses excess amounts recorded remote normal course business customers vendors others company contingently liable performance letters credit bank issued guarantees totaling approximately 1935 million december 31 2002 company also commitments outstanding purchase obligations related capital expenditures inventory purchase orders contracts approximately 1481 million december 31 2002 conjunction formation westerngeco company transferred venture lease seismic vessel company sole guarantor lease obligation however schlumberger indemnified company 70 total lease obligation december 31 2002 remaining commitment lease 927 million addition december 31 2002 company guaranteed debt third parties totaling 336 million practicable estimate fair value financial instruments management expect material losses financial instruments note 17 supplemental information supplemental consolidated statement operations information follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued supplemental consolidated statement cash flows information follows years ended december 31 formation petreco 2001 westerngeco 2000 included following cash noncash amounts years ended december 31 changes aggregate product warranty liability follows year ended december 31 baker hughes incorporated notes consolidated financial statements continued note 18 quarterly data unaudited see note 4 restructuring charges represents revenues less cost revenues item 9item 8 financial statements supplementary data management report financial responsibilities management baker hughes incorporated responsible preparation integrity accompanying consolidated financial statements information contained annual report form 10k consolidated financial statements prepared conformity generally accepted accounting principles include amounts based management’s informed judgments estimates fulfilling responsibilities integrity financial information management maintains relies company’s system internal control system includes written policies organizational structure providing division responsibilities selection training qualified personnel program financial operational reviews professional staff corporate auditors system designed provide reasonable assurance assets safeguarded transactions executed accordance management’s authorization accounting records reliable basis preparation consolidated financial statements concept reasonable assurance based recognition inherent limitations systems internal control cost systems exceed benefits derived management believes december 31 2003 company’s internal control system provides reasonable assurance material errors irregularities prevented detected within timely period cost effective management also established maintains system disclosure controls designed provide reasonable assurance information required disclosed accumulated reported accurate timely manner disclosure control internal control committee place oversee process management believes controls effective management recognizes responsibility fostering strong ethical climate company’s affairs conducted according highest standards personal corporate conduct responsibility characterized reflected company’s business code conduct distributed throughout company management maintains systematic program assess compliance policies included business code conduct board directors auditethics committee composed solely nonemployee directors reviews company’s financial reporting accounting ethical practices 2003 auditethics committee engaged company’s independent public accountants deloitte touche llp approved fee arrangements meets periodically independent public accountants management corporate auditors review work propriety discharge responsibilities independent public accountants corporate auditors full free access auditethics committee without management present discuss auditing financial reporting matters michael e wiley g stephen finley alan j keifer michael e wiley g stephen finley alan j keifer chairman senior vice president vice president chief executive officer finance administration controller chief financial officer independent auditors’ report stockholders baker hughes incorporated audited accompanying consolidated balance sheets baker hughes incorporated subsidiaries december 31 2003 2002 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2003 audits also included financial statement schedule ii valuation qualifying accounts financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position baker hughes incorporated subsidiaries december 31 2003 2002 results operations cash flows three years period ended december 31 2003 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein described note 1 consolidated financial statements effective january 1 2003 company adopted statement financial accounting standards 143 established new accounting reporting standards asset retirement obligations effective january 1 2002 company adopted statement financial accounting standards 142 established new accounting reporting standards recording amortization impairment goodwill intangibles effective january 1 2001 company adopted statement financial accounting standards 133 amended established new accounting reporting standards derivative instruments hedging activities deloitte touche llp houston texas february 11 2004 baker hughes incorporated consolidated statements operations millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated balance sheets millions except par value see notes consolidated financial statements baker hughes incorporated consolidated statements stockholders’ equity millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated statements cash flows millions see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements note 1 summary significant accounting policies nature operations baker hughes incorporated “baker hughes” engaged oilfield services industry baker hughes major supplier wellbore related products technology services systems oil natural gas industry worldwide basis provides products services drilling formation evaluation completion production oil natural gas wells basis presentation consolidated financial statements include accounts baker hughes majority owned subsidiaries “company” investments company owns 20 50 exercises significant influence operating financial policies accounted using equity method accounting significant intercompany accounts transactions eliminated consolidation notes consolidated financial statements dollar share amounts tabulations millions dollars shares respectively unless otherwise indicated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period company bases estimates judgments historical experience various assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained company’s operating environment changes management believes estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts inventory valuation reserves recoverability longlived assets useful lives used depreciation amortization income taxes related valuation allowances insurance environmental legal accruals revenue recognition company’s products services generally sold based upon purchase orders contracts customer include fixed determinable prices include right return similar provisions significant post delivery obligations revenue recognized products upon delivery title passes services tool rentals rendered collectibility reasonably assured provisions estimated warranty returns similar types items made time related revenue recognized cash equivalents company considers highly liquid investments original maturity three months less time purchase cash equivalents inventories stated lower cost market cost determined using firstin firstout “fifo” method average cost method approximates fifo includes cost materials labor manufacturing overhead property depreciation property stated cost less accumulated depreciation generally provided using straightline method estimated useful lives individual assets company manufactures substantial portion rental tools equipment cost items includes direct indirect manufacturing costs capitalized carried inventory tool completed tool complete cost tool reflected capital expenditures tool classified rental tools equipment property significant improvements betterments capitalized extend useful life asset baker hughes incorporated notes consolidated financial statements continued company interest oil producing property west africa sold effective january 2003 classified discontinued operation company used fullcost method accounting property method company capitalized acquisition exploration development costs incurred purpose finding oil reserves accordance full cost accounting rules company performed ceiling tests carrying value oil properties 2001 company recorded charge 22 million related ceiling test 2002 ceiling test charge recorded depreciation depletion amortization oil properties computed using unitofproduction method based upon production estimates proved reserves totaled 166 million 165 million 2002 2001 respectively costs excluded full cost amortization pool december 31 2002 company’s cost center related properties west africa goodwill intangible assets amortization january 1 2002 company adopted statement financial accounting standards “sfas” 142 goodwill intangible assets goodwill including goodwill associated equity method investments intangible assets indefinite lives amortized intangible assets finite useful lives amortized either straightline basis asset’s estimated useful life basis reflects pattern economic benefits intangible assets realized 2001 goodwill amortized using straightline method lesser expected useful life 40 years impairment longlived assets property intangible assets certain assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense amount impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets company performs annual impairment test goodwill october 1 frequently circumstances indicate impairment may exist investments affiliates also reviewed impairment whenever events changes circumstances indicate impairment may exist determination impairment made comparing carrying amount fair value calculated using combination market value discounted cash flows approach income taxes company uses liability method reporting income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered future tax benefits recognized extent realization benefits likely deferred income taxes provided estimated income tax effect temporary differences financial tax bases assets liabilities deferred tax assets also provided certain tax credit carryforwards valuation allowance reduce deferred tax assets established likely portion deferred tax assets realized company intends indefinitely reinvest earnings certain nonus subsidiaries operations outside us accordingly company provide us income taxes earnings company operates 80 countries many legal forms result company subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments company’s operations different jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenues rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions company’s level operations profitability taxing jurisdiction could impact upon amount income taxes company provides given year company’s subsidiaries’ tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts company believes assessments may occasionally based erroneous even arbitrary interpretations local tax law company received tax assessments various taxing authorities currently baker hughes incorporated notes consolidated financial statements continued varying stages appeals andor litigation regarding matters situations company provides amount company believes ultimately result proceedings company believes substantial defenses questions raised pursue legal remedies unfavorable outcome result however resolution matters involves uncertainties assurances outcomes favorable product warranties company sells certain products customers product warranty provides customers return defective product specified warranty period following purchase exchange replacement product repair cost customer issuance credit customer company accrues estimated exposure warranty claims based upon current historical product sales data warranty costs incurred related information known company environmental matters remediation costs accrued based estimates known environmental remediation exposure using currently available facts existing environmental permits technology presently enacted laws regulations sites company primarily responsible remediation company’s estimates costs developed based internal evaluations discounted accruals recorded probable company obligated pay amounts environmental site evaluation remediation related costs amounts reasonably estimated obligation estimated within range company accrues minimum amount range accruals recorded even significant uncertainties exist ultimate cost remediation ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred company identified potentially responsible party united states federal state “superfund” site company accrues share estimated remediation costs site based ratio estimated volume waste contributed site company total volume waste site foreign currency translation majority company’s significant foreign subsidiaries designated local currency functional currency gains losses resulting balance sheet translation foreign operations included separate component accumulated comprehensive loss within stockholders’ equity foreign subsidiaries designated us dollar functional currency gains losses resulting balance sheet translation foreign operations included consolidated statements operations incurred derivative financial instruments company monitors exposure various business risks including commodity price foreign exchange rate interest rate risks occasionally uses derivative financial instruments manage impact certain risks company’s policies permit use derivative financial instruments speculative purposes company uses foreign currency forward contracts hedge certain firm commitments transactions denominated foreign currencies company uses interest rate swaps manage interest rate risk january 1 2001 company adopted sfas 133 accounting derivative instruments hedging activities amended sfas nos 137 138 collectively referred sfas 133 sfas 133 establishes accounting reporting standards derivative instruments hedging activities require entity recognize derivatives asset liability measured fair value adoption sfas 133 january 1 2001 resulted gain 08 million net tax recorded cumulative effect accounting change consolidated statement operations gain 12 million net tax recorded accumulated comprehensive loss 2001 12 million gain reclassified earnings upon maturity contracts inception new derivative company designates derivative cash flow hedge fair value hedge company documents relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions company assesses whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item inception hedge ongoing basis baker hughes incorporated notes consolidated financial statements continued stockbased compensation allowed sfas 123 accounting stockbased compensation company elected account stockbased compensation using intrinsic value method accounting accordance accounting principles board opinion 25 accounting stock issued employees method compensation expense recognized number shares granted known exercise price stock option time grant equal greater market price company’s common stock reported net income include compensation expense associated stock options include compensation expense associated restricted stock awards company recognized compensation expense fair value based method applied awards provided sfas 123 company’s pro forma net income earnings per share “eps” stockbased compensation cost would follows years ended december 31 pro forma calculations may indicative future amounts since additional awards future years anticipated sfas 123 fair value stockbased awards calculated use option pricing models also require subjective assumptions including future stock price volatility expected time exercise greatly affect calculated values company’s calculations made using blackscholes option pricing model following weighted average assumptions weighted average fair values options granted 2003 2002 2001 1025 1024 1504 per share respectively new accounting standards effective january 1 2003 company adopted sfas 143 accounting asset retirement obligations sfas 143 addresses financial accounting reporting obligations associated retirement longlived assets sfas 143 requires fair value liability associated asset retirement obligation “aro” recognized period incurred reasonable estimate fair value made liability aro revised subsequent period due passage time changes estimates associated retirement costs capitalized part carrying amount longlived asset subsequently depreciated life asset baker hughes incorporated notes consolidated financial statements continued adoption sfas 143 2003 resulted charge 56 million net tax 28 million recorded cumulative effect accounting change consolidated statement operations conjunction adoption company recorded aro liabilities 114 million primarily anticipated costs obligations associated future disposal power source units certain divisions refurbishment costs associated certain leased facilities europe fleet leased railcars tanks company presented pro forma aro disclosures pro forma net income earnings per share would materially different company’s actual results november 2002 financial accounting standards board “fasb” issued fasb interpretation 45 “fin 45” guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 requires disclosures guarantor financial statements obligations certain guarantees issued requires guarantor recognize inception certain guarantees liability fair value obligation undertaken issuing guarantee adoption provisions fin 45 relating initial recognition measurement guarantor liabilities effective qualifying guarantees entered modified december 31 2002 impact consolidated financial statements company adopted new disclosure requirements 2002 january 2003 fasb issued fasb interpretation 46 “fin 46” consolidation variable interest entities entity subject consolidation rules fin 46 referred variable interest entity “vie” entity’s equity investors lack characteristics controlling financial interest sufficient equity risk entity finance operations without additional financial support december 2003 fasb issued modifications fin 46 “fin 46r” resulting multiple effective dates based nature well creation date vie company currently evaluating provisions original fin 46 fin 46r potential vies created prior february 1 2003 expect adoption material impact consolidated financial statements april 2003 fasb issued sfas 149 amendment statement 133 derivative instruments hedging activities amends clarifies accounting derivative instruments including certain derivative instruments embedded contracts hedging activities sfas 133 sfas 149 effective contracts entered modified june 30 2003 exceptions hedging relationships designated june 30 2003 adoption sfas 149 july 1 2003 impact consolidated financial statements may 2003 fasb issued sfas 150 accounting certain financial instruments characteristics liabilities equity modifies accounting certain financial instruments sfas 150 requires financial instruments classified liabilities applies immediately financial instruments entered modified may 31 2003 otherwise effective beginning first interim period beginning june 15 2003 adoption sfas 150 july 1 2003 impact consolidated financial statements december 2003 fasb revised sfas 132 employers’ disclosures pensions postretirement benefits new sfas 132 requires additional disclosures assets obligations cash flows net periodic benefit cost defined benefit pension plans defined benefit postretirement plans certain disclosures required 2004 company adopted disclosure requirements effective 2003 january 2004 fasb issued fasb staff position fas 1061 “fsp 1061” accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 provides temporary guidance concerning recently enacted medicare prescription drug improvement modernization act 2003 “act” sfas 106 employers’ accounting postretirement benefits pensions requires presently enacted changes laws take effect future periods taken account measuring current period postretirement benefit cost accumulated projected benefit obligation “apbo” fsp 1061 allows companies sponsor affected postretirement benefit plans elect defer recognizing effects act postretirement benefit expense apbo pursuant sfas 106 company elected defer accounting effects act 2004 reclassifications certain reclassifications made prior years’ consolidated financial statements conform current year presentation baker hughes incorporated notes consolidated financial statements continued note 2 discontinued operations third quarter 2003 company’s board directors approved management initiated plan sell bird machine “bird” remaining division former process segment october 2003 company signed definitive agreement sale bird recorded charges totaling 374 million net tax 109 million consisted loss 135 million writedown bird fair value 62 million severance warranty accruals loss 177 million related recognition cumulative foreign currency translation adjustments earnings sale closed january 2004 company received 56 million proceeds subject adjustment pending final completion purchase price company retained certain accounts receivable inventories assets 2000 company decided substantially exit oil natural gas exploration business proceeded dispose various oil natural gas properties december 2002 company entered exclusive negotiations sale company’s interest oil producing operations west africa 320 million proceeds transaction effective january 1 2003 resulted gain sale 41 million net tax benefit 02 million recorded first quarter 2003 company received 100 million deposit 2002 remaining 220 million april 2003 november 2002 company sold eimco process equipment “eimco” division former process segment recorded loss disposal 223 million net tax 12 million consisted loss 23 million writedown fair value loss 200 million related recognition cumulative foreign currency translation adjustments earnings company received total proceeds 489 million 49 million held escrow pending completion final adjustments purchase price 2003 purchase price adjustments completed resulting release escrow balance 29 million returned buyer 20 million received company 2003 company also recorded additional loss sale due purchase price adjustments 25 million net tax 13 million company reclassified consolidated financial statements prior periods presented reflect operations discontinued summarized financial information discontinued operations follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued assets liabilities discontinued operations follows years ended december 31 note 3 acquisitions 2003 company made two acquisitions aggregate purchase price 169 million 95 million paid cash result acquisitions company recorded approximately 39 million goodwill 96 million intangible assets december 31 2003 purchase prices allocated based fair values acquisitions pro forma results operations presented effects acquisitions material company’s consolidated financial statements either individual aggregate basis 2002 company made three acquisitions aggregate cash purchase price 397 million net cash acquired result acquisitions company recorded approximately 284 million goodwill purchase prices allocated based fair values acquisitions pro forma results operations presented effects acquisitions material company’s consolidated financial statements either individual aggregate basis note 4 reversals restructuring charge 2000 company’s board directors approved company’s plan substantially exit oil natural gas exploration business recorded restructuring charge 295 million included restructuring charge 11 million contractual obligation related oil natural gas property angola property sold 2003 company reversed liability related contractual obligation also included restructuring charge 45 million minimum amount company’s share project costs relating company’s interest oil natural gas property colombia unsuccessful attempts negotiate settlement joint venture partner company decided abandon involvement project subsequently 2001 third party approached company agreed assume remaining obligations exchange company’s interest project accordingly company reversed 42 million related obligation note 5 income taxes provision income taxes comprised following years ended december 31 baker hughes incorporated notes consolidated financial statements continued geographic sources income continuing operations income taxes follows years ended december 31 tax benefits 15 million 14 million 55 million associated exercise employee stock options allocated equity recorded capital excess par value years ended december 31 2003 2002 2001 respectively provision income taxes differs amount computed applying us statutory income tax rate income continuing operations income taxes reasons set forth years ended december 31 2003 company recognized incremental effect 363 million additional taxes attributable portion operations westerngeco amount 159 million related reduction carrying value company’s equity investment westerngeco tax benefit remaining 204 million arose operations venture due venture taxed certain foreign jurisdictions based deemed profit basis percentage revenues rather profits ii unbenefitted foreign losses venture operating losses impairment restructuring charges certain foreign jurisdictions current tax benefit deferred tax asset recorded due uncertainty realization 2002 2001 amount additional taxes resulting operations venture 402 million 148 million respectively 2003 company recognized current year benefit 33 million result refund claims filed us 2002 144 million benefit recognized result settlement internal revenue service “irs” examination related company’s september 30 1996 september 30 1998 tax years 2001 benefit 235 million recognized result settlement irs examination certain 1994 1997 preacquisition tax returns related refund claims western atlas inc company received tax assessments various taxing authorities currently varying stages appeals litigation regarding matters company believes substantial defenses questions raised pursue legal remedies unfavorable outcome result company provided amounts believes ultimately result proceedings baker hughes incorporated notes consolidated financial statements continued deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards tax effects company’s temporary differences carryforwards follows december 31 valuation allowance recorded likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions company provided valuation allowance operating loss carryforwards certain nonus jurisdictions operations decreased currently ceased company withdrawn entirely provision made us additional foreign taxes anticipated repatriation certain earnings foreign subsidiaries company considers undistributed earnings foreign subsidiaries amount already provided indefinitely reinvested additional foreign earnings could become subject additional tax remitted deemed remitted dividend however additional amount taxes payable practicable estimate december 31 2003 company approximately 310 million foreign tax credits 361 million general business credits available offset future payments federal income taxes expiring varying amounts 2009 2024 company’s 127 million alternative minimum tax credits may carried forward indefinitely current us law operating loss carryforwards without valuation allowance expire varying amounts next twenty years note 6 earnings per share reconciliation number shares used basic diluted eps computations follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued note 7 inventories comprised following december 31 note 8 investments affiliates company investments affiliates accounted using equity method accounting significant affiliates westerngeco seismic venture company schlumberger limited “schlumberger” company schlumberger 30 70 venture respectively conjunction formation westerngeco november 2000 company schlumberger entered agreement whereby company schlumberger make cash trueup payment party based formula comparing ratio net present value sales revenue party’s contributed multiclient seismic data libraries fouryear period ending november 30 2004 ratio net book value libraries november 30 2000 maximum payment either party required make result adjustment 1000 million event future sales contributed libraries continue relative percentages incurred december 31 2003 company currently estimates schlumberger make payment company range 50 million 100 million payment received company recorded adjustment carrying value investment westerngeco november 2000 company also entered agreement westerngeco whereby westerngeco subleased facility company period ten years current market rates 2003 2002 2001 company received payments 50 million 55 million 46 million respectively westerngeco related lease conjunction formation westerngeco venture company transferred lease seismic vessel venture company sole guarantor lease obligation 2003 lease guarantee terminated result purchase seismic vessel westerngeco included caption “equity income loss affiliates” company’s consolidated statement operations 2003 1357 million company’s share 4520 million certain impairment restructuring charges taken westerngeco 2003 charges related impairment westerngeco’s multiclient seismic library rationalization westerngeco’s marine seismic fleet addition result continuing weakness seismic industry company evaluated value investment westerngeco recorded impairment loss 453 million 2003 writedown investment fair value fair value determined using combination market value discounted cash flows approach company assisted determination fair value independent third party included caption “equity income loss affiliates” 2002 2001 902 million company’s share 3007 million restructuring charge related impairment assets reductions workforce closing certain operations reducing marine seismic fleet 103 million asset impairment charges respectively associated westerngeco 2003 company invested 301 million 50 interest quantx wellbore instrumentation venture “quantx” expro international “expro” venture engaged permanent inwell monitoring market formed combining expro’s permanent monitoring business one company’s product lines company accounts ownership quantx using equity method accounting 2002 company invested 165 million 40 interest luna energy llc “luna energy” venture formed develop manufacture commercialize sell market distribute hole fiber optic sensors oil natural gas exploration production transportation refining applications 2003 company invested additional 80 million luna energy 2001 company sequel holdings inc “sequel” created entity operate name petreco international “petreco” company contributed 166 million net assets refining production product line process segment petreco consisting primarily intangible assets accounts receivable inventories conjunction transaction company received 90 million cash two promissory notes totaling 100 million subsequently exchanged preferred stock petreco 2002 profits shared company sequel 49 51 interests respectively sequel entitled liquidation preference upon liquidation sale petreco company accounts baker hughes incorporated notes consolidated financial statements continued ownership petreco using equity method accounting recognize gain loss initial formation entity due company’s material continued involvement operations petreco february 2004 company completed sale minority interest petreco received proceeds 358 million 74 million held escrow pending outcome potential indemnification obligations pursuant sales agreement company believe transaction material financial condition results operations summarized unaudited combined financial information equity method affiliates follows december 31 december 31 2003 2002 net accounts receivable unconsolidated affiliates totaled 07 million 161 million respectively december 31 2003 2002 excess company’s investment company’s equity affiliates 2982 million 3102 million respectively conjunction adoption sfas 142 company discontinued amortization goodwill associated equity method investments effective january 1 2002 amortization expense year ended december 31 2001 79 million included company’s equity income loss affiliates note 9 property comprised following december 31 note 10 goodwill intangible assets january 1 2002 company adopted sfas 142 required company cease amortizing goodwill perform transitional impairment test goodwill reporting units january 1 2002 company’s reporting units based organizational reporting structure corporate assets liabilities allocated reporting units extent related operations reporting units company assisted determination fair value independent third party goodwill eimco bird operating divisions company’s former process segment determined impaired using combination market value discounted cash flows approach estimate fair value accordingly company recognized transitional impairment losses 425 million net taxes 204 million transitional impairment losses recorded first quarter 2002 cumulative effect accounting change consolidated statement operations company performs annual impairment test october 1 impairments 2003 2002 related annual impairment test baker hughes incorporated notes consolidated financial statements continued changes carrying amount goodwill net accumulated amortization follows intangible assets amortized comprised following years ended december 31 2003 joint venture accounted using equity method accounting dissolved mutual agreement company venture partner carrying value company’s investment joint venture included goodwill resulting prior purchase accounting connection dissolution joint venture company received rights market certain products previously held joint venture result company reclassified 212 million equity method goodwill contract based technology based marketing related intangibles adoption sfas 142 also required company reevaluate remaining useful lives intangible assets determine whether remaining useful lives appropriate company also reevaluated amortization methods intangible assets determine whether amortization reflects pattern economic benefits intangible assets consumed performing evaluations company reduced remaining life one marketing related intangibles changed method amortization one technology based intangibles amortization expense included net income years ended december 31 2003 2002 2001 135 million 109 million 561 million respectively estimated amortization expense subsequent five fiscal years expected within range 109 million 132 million baker hughes incorporated notes consolidated financial statements continued accordance sfas 142 company discontinued amortization goodwill associated equity method investments effective january 1 2002 pro forma results operations company giving effect sfas 142 adopted january 1 2001 follows year ended december 31 baker hughes incorporated notes consolidated financial statements continued note 11 indebtedness total debt consisted following december 31 december 31 2003 company 9302 million credit facilities commercial banks 5000 million threeyear committed revolving credit facility “facility” expires july 2006 facility contains certain covenants among things require maintenance funded indebtedness total capitalization ratio defined formula per facility less equal 050 limit amount subsidiary indebtedness restrict sale significant assets defined 10 total consolidated assets december 31 2003 company compliance facility covenants including funded indebtedness total capitalization ratio 030 direct borrowings facility year ended december 31 2003 however extent company outstanding commercial paper available borrowings facility reduced december 31 2003 company classified 384 million debt due within one year longterm debt company ability facility intent maintain obligations longer one year company realized gains result terminating various interest rate swap agreements prior scheduled maturities deferred gains amortized reduction interest expense remaining life underlying debt securities unamortized deferred gains included certain debt securities reported longterm debt consolidated balance sheets follows december 31 baker hughes incorporated notes consolidated financial statements continued maturities debt december 31 2003 follows 2004 3514 million 2005 00 million 2006 386 million 2007 00 million 2008 00 million 10944 million thereafter note 12 financial instruments fair value financial instruments company’s financial instruments include cash shortterm investments receivables payables debt foreign currency forward contracts except described estimated fair value financial instruments december 31 2003 2002 approximate carrying value reflected consolidated balance sheets fair value company’s debt foreign currency forward contracts estimated based yearend quoted market prices estimated fair value company’s debt december 31 2003 2002 16098 million 17030 million respectively differs carrying amounts 14844 million 15478 million respectively included consolidated balance sheets interest rate swaps different times 2003 company entered three separate interest rate swap agreements notional amount 3250 million associated company’s 625 notes due january 2009 agreements designated qualified fair value hedging instruments due company’s outlook interest rates company terminated three agreements received payments totaling 269 million three agreements terminated prior entering new agreement deferred gains amortized reduction interest expense remaining life underlying debt security matures january 2009 2002 company terminated two interest rate swap agreements entered prior years agreements designated qualified fair value hedging instruments upon termination company received proceeds totaling 158 million deferred gains 48 million 110 million amortized reduction interest expense remaining lives underlying debt securities mature june 2004 january 2009 respectively foreign currency forward contracts december 31 2003 company entered several foreign currency forward contracts notional amounts aggregating 625 million hedge exposure currency fluctuations british pound sterling norwegian krone euro brazilian real argentine peso contracts designated qualify fair value hedging instruments based quoted market prices december 31 2003 contracts similar terms maturity dates company recorded gain 15 million adjust foreign currency forward contracts fair market value gain offsets designated foreign exchange losses resulting underlying exposures included selling general administrative expense consolidated statement operations 2003 2002 company entered foreign currency forward contracts hedge exposure currency fluctuations specific transactions balances impact consolidated statements operations significant contracts either individually aggregate counterparties company’s forward contracts major financial institutions credit ratings concentration risk financial institutions monitored continuing basis unlikely event counterparties fail meet terms foreign currency contract company’s exposure limited foreign currency rate differential concentration credit risk company sells products services numerous companies oil natural gas industry although concentration could affect company’s overall exposure credit risk management believes company exposed minimal risk since majority business conducted major companies within industry company performs periodic credit evaluations customers’ financial condition generally require collateral accounts receivable cases company require payment advance security form letter credit bank guarantee baker hughes incorporated notes consolidated financial statements continued company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions believes risk loss minimal note 13 segment related information company operates six divisions baker atlas baker oil tools baker petrolite centrilift hughes christensen inteq aggregated oilfield segment similar economic characteristics longterm financial performance divisions affected similar economic conditions consolidated results evaluated regularly chief operating decision maker deciding allocate resources assessing performance 2003 company process segment manufactured sold process equipment separating solids liquids company reclassified operating results segment discontinued operations company sold eimco 2002 bird 2004 company longer operates segment operating divisions manufacture sell products provide services used oil natural gas exploration industry including drilling completion production oil natural gas wells reservoir measurement evaluation also operate markets substantially customers principal markets include major oil natural gas producing regions world including north america south america europe africa middle east far east customers include major multinational independent stateowned oil companies oilfield segment also includes company’s 30 interest westerngeco similar businesses accounting policies oilfield segment described note 1 notes consolidated financial statements company evaluates performance oilfield segment based segment profit loss defined income loss continuing operations income taxes accounting changes restructuring charges reversals impairment assets interest income expense summarized financial information shown following table “corporate other” column includes corporaterelated items results insignificant operations relates segment profit loss income expense allocated oilfield segment including restructuring charges reversals impairment assets “corporate other” column also includes results operations relating former process segment assets discontinued operations baker hughes incorporated notes consolidated financial statements continued years ended december 31 2003 2002 2001 revenues attributable one customer accounted 10 total revenues following table presents details “corporate other” segment loss years ended december 31 following table presents details “corporate other” total assets december 31 following table presents consolidated revenues country based location use products services years ended december 31 following table presents net property country based location asset december 31 note 14 employee stock plans company stock option plans provide issuance incentive nonqualified stock options directors officers key employees exercise price equal greater fair market value stock date grant stock options generally vest three years vested options exercisable part full time prior expiration date ten years date grant december 31 2003 152 million shares available future option grants baker hughes incorporated notes consolidated financial statements continued following table summarizes activity company’s stock option plans following table summarizes information stock options outstanding december 31 2003 company also employee stock purchase plan whereby eligible employees may purchase shares company’s common stock price equal 85 lower closing price company’s common stock first last trading day calendar year total 49 million shares remaining issuance plan employees purchased 08 million shares 2003 08 million shares 2002 06 million shares 2001 company awarded restricted stock directors certain executive officers fair value restricted stock date grant amortized ratably vesting period following table summarizes restricted stock awarded years ended december 31 baker hughes incorporated notes consolidated financial statements continued note 15 employee benefit plans defined benefit pension plans company noncontributory defined benefit pension plans “pension benefits” covering various domestic foreign employees generally company makes annual contributions plans amounts necessary meet exceed minimum governmental funding requirements measurements plan assets obligations october 1 year presented reconciliation beginning ending balances projected benefit obligations “pbo” fair value plan assets funded status plans follows years ended december 31 company reports prepaid benefit cost assets accrued benefit minimum liabilities pensions postretirement benefit obligations consolidated balance sheet amounts recognized consolidated balance sheet follows december 31 weighted average assumptions used determine benefit obligations plans follows baker hughes incorporated notes consolidated financial statements continued accumulated benefit obligation “abo” actuarial present value pension benefits attributed employee service date present compensation levels abo differs pbo abo include assumptions future compensation levels abo us plans 1746 million 1384 million december 31 2003 2002 respectively abo nonus plans 2450 million 1889 million december 31 2003 2002 respectively information plans abos excess plan assets follows december 31 components net periodic benefit cost follows years ended december 31 weighted average assumptions used determine net costs plans follows years ended december 31 selecting expected longterm rate return assets company considered average rate earnings expected funds invested provide benefits plans included considering trusts’ asset allocation expected returns likely earned life plans basis consistent prior year weightedaverage asset allocations asset category company’s us plans follows company investment committee meets quarterly review portfolio returns determine assetmix targets based assetliability studies nationally recognized thirdparty investment consultant assisted company developing asset allocation strategy determine company’s expected rate return expected risk various investment portfolios investment committee considered studies formal establishment current assetmix targets based projected risk return levels asset class baker hughes incorporated notes consolidated financial statements continued 2004 company expects contribute 240 million 270 million us pension plans 110 million 130 million nonus plans postretirement welfare benefits company provides certain postretirement health care life insurance benefits “postretirement welfare benefits” substantially us employees retire met certain age service requirements plan unfunded measurement plan obligations october 1 year presented reconciliation beginning ending balances benefit obligations funded status plan follows years ended december 31 weighted average discount rates 625 675 used determine postretirement welfare benefit obligations plan years ended december 31 2003 2002 respectively components net periodic benefit costs follows years ended december 31 weighted average discount rates 675 700 775 used determine net postretirement welfare benefit costs plan years ended december 31 2003 2002 2001 respectively assumed health care cost trend rates significant effect amounts reported postretirement welfare benefits plan assumed health care cost trend rate used measuring accumulated benefit obligation postretirement welfare benefits adjusted 2003 december 31 2003 health care cost trend rate 100 employees age 65 75 participants age 65 declining gradually successive year reaches 50 employees age 65 age 65 2008 one percentage point change assumed health care cost trend rates would following effects 2003 baker hughes incorporated notes consolidated financial statements continued december 2003 medicare prescription drug improvement modernization act 2003 ‘the act” signed law act expanded medicare include first time coverage prescription drugs company expects legislation eventually reduce company’s postretirement welfare benefit costs company elected defer accounting effects act 2004 accordance fsp 1061 2004 company expects make benefit payments approximately 140 million defined contribution plans periods reported generally company’s us employees eligible participate company sponsored thrift plan 401k plan internal revenue code 1986 amended thrift plan allows eligible employees elect contribute 1 50 salaries investment trust employee contributions matched cash company rate 100 per 100 employee contribution first 3 050 per 100 employee contribution next 2 employee’s salary contributions vest immediately addition company makes cash contribution eligible employees 2 5 salary depending employee’s age contributions become fully vested employee five years employment thrift plan provides nine different investment options employee sole discretion determining employer employee contributions invested company’s contributions thrift plan several nonus defined contribution plans amounted 677 million 628 million 637 million 2003 2002 2001 respectively certain nonus employees eligible participate thrift plan company provides nonqualified defined contribution plan provides basically benefits thrift plan addition company provides nonqualified supplemental retirement plan “srp” certain officers employees whose benefits thrift plan pension plan limited federal tax law srp also allows eligible employees defer portion eligible compensation provides employer matching base contributions pursuant limitations nonqualified plans fully funded invested trusts assets corresponding liabilities included company’s consolidated balance sheet company’s contributions nonqualified plans 55 million 60 million 42 million 2003 2002 2001 respectively postemployment benefits company provides certain postemployment disability income medical benefits substantially qualifying former inactive us employees part 2002 income benefits longterm disability “disability benefits” provided qualified selfinsured plan funded contributions company employees effective july 1 2002 company converted fullyinsured plan future longterm disability benefits disability benefits employees disabled july 1 2002 sold disability insurance company continuation medical life insurance benefits disability “continuation benefits” provided qualified selfinsured plan accrued postemployment liability continuation benefits december 31 2003 2002 272 million 303 million respectively included liabilities consolidated balance sheet note 16 commitments contingencies leases december 31 2003 company longterm noncancelable operating leases covering certain facilities equipment minimum annual rental commitments net amounts due subleases five years period ending december 31 2008 673 million 566 million 361 million 194 million 146 million respectively 1063 million aggregate thereafter company entered significant capital leases litigation company subsidiaries involved litigation proceedings arisen company’s ordinary business activities company insures risks extent deemed prudent management assurance given nature amount insurance sufficient fully indemnify company liabilities arising pending future legal proceedings many insurance policies contain deductibles selfinsured retentions amounts company deems prudent company responsible payment determining amount selfinsurance company’s policy selfinsure losses predictable measurable recurring nature claims baker hughes incorporated notes consolidated financial statements continued automobile liability general liability workers compensation company records accruals uninsured portion losses related types claims accruals losses calculated estimating losses claims using historical claim data specific loss development factors information necessary september 12 2001 company without admitting denying factual allegations contained order consented securities exchange commission “sec” entry order making findings imposing ceaseanddesist order “order” violations section 13b2a section 13b2b exchange act among findings included order following 1999 company discovered certain officers authorized improper 75000 payment indonesian tax official company embarked corrective course conduct including voluntarily promptly disclosing misconduct sec department justice “doj” course investigation indonesia matter company learned company made payments amount 15000 10000 india brazil respectively agents without taking adequate steps ensure none payments would passed foreign government officials order found foregoing payments violated section 13b2a order also found company violation section 13b2b system internal controls determine payments violated foreign corrupt practices act “fcpa” fcpa makes unlawful us issuers including company anyone acting behalf make improper payments foreign official order obtain retain business addition fcpa establishes accounting control requirements us issuers company cooperated sec’s investigation order dated september 12 2001 company agreed cease desist committing causing violation future violation section 13b2a section 13b2b exchange act sections exchange act require issuers x make keep books records accounts reasonable detail accurately fairly reflect transactions dispositions assets issuer devise maintain system internal accounting controls sufficient provide reasonable assurances transactions executed accordance management’s general specific authorization ii transactions recorded necessary permit preparation financial statements conformity generally accepted accounting principles criteria applicable statements ii maintain accountability assets march 25 2002 former employee alleging improper activities relating nigeria filed civil complaint company 281st district court harris county texas seeking back pay damages including future lost wages august 2 2002 former employee filed substantially complaint company federal district court southern district texas company’s insurer company finalized settlement agreement former employee final settlement documents fully executed december 2 2003 case formally dismissed prejudice order federal court december 19 2003 state court case previously dismissed settlement material company march 29 2002 company announced advised sec doj conducting investigations allegations violations law relating nigeria related matters sec issued formal order investigation possible violations provisions foreign corrupt practices act “fcpa” regarding antibribery books records internal controls doj asked interview current former employees august 6 2003 sec issued subpoena seeking information company’s operations angola kazakhstan part ongoing investigation company providing documents cooperating fully sec doj addition company conducting internal investigations matters sec doj broad range sanctions may seek impose appropriate circumstances including limited injunctive relief disgorgement fines penalties modifications business practices compliance programs well civil criminal charges individuals possible accurately predict time investigations completed actions may taken sec doj authorities effect thereof company’s ongoing internal investigation respect certain operations nigeria identified apparent deficiencies books records internal controls potential liabilities governmental authorities nigeria investigation substantially completed first quarter 2003 based upon current information company expect potential liabilities material adverse effect company’s results operations financial condition department commerce department navy doj “us agencies” investigating compliance certain export licenses issued western geophysical 1994 2000 export seismic equipment leased people’s republic china company acquired western geophysical august 1998 subsequently transferred related assets westerngeco december 2000 joint venture formation agreement westerngeco company owes indemnity westerngeco certain matters company cooperating fully us agencies based current information company cannot predict outcome investigation effect may financial condition baker hughes incorporated notes consolidated financial statements continued environmental matters company’s past present operations include activities subject extensive domestic including us federal state local international environmental regulations company’s environmental policies practices designed ensure compliance existing laws regulations minimize possibility significant environmental damage company involved voluntary remediation projects present former manufacturing facilities majority due acquisitions made company sites company longer actively uses operations estimate remediation costs voluntary remediation projects developed using currently available facts existing permits technology presently enacted laws regulations remediation cost estimates include direct costs related investigation external consulting costs governmental oversight fees treatment equipment costs associated longterm maintenance monitoring remediation project company also identified potentially responsible party “prp” remedial activities related various superfund sites company participates process set joint participation defense agreement negotiate government agencies identify prps determine prp’s allocation estimate remediation costs company accrued believes prorata share total estimated cost remediation superfund sites based upon ratio estimated volume waste contributed site company bears total estimated volume waste disposed site applicable united states federal law imposes joint several liability prp cleanup sites leaving company uncertainty may responsible remediation cost attributable prps unable pay share remediation costs accrual made joint several liability concept superfund sites company’s participation minor since company believes probability pay material costs volumetric share remote company believes prps greater involvement volumetric calculation basis substantial assets may reasonably expected pay share cost remediation superfund sites company major prp remediation costs estimated include recalcitrant parties cases company insurance coverage contractual indemnities third parties cover ultimate liability december 31 2003 2002 company’s total accrual environmental remediation 156 million 177 million respectively including 43 million remediation costs various superfund sites years measurement accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity utilized company believes likelihood material losses excess amounts recorded remote normal course business customers vendors others company contingently liable performance letters credit bank issued guarantees totaled approximately 2849 million december 31 2003 company also commitments outstanding purchase obligations related capital expenditures inventory purchase orders contracts approximately 1020 million december 31 2003 addition december 31 2003 company guaranteed debt third parties totaling 341 million including 150 million relating petreco guarantee terminated conjunction sale petreco february 2004 practicable estimate fair value financial instruments management expect material losses financial instruments note 17 supplemental information supplemental consolidated statement operations information follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued formation petreco included following cash noncash amounts year ended december 31 changes aggregate product warranty liability follows changes asset retirement obligation liability follows baker hughes incorporated notes consolidated financial statements continued note 18 quarterly data unaudited see note 4 reversals restructuring charge represents revenues less cost revenues item 9item 8 financial statements supplementary data management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rules 13a15f internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles control environment foundation system internal control embodied business code conduct sets tone company includes core values integrity teamwork performance learning included system internal control written policies organizational structure providing division responsibilities selection training qualified personnel program financial operations reviews professional staff internal auditors internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition assets could material effect financial statements supervision participation management including principal executive officer principal financial officer conducted evaluation effectiveness internal control financial reporting evaluation based framework internal control integrated framework issued committee sponsoring organizations treadway commission based evaluation framework internal control integrated framework principal executive officer principal financial officer concluded internal control financial reporting effective december 31 2005 conclusion principal executive officer principal financial officer based recognition inherent limitations systems internal control inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management’s assessment effectiveness internal control financial reporting december 31 2005 audited deloitte touche llp independent registered public accounting firm stated report included herein chad c deaton g stephen finley alan j keifer chad c deaton g stephen finley alan j keifer chairman senior vice president vice president chief executive officer finance administration controller chief financial officer houston texas february 23 2006 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited management’s assessment included accompanying management’s report internal control financial reporting baker hughes incorporated subsidiaries “company” maintained effective internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment opinion effectiveness company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion management’s assessment company maintained effective internal control financial reporting december 31 2005 fairly stated material respects based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission also opinion company maintained material respects effective internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states consolidated financial statements financial statement schedule ii year ended december 31 2005 company report dated february 23 2006 expressed unqualified opinion consolidated financial statements financial statement schedule deloitte touche llp houston texas february 23 2006 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited accompanying consolidated balance sheets baker hughes incorporated subsidiaries “company” december 31 2005 2004 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2005 audits also included financial statement schedule ii valuation qualifying accounts listed index item 15 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position baker hughes incorporated subsidiaries december 31 2005 2004 results operations cash flows three years period ended december 31 2005 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness company’s internal control financial reporting december 31 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 23 2006 expressed unqualified opinion management’s assessment effectiveness company’s internal control financial reporting unqualified opinion effectiveness company’s internal control financial reporting deloitte touche llp houston texas february 23 2006 baker hughes incorporated consolidated statements operations millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated balance sheets millions except par value see notes consolidated financial statements baker hughes incorporated consolidated statements stockholders’ equity millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated statements cash flows millions see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements note 1 summary significant accounting policies nature operations baker hughes incorporated “baker hughes” engaged oilfield services industry baker hughes major supplier wellborerelated products technology services systems worldwide oil natural gas industry provides products services drilling formation evaluation completion production oil natural gas wells basis presentation consolidated financial statements include accounts baker hughes majority owned subsidiaries “we” “our” “us” investments ability exercise significant influence operating financial policies hold controlling interest accounted using equity method accounting significant intercompany accounts transactions eliminated consolidation notes consolidated financial statements dollar share amounts tabulations millions dollars shares respectively unless otherwise indicated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period base estimates judgments historical experience various assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained operating environment changes believe estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts inventory valuation reserves recoverability longlived assets useful lives used depreciation amortization income taxes related valuation allowances insurance environmental legal pensions postretirement benefit obligations revenue recognition products services generally sold based upon purchase orders contracts customer include fixed determinable prices include right return similar provisions significant postdelivery obligations products produced standard manufacturing operation even produced customer’s specifications sold ordinary course business regular marketing channels recognize revenue products upon delivery title passes collectibility reasonably assured provisions estimated warranty returns similar types items made time related revenue recognized revenue services recognized services rendered collectibility reasonably assured rates services typically priced per day per meter per man hour similar basis cash equivalents consider highly liquid investments original maturity three months less time purchase cash equivalents shortterm investments 2005 began investing auction rate securities highly liquid variablerate debt securities underlying security longterm maturity interest rate reset dutch auctions typically held every 7 28 35 days creating shortterm liquidity securities trade par callable par interest payment date option issuer interest paid end auction period limit investments auction rate securities carry aaa equivalent rating recognized rating agency investments classified availableforsale recorded cost approximates market value baker hughes incorporated notes consolidated financial statements continued inventories stated lower cost market cost determined using firstin firstout “fifo” method average cost method approximates fifo includes cost materials labor manufacturing overhead property depreciation property stated cost less accumulated depreciation generally provided using straightline method estimated useful lives individual assets manufacture substantial portion rental tools equipment cost items includes direct indirect manufacturing costs capitalized carried inventory tool completed tool completed cost tool reflected capital expenditures tool classified rental tools equipment property significant improvements betterments capitalized extend useful life asset goodwill intangible assets amortization goodwill including goodwill associated equity method investments intangible assets indefinite lives amortized intangible assets finite useful lives amortized either straightline basis asset’s estimated useful life basis reflects pattern economic benefits intangible assets realized impairment longlived assets review property intangible assets certain assets impairment whenever events changes circumstances indicate carrying amount may recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense amount impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets perform annual impairment test goodwill reporting units october 1 frequently circumstances indicate impairment may exist reporting units based organizational reporting structure corporate assets liabilities allocated reporting units extent relate operations reporting units determining carrying amount investments affiliates also reviewed impairment whenever events changes circumstances indicate impairment may exist determination impairment made comparing carrying amount fair value calculated using combination market capitalization discounted cash flow approach income taxes use liability method determining income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered future tax benefits recognized extent realization benefits likely deferred income taxes provided estimated income tax effect temporary differences financial tax bases assets liabilities deferred tax assets also provided certain tax credit carryforwards valuation allowance reduce deferred tax assets established likely portion deferred tax assets realized intend indefinitely reinvest certain earnings foreign subsidiaries operations outside us accordingly provided us income taxes earnings provide us additional nonus taxes earnings anticipated repatriated nonus subsidiaries operate 90 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenues rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability taxing jurisdiction could impact upon amount income taxes provide given year baker hughes incorporated notes consolidated financial statements continued tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law received tax assessments various taxing authorities currently varying stages appeals andor litigation regarding matters provided amounts believe ultimately result proceedings believe substantial defenses questions raised pursue legal remedies unfavorable outcome result however resolution matters involves uncertainties assurances outcomes favorable product warranties sell certain products product warranty provides customers return defective product specified warranty period following purchase exchange replacement product repair cost customer issuance credit customer accrue amounts estimated warranty claims based upon current historical product sales data warranty costs incurred related information known us environmental matters remediation costs accrued based estimates known environmental remediation exposure using currently available facts existing environmental permits technology presently enacted laws regulations sites primarily responsible remediation cost estimates developed based internal evaluations discounted accruals recorded probable obligated pay environmental site evaluation remediation related activities costs reasonably estimated obligation estimated within range accrue minimum amount range accruals recorded even significant uncertainties exist ultimate cost remediation additional accurate information becomes available accruals adjusted reflect current cost estimates ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party united states federal state “superfund” site accrue share estimated remediation costs site share based ratio estimated volume waste contributed site total volume waste disposed site foreign currency majority significant foreign subsidiaries designated local currency functional currency gains losses resulting balance sheet translation foreign operations included separate component accumulated comprehensive loss within stockholders’ equity gains losses foreign currency transactions resulting settlement receivables payables nonfunctional currency included selling general administrative “sga” expense consolidated statements operations incurred foreign subsidiaries designated us dollar functional currency gains losses resulting balance sheet translation foreign operations also included sga expense consolidated statements operations incurred recorded net foreign currency transaction translation gains sga consolidated statement operations 68 million 40 million 15 million 2005 2004 2003 respectively derivative financial instruments monitor exposure various business risks including commodity price foreign currency exchange rate interest rate risks occasionally use derivative financial instruments manage impact certain risks policies permit use derivative financial instruments speculative purposes use foreign currency forward contracts hedge certain firm commitments transactions denominated foreign currencies use interest rate swaps manage interest rate risk inception new derivative designate derivative cash flow fair value hedge determine derivative undesignated hedging instrument facts dictate document relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions assess whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item inception hedge ongoing basis baker hughes incorporated notes consolidated financial statements continued stockbased compensation allowed statement financial accounting standards “sfas” 123 accounting stockbased compensation account compensation related stock options employee stock purchase plan using intrinsic value method accounting accordance accounting principles board opinion 25 “apb 25” accounting stock issued employees method compensation expense recognized difference quoted market price stock measurement date less amount employee required pay stock reported net income include compensation expense associated employee stock purchase plan stock option awards exercise prices stock option awards equal market prices underlying stock granted employee stock purchase plan non compensatory reported net income include compensation expense associated restricted stock awards december 2004 financial accounting standards board “fasb” issued revised sfas 123 sharebased payment “sfas 123r” sfas 123r revision sfas 123 supersedes apb 25 sfas 123r requires entity measure cost employee services received exchange award equity instruments based grantdate fair value award cost recognized period employee required provide service exchange award sfas 123r also requires entity initially measure cost employee services rendered exchange award liability instruments current fair value fair value remeasured subsequent reporting date settlement date changes fair value required service period recognized compensation cost period sfas 123r clarified accounting sfas 123 related estimating service period employees become retirement eligible vesting period requiring recognition compensation expense employees accelerated impacts timing expense recognition total expense recognized vesting period first quarter 2005 adopted new methodology prospective basis cumulative effect clarification 118 million net tax purposes calculating pro forma disclosure included pro forma disclosure stockbased compensation year ended december 31 2005 recognized compensation expense applying fair value based method awards provided sfas 123 pro forma net income earnings per share “eps” stockbased compensation cost would follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued sfas 123 fair value stockbased awards calculated use option pricing models require number subjective assumptions estimates significantly affect calculated values include future stock price volatility expected time exercise discount rates forfeiture rates employee turnover rates addition number awards granted impacts amount expense result pro forma amounts may indicative future amounts proforma calculations made using blackscholes option pricing model following weighted average assumptions years ended december 31 weighted average fair values options granted 2005 2004 2003 1462 1116 1025 per share respectively accordance guidance issued sec delayed effective date adopted sfas 123r january 1 2006 using modified prospective method whereby recognize expense previously granted unvested awards remaining service period award new awards granted adoption date expensed estimated service period based current estimates expect impact 2006 adoption sfas 123r additional expense 180 million 200 million net tax continuing evaluate various option pricing models required assumptions estimates used determining fair value awards made 2006 addition estimated number awards granted 2006 final amount determined result actual amount recorded expense 2006 may different estimated amount estimated amount may indicative expense may incur future years new accounting standards november 2004 fasb issued sfas 151 inventory costs amendment arb 43 chapter 4 amends guidance arb 43 clarify accounting abnormal amounts idle facility expense freight handling costs wasted material sfas 151 requires items recognized current period charges addition sfas 151 requires allocation fixed production overheads inventory based normal capacity production facilities sfas 151 effective inventory costs incurred fiscal years beginning june 15 2005 adopted sfas 151 january 1 2006 material impact consolidated financial statements december 2004 fasb issued fasb staff position 1091 “fsp 1091” application fasb statement 109 “accounting income taxes” “sfas 109” tax deduction qualified production activities provided american jobs creation act 2004 provides guidance american jobs creation act 2004 “act” act provides tax deduction income qualified domestic production activities fsp 1091 provides treatment deduction special deduction described sfas 109 deduction effect existing deferred tax assets liabilities impact deduction reported period deduction claimed us tax return adopted fsp 1091 january 1 2005 material impact 2005 effective tax rate expect deduction material impact effective tax rate future years december 2004 fasb issued fasb staff position 1092 “fsp 1092” accounting disclosure guidance foreign repatriation provision within american jobs creation act 2004 provides guidance sfas 109 respect recording potential impact repatriation provisions act company’s income tax expense deferred tax liability fsp 1092 states company allowed time beyond financial reporting period enactment evaluate effect act plan reinvestment repatriation foreign earnings purposes applying sfas 109 decided elect repatriate foreign earnings provisions act accordingly consolidated financial statements reflect provision taxes related election baker hughes incorporated notes consolidated financial statements continued march 2005 fasb issued fasb interpretation 47 “fin 47” accounting conditional asset retirement obligations fin 47 clarifies term “conditional asset retirement obligation” used sfas 143 accounting asset retirement obligations refers legal obligation perform asset retirement activity timing andor method settlement conditional future event may within control entity obligation perform asset retirement activity unconditional even though uncertainty exists timing andor method settlement fin 47 also clarifies entity would sufficient information reasonably estimate fair value asset retirement obligation adopted fin 47 december 31 2005 resulted charge 09 million net tax 05 million recorded cumulative effect accounting change consolidated statement operations conjunction adoption recorded conditional asset retirement obligations 16 million fair value costs associated certain conditional asset retirement obligations may 2005 fasb issued sfas 154 accounting changes error corrections sfas 154 replaces accounting principles board opinion 20 “apb 20” accounting changes sfas 3 reporting accounting changes interim financial statements changes requirements accounting reporting change accounting principle sfas 154 requires retrospective application changes accounting principle prior periods’ financial statements unless impracticable determine either periodspecific effects cumulative effect change sfas 154 effective accounting changes corrections errors made fiscal years beginning december 15 2005 adopted sfas 154 january 1 2006 note 2 discontinued operations fourth quarter 2005 management initiated board directors approved plan sell baker supply products division “spd” product line group within completion production segment spd distributes basic supplies products small tools drilling industry january 2006 signed nonbinding letter intent sale spd sale expected close first quarter 2006 transaction subject negotiation execution definitive sale agreement well various conditions including satisfactory due diligence review spd’s business assurance transaction consummated september 2004 completed sale baker hughes mining tools “bhmt” product line group within drilling evaluation segment manufactured rotary drill bits used mining industry 315 million recorded gain sale 02 million net tax 36 million consisted gain disposal 68 million offset loss 66 million related recognition cumulative foreign currency translation adjustments earnings october 2003 signed definitive agreement sale bird machine “bird” remaining division former process segment recorded charges totaling 374 million net tax 109 million consisted loss 135 million writedown bird fair value 62 million severance warranty accruals loss 177 million related recognition cumulative foreign currency translation adjustments earnings january 2004 completed sale bird recorded additional loss sale 05 million tax benefit received 56 million proceeds subject postclosing adjustments purchase price retained certain accounts receivable inventories assets second quarter 2004 made net payment 68 million buyer settlement final purchase price adjustments result changes value assets sold liabilities assumed buyer date initial sales price negotiated closing sale december 2002 entered exclusive negotiations sale interest oil producing operations west africa received 100 million deposit transaction effective january 1 2003 resulted gain sale 41 million net tax benefit 02 million received remaining 220 million proceeds april 2003 purchase price adjustments related sale eimco process equipment “eimco” completed resulting release escrow balance received 20 million 29 million returned buyer recorded additional loss sale eimco 25 million net tax 13 million baker hughes incorporated notes consolidated financial statements continued reclassified consolidated financial statements prior periods presented reflect operations discontinued summarized financial information discontinued operations follows years ended december 31 assets liabilities discontinued operations follows years ended december 31 note 3 acquisitions december 2005 purchased zeroth technology limited “zertech” developer expandable metal sealing element 203 million cash included completion production segment result acquisition based preliminary estimates fair values recorded approximately 195 million goodwill intangible assets may revised based final purchase price allocations purchase price preliminarily allocated based fair values assets acquired liabilities assumed acquisition pro forma results operations presented effects acquisition material consolidated financial statements terms purchase agreement former baker hughes incorporated notes consolidated financial statements continued owners zertech entitled additional purchase price consideration approximately 140 million based performance business 2006 2007 2008 2003 obtained 50 interest quantx wellbore instrumentation venture “quantx” engaged permanent inwell monitoring august 2005 accounted ownership quantx using equity method accounting august 2005 exercised right acquire remaining 50 interest quantx began consolidate quantx’s accounts discontinued using equity method accounting october 2005 finalized purchase remaining 50 interest quantx 272 million subject final purchase price adjustments based carrying value existing investment quantx 355 million additional consideration 272 million recorded approximately 284 million goodwill 196 million intangibles also assigned 51 million inprocess research development written october 2005 date acquisition writeoff included research development expenses included cost revenues consolidated statement operations purchase price allocated based fair value assets acquired liabilities assumed quantx fair values determined using discounted cash flow approach pro forma results operations presented effect acquisition material consolidated financial statements quantx included completion production segment 2002 entered venture luna energy llc “luna” 40 interest accounted using equity method accounting december 2004 acquired remaining 60 interest luna 10 million cash result acquisition recorded approximately 190 million goodwill 55 million intangible assets also assigned 18 million inprocess research development written date acquisition writeoff included research development expenses included cost revenues consolidated statement operations purchase price allocated based fair value assets acquired liabilities assumed luna fair values determined using discounted cash flow approach pro forma results operations presented effect acquisition material consolidated financial statements luna included completion production segment 2003 made two acquisitions aggregate purchase price 169 million 95 million paid cash result acquisitions recorded approximately 39 million goodwill 96 million intangible assets purchase price allocated based fair value assets acquired liabilities assumed acquisitions pro forma results operations presented effects acquisitions material consolidated financial statements either individual aggregate basis note 4 reversal restructuring charge 2000 board directors approved plan substantially exit oil natural gas exploration business recorded restructuring charge 295 million included restructuring charge 11 million contractual obligation related oil natural gas property angola property sold 2003 reversed liability related contractual obligation note 5 income taxes provision income taxes income continuing operations comprised following years ended december 31 baker hughes incorporated notes consolidated financial statements continued geographic sources income continuing operations income taxes follows years ended december 31 tax benefits 198 million 125 million 15 million associated exercise employee stock options allocated equity recorded capital excess par value years ended december 31 2005 2004 2003 respectively provision income taxes differs amount computed applying us statutory income tax rate income continuing operations income taxes reasons set forth years ended december 31 2005 2004 recognized incremental effect 41 million 18 million respectively additional taxes attributable portion operations westerngeco consists 33 million tax expense associated 133 million westerngeco trueup payment received schlumberger 2005 state tax effect related increased income us 2005 2004 2003 recognized incremental effect 363 million additional taxes related investment westerngeco amount 159 million related reduction carrying value equity investment westerngeco tax benefit remaining 204 million arose operations venture due venture taxed certain foreign jurisdictions based deemed profit basis percentage revenues rather profits ii unbenefitted foreign losses venture operating losses impairment restructuring charges certain foreign jurisdictions current tax benefit deferred tax asset recorded due uncertainty realization 2005 2003 recognized benefit 43 million 33 million respectively result refund claims filed us 2005 recognized 106 million deferred tax asset attributable cumulative temporary difference carrying values supplemental retirement plan “srp” financial reporting income tax purposes effect reducing current year tax expense received tax assessments various taxing authorities currently varying stages appeals litigation regarding matters provided amounts believe ultimately result proceedings believe substantial defenses questions raised pursue legal remedies unfavorable outcome result provided taxes believe ultimately payable result assessments aggregate assessments approximately 341 million excess taxes provided consolidated financial statements addition aforementioned assessments received various taxing authorities provide taxes certain situations assessments received situations consider probable taxes ultimately payable exceed amounts reflected filed tax returns accordingly taxes provided situations guidance sfas 5 accounting contingencies included income taxes current liabilities deferred income taxes tax liabilities consolidated balance sheets baker hughes incorporated notes consolidated financial statements continued deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards tax effects temporary differences carryforwards follows december 31 record valuation allowance likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions provided valuation allowance operating loss carryforwards certain nonus jurisdictions operations decreased currently ceased withdrawn entirely provided us additional foreign taxes anticipated repatriation certain earnings foreign subsidiaries consider undistributed earnings foreign subsidiaries amount already provided indefinitely reinvested intention repatriate earnings additional foreign earnings could become subject additional tax remitted deemed remitted dividend however practicable estimate additional amount taxes payable december 31 2005 approximately 410 million foreign tax credits expiring varying amounts 2014 2016 57 million state tax credits may carried forward indefinitely current state law operating loss carryforwards without valuation allowance expire varying amounts next twenty years note 6 earnings per share reconciliation number shares used basic diluted eps computations follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued note 7 inventories comprised following december 31 note 8 investments affiliates investments affiliates accounted using equity method accounting significant affiliates westerngeco seismic venture 30 schlumberger limited “schlumberger” owns 70 conjunction formation westerngeco november 2000 entered agreement schlumberger whereby cash trueup payment made either parties based formula comparing ratio net present value sales revenue party’s contributed multiclient seismic data libraries fouryear period ending november 30 2004 ratio net book value libraries november 30 2000 august 2005 received 133 million schlumberger related trueup payment recorded 130 million reduction carrying value investment westerngeco 03 million interest income tax effect 33 million related payment included provision income taxes year ended december 31 2005 november 2000 also entered agreement westerngeco whereby westerngeco subleased facility us period ten years current market rates 2005 2004 2003 received payments 65 million 55 million 50 million respectively westerngeco related lease 2005 received distributions 300 million westerngeco recorded reductions carrying value investment effective december 1 2005 either party westerngeco master formation agreement may offer sell entire interest venture party cash purchase price per percentage interest specified offer notice offer sell accepted offering party obligated purchase party obligated sell entire interest price per percentage interest price specified offer notice included caption “equity income loss affiliates” consolidated statement operations 2003 1357 million share 4520 million certain impairment restructuring charges taken westerngeco 2003 charges related impairment westerngeco’s multiclient seismic library rationalization westerngeco’s marine seismic fleet addition result continued weakness seismic industry evaluated value investment westerngeco recorded impairment loss 453 million 2003 writedown investment fair value fair value determined using combination market capitalization discounted cash flow approach february 2004 completed sale minority interest petreco international venture entered 2001 358 million 74 million placed escrow pending outcome potential indemnification obligations pursuant sales agreement may 2005 received 37 million release portion amount held escrow remainder expected released first quarter 2006 subject indemnity obligations sales agreement 2004 recognized gain sale 13 million net tax 15 million baker hughes incorporated notes consolidated financial statements continued summarized unaudited combined financial information affiliates account interests using equity method accounting follows december 31 december 31 2005 2004 net accounts receivable payable unconsolidated affiliates totaled 04 million 11 million respectively december 31 2005 2004 excess investment equity affiliates 2394 million 2689 million respectively note 9 property comprised following december 31 note 10 goodwill intangible assets changes carrying amount goodwill detailed segment perform annual impairment test goodwill october 1 every year impairments goodwill 2005 2004 2003 related annual impairment test baker hughes incorporated notes consolidated financial statements continued intangible assets comprised following december 31 intangible assets amortized either straightline basis estimated useful lives ranging 1 20 years basis reflects pattern economic benefits intangible assets consumed range 15 30 years amortization expense included net income years ended december 31 2005 2004 2003 152 million 149 million 135 million respectively estimated amortization expense subsequent five fiscal years expected within range 116 million 182 million note 11 indebtedness total debt consisted following december 31 december 31 2005 9556 million credit facilities commercial banks 5000 million committed revolving credit facility “facility” expires july 2010 facility provides three oneyear extensions subject approval acceptance lenders among conditions addition facility contains provision allow increase facility amount additional 5000 million subject approval acceptance lenders among conditions facility contains certain covenants among things require maintenance funded indebtedness total capitalization ratio defined formula per facility less equal 060 restrict certain merger transactions sale substantially assets company significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations facility may accelerated events default include baker hughes incorporated notes consolidated financial statements continued payment defaults lenders facility covenant defaults customary defaults december 31 2005 compliance facility covenants direct borrowings facility year ended december 31 2005 however extent outstanding commercial paper ability borrow facility reduced december 31 2005 outstanding commercial paper realized net gains result terminating various interest rate swap agreements prior scheduled maturities net gains deferred amortized net reduction interest expense remaining life underlying debt securities unamortized deferred gains 155 million 268 million included 625 notes due january 2009 reported longterm debt consolidated balance sheets december 31 2005 2004 respectively maturities debt december 31 2005 follows 2006 99 million 2007 00 million 2008 00 million 2009 5390 million 2010 00 million 5390 million thereafter note 12 financial instruments fair value financial instruments financial instruments include cash shortterm investments receivables payables debt foreign currency forward contracts except described estimated fair value financial instruments december 31 2005 2004 approximates carrying value reflected consolidated balance sheets fair value debt foreign currency forward contracts estimated based yearend quoted market prices estimated fair value total debt december 31 2005 2004 12336 million 13150 million respectively differs carrying amounts 10879 million 11623 million respectively included consolidated balance sheet interest rate swap agreements december 31 2005 interest rate swap agreements effect due outlook interest rates june 2 2005 terminated interest rate swap agreement entered april 2004 agreement designated qualified fair value hedging instrument upon termination required pay 55 million amount amortized increase interest expense remaining life underlying debt security matures january 2009 april 2004 entered interest rate swap agreement notional amount 3250 million associated 625 notes due january 2009 interest rate swap agreement designated qualified fair value hedging instrument interest rate swap agreement fully effective resulting gain loss recorded consolidated statement operations recorded fair value interest rate swap agreement 23 million liability december 31 2004 based quoted market prices contracts similar terms maturity dates foreign currency forward contracts december 31 2005 entered several foreign currency forward contracts notional amounts aggregating 650 million hedge exposure currency fluctuations various foreign currency payables receivables including british pound sterling norwegian krone euro brazilian real contracts designated qualify fair value hedging instruments based quoted market prices december 31 2005 contracts similar terms maturity dates recorded gain 01 million adjust foreign currency forward contracts fair market value gain offsets designated foreign exchange losses resulting underlying exposures included selling general administrative expense consolidated statement operations december 31 2004 entered several foreign currency forward contracts notional amounts aggregating 780 million hedge exposure currency fluctuations various foreign currency payables receivables including british pound sterling norwegian krone euro brazilian real contracts designated qualified fair value hedging instruments based quoted market prices december 31 2004 contracts similar terms maturity dates recorded loss 04 million adjust foreign currency forward contracts fair market value loss offsets designated foreign exchange gains resulting underlying exposures included selling general administrative expense consolidated statement operations baker hughes incorporated notes consolidated financial statements continued december 31 2004 also entered several foreign currency forward contracts notional amounts aggregating 1224 million hedge exposure currency fluctuations various foreign currencies including british pound sterling canadian dollar exposures arise local currency operating expenses balance local currency revenue collections funding imbalances supported shortterm intercompany borrowing commitments definitive amounts funding dates funding took place december 31 2005 foreign currency forward contracts designated cash flow hedging instruments fully effective based quoted market prices december 31 2004 contracts similar terms maturity dates recorded loss 01 million adjust foreign currency forward contracts fair market value loss recorded comprehensive income consolidated balance sheet additionally 2005 2004 entered settled foreign currency forward contracts hedge exposure currency fluctuations specific transactions balances impact consolidated statements operations significant contracts either individually aggregate counterparties foreign currency forward contracts major financial institutions credit ratings concentration risk financial institutions monitored continuing basis unlikely event counterparties fail meet terms foreign currency contract exposure limited foreign currency exchange rate differential concentration credit risk sell products services numerous companies oil natural gas industry although concentration could affect overall exposure credit risk believe exposed minimal risk since majority business conducted major companies within industry perform periodic credit evaluations customers’ financial condition generally require collateral accounts receivable cases require payment advance security form letter credit bank guarantee maintain cash deposits major banks may exceed federally insured limits periodically assess financial condition institutions believe risk loss minimal note 13 segment related information 2005 reorganized operating divisions two separate segments drilling evaluation segment consists baker atlas baker hughes drilling fluids hughes christensen inteq divisions completion production segment consists baker oil tools baker petrolite centrilift divisions completion production segment also includes production optimization business unit reorganization done align product lines based types products services provided customers provide additional focus product lines technology able effectively serve customers accordingly reporting results three segments drilling evaluation completion production westerngeco divisions drilling evaluation segment generally provide services products used directly drilling formation evaluation oil natural gas wells divisions completion production segment generally provide services products used complete wells rework existing wells enhance initiate production new wells aggregated divisions within segment similar economic characteristics longterm financial performance divisions affected similar economic conditions also operate markets include major oil natural gas producing regions world results segment evaluated regularly chief operating decision maker deciding allocate resources assessing performance prior period segment information restated reflect changes accounting policies segments described note 1 notes consolidated financial statements evaluate performance segments based segment profit loss defined income continuing operations income taxes accounting changes restructuring charge reversals impairment assets interest income expense baker hughes incorporated notes consolidated financial statements continued summarized financial information shown following table “corporate other” column includes corporaterelated items results insignificant operations relates segment profit loss income expense allocated segments including restructuring charge reversals impairment assets “corporate other” column periods presented also includes assets discontinued operations years ended december 31 2005 2004 2003 revenues attributable one customer accounted 10 total revenues following table presents details “corporate other” segment loss years ended december 31 baker hughes incorporated notes consolidated financial statements continued following table presents details “corporate other” total assets december 31 following table presents consolidated revenues country based location use products services years ended december 31 following table presents net property country based location asset december 31 baker hughes incorporated notes consolidated financial statements continued note 14 employee stock plans stock option plans provide issuance incentive nonqualified stock options directors officers key employees exercise price equal fair market value stock date grant stock options generally vest three years vested options exercisable part full time prior expiration date ten years date grant december 31 2005 113 million shares available future option grants following table summarizes activity stock option plans following table summarizes information stock options outstanding december 31 2005 also employee stock purchase plan whereby eligible employees may purchase shares common stock price equal 85 lower closing price common stock first last trading day calendar year total 34 million shares remaining issuance plan employees purchased 06 million 08 million 08 million shares three years ending december 31 2005 2004 2003 respectively baker hughes incorporated notes consolidated financial statements continued plan restricted stock issued directors executive officers beginning 2005 key employees fair value restricted stock date grant amortized ratably vesting period following table summarizes restricted stock awarded years ended december 31 note 15 employee benefit plans defined benefit pension plans noncontributory defined benefit pension plans “pension benefits” covering employees primarily us uk germany make annual contributions plans amounts least necessary meet minimum governmental funding requirements measurements plan assets obligations october 1 year presented reconciliation beginning ending balances projected benefit obligations “pbo” fair value plan assets funded status plans follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued report prepaid benefit cost assets accrued benefit minimum liabilities pensions postretirement benefit obligations consolidated balance sheet amounts recognized consolidated balance sheet follows december 31 weighted average assumptions used determine benefit obligations plans follows years ended december 31 accumulated benefit obligation “abo” actuarial present value pension benefits attributed employee service date present compensation levels abo differs pbo abo include assumptions future compensation levels abo us plans 2329 million 2018 million december 31 2005 2004 respectively abo nonus plans 2792 million 2525 million december 31 2005 2004 respectively information plans abos excess plan assets follows december 31 components net periodic benefit cost follows years ended december 31 weighted average assumptions used determine net costs plans follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued selecting expected rate return plan assets consider average rate earnings expected funds invested provide benefits plans includes considering trusts’ asset allocation expected returns likely earned life plans weightedaverage asset allocations asset category plans follows december 31 investment committee meets quarterly review portfolio returns determine assetmix targets based assetliability studies thirdparty investment consultant assisted us developing asset allocation strategy determine expected rate return expected risk various investment portfolios investment committee considered studies formal establishment current assetmix targets based projected risk return levels asset class 2006 expect contribute 20 million 30 million us pension plans 160 million 200 million nonus pension plans expected benefit payments related us pension plans five years period ending december 31 2010 127 million 134 million 146 million 168 million 189 million respectively 1417 million aggregate five years thereafter expected benefit payments related nonus pension plans five years period ending december 31 2010 71 million 96 million 44 million 36 million 44 million respectively 270 million aggregate five years thereafter payments reflect benefits attributable estimated future employee service primarily funded plan assets postretirement welfare benefits provide certain postretirement health care life insurance benefits “postretirement welfare benefits” substantially us employees retire met certain age service requirements plan unfunded measurement plan obligations october 1 year presented reconciliation beginning ending balances benefit obligations funded status plan follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued weighted average discount rates 550 600 used determine postretirement welfare benefit obligations plan years ended december 31 2005 2004 respectively components net periodic benefit cost follows years ended december 31 weighted average discount rates 600 625 675 used determine net postretirement welfare benefit costs plan years ended december 31 2005 2004 2003 respectively assumed health care cost trend rates significant effect amounts reported postretirement welfare benefits plan assumed health care cost trend rate used measuring accumulated benefit obligation postretirement welfare benefits increased 2003 december 31 2005 health care cost trend rate 100 employees age 65 70 participants age 65 declining gradually successive year reaches 50 employees age 65 age 65 2011 one percentage point change assumed health care cost trend rates would following effects 2005 expected benefit payments related postretirement welfare benefits follows years ending december 31 defined contribution plans periods reported generally us employees eligible participate sponsored thrift plan 401k plan internal revenue code 1986 amended thrift plan allows eligible employees elect contribute 1 50 salaries investment trust employee contributions matched cash us rate 100 per 100 employee contribution first 3 050 per 100 employee contribution next 2 employee’s salary contributions vest immediately addition make cash contributions eligible employees 2 5 salary depending employee’s age contributions become fully vested employee five years employment thrift plan provides ten different investment options employee sole discretion determining employer employee contributions invested contributions thrift plan several nonus defined contribution plans amounted 865 million 755 million 677 million 2005 2004 2003 respectively certain nonus employees eligible participate thrift plan provide nonqualified defined contribution plan provides basically benefits thrift plan addition provide nonqualified supplemental retirement plan “srp” certain officers employees whose benefits thrift plan andor us defined benefit pension plan limited federal tax law srp also allows eligible employees defer portion eligible compensation provides employer matching base contributions pursuant limitations nonqualified plans fully funded invested trusts assets corresponding liabilities included consolidated balance sheet contributions nonqualified plans 72 million 61 million 55 million 2005 2004 2003 respectively baker hughes incorporated notes consolidated financial statements continued postemployment benefits provide certain postemployment disability income medical benefits substantially qualifying former inactive us employees income benefits longterm disability provided fullyinsured plan continuation medical benefits disability “continuation benefits” provided qualified selfinsured plan accrued postemployment liability continuation benefits december 31 2005 2004 175 million 202 million respectively included liabilities consolidated balance sheet note 16 commitments contingencies leases december 31 2005 longterm noncancelable operating leases covering certain facilities equipment minimum annual rental commitments net amounts due subleases five years period ending december 31 2010 747 million 546 million 392 million 250 million 168 million respectively 1037 million aggregate thereafter entered significant capital leases litigation involved litigation proceedings arisen ordinary business activities insure risks extent deemed prudent management extent insurance available assurance given nature amount insurance sufficient fully indemnify us liabilities arising pending future legal proceedings many insurance policies contain deductibles selfinsured retentions amounts deem prudent responsible payment determining amount selfinsurance policy selfinsure losses predictable measurable recurring nature claims automobile liability general liability workers compensation record accruals uninsured portion losses related types claims accruals losses calculated estimating losses claims using historical claim data specific loss development factors information necessary march 29 2002 announced advised securities exchange commission “sec” department justice “doj” conducting investigations allegations violations law relating nigeria related matters sec issued formal order investigation possible violations provisions foreign corrupt practices act “fcpa” regarding antibribery books records internal controls sec issued subpoenas seeking information operations angola subpoena dated august 6 2003 kazakhstan subpoenas dated august 6 2003 april 22 2005 part ongoing investigation providing documents cooperating fully sec doj sec issued subpoenas otherwise asked interviews current former employees connection investigations regarding nigeria angola kazakhstan addition conducted internal investigations matters internal investigations identified issues regarding propriety certain payments apparent deficiencies books records internal controls respect certain operations nigeria angola kazakhstan well potential liabilities governmental authorities nigeria internal investigation nigeria substantially completed first quarter 2003 based upon current information expect potential liabilities material adverse effect consolidated financial statements internal investigations angola kazakhstan substantially completed third quarter 2004 evidence obtained course internal investigations provided sec doj department commerce department navy doj “us agencies” investigated compliance certain export licenses issued western geophysical 1994 2000 export seismic equipment leased people’s republic china acquired western geophysical august 1998 subsequently transferred related assets westerngeco december 2000 westerngeco continued use licenses 2001 westerngeco formation agreement owe indemnity westerngeco certain matters accordingly agreed indemnify westerngeco certain limitations connection matter cooperating fully us agencies received subpoena grand jury southern district new york regarding goods services delivered iraq 1995 2003 united nations oilforfood program also received request sec provide written statement certain information regarding participation program responded subpoena request may provide additional information documents future companies energy industry believed received similar subpoenas requests baker hughes incorporated notes consolidated financial statements continued us agencies sec authorities broad range civil criminal sanctions may seek impose corporations individuals appropriate circumstances including limited injunctive relief disgorgement fines penalties modifications business practices compliance programs agencies authorities entered agreements obtained range sanctions several public corporations individuals arising allegations improper payments deficiencies books records internal controls whereby civil criminal penalties imposed including cases multimillion dollar fines sanctions discussions us agencies sec regarding resolution including sanctions associated certain matters described possible accurately predict time matters resolved based current information cannot predict outcome investigations whether reach resolution discussions actions may taken us agencies sec authorities effect actions may consolidated financial statements may 10 2004 district court andrews county texas entered judgment favor lotus llc inteq amount 148 million lost profits resulting breach contract drilling well create salt cavern disposing naturally occurring radioactive waste filed appeal taken actions believe liability may incur result litigation would material adverse financial effect consolidated financial statements environmental matters past present operations include activities subject extensive domestic including us federal state local international environmental regulations regard air water quality environmental matters environmental procedures policies practices designed ensure compliance existing laws regulations minimize possibility significant environmental damage involved voluntary remediation projects present former manufacturing facilities majority relate properties obtained acquisitions sites longer actively used operations rare occasions remediation activities conducted specified government agencyissued consent decree agreed order remediation costs accrued based estimates probable exposure using currently available facts existing environmental permits technology presently enacted laws regulations remediation cost estimates include direct costs related environmental investigation external consulting activities governmental oversight fees treatment equipment costs associated longterm operation maintenance monitoring remediation project also identified potentially responsible party “prp” remedial activities related various superfund sites participate process set joint participation defense agreement negotiate government agencies identify prps determine prp’s allocation estimate remediation costs accrued believe prorata share total estimated cost remediation associated management superfund sites share based upon ratio estimated volume waste contributed site bears total estimated volume waste disposed site applicable united states federal law imposes joint several liability prp cleanup sites leaving us uncertainty may responsible remediation cost attributable prps unable pay share accrual made joint several liability concept superfund sites participation de minimis since believe probability pay material costs volumetric share remote believe prps greater involvement volumetric calculation basis substantial assets may reasonably expected pay share cost remediation superfund sites significant prp remediation costs estimated include recalcitrant parties cases insurance coverage contractual indemnities third parties cover portion ultimate liability total accrual environmental remediation 174 million 136 million includes accruals 49 million 36 million various superfund sites december 31 2005 2004 respectively determination required accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity utilized believe likelihood material losses excess recorded accruals remote normal course business customers vendors others entered offbalance sheet arrangements letters credit bank issued guarantees totaled approximately 3198 million december 31 2005 also commitments outstanding purchase obligations related capital expenditures inventory purchase orders contracts approximately 1730 million december 31 2005 addition december 31 2005 guaranteed debt baker hughes incorporated notes consolidated financial statements continued obligations third parties maximum exposure 14 million practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements note 17 supplemental information supplemental consolidated statement operations information follows years ended december 31 changes aggregate product warranty liability follows january 1 2003 adopted sfas 143 accounting asset retirement obligations sfas 143 requires fair value liability associated asset retirement obligation “aro” recognized period incurred reasonable estimate made liability aro revised subsequent period due passage time changes estimates associated retirement costs capitalized part carrying amount longlived asset subsequently depreciated estimated useful life asset adoption sfas 143 2003 resulted charge 56 million net tax 28 million recorded cumulative effect accounting change consolidated statement operations conjunction adoption recorded aro liabilities 114 million primarily anticipated costs obligations associated future disposal power source units certain divisions refurbishment costs associated certain leased facilities europe fleet leased railcars tanks december 31 2005 adopted financial accounting standards board “fasb” interpretation 47 “fin 47” conditional asset retirement obligations fin 47 clarifies term “conditional asset retirement obligation” used sfas 143 accounting asset retirement obligations refers legal obligation perform asset retirement activity timing andor method settlement conditional future event may within control entity obligation perform asset retirement activity unconditional even though uncertainty exists timing andor method settlement fin 47 also clarifies entity would sufficient information reasonably estimate fair value asset retirement obligation adoption fin 47 resulted charge 09 million net tax 05 million recorded cumulative effect accounting change consolidated statement operations conjunction adoption recorded conditional asset retirement obligations 16 million fair value costs associated special handling asbestos related materials certain facilities also certain facilities contain asbestos related materials liability recognized fair value cannot reasonably estimated believe indeterminate settlement dates obligations range time would settle obligations unknown cannot estimated therefore sufficient information exist apply expected present value technique baker hughes incorporated notes consolidated financial statements continued changes asset retirement obligation liability follows accumulated comprehensive loss net tax comprised following december 31 baker hughes incorporated notes consolidated financial statements continued note 18 quarterly data unaudited 1 represents revenues less cost revenues note 19 subsequent events unaudited january 2006 acquired nova technology corporation “nova” approximately 670 million cash assumed debt nova leading supplier permanent monitoring chemical injection systems multiline services deepwater subsea oil gas well applications included production optimization business unit within completion production segment item 9item 8 financial statements supplementary data management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rules 13a15f internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles control environment foundation system internal control embodied business code conduct sets tone company includes core values integrity teamwork performance learning included system internal control written policies organizational structure providing division responsibilities selection training qualified personnel program financial operations reviews professional staff internal auditors internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition assets could material effect financial statements supervision participation management including principal executive officer principal financial officer conducted evaluation effectiveness internal control financial reporting evaluation based framework internal control integrated framework issued committee sponsoring organizations treadway commission based evaluation framework internal control integrated framework principal executive officer principal financial officer concluded internal control financial reporting effective december 31 2007 conclusion principal executive officer principal financial officer based recognition inherent limitations systems internal control inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate deloitte touche llp company’s independent registered public accounting firm issued attestation report effectiveness company’s internal control financial reporting chad c deaton peter ragauss alan j keifer chad c deaton peter ragauss alan j keifer chairman president senior vice president vice president chief executive officer chief financial officer controller houston texas february 19 2008 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited internal control financial reporting baker hughes incorporated subsidiaries “company” december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion company maintained material respects effective internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states consolidated financial statements financial statement schedule year ended december 31 2007 company report dated february 19 2008 expressed unqualified opinion financial statements financial statement schedule included explanatory paragraph regarding company’s adoption new accounting standards deloitte touche llp houston texas february 19 2008 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited accompanying consolidated balance sheets baker hughes incorporated subsidiaries “company” december 31 2007 2006 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2007 audits also included financial statement schedule ii valuation qualifying accounts listed index item 15 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position baker hughes incorporated subsidiaries december 31 2007 2006 results operations cash flows three years period ended december 31 2007 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein described note 1 note 6 consolidated financial statements effective january 1 2007 company adopted financial accounting standards board “fasb” staff position “fsp” aug air1 prohibits accrueinadvance method accounting planned major maintenance activities effective january 1 2007 company adopted fasb interpretation 48 established new accounting reporting standards uncertainty income taxes recognized financial statements furthermore described note 4 note 14 consolidated financial statements effective january 1 2006 company adopted statement financial accounting standards “sfas” 123r established new accounting reporting standards stockbased compensation effective december 31 2006 company adopted sfas 158 established new accounting reporting standards defined benefit pension postretirement plans also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 19 2008 expressed unqualified opinion company’s internal control financial reporting deloitte touche llp houston texas february 19 2008 baker hughes incorporated consolidated statements operations millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated balance sheets millions except per value see notes consolidated financial statements baker hughes incorporated consolidated statements stockholders’ equity millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated statements cash flows millions see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements note 1 summary significant accounting policies nature operations baker hughes incorporated “baker hughes” engaged oilfield services industry baker hughes major supplier products technology services systems worldwide oil natural gas industry provides products services drilling formation evaluation completion production oil natural gas wells basis presentation consolidated financial statements include accounts baker hughes majority owned subsidiaries “company” “we” “our” “us” investments ability exercise significant influence operating financial policies hold controlling interest accounted using equity method accounting significant intercompany accounts transactions eliminated consolidation notes consolidated financial statements dollar share amounts tabulations millions dollars shares respectively unless otherwise indicated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period base estimates judgments historical experience various assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained operating environment changes believe estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts inventory valuation reserves recoverability longlived assets useful lives used depreciation amortization income taxes related valuation allowances insurance environmental legal pensions postretirement benefit obligations revenue recognition products services generally sold based upon purchase orders contracts customer include fixed determinable prices include right return similar provisions significant postdelivery obligations products produced standard manufacturing operation even produced customer’s specifications sold ordinary course business regular marketing channels recognize revenue products upon delivery title passes collectibility reasonably assured significant obligations future performance provisions estimated warranty returns similar types items made time related revenue recognized revenue services rentals recognized services rendered collectibility reasonably assured rates services typically priced per day per meter per man hour similar basis cash equivalents consider highly liquid investments original maturity three months less time purchase cash equivalents investments prior september 2007 invested auction rate securities variablerate debt securities underlying security longterm maturity interest rate reset dutch auctions typically held every 7 28 35 days securities trade par callable par interest payment date option issuer interest paid end auction period limited investments auction rate securities non mortgagebacked securities carry aaa equivalent rating recognized rating agency investments classified availableforsale recorded cost believe approximates fair market value december 31 2007 held 356 million auction rate securities part unsuccessful auctions result unsuccessful auctions interest rate resets every 28 days one month libor plus 50 basis points liquidity investments diminished december 31 2007 based ability intent baker hughes incorporated notes consolidated financial statements continued hold investments classified investments auction rate securities totaling 356 million noncurrent investments included assets consolidated balance sheet december 31 2006 investments classified shortterm investments inventories stated lower cost market cost determined using firstin firstout “fifo” method average cost method approximates fifo includes cost materials labor manufacturing overhead property plant equipment accumulated depreciation property plant equipment “ppe” stated cost less accumulated depreciation generally provided using straightline method estimated useful lives individual assets significant improvements betterments capitalized extend useful life asset manufacture substantial portion rental tools equipment cost items includes direct indirect manufacturing costs capitalized carried inventory tool completed tool completed cost tool reflected capital expenditures tool classified rental tools equipment ppe capitalized costs computer software developed purchased internal use classified machinery equipment ppe goodwill intangible assets amortization goodwill including goodwill associated equity method investments intangible assets indefinite lives amortized intangible assets finite useful lives amortized either straightline basis asset’s estimated useful life basis reflects pattern economic benefits intangible assets realized impairment longlived assets review property intangible assets certain assets impairment whenever events changes circumstances indicate carrying amount may recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense amount impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets perform annual impairment test goodwill reporting units october 1 frequently circumstances indicate impairment may exist reporting units based organizational reporting structure corporate assets liabilities allocated reporting units extent relate operations reporting units determining carrying amount investments affiliates also reviewed impairment whenever events changes circumstances indicate impairment may exist determination impairment made comparing carrying amount fair value calculated using combination market capitalization discounted cash flow approach income taxes use liability method determining income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered future tax benefits recognized extent realization benefits likely deferred income taxes provided estimated income tax effect temporary differences financial tax bases assets liabilities deferred tax assets also provided certain tax credit carryforwards valuation allowance reduce deferred tax assets established likely portion deferred tax assets realized intend indefinitely reinvest certain earnings foreign subsidiaries operations outside us accordingly provided us income taxes earnings provide us additional nonus taxes earnings anticipated repatriated nonus subsidiaries operate 90 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different baker hughes incorporated notes consolidated financial statements continued jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenues rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability tax jurisdiction could impact upon amount income taxes provide given year tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law received tax assessments various tax authorities currently varying stages appeals andor litigation regarding matters provided amounts believe ultimately result proceedings believe substantial defenses questions raised pursue legal remedies unfavorable outcome result however resolution matters involves uncertainties assurances outcomes favorable provide uncertain tax positions pursuant fin 48 accounting uncertainty income taxes interpretation fasb statement 109 product warranties sell certain products product warranty provides customers return defective product specified warranty period following purchase exchange replacement product repair cost customer issuance credit customer accrue amounts estimated warranty claims based upon current historical product sales data warranty costs incurred related information known us environmental matters estimated remediation costs accrued using currently available facts existing environmental permits technology presently enacted laws regulations sites primarily responsible remediation cost estimates developed based internal evaluations discounted accruals recorded probable obligated pay environmental site evaluation remediation related activities costs reasonably estimated obligation estimated within range accrue minimum amount range accruals recorded even significant uncertainties exist ultimate cost remediation additional accurate information becomes available accruals adjusted reflect current cost estimates ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party united states federal state “superfund” site accrue share estimated remediation costs site share based ratio estimated volume waste contributed site total volume waste disposed site foreign currency number significant foreign subsidiaries designated local currency functional currency gains losses resulting balance sheet translation foreign operations included separate component accumulated comprehensive loss within stockholders’ equity gains losses foreign currency transactions resulting settlement receivables payables nonfunctional currency included marketing general administrative “mga” expense consolidated statements operations incurred foreign subsidiaries designated us dollar functional currency gains losses resulting balance sheet translation foreign operations also included mga expense consolidated statements operations incurred recorded net foreign currency transaction translation gains mga consolidated statement operations 107 million 17 million 68 million 2007 2006 2005 respectively derivative financial instruments monitor exposure various business risks including commodity prices foreign currency exchange rates interest rates occasionally use derivative financial instruments manage impact certain risks policies permit use derivative financial instruments speculative purposes use foreign currency forward contracts hedge certain firm commitments transactions denominated foreign currencies used may use interest rate swaps manage interest rate risk baker hughes incorporated notes consolidated financial statements continued inception new derivative designate derivative hedge term defined sfas 133 amended interpreted accounting derivative instruments hedging activities determine derivative undesignated hedging instrument facts dictate document relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions assess whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item inception hedge ongoing basis reclassifications fourth quarter 2007 began classifying certain expenses cost sales cost services rentals previously classified selling general administrative expenses change result internal review improve management reporting reclassified expenses relate selling field service costs closely related operating activities addition renamed selling general administrative expenses statement operations marketing general administrative expenses accurately describe costs included therein impact reclassifications increase cost sales 3661 million 3186 million 2762 million years ended december 31 2007 2006 2005 respectively increase cost services rentals 1239 million 1143 million 1047 million years ended december 31 2007 2006 2005 respectively decrease marketing general administrative expense 4900 million 4329 million 3809 million years ended december 31 2007 2006 2005 respectively reclassifications impact total costs expenses changes offset one another prior periods reclassified conform new presentation new accounting standards february 2006 financial accounting standards board “fasb” issued statement financial accounting standards “sfas” 155 accounting certain hybrid financial instruments amendment fasb statements 133 140 “sfas 155” sfas 155 amends sfas 133 required derivative embedded host contract meet definition derivative accounted separately certain conditions sfas 155 effective financial instruments acquired issued subject remeasurement event following start entity’s first fiscal year beginning september 15 2006 adopted sfas 155 january 1 2007 impact consolidated financial statements july 2006 fasb issued fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” fin 48 clarifies accounting uncertainty income taxes recognized entity’s financial statements accordance sfas 109 accounting income taxes prescribes minimum threshold tax position required meet recognized financial statements fin 48 also provides guidance derecognition measurement classification interest penalties accounting interim periods disclosure transition adopted fin 48 january 1 2007 required recorded reduction beginning retained earnings 642 million see note 6 information september 2006 fasb issued fasb staff position aug air1 “fsp aug air1” addresses accounting planned major maintenance activities fsp aug air1 prohibits use accrueinadvance method accounting planned major maintenance activities annual interim financial reporting periods adopted fsp aug air1 january 1 2007 change method accounting repairs maintenance activities certain rental tools accrueinadvance method direct expense method adoption resulted reversal 342 million accrued liability future repairs maintenance “rm” costs recording income tax liability 90 million net impact 252 million recorded increase beginning retained earnings january 1 2007 restate prior periods impact material financial statements september 2006 fasb issued sfas 157 fair value measurements “sfas 157” intended increase consistency comparability fair value measurements defining fair value establishing framework measuring fair value expanding disclosures fair value measurements sfas 157 originally effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years november 2007 fasb placed one year deferral implementation sfas 157 nonfinancial assets liabilities however sfas 157 effective fiscal years beginning november 15 2007 financial assets liabilities well assets liabilities carried fair value recurring basis financial statements adopted sfas 157 january 1 2008 financial assets liabilities well assets liabilities carried fair value recurring basis financial statements impact consolidated financial statements begin new disclosure requirements first quarter 2008 baker hughes incorporated notes consolidated financial statements continued september 2006 fasb issued sfas 158 employers’ accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r “sfas 158” sfas 158 requires employer recognize overfunded underfunded status defined benefit postretirement plan asset liability statement financial position recognize changes funded status year changes occur comprehensive income additionally requires employer measure funded status plan date year end statement financial position limited exceptions sfas 158 effective end fiscal year ending december 15 2006 however requirement measure plan assets benefit obligations date employer’s fiscal year end statement financial position effective fiscal years ending december 15 2008 adopted requirements sfas 158 december 31 2006 except funded status measurement date requirement adopted december 31 2008 allowed sfas 158 currently expect material impact consolidated financial statements result adoption funded status measurement date requirement february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities including amendment fasb statement 115 “sfas 159” sfas 159 permits entities choose measure eligible financial assets liabilities fair value unrealized gains losses items fair value option elected reported earnings sfas 159 effective fiscal years beginning november 15 2007 adopted sfas 159 january 1 2008 continue evaluate application sfas 159 currently expect material impact consolidated financial statements result adoption december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statements amendment arb 51 sfas 160 establishes accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary effort improve relevance comparability transparency financial information reporting entity provides consolidated financial statements sfas 160 effective fiscal years beginning december 15 2008 adopt sfas 160 january 1 2009 yet determined impact consolidated financial statements december 2007 fasb issued sfas 141 revised 2007 business combinations “sfas 141r” sfas 141r replaces fasb statement 141 business combinations statement retains purchase method accounting used business combinations replaces sfas 141 establishing principles requirements recognition measurement assets liabilities goodwill including requirement transaction costs restructuring costs expensed addition statement requires disclosures enable users evaluate nature financial effects business combination sfas 141 effective business combinations acquisition date beginning first annual reporting period beginning december 15 2008 adopt sfas 141r january 1 2009 acquisitions date note 2 discontinued operations fourth quarter 2005 management initiated board directors approved plan sell baker supply products division “baker spd” product line group within completion production segment distributes basic supplies products small tools drilling industry march 2006 completed sale baker spd received cash proceeds 425 million recorded gain sale 192 million net tax 110 million consisted aftertax gain disposal 169 million 23 million related recognition cumulative foreign currency translation adjustments earnings reclassified consolidated financial statements prior periods presented reflect operations discontinued summarized financial information discontinued operations follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued note 3 acquisitions january 2006 acquired nova technology corporation “nova” 554 million net cash acquired 30 million plus assumed debt nova supplier permanent monitoring chemical injection systems multiline services deepwater subsea oil gas well applications result acquisition recorded 297 million goodwill 243 million intangible assets assigned 26 million inprocess research development terms purchase agreement former owners nova entitled additional purchase price consideration 30 million based certain postclosing events extent events occur later january 31 2016 10 million paid 2007 december 2005 purchased zeroth technology limited “zertech” developer expandable metal sealing element 203 million cash result acquisition recorded 94 million goodwill 103 million intangible assets terms purchase agreement former owners zertech entitled additional purchase price consideration approximately 140 million based performance business 2006 2007 2008 owned 50 interest quantx wellbore instrumentation venture “quantx” october 2005 purchased remaining 50 interest quantx 272 million recorded 284 million goodwill 196 million intangibles assigned 51 million inprocess research development acquisitions included completion production segment acquisitions purchase price allocated based fair value assets acquired liabilities assumed using discounted cash flow approach amounts related inprocess research development written date acquisition included research engineering expenses pro forma results operations presented individually aggregate acquisitions effects acquisitions material consolidated financial statements note 4 stockbased compensation january 1 2006 adopted sfas 123r establishes accounting equity instruments exchanged employee services sfas 123r revision sfas 123 supersedes apb 25 provisions sfas 123r stockbased compensation cost measured date grant based calculated fair value award recognized expense employee’s service period generally vesting period equity grant prior january 1 2006 accounted stockbased compensation employees intrinsic value method accordance apb 25 permitted sfas 123 method compensation cost recognized difference quoted market price common stock date grant amount employee required pay common stock exercise price accordingly recognize compensation cost stock option awards employee stock purchase plan issue options exercise prices equal market value stock date grant employee stock purchase plan noncompensatory record compensation cost restricted stock awards restricted stock units adopted sfas 123r using modified prospective application method accordingly prior periods restated method compensation cost recognized year ended december 31 2006 includes compensation cost stockbased awards granted prior yet vested january 1 2006 based grantdate fair value estimated accordance original provisions sfas 123 b compensation cost stockbased awards granted january 1 2006 based grantdate fair value estimated accordance sfas 123r additionally compensation cost recognized based awards ultimately expected vest therefore reduced cost estimated forfeitures based historical forfeiture rates sfas 123r requires forfeitures estimated time grant revised necessary subsequent periods reflect actual forfeitures result adoption sfas 123r balance unearned compensation recorded stockholders’ equity january 1 2006 124 million net tax reclassified reduced balance capital excess par value fasb staff position fas 123 r3 “transition election related accounting tax effects sharebased payment awards” “fsp 123r3” provides alternative method calculating excess tax benefits “apic pool” method defined sfas 123r onetime election adopt transition method fsp 123r3 available entities adopting sfas 123r company calculated apic pool using alternative method outlined fsp 123r3 baker hughes incorporated notes consolidated financial statements continued following table summarizes stockbased compensation costs recognized sfas 123r years ended december 31 2007 2006 apb 25 year ended december 31 2005 stockbased compensation costs capitalized amounts material stock options restricted stock awards units currently 300 million shares authorized issuance december 31 2007 approximately 75 million shares available future grants policy issue new shares exercises stock options vesting restricted stock awards units issuances employee stock purchase plan following table illustrates pro forma effect net income earnings per share year ended december 31 2005 recognized compensation expense applying fair value based method awards provided sfas 123 stock options stock option plans provide issuance incentive nonqualified stock options directors officers key employees exercise price equal fair market value stock date grant although subject terms stock option agreement substantially stock options become exercisable three equal annual installments beginning year date grant generally expire ten years date grant stock option plans provide acceleration vesting upon employee’s retirement therefore service period reduced employees become retirement eligible vesting period accordingly recognition compensation expense employees accelerated compensation cost related stock options recognized straightline basis vesting service period net forfeitures fair value stock option granted estimated date grant using blackscholes option pricing model following table presents weighted average assumptions used option pricing model options granted expected life options represents period time options expected outstanding year 2005 expected life based historical trends years ended december 31 2007 2006 expected life based historical exercise trends postvest termination data incorporated forwardlooking stock price model year 2005 expected volatility based historical volatility stock period approximating expected life years ended december 31 2007 2006 allowed securities exchange commission’s staff accounting bulletin 107 “sab 107” expected volatility based implied volatility forecast implied prices actively traded options purchase stock observed market riskfree interest rate based observed us treasury yield curve effect time options granted dividend yield based history dividend payouts baker hughes incorporated notes consolidated financial statements continued summary stock option activity related information presented thousands except per option prices total intrinsic value stock options defined amount market price underlying stock date exercise exceeds exercise price option exercised 2007 2006 2005 725 million 736 million 846 million respectively income tax benefit realized stock options exercised 185 million year ended december 31 2007 total fair value options vested 2007 2006 2005 196 million 202 million 204 million respectively december 31 2007 104 million total unrecognized compensation cost related nonvested stock options expected recognized weighted average period 19 years following table summarizes information stock options outstanding december 31 2007 thousands except per option prices remaining life aggregate intrinsic value stock options outstanding december 31 2007 867 million 683 million relates awards vested exercisable 184 million relates awards expected vest intrinsic value stock options outstanding calculated amount quoted price 8260 common stock end 2007 exceeds exercise price options restricted stock awards units addition stock options officers directors key employees may granted restricted stock awards “rsa” award common stock exercise price restricted stock units “rsu” unit represents right receive baker hughes incorporated notes consolidated financial statements continued end stipulated period one unrestricted share stock exercise price rsas rsus subject cliff graded vesting generally ranging three five year period determine fair value restricted stock awards restricted stock units based market price common stock date grant compensation cost rsas rsus primarily recognized straightline basis vesting service period net forfeitures summary rsa rsu activity related information presented thousands except per shareunit prices weighted average grant date fair value per share rsas 2006 2005 7397 4428 respectively weighted average grant date fair value per share rsus 2006 2005 7400 4260 respectively total grant date fair value rsas rsus vested 2007 2006 163 million 106 million respectively rsas rsus vested 2005 december 31 2007 262 million 60 million total unrecognized compensation cost related nonvested rsas rsus respectively expected recognized weighted average period 18 years employee stock purchase plan employee stock purchase plan “espp” allows eligible employees elect contribute aftertax basis 1 10 annual pay purchase common stock provided however employee may contribute 25000 annually plan pursuant internal revenue service restrictions shares purchased 15 discount fair market value common stock january 1 december 31 whichever lower currently 145 million shares authorized issuance espp december 31 2007 29 million shares reserved future issuance espp compensation expense determined sfas 123r year ended december 31 2007 calculated using blackscholes option pricing model following assumptions calculated estimated volatility using historical daily prices based expected life stock purchase plan riskfree interest rate based observed us treasury yield curve effect time espp shares granted dividend yield based history dividend payouts note 5 sale interest investments affiliates investments affiliates accounted using equity method accounting significant affiliates 30 interest westerngeco seismic venture jointly owned schlumberger limited “schlumberger” april 28 2006 sold 30 interest westerngeco schlumberger 24 billion cash recorded pretax gain 17435 million 10352 million aftertax prior sale 2006 2005 received distributions 596 million 300 million respectively westerngeco recorded reductions carrying value investment baker hughes incorporated notes consolidated financial statements continued 2005 received 133 million schlumberger related trueup payment associated revenues earned westerngeco four year period ending november 2004 party’s contributed multiclient seismic data libraries recorded 130 million reduction carrying value investment westerngeco 03 million interest income tax effect 33 million related payment included provision income taxes year ended december 31 2005 november 2000 entered agreement westerngeco whereby westerngeco subleases facility us period ten years current market rates 2006 entered extension sublease five additional years rent determined based market rates 2010 2007 2006 2005 received payments 82 million 56 million 65 million respectively westerngeco related lease following table includes summarized unaudited combined financial information affiliates account interests using equity method accounting included table 2006 operating financial position results westerngeco march 31 2006 recent date information available information affiliates december 31 december 31 2007 2006 excess investments recorded balance sheet prorata share shareholders’ equity reported affiliates 47 million 84 million respectively note 6 income taxes provision income taxes income continuing operations comprised following years ended december 31 baker hughes incorporated notes consolidated financial statements continued geographic sources income continuing operations income taxes follows years ended december 31 tax benefits 171 million 194 million 198 million associated exercise employee stock options allocated equity recorded capital excess par value years ended december 31 2007 2006 2005 respectively provision income taxes differs amount computed applying us statutory income tax rate income continuing operations income taxes reasons set forth years ended december 31 2006 provided 7083 million taxes related sale interest westerngeco approximately 981 million tax provision excess us statutory income tax rate due taxes provided expected repatriation nonus proceeds received transaction larger us tax gain due lower tax basis compared book basis 2005 recognized 106 million deferred tax asset attributable cumulative temporary difference carrying values supplemental retirement plan “srp” financial reporting income tax purposes effect reducing tax expense baker hughes incorporated notes consolidated financial statements continued deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards tax effects temporary differences carryforwards follows december 31 record valuation allowance likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions provided valuation allowance operating loss carryforwards certain nonus jurisdictions operations decreased currently ceased withdrawn entirely provided us additional foreign taxes anticipated repatriation certain earnings foreign subsidiaries consider undistributed earnings foreign subsidiaries amount taxes already provided indefinitely reinvested intention repatriate earnings deferred income taxes provided temporary differences approximately 16 billion 08 billion 04 billion december 31 2007 2006 2005 respectively representing earnings nonus subsidiaries intended permanently reinvested additional foreign earnings could become subject additional tax remitted deemed remitted dividend computation potential deferred tax liability associated undistributed earnings basis difference practicable december 31 2007 approximately 285 million foreign tax credits may carried forward indefinitely applicable foreign law 28 million state tax credits expiring varying amounts 2016 2021 operating loss carryforwards without valuation allowance expire varying amounts next twenty years june 2006 fasb issued fin 48 accounting uncertainty income taxes interpretation fasb statement 109 fin 48 addresses determination whether tax benefits eg tax deductions credits claimed expected claimed tax return recorded financial statements reduction income tax expense related income tax liabilities fin 48 tax benefit uncertain tax position recognized reduction income tax expense likely based technical merits position sustained examination taxing authorities including resolution related appeals litigation processes additionally amount tax benefit recognized largest amount tax benefit greater fifty percent likelihood realized upon ultimate settlement taxing authorities fin 48 also provides guidance derecognition measurement classification interest penalties accounting interim periods disclosure transition baker hughes incorporated notes consolidated financial statements continued adopted fin 48 january 1 2007 pursuant recognized 785 million increase gross liability unrecognized tax benefits included 173 million interest penalties result implementation fin 48 recognized following adjustments accounts january 1 2007 january 1 2007 4228 million tax liabilities gross unrecognized tax benefits includes liabilities interest penalties 504 million 181 million respectively prevail uncertain tax positions net effect would benefit effective tax rate approximately 3392 million remaining approximately 836 million recorded deferred tax asset represents tax benefits would received different taxing jurisdictions event prevail uncertain tax positions december 31 2007 4569 million tax liabilities gross unrecognized tax benefits includes liabilities interest penalties 714 million 221 million respectively gross unrecognized tax benefits include 93 million additional taxes related interest penalties recorded 2007 associated disallowed tax deductions taken previous years arising resolution investigations securities exchange commission “sec” department justice “doj” prevail uncertain tax positions net effect would benefit effective tax rate approximately 3733 million remaining approximately 836 million recorded deferred tax asset represents tax benefits would received different taxing jurisdictions event prevail uncertain tax positions elected fin 48 continue prior policy classify interest penalties related unrecognized tax benefits income taxes financial statements year ended december 31 2007 recognized 250 million interest penalties expense related unrecognized tax benefits consolidated statement operations following presents rollforward unrecognized tax benefits associated interest penalties included balance sheet expected amount unrecognized tax benefits change next twelve months due expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate december 31 2007 current taxes payable included approximately 1055 million gross unrecognized tax benefits expect settle within next twelve months primarily result audit settlements statute expirations several taxing jurisdictions significant uncertainties due possible transfer pricing adjustments related goods services provided across borders various countries baker hughes incorporated notes consolidated financial statements continued december 31 2007 approximately 3514 million gross unrecognized tax benefits included noncurrent portion income tax liabilities settlement period cannot determined however expected within next twelve months operate 90 countries subject income taxes taxing jurisdictions operate following table summarizes earliest tax years remain subject examination major taxing jurisdictions operate jurisdictions project highest tax liability 2007 note 7 earnings per share reconciliation number shares used basic diluted eps computations follows years ended december 31 note 8 inventories comprised following december 31 note 9 property plant equipment property plant equipment comprised following december 31 baker hughes incorporated notes consolidated financial statements continued note 10 goodwill intangible assets changes carrying amount goodwill detailed segment perform annual impairment test goodwill october 1 every year impairments goodwill 2007 2006 2005 related annual impairment test intangible assets comprised following december 31 intangible assets amortized either straightline basis estimated useful lives ranging 1 20 years basis reflects pattern economic benefits intangible assets expected realized range 15 30 years amortization expense included net income years ended december 31 2007 2006 2005 208 million 200 million 152 million respectively estimated amortization expense subsequent five fiscal years expected follows 2008 191 million 2009 183 million 2010 148 million 2011 138 million 2012 135 million baker hughes incorporated notes consolidated financial statements continued note 11 indebtedness total debt consisted following december 31 december 31 2007 10185 million credit facilities commercial banks 5000 million committed revolving credit facility “facility” expires july 2012 facility provides one year extension subject approval acceptance lenders among conditions addition facility contains provision allow increase facility amount additional 5000 million subject approval acceptance lenders among conditions facility contains certain covenants among things require maintenance funded indebtedness total capitalization ratio defined formula per facility less equal 060 restrict certain merger transactions sale substantially assets company significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations facility may accelerated events default include payment defaults lenders facility covenant defaults customary defaults december 31 2007 compliance facility covenants direct borrowings facility year ended december 31 2007 however extent outstanding commercial paper ability borrow facility reduced december 31 2007 outstanding commercial paper prior years terminated various interest rate swap agreements prior scheduled maturities resulting net gains net gains deferred amortized net reduction interest expense remaining life underlying debt securities unamortized net deferred gains 53 million 105 million included 625 notes due january 2009 reported longterm debt consolidated balance sheets december 31 2007 2006 respectively maturities debt december 31 2007 follows 2008 154 million 2009 5298 million 2010 00 million 2011 00 million 2012 00 million 5396 million thereafter note 12 financial instruments fair value financial instruments financial instruments include cash shortterm investments noncurrent investments auction rate securities accounts receivable accounts payable debt foreign currency forward contracts foreign currency option contracts except described estimated fair value financial instruments december 31 2007 2006 approximates carrying value reflected consolidated balance sheets fair value debt foreign currency forward contracts estimated based quoted year end market prices baker hughes incorporated notes consolidated financial statements continued estimated fair value total debt december 31 2007 2006 11697 million 11710 million respectively differs carrying amounts 10848 million 10751 million respectively included consolidated balance sheets foreign currency forward contracts december 31 2007 entered several foreign currency forward contracts notional amounts aggregating 1150 million hedge exposure currency fluctuations various foreign currency denominated accounts payable accounts receivable including british pound sterling norwegian krone euro brazilian real contracts designated qualify fair value hedging instruments based quoted market prices december 31 2007 contracts similar terms maturity dates recorded gain 11 million adjust foreign currency forward contracts fair market value gain offsets designated foreign currency exchange losses resulting underlying exposures included marketing general administrative expense consolidated statement operations december 31 2007 entered option contracts notional amounts aggregating 200 million hedge fluctuations russian ruble exchange rate contracts designated hedging instruments based quoted market prices december 31 2007 contracts similar terms maturity dates recorded loss 03 million adjust carrying value contracts fair market value loss included marketing general administrative expense consolidated statement operations december 31 2006 entered several foreign currency forward contracts notional amounts aggregating 1050 million hedge exposure currency fluctuations various foreign currency payables receivables including british pound sterling norwegian krone euro indonesian rupiah brazilian real contracts designated qualified fair value hedging instruments based quoted market prices december 31 2006 contracts similar terms maturity dates recorded loss 02 million adjust foreign currency forward contracts fair market value loss offsets designated foreign currency exchange gains resulting underlying exposures included marketing general administrative expense consolidated statement operations counterparties foreign currency forward contracts major financial institutions credit ratings concentration risk financial institutions monitored continuing basis unlikely event counterparties fail meet terms foreign currency contract exposure limited foreign currency exchange rate differential concentration credit risk sell products services numerous companies oil natural gas industry although concentration could affect overall exposure credit risk believe exposed minimal risk since majority business conducted major companies within industry perform periodic credit evaluations customers’ financial condition generally require collateral accounts receivable cases require payment advance security form letter credit bank guarantee maintain cash deposits major banks may exceed federally insured limits periodically assess financial condition institutions believe risk loss minimal note 13 segment related information provider drilling formation evaluation completion production products services worldwide oil natural gas industry report results productline focused divisions two segments drilling evaluation segment completion production segment aggregated divisions within segment similar economic characteristics longterm financial performance divisions affected similar economic conditions also operate markets includes major oil natural gas producing regions world results segment evaluated regularly chief operating decision maker deciding allocate resources assessing performance westerngeco segment consisted 30 interest westerngeco sold april 2006 accounting policies segments described note 1 notes consolidated financial statements • drilling evaluation segment consists baker hughes drilling fluids drilling fluids hughes christensen oilfield drill bits inteq drilling measurementwhiledrilling loggingwhiledrilling baker atlas wireline baker hughes incorporated notes consolidated financial statements continued formation evaluation wireline completion services divisions drilling evaluation segment provides products services used drill evaluate oil natural gas wells • completion production segment consists baker oil tools workover fishing completion equipment baker petrolite oilfield specialty chemicals centrilift electrical submersible pumps progressing cavity pumps divisions productionquest production optimization permanent monitoring business unit completion production segment provides equipment services used completion phase productive life oil natural gas wells performance segments evaluated based segment profit loss defined income continuing operations income taxes interest expense interest dividend income accounting changes “corporate other” column includes corporaterelated items pretax gain sale interest westerngeco 17435 million financial charge 461 million recorded connection settlement negotiations sec doj results insignificant operations relates segment profit loss income expense allocated segments fourth quarter 2007 started allocating certain expenses previously reported “corporate other” drilling evaluation completion production segments expenses consist administrative operations support costs closely related operating activities impact allocation reduction “corporate other” 154 million 122 million 331 million years ended december 31 2007 2006 2005 respectively prior periods reclassified conform new presentation “corporate other” column also includes assets discontinued operations december 31 2005 summarized financial information shown following table years ended december 31 2007 2006 2005 revenues attributable one customer accounted 10 total revenues baker hughes incorporated notes consolidated financial statements continued following table presents details “corporate other” segment profit loss years ended december 31 following table presents details “corporate other” total assets december 31 following table presents consolidated revenues country based location use products services years ended december 31 following table presents net property plant equipment country based location asset december 31 note 14 employee benefit plans defined benefit plans noncontributory defined benefit pension plans “pension benefits” covering employees primarily us uk germany us merged two pension plans effective january 1 2007 resulting one taxqualified us pension plan baker hughes incorporated pension plan “bhipp” provisions bhipp hypothetical cash balance account established participant accounts receive pay credits quarterly basis quarterly pay credit based baker hughes incorporated notes consolidated financial statements continued percentage according employee’s age last day quarter applied quarterly eligible compensation addition quarterly pay credits cash balance account receives interest credits based balance account last day quarter bhipp also includes frozen accrued benefits participants legacy defined benefit plans majority participants uk pension plans accrue benefits plans frozen however limited number members still accrue future benefits defined benefit basis germany pension plan unfunded plan benefits based creditable years service creditable pay accrual rates also provide certain postretirement health care benefits “other postretirement benefits” unfunded plan substantially us employees retire met certain age service requirements adopted sfas 158 effective december 31 2006 sfas 158 requires employer recognize overfunded underfunded status defined pension postretirement benefit plans net asset liability statement financial position recognize changes funded status year changes occur comprehensive income additionally sfas 158 requires employer measure funded status plans date year end statement financial position adopt provision december 31 2008 allowed sfas 158 using alternative method transition fiscal yearend measurement date funded status pension postretirement benefit plans currently measured october 1 year presented funded status reconciliation beginning ending balances benefit obligations fair value plan assets funded status plans pension plans benefit obligation projected benefit obligation “pbo” postretirement benefit plan benefit obligation accumulated postretirement benefit obligation “apbo” baker hughes incorporated notes consolidated financial statements continued amounts recognized consolidated balance sheet consist following december 31 weighted average asset allocations asset category plans follows december 31 investment committees meet least quarterly review portfolio returns periodically determine assetmix targets based assetliability studies thirdparty investment consultants assisted us developing asset allocation strategies determine expected rates return expected risk various investment portfolios investment committees considered studies formal establishment current assetmix targets based projected risk return levels major asset classes accumulated benefit obligation “abo” actuarial present value pension benefits attributed employee service date present compensation levels abo differs pbo abo include assumptions future compensation levels abo us plans 2752 million 2609 million december 31 2007 2006 respectively abo nonus plans 3090 million 3533 million december 31 2007 2006 respectively information plans abos excess plan assets follows december 31 weighted average assumptions used determine benefit obligations plans follows years ended december 31 development discount rate us plans based bond matching model whereby hypothetical bond portfolio highquality fixedincome securities selected match cash flows underlying projected benefit obligation discount rate assumption nonus plans reflects market rate highquality fixedincome securities baker hughes incorporated notes consolidated financial statements continued accumulated comprehensive loss amounts recognized accumulated comprehensive loss consist following december 31 estimated net loss prior service cost defined benefit pension plans amortized accumulated comprehensive loss net periodic benefit cost next fiscal year 19 million 05 million respectively estimated prior service cost postretirement benefits amortized accumulated comprehensive loss net periodic benefit cost next fiscal year 11 million net periodic benefit costs components net periodic benefit cost follows years ended december 31 weighted average assumptions used determine net periodic benefit costs plans follows years ended december 31 selecting expected rate return plan assets consider average rate earnings expected funds invested provide benefits plans includes considering trusts’ asset allocation expected returns likely earned life plans expected cash flows pension plans make annual contributions plans amounts equal greater amounts necessary meet minimum governmental funding requirements result merger us plans effective january 1 2007 bhipp overfunded therefore required intend make pension contributions bhipp 2008 currently estimate required make contributions bhipp four seven years thereafter 2008 expect contribute 20 million 30 million nonqualified us pension plans 130 million 150 million nonus pension plans baker hughes incorporated notes consolidated financial statements continued following table presents expected benefit payments next ten years us nonus pension benefit payments made respective pension trust funds postretirement benefits net expected medicare subsidies approximately 22 million per year payments expected made us health care cost trend rates assumed health care cost trend rates significant effect amounts reported postretirement benefits december 31 2007 health care cost trend rate 85 employees age 65 participants age 65 declining gradually successive year reaches 50 employees age 65 age 65 2012 one percentage point change assumed health care cost trend rates would following effects 2007 defined contribution plans periods reported generally us employees eligible participate sponsored thrift plan 401k plan internal revenue code 1986 amended “the code” thrift plan allows eligible employees elect contribute 1 50 salaries investment trust beginning january 1 2007 employee contributions matched company cash rate 100 per 100 employee contribution first 5 employee’s salary prior years employee contributions matched cash us rate 100 per 100 employee contribution first 3 050 per 100 employee contribution next 2 employee’s salary years contributions vest immediately addition make cash contributions eligible employees 2 5 salary depending employee’s age contributions fully vested employee three years employment thrift plan provides ten different investment options employee sole discretion determining employer employee contributions invested contributions thrift plan several nonus defined contribution plans amounted 1307 million 1022 million 865 million 2007 2006 2005 respectively certain nonus employees eligible participate thrift plan provide nonqualified defined contribution plan provides basically benefits thrift plan addition provide nonqualified supplemental retirement plan “srp” certain officers employees whose benefits thrift plan andor us defined benefit pension plan limited federal tax law srp also allows eligible employees defer portion eligible compensation provides employer matching base contributions pursuant limitations nonqualified plans invested trusts assets corresponding liabilities included consolidated balance sheet contributions nonqualified plans 110 million 83 million 72 million 2007 2006 2005 respectively 2008 expect contribute 1420 million 1530 million defined contribution plans postemployment benefits provide certain postemployment disability income medical benefits substantially qualifying former inactive us employees income benefits longterm disability provided fullyinsured plan continuation medical benefits disability “continuation benefits” provided qualified selfinsured plan accrued postemployment liability continuation benefits december 31 2007 2006 144 million 176 million respectively included liabilities consolidated balance sheet baker hughes incorporated notes consolidated financial statements continued note 15 commitments contingencies leases december 31 2007 longterm noncancelable operating leases covering certain facilities equipment minimum annual rental commitments net amounts due subleases five years period ending december 31 2012 950 million 649 million 432 million 295 million 217 million respectively 1230 million aggregate thereafter entered significant capital leases three years ended december 31 2007 litigation involved litigation proceedings arisen ordinary business activities insure risks extent deemed prudent management extent insurance available assurance given nature amount insurance sufficient fully indemnify us liabilities arising pending future legal proceedings many insurance policies contain deductibles selfinsured retentions amounts deem prudent responsible payment determining amount selfinsurance policy selfinsure losses predictable measurable recurring nature claims automobile liability general liability workers compensation record accruals uninsured portion losses related types claims accruals losses calculated estimating losses claims using historical claim data specific loss development factors information necessary march 29 2002 announced advised sec doj conducting investigations allegations violations law relating nigeria related matters sec issued formal order investigation possible violations provisions foreign corrupt practices act “fcpa” regarding antibribery books records internal controls connection investigations sec issued subpoenas seeking information operations angola subpoena dated august 6 2003 kazakhstan subpoenas dated august 6 2003 april 22 2005 part ongoing investigation provided documents cooperated fully sec doj addition conducted internal investigations matters internal investigations identified issues regarding propriety certain payments apparent deficiencies books records internal controls respect certain operations angola kazakhstan nigeria well potential liabilities government authorities nigeria evidence obtained course investigations provided sec doj april 26 2007 united states district court southern district texas houston division “court” unsealed threecount criminal information filed us part execution deferred prosecution agreement “dpa” us doj three counts arise payments made agent connection project kazakhstan include conspiracy violate fcpa substantive violation antibribery provisions fcpa violation fcpa’s booksandrecords provisions three counts relate operations kazakhstan period 2000 2003 although plead guilty information face prosecution information possibly charges well fail comply terms dpa terms include twoyear term dpa full cooperation government compliance federal criminal law including limited fcpa adoption compliance code containing specific provisions intended prevent violations fcpa dpa also requires us retain independent monitor term three years assess make recommendations compliance policies procedures implementation procedures provided comply dpa doj agreed prosecute us violations fcpa based information disclosed doj regarding operations nigeria angola kazakhstan indonesia russia uzbekistan turkmenistan azerbaijan among countries date court also accepted plea guilty subsidiary baker hughes services international inc “bhsii” pursuant plea agreement bhsii doj “plea agreement” based similar charges relating conduct pursuant plea agreement bhsii agreed threeyear term organizational probation plea agreement contains provisions requiring bhsii cooperate government comply federal criminal law adopt compliance code similar one dpa requires company also april 26 2007 sec filed complaint “sec complaint” proposed order “sec order” us court sec complaint sec order filed part settled civil enforcement action sec resolve civil portion government’s investigation us part agreement sec consented filing sec complaint without admitting denying allegations complaint also consented entry sec order sec complaint alleges civil violations fcpa’s antibribery provisions related operations kazakhstan fcpa’s books baker hughes incorporated notes consolidated financial statements continued andrecords internalcontrols provisions related operations nigeria angola kazakhstan indonesia russia uzbekistan sec’s cease desist order september 12 2001 sec order became effective may 1 2007 date confirmed court sec order enjoins us violating fcpa’s antibribery booksandrecords internalcontrols provisions dpa requires retain independent monitor assess fcpa compliance policies procedures threeyear period terms settlements doj sec company bhsii paid second quarter 2007 441 million 11 million criminal penalties 10 million civil penalties 199 million disgorgement profits 32 million prejudgment interest settle investigations fourth quarter 2006 recorded financial charge potential settlement retained sec doj approved independent monitor assess fcpa compliance policies procedures specified threeyear period may 4 2007 may 15 2007 sheetmetal workers’ national pension fund chris larson respectively instituted shareholder derivative lawsuits company’s behalf certain current former members board directors certain officers company nominal defendant following company’s settlement doj sec april 2007 august 17 2007 alaska plumbing pipefitting industry pension trust also instituted shareholder derivative lawsuit company’s behalf certain current former members board directors certain officers company nominal defendant complaints three lawsuits allege among things individual defendants failed implement adequate controls compliance procedures prevent events addressed settlement doj sec relief sought lawsuits includes declaration defendants breached fiduciary duties award damages sustained company result alleged breach monetary injunctive relief well attorneys’ experts’ fees lawsuits brought sheetmetal workers’ national pension fund alaska plumbing pipefitting industry pension trust pending houston division united states district court southern district texas lawsuits consolidated amended complaint consolidated action filed october 15 2007 lawsuit brought chris larson pending 215th district court harris county texas expect lawsuits material adverse effect consolidated financial statements may 12 2006 baker hughes oilfield operations inc “bhoo” subsidiary company named defendant lawsuit united states district court eastern district texas brought reed hycalog bhoo third parties arising alleged patent infringement relating sale certain diamond drill bits utilizing certain types polycrystalline diamond cutters sold hughes christensen division reed hycalog seeks compensatory damages injunctive relief defendants well attorneys’ fees costs september 11 2007 court issued ruling regarding scope reed hycalog’s patent infringement claims january 18 2008 reed hycalog filed court report claiming amount compensatory damages due baker hughes ranging approximately 51 million approximately 226 million reed hycalog also claimed entitled enhanced damages attorney fees company bhoo believe reasonable defenses claims asserted counterclaims infringement reed hycalog certain drill bit patents lawsuit able predict outcome litigation impact consolidated financial statements information contained “environmental matters” section item 1 business item 3 legal proceedings contained herein environmental matters past present operations include activities subject extensive domestic including us federal state local international environmental regulations regard air land water quality environmental matters environmental procedures policies practices designed ensure compliance existing laws regulations minimize possibility significant environmental damage involved voluntary remediation projects present former manufacturing locations facilities majority relate properties obtained acquisitions sites longer actively used operations rare occasions remediation activities conducted specified government agencyissued consent decree agreed order remediation costs accrued based estimates probable exposure using currently available facts existing environmental permits technology presently enacted laws regulations remediation cost estimates include direct costs related environmental investigation external consulting activities governmental oversight fees treatment equipment costs associated longterm operation maintenance monitoring remediation project baker hughes incorporated notes consolidated financial statements continued also identified potentially responsible party “prp” remedial activities related various superfund sites participate process set joint participation defense agreement negotiate government agencies identify prps determine prp’s allocation estimate remediation costs accrued believe prorata share total estimated cost remediation associated management superfund sites share based upon ratio estimated volume waste contributed site bears total estimated volume waste disposed site applicable united states federal law imposes joint several liability prp cleanup sites leaving us uncertainty may responsible remediation cost attributable prps unable pay share accrual made joint several liability concept superfund sites participation de minimis since believe probability pay material costs volumetric share remote believe prps greater involvement volumetric calculation basis substantial assets may reasonably expected pay share cost remediation superfund sites significant prp remediation costs estimated include recalcitrant parties cases insurance coverage contractual indemnities third parties cover portion ultimate liability total accrual environmental remediation 169 million 173 million includes accruals 53 million 59 million various superfund sites december 31 2007 2006 respectively determination required accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity utilized believe likelihood material losses excess amounts accrued remote normal course business customers vendors others entered offbalance sheet arrangements letters credit bank issued guarantees totaled approximately 4668 million december 31 2007 also commitments outstanding purchase obligations related capital expenditures inventory purchase orders contracts approximately 2931 million december 31 2007 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements note 16 supplemental information product warranty liability changes aggregate product warranty liability follows asset retirement obligations december 31 2005 adopted fasb interpretation 47 conditional asset retirement obligations “fin 47” fin 47 clarifies term “conditional asset retirement obligation” used sfas 143 accounting asset retirement obligations refers legal obligation perform asset retirement activity timing andor method settlement conditional future event may within control entity obligation perform asset retirement activity unconditional even though uncertainty exists timing andor method settlement fin 47 also clarifies entity would sufficient information reasonably estimate fair value asset retirement obligation adoption fin 47 resulted charge 09 million net tax 05 million recorded cumulative effect accounting change consolidated statement operations conjunction adoption recorded conditional asset retirement obligations 16 million fair value costs associated special handling asbestos related materials certain facilities baker hughes incorporated notes consolidated financial statements continued certain facilities contain asbestos related materials liability recognized unable determine time frame obligations may settled normal practice conduct asbestos abatement procedures required contractual requirements related asset disposals facility asbestos subject significant renovation demolished plans expectations sell abandon demolish facilities anticipate need major renovations resulting technological operations changes factors expect facilities operational current state foreseeable future therefore time frame obligations settled cannot determined result sufficient information exist enable us reasonably estimate fair value asset retirement obligation changes asset retirement obligation liability follows accumulated comprehensive loss accumulated comprehensive loss net tax comprised following december 31 supplemental consolidated statement operations information follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued note 17 quarterly data unaudited 1 represents revenues less cost sales cost services rentals research engineering item 9item 8 financial statements supplementary data management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rules 13a15f internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles control environment foundation system internal control embodied business code conduct sets tone company includes core values integrity teamwork performance learning included system internal control written policies organizational structure providing division responsibilities selection training qualified personnel program financial operations reviews professional staff internal auditors internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition assets could material effect financial statements supervision participation management including principal executive officer principal financial officer conducted evaluation effectiveness internal control financial reporting evaluation based framework internal control integrated framework issued committee sponsoring organizations treadway commission based evaluation framework internal control integrated framework principal executive officer principal financial officer concluded internal control financial reporting effective december 31 2008 conclusion principal executive officer principal financial officer based recognition inherent limitations systems internal control inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate deloitte touche llp company’s independent registered public accounting firm issued attestation report effectiveness company’s internal control financial reporting chad c deaton peter ragauss alan j keifer chad c deaton peter ragauss alan j keifer chairman president senior vice president vice president chief executive officer chief financial officer controller houston texas february 25 2009 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited internal control financial reporting baker hughes incorporated subsidiaries “company” december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion company maintained material respects effective internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states consolidated financial statements financial statement schedule ii year ended december 31 2008 company report dated february 25 2009 expressed unqualified opinion financial statements financial statement schedule included explanatory paragraph regarding company’s adoption new accounting standards deloitte touche llp houston texas february 25 2009 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited accompanying consolidated balance sheets baker hughes incorporated subsidiaries “company” december 31 2008 2007 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2008 audits also included financial statement schedule ii valuation qualifying accounts listed index item 15 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position baker hughes incorporated subsidiaries december 31 2008 2007 results operations cash flows three years period ended december 31 2008 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein described note 10 consolidated financial statements effective january 1 2008 company adopted statement financial accounting standards “sfas” 157 established new accounting reporting standards fair value measurements certain financial assets liabilities furthermore described note 1 consolidated financial statements effective january 1 2007 company adopted financial accounting standards board “fasb” aug air1 prohibits accrueinadvance method accounting planned major maintenance activities effective january 1 2007 company adopted fasb interpretation 48 established new accounting reporting standards uncertainty income taxes recognized financial statements also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 25 2009 expressed unqualified opinion company’s internal control financial reporting deloitte touche llp houston texas february 25 2009 baker hughes incorporated consolidated statements operations millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated balance sheets millions except par value see notes consolidated financial statements baker hughes incorporated consolidated statements stockholders’ equity millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated statements cash flows millions see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements note 1 summary significant accounting policies nature operations baker hughes incorporated “baker hughes” engaged oilfield services industry major supplier wellbore related products technology services systems provide products services drilling formation evaluation completion production reservoir technology consulting worldwide oil natural gas industry basis presentation consolidated financial statements include accounts baker hughes majority owned subsidiaries “company” “we” “our” “us” investments ability exercise significant influence operating financial policies hold controlling interest accounted using equity method accounting significant intercompany accounts transactions eliminated consolidation notes consolidated financial statements dollar share amounts tabulations millions dollars shares respectively unless otherwise indicated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period base estimates judgments historical experience various assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained operating environment changes believe estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts inventory valuation reserves recoverability longlived assets useful lives used depreciation amortization income taxes related valuation allowances insurance environmental legal pensions postretirement benefit obligations revenue recognition products services generally sold based upon purchase orders contracts customer include fixed determinable prices include right return similar provisions significant postdelivery obligations products produced standard manufacturing operation even produced customer’s specifications sold ordinary course business regular marketing channels recognize revenue products upon delivery title passes collectibility reasonably assured significant obligations future performance provisions estimated warranty returns similar types items made time related revenue recognized revenue services rentals recognized services rendered collectibility reasonably assured rates services typically priced per day per meter per man hour similar basis cost sales cost services rentals cost sales cost services rentals include material labor selling field service costs overhead costs associated manufacture distribution products sale rental distribution costs include freight costs purchasing receiving costs warehousing costs distribution network research engineering research engineering expenses include costs associated research development new products services costs associated sustaining engineering existing products services costs expensed incurred include research development costs new products services 263 million 234 million 216 million year ended december 31 2008 2007 2006 respectively baker hughes incorporated notes consolidated financial statements continued marketing general administrative marketing general administrative “mga” expenses include advertising marketing efforts business development costs general administrative costs directly associated manufacture distribution products sale rental employee related costs associated functions mga expenses also include gains losses foreign currency transactions cash equivalents consider highly liquid investments original maturity three months less time purchase cash equivalents investments prior september 2007 invested auction rate securities variablerate debt securities underlying security longterm maturity interest rate reset dutch auctions typically held every 7 28 35 days interest paid end auction period limited investments auction rate securities “ars” non mortgagebacked securities time initial investment carried aaa equivalent rating recognized rating agency since september 2007 unable sell ars investments unsuccessful auctions result interest rate resets every 28 days one month libor plus spread determined certificate’s lowest assigned rating liquidity investments diminished 2008 recorded otherthantemporary impairment loss investments 25 million reflected consolidated statement operations december 31 2008 2007 held ars investments totaling 11 million 36 million respectively ars investments classified noncurrent investments included assets consolidated balance sheet inventories stated lower cost market cost determined using firstin firstout “fifo” method average cost method approximates fifo includes cost materials labor manufacturing overhead property plant equipment accumulated depreciation property plant equipment “ppe” stated cost less accumulated depreciation generally provided using straightline method estimated useful lives individual assets significant improvements betterments capitalized extend useful life asset manufacture substantial portion rental tools equipment cost items includes direct indirect manufacturing costs capitalized carried inventory tool completed tool completed cost tool reflected capital expenditures tool classified rental tools equipment ppe maintenance repairs charged expense incurred capitalized costs computer software developed purchased internal use classified machinery equipment ppe 2006 fasb issued fasb staff position aug air1 “fsp aug air1” prohibits use accrueinadvance method accounting planned major maintenance repair activities adopted fsp aug air1 january 1 2007 change method accounting repairs maintenance activities certain rental tools accrueinadvance method direct expense method adoption resulted increase 25 million beginning retained earnings january 1 2007 restate prior periods impact material consolidated financial statements asset retirement obligations legal obligations associated retirement longlived assets recognized fair value time obligations incurred upon initial recognition liability cost capitalized part related longlived asset depreciated straightline basis remaining estimated useful life related asset accretion expense connection discounted liability also recognized remaining useful life related asset retirement obligations 17 million 16 million december 31 2008 2007 respectively baker hughes incorporated notes consolidated financial statements continued goodwill intangible assets amortization goodwill intangible assets indefinite lives amortized intangible assets finite useful lives amortized basis reflects pattern economic benefits intangible assets realized generally straightline basis asset’s estimated useful life impairment longlived assets review ppe intangible assets certain assets impairment whenever events changes circumstances indicate carrying amount may recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense amount impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets perform annual impairment test goodwill reporting units october 1 frequently circumstances indicate impairment may exist reporting units based organizational reporting structure corporate assets liabilities allocated reporting units extent relate operations reporting units determining carrying amount investments affiliates also reviewed impairment whenever events changes circumstances indicate impairment may exist determination impairment made comparing carrying amount fair value calculated using combination market capitalization discounted cash flow approach income taxes use liability method determining income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered future tax benefits recognized extent realization benefits likely deferred income taxes provided estimated income tax effect temporary differences financial tax bases assets liabilities deferred tax assets also provided certain tax credit carryforwards valuation allowance reduce deferred tax assets established likely portion deferred tax assets realized intend indefinitely reinvest certain earnings foreign subsidiaries operations outside us accordingly provided us income taxes earnings provide us additional nonus taxes earnings anticipated repatriated nonus subsidiaries operate 90 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenues rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability tax jurisdiction could impact upon amount income taxes provide given year tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law received tax assessments various tax authorities currently varying stages appeals andor litigation regarding matters provided amounts believe ultimately result proceedings believe substantial defenses questions raised pursue legal remedies unfavorable outcome result however resolution matters involves uncertainties assurances outcomes favorable provide uncertain tax positions pursuant fin 48 accounting uncertainty income taxes interpretation fasb statement 109 baker hughes incorporated notes consolidated financial statements continued financial accounting standards board “fasb” issued fin 48 july 2006 fin 48 provides tax benefit uncertain tax position may recognized likely position sustained upon examination including resolutions related appeals litigation processes based technical merits interpretation also provides guidance measurement derecognition classification interest penalties accounting interim periods disclosure transition adopted provisions fin 48 effective january 1 2007 pursuant recognized 78 million increase gross liability unrecognized tax benefits 14 million increase noncurrent tax receivables net decrease beginning retained earnings 64 million product warranties sell certain products product warranty provides customers return defective product specified warranty period following purchase exchange replacement product repair cost customer issuance credit customer accrue amounts estimated warranty claims based upon current historical product sales data warranty costs incurred related information known us product warranty liability 8 million 15 million december 31 2008 2007 respectively environmental matters estimated remediation costs accrued using currently available facts existing environmental permits technology presently enacted laws regulations sites primarily responsible remediation cost estimates developed based internal evaluations discounted accruals recorded probable obligated pay environmental site evaluation remediation related activities costs reasonably estimated obligation estimated within range accrue minimum amount range accruals recorded even significant uncertainties exist ultimate cost remediation additional accurate information becomes available accruals adjusted reflect current cost estimates ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party united states federal state “superfund” site accrue share estimated remediation costs site share based ratio estimated volume waste contributed site total volume waste disposed site foreign currency number significant foreign subsidiaries designated local currency functional currency gains losses resulting balance sheet translation foreign operations included separate component accumulated comprehensive loss within stockholders’ equity gains losses foreign currency transactions resulting settlement receivables payables nonfunctional currency included mga expenses consolidated statements operations incurred foreign subsidiaries designated us dollar functional currency gains losses resulting balance sheet translation foreign operations also included mga expense consolidated statements operations incurred derivative financial instruments monitor exposure various business risks including commodity prices foreign currency exchange rates interest rates occasionally use derivative financial instruments manage risks policies permit use derivative financial instruments speculative purposes use foreign currency forward contracts hedge certain firm commitments transactions denominated foreign currencies used may use interest rate swaps manage interest rate risk inception new derivative designate derivative hedge term defined sfas 133 amended interpreted accounting derivative instruments hedging activities determine derivative undesignated hedging instrument facts dictate document relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions assess whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item inception hedge ongoing basis baker hughes incorporated notes consolidated financial statements continued new accounting standards september 2006 financial accounting standards board “fasb” issued statement financial accounting standards “sfas” 157 fair value measurements “sfas 157” intended increase consistency comparability fair value measurements defining fair value establishing framework measuring fair value expanding disclosures fair value measurements sfas 157 originally effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years november 2007 fasb placed one year deferral implementation sfas 157 nonfinancial assets liabilities however sfas 157 effective fiscal years beginning november 15 2007 financial assets liabilities adopted requirements sfas 157 january 1 2008 except relate nonfinancial assets liabilities required measured fair value recurring basis adopted remaining requirements sfas 157 nonfinancial assets liabilities january 1 2009 nonfinancial assets liabilities include goodwill impairment disposal long lived assets asset retirement obligations assets liabilities relating business acquisitions see “note 10 fair value certain financial assets liabilities” information impact standard september 2006 fasb issued sfas 158 employers’ accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r “sfas 158” sfas 158 requires employer recognize overfunded underfunded status defined benefit postretirement plan asset liability statement financial position recognize changes funded status year changes occur comprehensive income additionally requires employer measure funded status plan date year end statement financial position limited exceptions sfas 158 effective end fiscal year ending december 15 2006 however requirement measure plan assets benefit obligations date employer’s fiscal year end statement financial position effective fiscal years ending december 15 2008 adopted requirements sfas 158 december 31 2006 except funded status measurement date requirement adopted december 31 2008 allowed sfas 158 impact moving funded status measurement date october 1st december 31st reduction 4 million beginning retained earnings 2008 see “note 14 employee benefit plans” information impact standard february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities including amendment fasb statement 115 “sfas 159” sfas 159 permits entities choose measure eligible financial assets liabilities fair value unrealized gains losses items fair value option elected reported earnings sfas 159 effective fiscal years beginning november 15 2007 adopted sfas 159 january 1 2008 impact consolidated financial statements choose measure eligible financial assets liabilities fair value december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statements amendment arb 51 “sfas 160” sfas 160 establishes accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary effort improve relevance comparability transparency financial information reporting entity provides consolidated financial statements sfas 160 effective fiscal years beginning december 15 2008 adopted sfas 160 january 1 2009 material impact consolidated financial statements december 2007 fasb issued sfas 141 revised 2007 business combinations “sfas 141r” sfas 141r replaces fasb statement 141 business combinations “sfas 141” statement retains purchase method accounting used business combinations replaces sfas 141 establishing principles requirements recognition measurement assets liabilities goodwill including requirement transaction restructuring costs related acquisition expensed addition statement requires disclosures enable users evaluate nature financial effects business combination sfas 141r effective business combinations acquisition date beginning first annual reporting period beginning december 15 2008 adopted sfas 141r january 1 2009 business combinations occurring date march 2008 fasb issued sfas 161 disclosures derivative instruments hedging activities amendment fasb statement 133 “sfas 161” sfas 161 requires qualitative disclosures objectives strategies using derivatives quantitative data fair value gains losses derivative contracts details creditriskrelated contingent features hedged positions statement also requires enhanced disclosures regarding entities use derivative instruments derivative instruments related hedged items accounted derivative instruments related hedged items affect entities’ financial position financial performance cash flows sfas 161 effective fiscal years beginning november 15 2008 adopt new disclosure requirements sfas 161 first quarter 2009 baker hughes incorporated notes consolidated financial statements continued december 2008 fasb issued fsp fas 132r1 employers’ disclosures postretirement benefit plan assets “fsp 132r1” fsp 132r1 amends fasb statement 132 revised 2003 employers’ disclosures pensions postretirement benefits provide guidance employer’s disclosures plan assets defined benefit pension postretirement plan fsp requires disclosures investment policies strategies major categories plan assets fair value measurement plan assets significant concentration credit risks fsp 132r1 effective fiscal years ending december 15 2009 adopt new disclosure requirements fsp 132r1 fourth quarter 2009 note 2 dispositions discontinued operations february 2008 sold assets associated completion production segment’s surface safety systems “sss” product line received cash proceeds 31 million sss assets sold included hydraulic pneumatic actuators bonnet assemblies control systems recorded pretax gain 28 million 18 million aftertax investments affiliates accounted using equity method accounting 2006 significant affiliates 30 interest westerngeco seismic venture jointly owned schlumberger limited “schlumberger” april 28 2006 sold 30 interest westerngeco schlumberger 24 billion cash recorded pretax gain 1744 million 1035 million aftertax prior sale 2006 received distributions 60 million westerngeco recorded reductions carrying value investment fourth quarter 2005 management initiated board directors approved plan sell baker supply products division “baker spd” product line group within completion production segment distributes basic supplies products small tools drilling industry march 2006 completed sale baker spd received cash proceeds 43 million income discontinued operations 2006 20 million included aftertax gain 19 million discontinued operations 2007 2008 note 3 acquisitions april 2008 acquired two firms reservoir technology consulting group gaffney cline associates “gca” geomechanics international “gmi” 72 million cash including 4 million direct transaction costs net cash acquired 5 million firms provide consulting services related reservoir engineering technical managerial advisory services reservoir geomechanics result acquisitions recorded 43 million goodwill 19 million intangibles terms purchase agreements may required make additional payments approximately 46 million based performance businesses 2008 2009 2010 2008 made several acquisitions aggregate purchase price 53 million 48 million paid cash result acquisitions recorded 2 million goodwill 26 million intangible assets december 31 2008 january 2006 acquired nova technology corporation “nova” 55 million net cash acquired 3 million plus assumed debt nova supplier permanent monitoring chemical injection systems multiline services deepwater subsea oil gas well applications result acquisition recorded 30 million goodwill 24 million intangible assets assigned 2 million inprocess research development acquisitions purchase price allocated based fair value assets acquired liabilities assumed using discounted cash flow approach amounts related inprocess research development written date acquisition included research engineering expenses pro forma results operations presented individually aggregate acquisitions effects acquisitions material consolidated financial statements baker hughes incorporated notes consolidated financial statements continued note 4 stockbased compensation stockbased compensation cost measured date grant based calculated fair value award recognized expense employee’s service period generally vesting period equity grant additionally compensation cost recognized based awards ultimately expected vest therefore reduced cost estimated forfeitures based historical forfeiture rates forfeitures estimated time grant revised necessary subsequent periods reflect actual forfeitures following table summarizes stockbased compensation costs years ended december 31 2008 2007 2006 stockbased compensation costs capitalized amounts material stock options restricted stock awards units currently 17 million shares authorized issuance december 31 2008 approximately 6 million shares available future grants policy issue new shares exercises stock options vesting restricted stock awards units issuances employee stock purchase plan stock options stock option plans provide issuance incentive nonqualified stock options directors officers key employees exercise price equal fair market value stock date grant although subject terms stock option agreement substantially stock options become exercisable three equal annual installments beginning year date grant generally expire ten years date grant stock option plans provide acceleration vesting upon employee’s retirement therefore service period reduced employees become retirement eligible vesting period accordingly recognition compensation expense employees accelerated compensation cost related stock options recognized straightline basis vesting service period net forfeitures fair value stock option granted estimated date grant using blackscholes option pricing model following table presents weighted average assumptions used option pricing model options granted expected life options represents period time options expected outstanding expected life based historical exercise trends postvest termination data incorporated forwardlooking stock price model allowed securities exchange commission’s staff accounting bulletin 107 “sab 107” expected volatility based implied volatility forecast implied prices actively traded options purchase stock observed market riskfree interest rate based observed us treasury yield curve effect time options granted dividend yield based history dividend payouts baker hughes incorporated notes consolidated financial statements continued summary stock option activity related information presented thousands except per option prices total intrinsic value stock options defined amount market price underlying stock date exercise exceeds exercise price option exercised 2008 2007 2006 13 million 73 million 74 million respectively income tax benefit realized stock options exercised 7 million year ended december 31 2008 total fair value options vested 2008 2007 2006 17 million 20 million 20 million respectively december 31 2008 10 million total unrecognized compensation cost related nonvested stock options expected recognized weighted average period 2 years following table summarizes information stock options outstanding december 31 2008 thousands except per option prices remaining life aggregate intrinsic value stock options outstanding december 31 2008 2 million relates options vested exercisable intrinsic value stock options outstanding calculated amount quoted price 3433 common stock end 2008 exceeds exercise price options restricted stock awards units addition stock options officers directors key employees may granted restricted stock awards “rsa” award common stock exercise price restricted stock units “rsu” unit represents right receive end stipulated period one unrestricted share stock exercise price rsas rsus subject cliff graded vesting generally ranging three five year period determine fair value restricted stock awards restricted stock units based market price common stock date grant compensation cost rsas rsus primarily recognized straightline basis vesting service period net forfeitures baker hughes incorporated notes consolidated financial statements continued summary rsa rsu activity related information presented thousands except per shareunit prices weighted average grant date fair value per share rsas 2008 2007 2006 7282 6193 7397 respectively weighted average grant date fair value per unit rsus 2008 2007 2006 7596 6656 7400 respectively total grant date fair value rsas rsus vested 2008 2007 2006 30 million 16 million 11 million respectively december 31 2008 37 million 16 million total unrecognized compensation cost related nonvested rsas rsus respectively expected recognized weighted average period 2 years employee stock purchase plan employee stock purchase plan “espp” allows eligible employees elect contribute aftertax basis 1 10 annual pay purchase common stock provided however employee may contribute 25000 annually plan pursuant internal revenue service restrictions shares purchased 15 discount fair market value common stock january 1 december 31 whichever lower initially 145 million shares authorized issuance espp december 31 2008 10 million shares reserved future issuance espp april 2009 annual meeting stockholders asking stockholders approve amendment espp increase shares authorized issuance espp 8 million shares compensation expense determined sfas 123r year ended december 31 2008 calculated using blackscholes option pricing model following assumptions calculated estimated volatility using historical daily prices based expected life stock purchase plan riskfree interest rate based observed us treasury yield curve effect time espp shares granted dividend yield based history dividend payouts baker hughes incorporated notes consolidated financial statements continued note 5 income taxes provision income taxes income continuing operations comprised following years ended december 31 geographic sources income continuing operations income taxes follows years ended december 31 provision income taxes differs amount computed applying us statutory income tax rate income continuing operations income taxes reasons set forth years ended december 31 2006 provided 708 million taxes related sale interest westerngeco approximately 98 million tax provision excess us statutory income tax rate due taxes provided expected repatriation nonus proceeds received transaction larger us tax gain due lower tax basis compared book basis baker hughes incorporated notes consolidated financial statements continued deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards tax effects temporary differences carryforwards follows december 31 record valuation allowance likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions provided valuation allowance operating loss foreign tax credit carryforwards certain nonus jurisdictions operating loss carryforwards without valuation allowance expire varying amounts next twenty years provided us additional foreign taxes anticipated repatriation certain earnings foreign subsidiaries consider undistributed earnings foreign subsidiaries amount taxes already provided indefinitely reinvested intention repatriate earnings deferred income taxes provided temporary differences approximately 22 billion 16 billion 08 billion december 31 2008 2007 2006 respectively representing earnings nonus subsidiaries intended permanently reinvested additional foreign earnings could become subject additional tax remitted deemed remitted dividend computation potential deferred tax liability associated undistributed earnings basis difference practicable december 31 2008 approximately 45 million foreign tax credits may carried forward indefinitely applicable foreign law 8 million foreign tax credits available offset future payments federal income taxes expiring 2018 addition december 31 2008 approximately 1 million state tax credits expiring varying amounts 2016 2021 provide uncertain tax positions pursuant fin 48 accounting uncertainty income taxes interpretation fasb statement 109 december 31 2008 401 million tax liabilities gross unrecognized tax benefits includes liabilities interest penalties 63 million 15 million respectively prevail uncertain tax positions net effect would benefit effective tax rate approximately 323 million remaining approximately 78 million recorded deferred tax asset represents tax benefits would received different taxing jurisdictions event prevail uncertain tax positions december 31 2007 457 million tax liabilities gross unrecognized tax benefits includes liabilities interest penalties 72 million 22 million respectively gross unrecognized tax benefits include 9 million additional taxes related interest penalties recorded 2007 associated disallowed tax deductions taken previous years arising resolution investigations securities exchange commission “sec” baker hughes incorporated notes consolidated financial statements continued department justice “doj” prevail uncertain tax positions net effect would benefit effective tax rate approximately 373 million remaining approximately 84 million recorded deferred tax asset represents tax benefits would received different taxing jurisdictions event prevail uncertain tax positions elected fin 48 continue prior policy classify interest penalties related unrecognized tax benefits income taxes financial statements year ended december 31 2008 recognized benefit 16 million interest penalties related unrecognized tax benefits consolidated statement operations following presents rollforward unrecognized tax benefits associated interest penalties included balance sheet expected amount unrecognized tax benefits change next twelve months due expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate december 31 2008 approximately 77 million tax liabilities net 20 million tax assets related uncertain tax provisions individually insignificant reasonably possible settled within next twelve months primarily result audit settlements statute expirations several taxing jurisdictions december 31 2008 approximately 304 million gross unrecognized tax benefits included noncurrent portion income tax liabilities settlement period cannot determined however expected within next twelve months operate 90 countries subject income taxes taxing jurisdictions operate following table summarizes earliest tax years remain subject examination major taxing jurisdictions operate jurisdictions project highest tax liability 2008 baker hughes incorporated notes consolidated financial statements continued note 6 earnings per share reconciliation number shares used basic diluted eps computations follows years ended december 31 note 7 inventories comprised following december 31 note 8 property plant equipment property plant equipment comprised following december 31 baker hughes incorporated notes consolidated financial statements continued note 9 goodwill intangible assets changes carrying amount goodwill detailed segment perform annual impairment test goodwill october 1 every year impairments goodwill 2008 2007 2006 related annual impairment test intangible assets comprised following december 31 intangible assets amortized either straightline basis estimated useful lives ranging 1 20 years basis reflects pattern economic benefits intangible assets expected realized range 15 30 years amortization expense included net income years ended december 31 2008 2007 2006 20 million 21 million 20 million respectively estimated amortization expense subsequent five fiscal years expected follows 2009 25 million 2010 23 million 2011 20 million 2012 18 million 2013 15 million note 10 fair value certain financial assets liabilities january 1 2008 adopted methods determining fair value described sfas 157 value certain financial assets liabilities sfas 157 defines fair value price would received sell asset paid transfer liability exit price orderly transaction market participants reporting date statement establishes consistency comparability providing fair value hierarchy prioritizes inputs valuation techniques three broad levels described • level 1 inputs quoted market prices active markets identical assets liabilities observable market inputs • level 2 inputs quoted prices included within level 1 observable asset liability includes quoted market prices similar assets identical similar assets markets transactions prices current vary substantially baker hughes incorporated notes consolidated financial statements continued • level 3 inputs unobservable inputs reflect entity’s assumptions pricing asset liability used little market data available sfas 157 requires use observable market inputs quoted market prices measuring fair value whenever possible requires level 1 quoted price used measure fair value whenever possible financial assets liabilities included financial statements measured fair value december 31 2008 classified based valuation technique level table following reconciliation activity period assets measured fair value based significant unobservable inputs level 3 auction rate securities july 2007 company invested auction rate securities “ars” represent interests three variable rate debt securities credit linked notes generally combine low risk assets credit default swaps “cds” create security pays interest assets’ coupon payments periodic sale proceeds cds december 31 2008 three notes carried split ratings ranging bb provided standard poor’s fitch rating agencies since september 2007 unable sell ars investments unsuccessful auctions liquidity auction rate securities typically provided auction process resets applicable interest rate predetermined intervals usually every 7 28 35 days result unsuccessful auctions downgrade credit quality interest rate certificate resets every 28 days one month libor plus spread determined certificate’s lowest assigned rating utilized level 3 inputs estimate fair value ars investments based underlying structure security collateral values including assessments counterparty credit quality default risk underlying security expected cash flows discount rates overall capital market liquidity based analysis recorded otherthantemporary impairment loss 25 million included consolidated statement operations valuation ars investments subject uncertainties difficult predict require significant judgment fair value ars investments could change significantly future based various factors including changes credit ratings securities well underlying assets supporting securities rates default underlying assets underlying collateral value discount rates counterparty risk auctions resume based ability intent hold investments period time sufficient allow anticipated recovery fair value classified auction rate securities noncurrent investments baker hughes incorporated notes consolidated financial statements continued nonqualified defined contribution plan assets liabilities nonqualified defined contribution plan provides basically benefit thrift plan certain nonus employees eligible participate thrift plan addition provide nonqualified supplemental retirement plan certain officers employees whose benefits thrift plan andor us defined benefit pension plan limited federal tax law assets plans consist primarily mutual funds lesser extent equity securities hold assets plans grantor trust recorded assets along related deferred compensation liability fair value assets liabilities valued using level 2 inputs reporting date based quoted market prices various major stock exchanges nonfinancial assets liabilities november 2007 fasb placed one year deferral implementation sfas 157 nonfinancial assets liabilities accordingly adopted methods determining fair value described sfas 157 applicable nonfinancial assets liabilities beginning january 1 2009 note 11 financial instruments fair value financial instruments financial instruments include cash shortterm investments noncurrent investments auction rate securities accounts receivable accounts payable debt foreign currency forward contracts foreign currency option contracts except described estimated fair value financial instruments december 31 2008 2007 approximates carrying value reflected consolidated balance sheets fair value debt foreign currency forward contracts estimated based quoted year end market prices estimated fair value total debt december 31 2008 2007 2471 million 1170 million respectively differs carrying amounts 2333 million 1084 million respectively included consolidated balance sheets foreign currency forward contracts december 31 2008 entered several foreign currency forward contracts notional amounts aggregating 125 million hedge exposure currency fluctuations various foreign currencies including british pound sterling euro norwegian krone brazilian real contracts designated qualify fair value hedging instruments based quoted market prices december 31 2008 contracts similar terms maturity dates recorded loss 05 million adjust foreign currency forward contracts fair market value loss offsets designated foreign exchange gains resulting underlying exposures included mga expenses consolidated statement operations december 31 2007 entered several foreign currency forward contracts notional amounts aggregating 115 million hedge exposure currency fluctuations various foreign currency denominated accounts payable accounts receivable including british pound sterling norwegian krone euro brazilian real contracts designated qualify fair value hedging instruments based quoted market prices december 31 2007 contracts similar terms maturity dates recorded gain 1 million adjust foreign currency forward contracts fair market value gain offsets designated foreign currency exchange losses resulting underlying exposures included mga expenses consolidated statement operations december 31 2007 entered option contracts notional amounts aggregating 20 million hedge fluctuations russian ruble exchange rate contracts designated hedging instruments based quoted market prices december 31 2007 contracts similar terms maturity dates recorded loss 03 million adjust carrying value contracts fair market value loss included mga expenses consolidated statement operations counterparties foreign currency forward contracts financial institutions monitor credit ratings concentration risk financial institutions continuing basis event counterparties fail meet terms foreign currency contract exposure limited foreign currency exchange rate differential baker hughes incorporated notes consolidated financial statements continued concentration credit risk sell products services numerous companies oil natural gas industry although concentration could affect overall exposure credit risk believe risk minimized since majority business conducted major companies within industry perform periodic credit evaluations customers’ financial condition generally require collateral accounts receivable cases require payment advance security form letter credit bank guarantee maintain cash deposits financial institutions may exceed federally insured limits monitor credit ratings concentration risk financial institutions continuing basis safeguard cash deposits note 12 indebtedness total debt consisted following december 31 net unamortized discount debt issuance costs april 1 2008 entered credit agreement “2008 credit agreement” committed 500 million revolving credit facility expires march 2009 2008 credit agreement contains certain covenants among things require maintenance funded indebtedness total capitalization ratio defined formula per agreement less equal 060 restrict certain merger transactions sale substantially assets significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations 2008 credit agreement may accelerated events default include payment defaults lenders 2008 credit agreement covenant defaults customary defaults march 2009 expect renew extend facility able renew extend 2008 credit agreement acceptable terms availability commercial paper program also reduced 500 million december 31 2008 1508 million credit facilities commercial banks 10 billion committed revolving credit facilities includes 2008 credit agreement committed facilities expire july 7 2012 500 million unless extended march 31 2009 500 million 500 million facility expires july 7 2012 provides one year extension subject approval acceptance lenders among conditions addition facility contains provision allow increase facility amount additional 500 million subject approval acceptance lenders among conditions facilities contain certain covenants among things require maintenance funded indebtedness total capitalization ratio restrict certain merger transactions sale substantially assets company significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations facilities may accelerated events default include payment defaults lenders facilities covenant defaults customary defaults december 31 2008 compliance covenants facilities direct borrowings facilities year ended december 31 2008 however extent outstanding commercial paper ability borrow facilities reduced baker hughes incorporated notes consolidated financial statements continued march 3 2008 initiated commercial paper program “program” may issue time unsecured commercial paper notes maximum aggregate amount outstanding time 500 million april 2 2008 increased program aggregate 10 billion proceeds program used general corporate purposes including working capital expenditures acquisitions share repurchases commercial paper issued program scheduled mature within approximately 270 days issuance commercial paper redeemable prior maturity subject voluntary prepayment december 31 2008 outstanding commercial paper october 28 2008 sold 500 million 650 senior notes mature november 15 2013 750 million 750 senior notes mature november 15 2018 collectively “notes” net proceeds offering 1235 million deducting underwriting discounts expenses offering used portion net proceeds repay outstanding commercial paper well repay 325 million aggregate principal amount outstanding 625 notes matured january 15 2009 200 million aggregate principal amount outstanding 600 notes matured february 15 2009 use remaining net proceeds offering general corporate purposes could include funding ongoing operations business acquisitions repurchases common stock interest notes payable may 15 november 15 year first interest payment made may 15 2009 consist accrued interest october 28 2008 notes senior unsecured obligations rank equal right payment existing future senior indebtedness senior right payment future subordinated indebtedness effectively junior future secured indebtedness existing future indebtedness subsidiaries may redeem option part notes time applicable makewhole redemption prices plus accrued unpaid interest date redemption prior years terminated various interest rate swap agreements prior scheduled maturities resulting net gains net gains deferred amortized net reduction interest expense remaining life underlying debt securities unamortized net deferred gains 02 million 5 million included 625 notes due january 2009 consolidated balance sheets december 31 2008 2007 respectively maturities debt december 31 2008 follows 2009 558 million 2010 0 million 2011 0 million 2012 0 million 2013 495 million 1280 million thereafter note 13 segment related information major supplier wellbore related products technology services systems provide products services drilling formation evaluation completion production reservoir technology consulting worldwide oil natural gas industry report results productline focused divisions two segments drilling evaluation segment completion production segment aggregated divisions within segment similar economic characteristics longterm financial performance divisions affected similar economic conditions also operate markets includes major oil natural gas producing regions world results segment evaluated regularly chief operating decision maker deciding allocate resources assessing performance accounting policies segments described note 1 notes consolidated financial statements • drilling evaluation segment consists baker hughes drilling fluids drilling fluids hughes christensen oilfield drill bits inteq drilling measurementwhiledrilling loggingwhiledrilling baker atlas wireline formation evaluation wireline completion services divisions also includes reservoir technology consulting group drilling evaluation segment provides products services used drill evaluate oil natural gas wells well consulting services used analysis oil gas reservoirs • completion production segment consists baker oil tools workover fishing completion equipment baker petrolite oilfield specialty chemicals centrilift electrical submersible pumps progressing cavity pumps divisions productionquest production optimization permanent monitoring business unit integrated operations project management completion production segment provides equipment services used completion phase productive life oil natural gas wells performance segments evaluated based segment profit loss defined income continuing operations income taxes interest expense interest dividend income certain gains losses allocated segments baker hughes incorporated notes consolidated financial statements continued summarized financial information shown following table years ended december 31 2008 2007 2006 revenues attributable one customer accounted 10 total revenues following table presents details “corporate other” segment profit loss years ended december 31 baker hughes incorporated notes consolidated financial statements continued following table presents details “corporate other” total assets december 31 following table presents consolidated revenues based location use products services years ended december 31 following table presents net property plant equipment based location asset december 31 note 14 employee benefit plans defined benefit plans noncontributory defined benefit pension plans “pension benefits” covering employees primarily us uk germany provisions us qualified pension plan hypothetical cash balance account established participant accounts receive pay credits quarterly basis quarterly pay credit based percentage according employee’s age last day quarter applied quarterly eligible compensation addition quarterly pay credits cash balance account receives interest credits based balance account last day quarter us qualified pension plan also includes frozen accrued benefits participants legacy defined benefit plans majority participants uk pension plans accrue benefits plans frozen however limited number members still accrue future benefits defined benefit basis germany pension plan unfunded plan benefits based creditable years service creditable pay accrual rates also provide certain postretirement health care benefits “other postretirement benefits” unfunded plan substantially us employees retire met certain age service requirements sfas 158 requires employer measure funded status plans date year end statement financial position effective 2008 impact moving funded status measurement date october 1st december 31st reduction 4 million 2008 beginning retained earnings baker hughes incorporated notes consolidated financial statements continued funded status reconciliation beginning ending balances benefit obligations fair value plan assets funded status plans pension plans benefit obligation projected benefit obligation “pbo” postretirement benefit plan benefit obligation accumulated postretirement benefit obligation “apbo” beginning year balances october 1st 2008 2007 end year balances december 31st 2008 september 30th 2007 therefore 2008 reconciling items reflected represent fifteen months activity result adoption sfas 158 amounts recognized consolidated balance sheet consist following december 31 weighted average asset allocations asset category plans follows december 31 baker hughes incorporated notes consolidated financial statements continued investment committees meet least quarterly review portfolio returns periodically determine assetmix targets based assetliability studies thirdparty investment consultants assisted us developing asset allocation strategies determine expected rates return expected risk various investment portfolios investment committees considered studies formal establishment current assetmix targets based projected risk return levels major asset classes accumulated benefit obligation “abo” actuarial present value pension benefits attributed employee service date present compensation levels abo differs pbo abo include assumptions future compensation levels abo us plans 293 million 275 million december 31 2008 2007 respectively abo nonus plans 220 million 309 million december 31 2008 2007 respectively information plans abos excess plan assets follows december 31 weighted average assumptions used determine benefit obligations plans follows years ended december 31 development discount rate us plans based bond matching model whereby hypothetical bond portfolio highquality fixedincome securities selected match cash flows underlying projected benefit obligation discount rate assumption nonus plans reflects market rate highquality fixedincome securities accumulated comprehensive loss amounts recognized accumulated comprehensive loss consist following december 31 estimated net loss prior service cost defined benefit pension plans amortized accumulated comprehensive loss net periodic benefit cost next fiscal year 16 million 1 million respectively estimated prior service cost postretirement benefits amortized accumulated comprehensive loss net periodic benefit cost next fiscal year 1 million baker hughes incorporated notes consolidated financial statements continued net periodic benefit costs components net periodic benefit cost follows years ended december 31 weighted average assumptions used determine net periodic benefit costs plans follows years ended december 31 selecting expected rate return plan assets consider average rate earnings expected funds invested provide benefits plans includes considering trusts’ asset allocation expected returns likely earned life plans expected cash flows pension plans make annual contributions plans amounts equal greater amounts necessary meet minimum governmental funding requirements required intend make pension contributions us qualified pension plan 2009 although previously expected forgo contributions period five eight years due recent downturns investment markets decline value pension plan assets may required make contributions us qualified pension plan within next two three years 2009 expect contribute 2 million 3 million nonqualified us pension plans 12 million 14 million nonus pension plans 2009 also expect make benefit payments related postretirement welfare plans 15 million 16 million following table presents expected benefit payments next ten years us nonus pension benefit payments made respective pension trust funds postretirement benefits net expected medicare subsidies approximately 2 million per year payments expected made us baker hughes incorporated notes consolidated financial statements continued health care cost trend rates assumed health care cost trend rates significant effect amounts reported postretirement benefits december 31 2008 health care cost trend rate 8 employees age 65 participants age 65 declining gradually successive year reaches 5 employees age 65 age 65 2018 one percentage point change assumed health care cost trend rates would following effects 2008 defined contribution plans periods reported generally us employees eligible participate sponsored thrift plan 401k plan internal revenue code 1986 amended “the code” thrift plan allows eligible employees elect contribute 1 50 salaries investment trust beginning january 1 2007 employee contributions matched company cash rate 100 per 100 employee contribution first 5 employee’s salary prior years employee contributions matched cash us rate 100 per 100 employee contribution first 3 050 per 100 employee contribution next 2 employee’s salary years contributions vest immediately addition make cash contributions eligible employees 2 5 salary depending employee’s age contributions fully vested employee three years employment thrift plan provides ten different investment options employee sole discretion determining employer employee contributions invested thrift plan offer baker hughes company stock investment option contributions thrift plan several nonus defined contribution plans amounted 137 million 131 million 102 million 2008 2007 2006 respectively certain nonus employees eligible participate thrift plan provide nonqualified defined contribution plan provides basically benefits thrift plan addition provide nonqualified supplemental retirement plan “srp” certain officers employees whose benefits thrift plan andor us defined benefit pension plan limited federal tax law srp also allows eligible employees defer portion eligible compensation provides employer matching base contributions pursuant limitations nonqualified plans invested trusts assets corresponding liabilities included consolidated balance sheet contributions nonqualified plans 9 million 11 million 8 million 2008 2007 2006 respectively 2009 estimate contribute 139 million 150 million defined contribution plans postemployment benefits provide certain postemployment disability income medical benefits substantially qualifying former inactive us employees income benefits longterm disability provided fullyinsured plan continuation medical benefits disability “continuation benefits” provided qualified selfinsured plan accrued postemployment liability continuation benefits december 31 2008 2007 12 million 14 million respectively included liabilities consolidated balance sheet note 15 commitments contingencies leases december 31 2008 longterm noncancelable operating leases covering certain facilities equipment minimum annual rental commitments net amounts due subleases five years period ending december 31 2013 123 million 94 million 67 million 47 million 27 million respectively 118 million aggregate thereafter rent expense generally includes transportation equipment warehouse facilities 227 million 179 million 161 million years ended december 31 2008 2007 2006 respectively entered significant capital leases three years ended december 31 2008 baker hughes incorporated notes consolidated financial statements continued litigation involved litigation proceedings arisen ordinary business activities insure risks extent deemed prudent management extent insurance available assurance given nature amount insurance sufficient fully indemnify us liabilities arising pending future legal proceedings many insurance policies contain deductibles selfinsured retentions amounts deem prudent responsible payment determining amount selfinsurance policy selfinsure losses predictable measurable recurring nature claims automobile liability general liability workers compensation record accruals uninsured portion losses accruals losses calculated estimating losses claims using historical claim data specific loss development factors information necessary september 12 2001 without admitting denying factual allegations contained order consented sec entry order making findings imposing ceaseanddesist order “order” violations section 13b2a section 13b2b exchange act among findings included order following 1999 discovered certain officers authorized improper 75000 payment indonesian tax official embarked corrective course conduct including voluntarily promptly disclosing misconduct sec doj course investigation indonesia matter learned made payments amount 15000 10000 india brazil respectively agents without taking adequate steps ensure none payments would passed foreign government officials order found foregoing payments violated section 13b2a order also found us violation section 13b2b system internal controls determine payments violated fcpa makes unlawful us issuers including us anyone acting behalf make improper payments foreign official order obtain retain business addition discussed fcpa establishes accounting internal control requirements us issuers cooperated sec’s investigation order dated september 12 2001 previously disclosed us incorporated reference annual report exhibit 991 agreed cease desist committing causing violation future violation section 13b2a section 13b2b exchange act sections exchange act require issuers x make keep books records accounts reasonable detail accurately fairly reflect transactions dispositions assets issuer devise maintain system internal accounting controls sufficient provide reasonable assurances transactions executed accordance management’s general specific authorization ii transactions recorded necessary permit preparation financial statements conformity generally accepted accounting principles criteria applicable statements ii maintain accountability assets march 29 2002 announced advised sec doj conducting investigations allegations violations law relating nigeria related matters sec issued formal order investigation possible violations provisions fcpa regarding antibribery books records internal controls connection investigations sec issued subpoenas seeking information operations angola subpoena dated august 6 2003 kazakhstan subpoenas dated august 6 2003 april 22 2005 part investigation provided documents cooperated fully sec doj addition conducted internal investigations matters internal investigations identified issues regarding propriety certain payments apparent deficiencies books records internal controls respect certain operations angola kazakhstan nigeria well potential liabilities government authorities nigeria evidence obtained course investigations provided sec doj april 26 2007 united states district court southern district texas houston division “court” unsealed threecount criminal information filed us part execution deferred prosecution agreement “dpa” us doj three counts arise payments made agent connection project kazakhstan include conspiracy violate fcpa substantive violation antibribery provisions fcpa violation fcpa’s booksandrecords provisions three counts relate operations kazakhstan period 2000 2003 although plead guilty information face prosecution information possibly charges well fail comply terms dpa terms include twoyear term dpa full cooperation government compliance federal criminal law including limited fcpa adoption compliance code containing specific provisions intended prevent violations fcpa dpa also requires us retain independent monitor term three years assess make recommendations compliance policies procedures implementation procedures provided comply dpa doj agreed prosecute us violations fcpa based information disclosed doj regarding operations nigeria angola kazakhstan indonesia russia uzbekistan turkmenistan azerbaijan among countries baker hughes incorporated notes consolidated financial statements continued date court also accepted plea guilty subsidiary baker hughes services international inc “bhsii” pursuant plea agreement bhsii doj “plea agreement” based similar charges relating conduct pursuant plea agreement bhsii agreed threeyear term organizational probation plea agreement contains provisions requiring bhsii cooperate government comply federal criminal law adopt compliance code similar one dpa requires company also april 26 2007 sec filed complaint “sec complaint” proposed order “sec order” us court sec complaint sec order filed part settled civil enforcement action sec resolve civil portion government’s investigation us part agreement sec consented filing sec complaint without admitting denying allegations complaint also consented entry sec order sec complaint alleges civil violations fcpa’s antibribery provisions related operations kazakhstan fcpa’s booksandrecords internalcontrols provisions related operations nigeria angola kazakhstan indonesia russia uzbekistan sec’s cease desist order september 12 2001 sec order became effective may 1 2007 date confirmed court sec order enjoins us violating fcpa’s antibribery booksandrecords internalcontrols provisions dpa requires retain independent monitor assess fcpa compliance policies procedures threeyear period terms settlements doj sec company bhsii paid second quarter 2007 44 million 11 million criminal penalties 10 million civil penalties 20 million disgorgement profits 3 million prejudgment interest settle investigations fourth quarter 2006 recorded financial charge potential settlement previously disclosed copies agreements settlements incorporated reference annual report exhibits 1057 1058 992 997 retained sec doj approved independent monitor assess fcpa compliance policies procedures specified threeyear period may 4 2007 may 15 2007 sheetmetal workers’ national pension fund chris larson respectively instituted shareholder derivative lawsuits company’s behalf certain current former members board directors certain current former officers company nominal defendant following company’s settlement doj sec april 2007 august 17 2007 alaska plumbing pipefitting industry pension trust also instituted shareholder derivative lawsuit company’s behalf certain current former members board directors certain current former officers company nominal defendant june 6 2008 midwestern teamsters pension trust fund oppenheim kapitalanlagegesellschaft mbh instituted shareholder derivative lawsuit company’s behalf certain current former members board directors certain current former officers company nominal defendant complaints four lawsuits allege among things individual defendants failed implement adequate controls compliance procedures prevent events addressed settlement doj sec relief sought lawsuits includes declaration defendants breached fiduciary duties award damages sustained company result alleged breach monetary injunctive relief well attorneys’ experts’ fees may 15 2008 consolidated complaint sheetmetal workers’ national pension fund alaska plumbing pipefitting industry pension trust dismissed lack subject matter jurisdiction houston division united states district court southern district texas lawsuit brought chris larson 215th district court harris county texas dismissed september 15 2008 lawsuit brought midwestern teamsters pension trust fund oppenheim kapitalanlagegesellschaft mbh pending houston division united states district court southern district texas estimate possible loss range loss connection lawsuit cannot made however expect lawsuit material adverse effect consolidated financial statements may 12 2006 baker hughes oilfield operations inc “bhoo” subsidiary company named defendant lawsuit united states district court eastern district texas brought reedhycalog bhoo third parties arising alleged patent infringement relating sale certain diamond drill bits utilizing certain types polycrystalline diamond cutters sold hughes christensen division “reedhycalog claims” may 22 2008 agreement reached reciprocal licenses reedhycalog division national oilwell varco inc regarding reedhycalog claims related baker hughes counterclaims part agreement company reedhycalog agreed crosslicense disputed technologies result june 2008 company paid reedhycalog 70 million royalties prior use certain patented technologies reedhycalog paid company 8 million royalties license certain company patented technologies net pretax charge 62 million settlement litigation reflected consolidated statement operations year ended december 31 2008 addition company pay minimum 30 million royalties future baker hughes incorporated notes consolidated financial statements continued use 7 million paid december 31 2008 pursuant agreement bhoo dismissed claims released reedhycalog counterclaims information contained “environmental matters” section item 1 business contained herein environmental matters past present operations include activities subject extensive domestic including us federal state local international environmental regulations regard air land water quality environmental matters environmental procedures policies practices designed ensure compliance existing laws regulations minimize possibility significant environmental damage involved voluntary remediation projects present former manufacturing locations facilities majority relate properties obtained acquisitions sites longer actively used operations rare occasions remediation activities conducted specified government agencyissued consent decree agreed order remediation costs accrued based estimates probable exposure using currently available facts existing environmental permits technology presently enacted laws regulations remediation cost estimates include direct costs related environmental investigation external consulting activities governmental oversight fees treatment equipment costs associated longterm operation maintenance monitoring remediation project also identified potentially responsible party “prp” remedial activities related various superfund sites participate process set joint participation defense agreement negotiate government agencies identify prps determine prp’s allocation estimate remediation costs accrued believe prorata share total estimated cost remediation associated management superfund sites share based upon ratio estimated volume waste contributed site bears total estimated volume waste disposed site applicable united states federal law imposes joint several liability prp cleanup sites leaving us uncertainty may responsible remediation cost attributable prps unable pay share accrual made joint several liability concept superfund sites participation de minimis since believe probability pay material costs volumetric share remote believe prps greater involvement volumetric calculation basis substantial assets may reasonably expected pay share cost remediation superfund sites significant prp remediation costs estimated include recalcitrant parties cases insurance coverage contractual indemnities third parties cover portion ultimate liability total accrual environmental remediation 17 million 17 million includes accruals 6 million 5 million various superfund sites december 31 2008 2007 respectively determination required accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity utilized believe likelihood material losses excess amounts accrued remote normal course business customers vendors others entered offbalance sheet arrangements letters credit bank issued guarantees totaled approximately 660 million december 31 2008 also commitments outstanding purchase obligations related capital expenditures inventory purchase orders contracts approximately 433 million december 31 2008 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements baker hughes incorporated notes consolidated financial statements continued note 16 accumulated comprehensive loss following reconciliation accumulated comprehensive loss baker hughes incorporated notes consolidated financial statements continued note 17 quarterly data unaudited 1 represents revenues less cost sales cost services rentals research engineering item 9item 8 financial statements supplementary data management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rules 13a15f internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles control environment foundation system internal control embodied business code conduct sets tone company includes core values integrity teamwork performance learning included system internal control written policies organizational structure providing division responsibilities selection training qualified personnel program financial operations reviews professional staff internal auditors internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition assets could material effect financial statements supervision participation management including principal executive officer principal financial officer conducted evaluation effectiveness internal control financial reporting evaluation based framework internal control integrated framework issued committee sponsoring organizations treadway commission based evaluation framework internal control integrated framework principal executive officer principal financial officer concluded internal control financial reporting effective december 31 2009 conclusion principal executive officer principal financial officer based recognition inherent limitations systems internal control inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate deloitte touche llp company’s independent registered public accounting firm issued attestation report effectiveness company’s internal control financial reporting chad c deaton peter ragauss alan j keifer chad c deaton peter ragauss alan j keifer chairman president senior vice president vice president chief executive officer chief financial officer controller houston texas february 25 2010 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited internal control financial reporting baker hughes incorporated subsidiaries “company” december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion company maintained material respects effective internal control financial reporting december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states consolidated financial statements financial statement schedule ii year ended december 31 2009 company report dated february 25 2010 expressed unqualified opinion financial statements financial statement schedule sdeloitte touche llp houston texas february 25 2010 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited accompanying consolidated balance sheets baker hughes incorporated subsidiaries “company” december 31 2009 2008 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2009 audits also included financial statement schedule ii valuation qualifying accounts listed index item 15 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position baker hughes incorporated subsidiaries december 31 2009 2008 results operations cash flows three years period ended december 31 2009 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 25 2010 expressed unqualified opinion company’s internal control financial reporting sdeloitte touche llp houston texas february 25 2010 baker hughes incorporated consolidated statements operations millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated balance sheets millions except par value see notes consolidated financial statements baker hughes incorporated consolidated statements stockholders’ equity millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated statements cash flows millions see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements note 1 summary significant accounting policies nature operations baker hughes incorporated “baker hughes” engaged oilfield services industry major supplier wellbore related products technology services systems provide products services drilling formation evaluation completion production reservoir technology consulting worldwide oil natural gas industry basis presentation consolidated financial statements include accounts baker hughes majority owned subsidiaries “company” “we” “our” “us” investments ability exercise significant influence operating financial policies hold controlling interest accounted using equity method accounting significant intercompany accounts transactions eliminated consolidation notes consolidated financial statements dollar share amounts tabulations millions dollars shares respectively unless otherwise indicated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period base estimates judgments historical experience various assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained operating environment changes believe estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts inventory valuation reserves recoverability longlived assets useful lives used depreciation amortization income taxes related valuation allowances insurance environmental legal pensions postretirement benefit obligations stockbased compensation revenue recognition products services generally sold based upon purchase orders contracts customer include fixed determinable prices include right return similar provisions significant postdelivery obligations products produced standard manufacturing operation even produced customer’s specifications sold ordinary course business regular marketing channels recognize revenue products upon delivery title passes collectibility reasonably assured significant obligations future performance provisions estimated warranty returns similar types items made time related revenue recognized revenue services rentals recognized services rendered collectibility reasonably assured rates services typically priced per day per meter per man hour similar basis certain situations revenue generated transactions may include multiple products services one contract agreement revenue arrangements recognized item service delivered based relative fair value cost sales cost services rentals cost sales cost services rentals include material labor selling field service costs overhead costs associated manufacture distribution products sale rental distribution costs include freight costs purchasing receiving costs warehousing costs distribution network research engineering research engineering expenses include costs associated research development new products services costs associated sustaining engineering existing products services costs expensed incurred include research development costs new products services 231 million 263 million 234 million year ended december 31 2009 2008 2007 respectively baker hughes incorporated notes consolidated financial statements continued marketing general administrative marketing general administrative “mga” expenses include advertising marketing efforts business development costs general administrative costs directly associated manufacture distribution products sale rental employee related costs associated functions mga expenses also include gains losses foreign currency transactions cash equivalents consider highly liquid investments original maturity three months less time purchase cash equivalents investments prior september 2007 invested auction rate securities variablerate debt securities limited investments auction rate securities “ars” non mortgagebacked securities time initial investment carried aaa equivalent rating recognized rating agency 2009 sold ars investments recorded gain 4 million 2008 recorded impairment loss 25 million investments inventories stated lower cost market cost determined using firstin firstout “fifo” method average cost method approximates fifo includes cost materials labor manufacturing overhead property plant equipment accumulated depreciation property plant equipment “ppe” stated cost less accumulated depreciation generally provided using straightline method estimated useful lives individual assets significant improvements betterments capitalized extend useful life asset manufacture substantial portion rental tools equipment cost items includes direct indirect manufacturing costs capitalized carried inventory tool completed tool completed cost tool reflected capital expenditures tool classified rental tools equipment ppe maintenance repairs charged expense incurred capitalized costs computer software developed purchased internal use classified machinery equipment ppe 2006 financial accounting standards board “fasb” issued update accounting standards codification “asc” 360 property plant equipment prohibits use accrueinadvance method accounting planned major maintenance repair activities adopted update january 1 2007 change method accounting repairs maintenance activities certain rental tools accrueinadvance method direct expense method adoption resulted increase 25 million beginning retained earnings january 1 2007 asset retirement obligations legal obligations associated retirement longlived assets recognized fair value time obligations incurred upon initial recognition liability cost capitalized part related longlived asset depreciated straightline basis remaining estimated useful life related asset accretion expense connection discounted liability also recognized remaining useful life related asset retirement obligations 18 million 17 million december 31 2009 2008 respectively baker hughes incorporated notes consolidated financial statements continued goodwill intangible assets amortization goodwill intangible assets indefinite lives amortized intangible assets finite useful lives amortized basis reflects pattern economic benefits intangible assets realized generally straightline basis asset’s estimated useful life impairment longlived assets review ppe intangible assets certain assets impairment whenever events changes circumstances indicate carrying amount may recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense amount impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets perform annual impairment test goodwill reporting units october 1 frequently circumstances indicate impairment may exist reporting units based organizational reporting structure corporate assets liabilities allocated reporting units extent relate operations reporting units determining carrying amount determination impairment made comparing carrying amount fair value calculated using combination market discounted cash flow approach income taxes use liability method determining income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered future tax benefits recognized extent realization benefits likely deferred income taxes provided estimated income tax effect temporary differences financial tax bases assets liabilities deferred tax assets also provided certain tax credit carryforwards valuation allowance reduce deferred tax assets established likely portion deferred tax assets realized intend indefinitely reinvest certain earnings foreign subsidiaries operations outside us accordingly provided us income taxes earnings provide us additional nonus taxes earnings anticipated repatriated nonus subsidiaries operate 90 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenues rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability tax jurisdiction could impact upon amount income taxes provide given year tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law received tax assessments various tax authorities currently varying stages appeals andor litigation regarding matters provided amounts believe ultimately result proceedings believe substantial defenses questions raised pursue legal remedies unfavorable outcome result however resolution matters involves uncertainties assurances outcomes favorable provide uncertain tax positions pursuant asc 740 income taxes baker hughes incorporated notes consolidated financial statements continued july 2006 fasb issued new guidance accounting uncertain tax positions provides tax benefit uncertain tax position may recognized likely position sustained upon examination including resolutions related appeals litigation processes based technical merits interpretation also provides guidance measurement derecognition classification interest penalties accounting interim periods disclosure transition adopted provisions effective january 1 2007 pursuant recognized 78 million increase gross liability unrecognized tax benefits 14 million increase noncurrent tax receivables net decrease beginning retained earnings 64 million product warranties sell certain products product warranty provides customers return defective product specified warranty period following purchase exchange replacement product repair cost customer issuance credit customer accrue amounts estimated warranty claims based upon current historical product sales data warranty costs incurred related information known us product warranty liability 11 million 8 million december 31 2009 2008 respectively environmental matters estimated remediation costs accrued using currently available facts existing environmental permits technology presently enacted laws regulations sites primarily responsible remediation cost estimates developed based internal evaluations discounted accruals recorded probable obligated pay environmental site evaluation remediation related activities costs reasonably estimated obligation estimated within range accrue minimum amount range accruals recorded even significant uncertainties exist ultimate cost remediation additional accurate information becomes available accruals adjusted reflect current cost estimates ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party united states federal state “superfund” site accrue share estimated remediation costs site share based ratio estimated volume waste contributed site total volume waste disposed site foreign currency number significant foreign subsidiaries designated local currency functional currency gains losses resulting balance sheet translation foreign operations included separate component accumulated comprehensive loss within stockholders’ equity gains losses foreign currency transactions resulting settlement receivables payables nonfunctional currency included mga expenses consolidated statements operations incurred foreign subsidiaries designated us dollar functional currency gains losses resulting balance sheet remeasurement foreign operations also included mga expense consolidated statements operations incurred derivative financial instruments monitor exposure various business risks including commodity prices foreign currency exchange rates interest rates occasionally use derivative financial instruments manage risks policies permit use derivative financial instruments speculative purposes use foreign currency forward contracts hedge certain firm commitments transactions denominated foreign currencies use interest rate swaps manage interest rate risk inception new derivative designate derivative hedge term defined asc 815 derivatives hedging determine derivative undesignated hedging instrument facts dictate document relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions assess whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item inception hedge ongoing basis baker hughes incorporated notes consolidated financial statements continued new accounting standards accounting standards updates june 2009 fasb issued asc 105 generally accepted accounting principles asc identifies source authoritative accounting principles recognized fasb applied nongovernmental entities preparation financial statements conformity generally accepted accounting principles united states rules interpretive releases sec authority federal securities laws also sources authoritative gaap asc change gaap intended simplify user access authoritative gaap providing authoritative literature related particular topic one place statement effective financial statements issued interim annual periods ending september 15 2009 included references authoritative accounting literature accordance codification changes content company’s financial statements disclosures result adoption october 2009 fasb issued update asc 605 revenue recognition multiple deliverable revenue arrangements asu addresses accounting multipledeliverable arrangements enable vendors account deliverables separately provision establishes selling price hierarchy determining selling price deliverable update requires expanded disclosures multiple deliverable revenue arrangements asu effective revenue arrangements entered materially modified beginning june 15 2010 determined impact consolidated financial statements september 2006 fasb issued asc 820 fair value measurements disclosures intended increase consistency comparability fair value measurements defining fair value establishing framework measuring fair value expanding disclosures fair value measurements january 1 2008 adopted provisions asc related financial assets liabilities nonfinancial assets liabilities measured fair value recurring basis january 1 2009 adopted provisions related nonfinancial assets liabilities required permitted measured fair value recurring basis material impact consolidated financial statements related adoptions additionally april 2009 fasb issued following three accounting standards updates asc 820 determining fair value volume level activity asset liability significantly decreased identifying transactions orderly ii asc 320 recognition presentation otherthantemporary impairments iii asc 825 interim disclosures fair value financial instruments collectively provide additional guidance require additional disclosure regarding determining reporting fair values certain assets liabilities adopted three accounting standards updates second quarter 2009 material impact consolidated financial statements september 2009 fasb issued update asc 820 fair value measurements disclosures investments certain entities calculate net asset value per share equivalent asu provides practical means measuring fair value investments certain entities calculate net asset value per share asu effective first reporting period ending december 15 2009 adopted provisions disclosure requirements asu december 2009 material impact consolidated financial statements december 2007 fasb issued update asc 810 consolidation establish accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary effort improve relevance comparability transparency financial information reporting entity provides january 1 2009 adopted statement change consolidated financial statements amounts immaterial december 2007 fasb issued update asc 805 business combinations establish principles requirements recognition measurement assets liabilities goodwill requires transaction restructuring costs related acquisition expensed applied provisions asc business combinations acquisition date january 1 2009 march 2008 fasb issued update asc 815 disclosures derivative instruments hedging activities require qualitative disclosures objectives strategies using derivatives quantitative data fair value gains losses derivative contracts adopted new disclosure requirements first quarter 2009 june 2008 fasb issued update asc 260 determining whether instruments granted sharebased payment transactions participating securities clarify unvested sharebased payments contain rights nonforfeitable dividends participating securities shall included computation basic diluted earnings per share january 1 2009 adopted asc applied provisions prior year quarters impact immaterial baker hughes incorporated notes consolidated financial statements continued december 2008 fasb issued update asc 715 employers’ disclosures postretirement benefit plan assets require disclosures investment policies strategies major categories plan assets fair value measurement plan assets significant concentration credit risks adopted new disclosure requirements fourth quarter 2009 see note 14 notes consolidated financial statements item 8 herein information impact standard note 2 pending merger bj services august 30 2009 company subsidiary bj services company “bj services” entered merger agreement “merger agreement” pursuant company acquire 100 outstanding common stock bj services exchange newly issued shares company’s common stock cash bj services leading provider pressure pumping oilfield services merger agreement merger approved board directors company bj services consummation merger subject approval stockholders company bj services’ stockholders special meetings scheduled march 19 2010 subject adjournment postponement regulatory approvals satisfaction waiver various conditions fully described merger agreement subject receipt required approvals anticipated closing merger occur march 2010 terms merger agreement share bj services common stock converted right receive 040035 shares company’s common stock 269 cash baker hughes estimated total consideration expected issued paid merger approximately 64 billion consisting approximately 08 billion paid cash approximately 56 billion paid issuance approximately 118 million shares baker hughes common stock valued february 11 2010 closing share price 4668 per share value merger consideration fluctuate based upon changes price shares baker hughes common stock number bj services common shares options outstanding closing date note 3 gain sale product line february 2008 sold assets associated completion production segment’s surface safety systems “sss” product line received cash proceeds 31 million sss assets sold included hydraulic pneumatic actuators bonnet assemblies control systems recorded pretax gain 28 million 18 million aftertax 2008 note 4 stockbased compensation stockbased compensation cost measured date grant based calculated fair value award recognized expense employee’s service period generally vesting period equity grant additionally compensation cost recognized based awards ultimately expected vest therefore reduced cost estimated forfeitures based historical forfeiture rates forfeitures estimated time grant revised necessary subsequent periods reflect actual forfeitures following table summarizes stockbased compensation costs years ended december 31 2009 2008 2007 stockbased compensation costs capitalized amounts material stock options restricted stock awards units currently 17 million shares authorized issuance december 31 2009 approximately 2 million shares available future grants policy issue new shares exercises stock options vesting restricted stock awards units issuances employee stock purchase plan stock options stock option plans provide issuance incentive nonqualified stock options directors officers key employees exercise price equal fair market value stock date grant although subject terms stock option agreement substantially stock options become exercisable three equal annual installments beginning year date grant generally expire ten years date grant stock option plans provide acceleration baker hughes incorporated notes consolidated financial statements continued vesting upon employee’s retirement therefore service period reduced employees become retirement eligible vesting period accordingly recognition compensation expense employees accelerated compensation cost related stock options recognized straightline basis vesting service period net forfeitures fair value stock option granted estimated using blackscholes option pricing model following table presents weighted average assumptions used option pricing model options granted expected life options represents period time options expected outstanding expected life based historical exercise trends postvest termination data incorporated forwardlooking stock price model expected volatility based implied volatility forecast implied prices actively traded options purchase stock observed market riskfree interest rate based observed us treasury yield curve effect time options granted dividend yield based history dividend payouts summary stock option activity related information presented thousands except per option prices total intrinsic value stock options defined amount market price underlying stock date exercise exceeds exercise price option exercised 2009 2008 2007 04 million 13 million 73 million respectively income tax benefit realized stock options exercised 01 million 7 million 19 million 2009 2008 2007 respectively total fair value options vested 2009 2008 2007 17 million 17 million 20 million respectively december 31 2009 15 million total unrecognized compensation cost related nonvested stock options expected recognized weighted average period two years baker hughes incorporated notes consolidated financial statements continued following table summarizes information stock options outstanding december 31 2009 thousands except per option prices remaining life aggregate intrinsic value stock options outstanding december 31 2009 17 million 5 million relates options vested exercisable intrinsic value stock options outstanding calculated amount quoted price 4048 common stock end 2009 exceeds exercise price options restricted stock awards units addition stock options officers directors key employees may granted restricted stock awards “rsa” award common stock exercise price restricted stock units “rsu” unit represents right receive end stipulated period one unrestricted share stock exercise price rsas rsus subject cliff graded vesting generally ranging three five year period determine fair value restricted stock awards restricted stock units based market price common stock date grant compensation cost rsas rsus primarily recognized straightline basis vesting service period net forfeitures summary rsa rsu activity related information presented thousands except per shareunit prices weighted average grant date fair value per share rsas 2009 2008 2007 3118 7282 6859 respectively weighted average grant date fair value per unit rsus 2009 2008 2007 3154 7596 6854 respectively total fair value rsas rsus vested 2009 2008 2007 18 million 30 million 16 million respectively december 31 2009 38 million 18 million total unrecognized compensation cost related nonvested rsas rsus respectively expected recognized weighted average period two years employee stock purchase plan 2009 employee stock purchase plan “espp” allowed eligible employees elect contribute aftertax basis 1 10 annual pay purchase common stock provided however employee may contribute baker hughes incorporated notes consolidated financial statements continued 25000 annually plan pursuant internal revenue service restrictions shares purchased 15 discount fair market value common stock january 1 december 31 whichever lower effective january 1 2010 espp provide shares purchased june 30 year 15 discount fair market value common stock january 1 june 30 whichever lower ii december 31 year 15 discount fair market value common stock july 1 december 31 whichever lower also effective january 1 2010 employee may contribute 5000 either sixmonth measurement periods described 10000 annually terms conditions espp remain effect currently 225 million shares authorized issuance espp december 31 2009 72 million shares reserved future issuance espp compensation expense determined asc 718 compensation stock compensation year ended december 31 2009 calculated using blackscholes option pricing model following assumptions calculated estimated volatility using historical daily prices based expected life stock purchase plan riskfree interest rate based observed us treasury yield curve effect time espp shares granted dividend yield based history dividend payouts note 5 income taxes provision income taxes income comprised following years ended december 31 geographic sources income taxes follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued provision income taxes differs amount computed applying us statutory income tax rate income taxes reasons set forth years ended december 31 deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards tax effects temporary differences carryforwards follows december 31 record valuation allowance likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions provided valuation allowance operating loss foreign tax credit carryforwards certain nonus jurisdictions 65 million net increase valuation allowance 2009 38 million represents net tax charges related foreign losses 28 million pertains change ability fully utilize deferred tax assets venezuela offset 12 million reduction valuation allowance related deferred tax assets brazil remaining 11 million net increase represents various items none individually significant operating loss carryforwards without valuation allowance expire varying amounts next twenty years provided us additional foreign taxes anticipated repatriation certain earnings foreign subsidiaries consider undistributed earnings foreign subsidiaries amount taxes already provided indefinitely reinvested intention repatriate earnings deferred income taxes provided temporary differences approximately 23 billion 22 billion 16 billion december 31 2009 2008 2007 respectively representing earnings nonus subsidiaries intended permanently reinvested additional foreign earnings could become subject additional tax remitted deemed remitted dividend computation potential deferred tax liability associated undistributed earnings basis difference practicable december 31 2009 approximately 55 million foreign tax credits may carried forward indefinitely applicable foreign law 115 million foreign tax credits available offset future payments federal income taxes expiring baker hughes incorporated notes consolidated financial statements continued 2018 2019 addition december 31 2009 approximately 1 million state tax credits expiring varying amounts 2016 2021 december 31 2009 339 million tax liabilities gross unrecognized tax benefits includes liabilities interest penalties 72 million 17 million respectively prevail uncertain tax positions net effect would benefit effective tax rate approximately 288 million remaining approximately 51 million recorded deferred tax asset represents tax benefits would received different taxing jurisdictions event prevail uncertain tax positions classify interest penalties related unrecognized tax benefits income taxes financial statements year ended december 31 2009 recognized tax provision 11 million interest penalties related unrecognized tax benefits consolidated statement operations following presents rollforward unrecognized tax benefits associated interest penalties included balance sheet expected amount unrecognized tax benefits change next 12 months due expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate december 31 2009 approximately 80 million tax liabilities net 35 million tax assets related uncertain tax positions individually insignificant reasonably possible settled within next twelve months primarily result audit settlements statute expirations several taxing jurisdictions december 31 2009 approximately 224 million gross unrecognized tax benefits included noncurrent portion income tax liabilities settlement period cannot determined however expected within next 12 months operate 90 countries subject income taxes taxing jurisdictions operate following table summarizes earliest tax years remain subject examination major taxing jurisdictions operate jurisdictions project highest tax liability 2010 baker hughes incorporated notes consolidated financial statements continued note 6 earnings per share january 1 2009 adopted update asc 260 clarifies unvested sharebased payments contain rights nonforfeitable dividends participating securities shall included computation basic diluted earnings per share asc 260 applied prior year impact immaterial reconciliation number shares used basic diluted eps computations follows years ended december 31 note 7 inventories net reserves 297 million 244 million 2009 2008 respectively comprised following december 31 note 8 property plant equipment property plant equipment comprised following december 31 baker hughes incorporated notes consolidated financial statements continued note 9 goodwill intangible assets changes carrying amount goodwill detailed segment perform annual impairment test goodwill october 1 every year impairments goodwill 2009 2008 2007 related annual impairment test intangible assets comprised following december 31 intangible assets amortized either straightline basis estimated useful lives ranging 1 20 years basis reflects pattern economic benefits intangible assets expected realized range 15 30 years amortization expense included net income years ended december 31 2009 2008 2007 31 million 20 million 21 million respectively estimated amortization expense subsequent five fiscal years expected follows 2010 24 million 2011 19 million 2012 18 million 2013 17 million 2014 16 million note 10 fair value certain financial assets liabilities measure certain financial assets liabilities fair value fair value defined price would received sell asset paid transfer liability exit price orderly transaction market participants reporting date use fair value hierarchy prioritizes inputs used measure fair value three broad levels described • level 1 quoted prices active markets identical assets liabilities observable market inputs fair value hierarchy gives highest priority level 1 inputs • level 2 observable prices based inputs quoted active markets includes quoted market prices similar assets identical similar assets markets transactions prices current vary substantially • level 3 unobservable inputs reflect entity’s assumptions pricing asset liability used little market data available baker hughes incorporated notes consolidated financial statements continued financial assets liabilities included financial statements measured fair value december 31 2009 2008 classified based valuation hierarchy table following reconciliation activity period assets measured fair value based significant unobservable inputs level 3 auction rate securities company owned auction rate securities “ars” purchased 2007 original cost 36 million ars represented interests three variable rate debt securities credit linked notes generally combine low risk assets credit default swaps “cds” create security pays interest assets’ coupon payments periodic sale proceeds cds december 2009 sold ars investments 15 million recorded gain 4 million estimating fair value ars investments used level 3 inputs based underlying structure security collateral values including assessments credit quality default risk expected cash flows discount rates overall capital market liquidity based ability intent hold investments period time sufficient allow anticipated recovery fair value classified ars noncurrent investments sale december 2009 baker hughes incorporated notes consolidated financial statements continued nonqualified defined contribution plan assets liabilities nonqualified defined contribution plan provides basically benefit thrift plan certain nonus employees eligible participate thrift plan addition provide nonqualified supplemental retirement plan certain officers employees whose benefits thrift plan andor us defined benefit pension plan limited federal tax law assets plans consist primarily mutual funds lesser extent equity securities hold assets plans grantor trust recorded assets along related deferred compensation liability fair value assets liabilities valued using level 1 inputs reporting date based quoted market prices various major stock exchanges note 11 financial instruments fair value financial instruments financial instruments include cash shortterm investments noncurrent investments auction rate securities accounts receivable accounts payable debt foreign currency forward contracts foreign currency option contracts interest rate swaps except described estimated fair value financial instruments december 31 2009 2008 approximates carrying value reflected consolidated balance sheets fair value debt foreign currency forward contracts interest rate swaps estimated based quoted year end market prices estimated fair value total debt december 31 2009 2008 2126 million 2471 million respectively differs carrying amounts 1800 million 2333 million respectively included consolidated balance sheets foreign currency forward contracts conduct business 90 countries around world exposed market risks resulting fluctuations foreign currency exchange rates number significant foreign subsidiaries designated local currency functional currency transact various foreign currencies established program primarily utilizes foreign currency forward contracts reduce risks associated effects certain foreign currency exposures program strategy gains losses foreign currency forward contracts mitigate foreign currency transaction gains losses extent practical foreign currency exposures typically arise changes value assets liabilities denominated currencies functional currency foreign currency forward contracts generally settle within 90 days use forward contracts trading speculative purposes designate forward contracts fair value hedging instruments pursuant asc 815 derivatives hedging accordingly record fair value contracts end reporting period consolidated balance sheet changes fair value recorded consolidated statement operations along change fair value hedged item december 31 2009 2008 outstanding foreign currency forward contracts notional amounts aggregating 153 million 125 million respectively hedge exposure currency fluctuations various foreign currencies contracts designated qualify fair value hedging instruments fair value determined using model level 2 inputs including quoted market prices contracts similar terms maturity dates interest rate swaps subject interest rate risk debt investment cash equivalents arising normal course business engage speculative trading strategies maintain interest rate management strategy primarily uses mix fixed variable rate debt intended mitigate exposure changes interest rates aggregate investment portfolio addition currently using interest rate swaps manage economic effect fixed rate obligations associated senior notes interest payable senior notes effectively becomes linked variable rates june 2009 entered two interest rate swap agreements “the swap agreements” notional amount 250 million order hedge changes fair market value 500 million 65 senior notes maturing november 15 2013 swap agreements receive interest fixed rate 65 pay interest floating rate onemonth libor plus spread 367 one swap threemonth libor plus spread 354 second swap november 15 2013 counterparties primarily lenders credit facilities swap agreements designated qualifies fair value hedging instrument swap threemonth libor deemed 100 percent effective resulting gain loss recorded baker hughes incorporated notes consolidated financial statements continued consolidated statement operations effectiveness swap onemonth libor highly effective calculated period end ineffective portion recognized consolidated statement operations fair value swap agreements determined using model level 2 inputs including quoted market prices contracts similar terms maturity dates fair value derivative instruments fair value derivative instruments included consolidated balance sheet follows december 31 2009 derivative balance sheet location fair value foreign currency forward contracts accrued liabilities interest rate swaps assets effects derivative instruments consolidated statement operations follows year ended december 31 2009 amounts exclude income tax effects derivative statement operations location amount gain recognized income foreign currency forward contracts marketing general administrative interest rate swaps interest expense concentration credit risk sell products services numerous companies oil natural gas industry although concentration could affect overall exposure credit risk believe risk minimized since majority business conducted major companies within industry perform periodic credit evaluations customers’ financial condition generally require collateral accounts receivable cases require payment advance security form letter credit bank guarantee maintain cash deposits financial institutions may exceed federally insured limits monitor credit ratings concentration risk financial institutions continuing basis safeguard cash deposits note 12 indebtedness total debt consisted following december 31 net unamortized discount debt issuance costs baker hughes incorporated notes consolidated financial statements continued first quarter 2009 repaid 325 million principal amount 625 notes matured january 15 2009 200 million principal amount 600 notes matured february 15 2009 march 30 2009 entered credit agreement “2009 credit agreement” committed 500 million revolving credit facility expires march 2010 addition 2009 credit agreement 500 million committed revolving credit facility expires july 7 2012 committed facility lender obligated advance funds andor provide credit borrower per terms conditions stipulated credit agreement december 31 2009 10 billion committed revolving credit facilities commercial banks facilities contain certain covenants among things require maintenance funded indebtedness total capitalization ratio defined formula per agreement restrict certain merger transactions sale substantially assets significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations facilities may accelerated events default include payment defaults lenders facilities covenant defaults customary defaults december 31 2009 compliance covenants committed credit facilities direct borrowings committed credit facilities 2009 also outstanding commercial paper program may issue time 10 billion commercial paper maturity 270 days extent commercial paper outstanding ability borrow facilities reduced december 31 2009 outstanding commercial paper maturities debt december 31 2009 follows 2010 15 million 2011 0 million 2012 0 million 2013 504 million 2014 0 million 1281 million thereafter note 13 segment related information major supplier wellborerelated products technology services systems provide products services drilling formation evaluation completion production reservoir technology consulting worldwide oil natural gas industry may 2009 reorganized company geography product lines however time continue review product line financial information well geographic information deciding allocate resources assessing performance accordingly report results product lines two segments drilling evaluation segment completion production segment aggregated product lines within segment similar economic characteristics longterm financial performance product lines affected similar economic conditions also operate markets includes major oil natural gas producing regions world accounting policies segments described note 1 notes consolidated financial statements • drilling evaluation segment consists following product lines drilling fluids drill bits directional drilling evaluation services wireline formation evaluation wireline completion production services reservoir technology consulting drilling evaluation segment provides products services used drill evaluate oil natural gas wells well consulting services used analysis oil gas reservoirs • completion production segment consists following product lines wellbore construction completion specialty chemicals artificial lift systems permanent monitoring systems chemical injection systems integrated operations project management completion production segment provides equipment services used completion phase productive life oil natural gas wells performance segments evaluated based segment profit loss defined income taxes interest expense interest dividend income certain gains losses allocated segments baker hughes incorporated notes consolidated financial statements continued summarized financial information shown following table years ended december 31 2009 2008 2007 revenues attributable one customer accounted 10 total revenues following table presents details “corporate other” segment loss years ended december 31 following table presents details “corporate other” total assets december 31 baker hughes incorporated notes consolidated financial statements continued following table presents consolidated revenues based location use products services years ended december 31 following table presents net property plant equipment based location asset december 31 note 14 employee benefit plans defined benefit plans funded unfunded noncontributory defined benefit pension plans “pension benefits” covering employees primarily us uk germany several countries middle east region provisions us qualified pension plan hypothetical cash balance account established participant accounts receive pay credits quarterly basis quarterly pay credit based percentage according employee’s age last day quarter applied quarterly eligible compensation addition quarterly pay credits cash balance account receives interest credits based balance account last day quarter us qualified pension plan also includes frozen accrued benefits participants legacy defined benefit plans majority participants uk pension plans accrue benefits plans frozen however limited number members still accrue future benefits defined benefit basis germany pension plan unfunded plan benefits based creditable years service creditable pay accrual rates also provide certain postretirement health care benefits “other postretirement benefits” unfunded plan substantially us employees retire met certain age service requirements asc 715 compensation retirement requires employer measure funded status plans date year end statement financial position effective 2008 impact moving funded status measurement date october 1 december 31 reduction 4 million 2008 beginning retained earnings funded status reconciliation beginning ending balances benefit obligations fair value plan assets funded status plans pension plans benefit obligation projected benefit obligation “pbo” postretirement benefit plan benefit obligation accumulated postretirement benefit obligation “apbo” beginning year balance october 1 2008 end year balances december 31 2009 2008 therefore 2008 reconciling items reflected represent 15 months activity result adoption asc 715 baker hughes incorporated notes consolidated financial statements continued amounts recognized consolidated balance sheet consist following december 31 accumulated benefit obligation “abo” actuarial present value pension benefits attributed employee service date present compensation levels abo differs pbo abo include assumptions future compensation levels abo us plans 366 million 293 million december 31 2009 2008 respectively abo nonus plans 313 million 220 million december 31 2009 2008 respectively information plans abos excess plan assets follows december 31 baker hughes incorporated notes consolidated financial statements continued weighted average assumptions used determine benefit obligations plans follows years ended december 31 development discount rate us plans based bond matching model whereby hypothetical bond portfolio highquality fixedincome securities selected match cash flows underlying projected benefit obligation discount rate assumption nonus plans reflects market rate highquality fixedincome securities accumulated comprehensive loss amounts recognized accumulated comprehensive loss consist following december 31 estimated net loss prior service cost defined benefit pension plans amortized accumulated comprehensive loss net periodic benefit cost next fiscal year 14 million 1 million respectively estimated prior service cost postretirement benefits amortized accumulated comprehensive loss net periodic benefit cost next fiscal year 1 million net periodic benefit costs components net periodic cost benefit follows years ended december 31 weighted average assumptions used determine net periodic benefit costs plans follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued selecting expected rate return plan assets consider average rate earnings expected funds invested provide benefits plans includes considering trusts’ asset allocation expected returns likely earned life plans health care cost trend rates assumed health care cost trend rates significant effect amounts reported postretirement benefits december 31 2009 health care cost trend rate 77 employees age 65 64 participants age 65 declining gradually successive year reaches 50 employees age 65 age 65 2018 one percentage point change assumed health care cost trend rates would following effects 2009 plan assets us pension plan investment committees meet regularly review portfolio returns determine assetmix targets based assetliability studies thirdparty investment consultants assist us developing asset allocation strategies determine expected rates return expected risk various investment portfolios investment committees considered strategies formal establishment current assetmix targets based projected risk return levels major asset classes investment policy us pension plan “us plan” developed examining historical relationships risk return among asset classes relationship expected behavior us plan’s assets liabilities investment policy us plan designed provide greatest probability meeting exceeding us plan’s objectives lowest possible risk establishing risk tolerance investment committee us plan “us committee” considers ability withstand shortterm intermediateterm volatility market conditions us committee also reviews longterm characteristics various asset classes focusing balancing risk expected return accordingly us committee selected following four asset classes allowable investments assets us plan us equities real estate us fixedincome securities nonus equities table presents fair values assets us plan december 31 2009 asset category levels fair value defined note 10 notes consolidated financial statements pooled fund strategy investing fixed income securities current allocation includes 35 us government securities 34 residential mortgage backed 26 corporate bonds 5 indexlinked commercial mortgagebacked assetbacked securities cash b multimanager strategy investing common stocks nonus listed companies using value growth approaches c multimanager strategy investing common stocks smaller us listed companies using value growth approaches passively managed commingled fund investing common stocks sp 500 index baker hughes incorporated notes consolidated financial statements continued e multimanager growth strategy investing common stocks us listed large capitalization companies f multimanager value strategy investing common stocks us listed large capitalization companies g commingled fund investing diversified portfolio us based properties current allocation includes 30 office 28 apartments 24 retail 12 industrial 6 hotel plan assets nonus pension plans investment policy baker hughes uk pension plan “uk plan” covers asset allocation trustees believe appropriate uk plan long term taking account nature liabilities expect meet suitability asset allocation investment policy reviewed every actuarial valuation uk plan take form asset liability modeling study required part review trustees examine impact volatility uk plan’s funding level arising decisions made investment arrangements including decisions investment strategy active passive management manager selection trustees consider likely impact ability pay benefits uk plan fail fully funded ongoing discontinuance basis review also take account risk changes plan’s funding position resulting changes uk plan’s liabilities table presents fair values assets nonus pension plans december 31 2009 asset category levels fair value defined note 10 notes consolidated financial statements invests passively securities achieve returns line financial times london stock exchange “ftse” allshare index b invests global securities world’s developed markets including us annualized basis seeks outperform morgan stanley capital international world index 3 complete market cycle c invests passively securities achieve returns line ftse uk gilts 15 year index invests passively securities achieve returns line iboxx £ nongilts 15 years index e invests diversified range property throughout uk principally retail office industrialwarehouse sectors f invests securities receive investment return consistent security capital high degree liquidity g invests passively securities receive returns line ftse uk gilts indexlinked 5 years index following table presents rollforward fair value assets using level 3 unobservable inputs baker hughes incorporated notes consolidated financial statements continued expected cash flows pension plans make annual contributions plans amounts equal greater amounts necessary meet minimum governmental funding requirements although previously expected forgo contributions period five eight years due recent downturns investment markets decline value pension plan assets may required make contributions us qualified pension plan within next one two years 2010 expect contribute 20 million 25 million us pension plans 15 million 20 million nonus pension plans 2010 also expect make benefit payments related postretirement welfare plans 18 million 20 million following table presents expected benefit payments next ten years us nonus pension benefit payments made respective pension trust funds postretirement benefits net expected medicare subsidies approximately 2 million per year payments expected made us defined contribution plans periods reported generally us employees eligible participate sponsored thrift plan 401k plan internal revenue code 1986 amended “the code” thrift plan allows eligible employees elect contribute 1 50 salaries investment trust employee contributions matched company cash rate 100 per 100 employee contribution first 5 employee’s salary contributions vest immediately addition make cash contributions eligible employees 2 5 salary depending employee’s age contributions fully vested employee three years employment thrift plan provides ten different investment options employee sole discretion determining employer employee contributions invested thrift plan offer baker hughes company stock investment option contributions thrift plan several nonus defined contribution plans amounted 129 million 137 million 131 million 2009 2008 2007 respectively certain nonus employees eligible participate thrift plan provide nonqualified defined contribution plan provides basically benefits thrift plan addition provide nonqualified supplemental retirement plan “srp” certain officers employees whose benefits thrift plan andor us defined benefit pension plan limited federal tax law srp also allows eligible employees defer portion eligible compensation provides employer matching base contributions pursuant limitations nonqualified plans invested trusts assets corresponding liabilities included consolidated balance sheet contributions nonqualified plans 11 million 9 million 11 million 2009 2008 2007 respectively 2010 estimate contribute 142 million 154 million defined contribution plans postemployment benefits provide certain postemployment disability income medical benefits substantially qualifying former inactive us employees income benefits longterm disability provided fullyinsured plan continuation medical benefits disability “continuation benefits” provided qualified selfinsured plan accrued postemployment liability continuation benefits december 31 2009 2008 13 million 12 million respectively included liabilities consolidated balance sheet baker hughes incorporated notes consolidated financial statements continued note 15 commitments contingencies leases december 31 2009 longterm noncancelable operating leases covering certain facilities equipment minimum annual rental commitments net amounts due subleases five years period ending december 31 2014 126 million 87 million 63 million 40 million 27 million respectively 102 million aggregate thereafter rent expense generally includes transportation equipment warehouse facilities 241 million 227 million 179 million years ended december 31 2009 2008 2007 respectively entered significant capital leases three years ended december 31 2009 litigation involved litigation proceedings arisen ordinary business activities well relation pending merger bj services insure risks extent deemed prudent management extent insurance available assurance given nature amount insurance sufficient fully indemnify us liabilities arising pending future legal proceedings many insurance policies contain deductibles selfinsured retentions amounts deem prudent responsible payment determining amount selfinsurance policy selfinsure losses predictable measurable recurring nature claims automobile liability general liability workers compensation accruals losses calculated estimating losses claims using historical claim data specific loss development factors information necessary department justice securities exchange commission matters april 26 2007 united states district court southern district texas houston division “court” unsealed threecount criminal information “information” filed us part execution deferred prosecution agreement “dpa” us department justice “doj” three counts arose payments made agent connection project kazakhstan included conspiracy violate foreign corrupt practices act “fcpa” substantive violation antibribery provisions fcpa violation fcpa’s booksandrecords provisions three counts related operations kazakhstan period 2000 2003 dpa relates march 29 2002 announcement sec doj conducting investigations allegations violations law relating nigeria related matters connection therewith sec issued formal order investigation possible violations provisions fcpa issued subpoenas regarding operations nigeria angola kazakhstan april 26 2009 dpa expired pursuant motion filed doj court issued order april 28 2009 dismissing information basis company fully complied obligations dpa also required us retain independent monitor “monitor” term three years assess make recommendations compliance policies procedures implementation procedures addition monitor required perform two follow reviews “certify whether antibribery compliance program baker hughes including policies procedures appropriately designed implemented ensure compliance fcpa us commercial bribery laws foreign bribery laws” april 8 2009 monitor issued report first follow reviews monitor issued certification compliance program appropriately designed implemented ensure compliance pursuant dpa doj agreed prosecute us violations fcpa based information disclosed doj regarding operations nigeria angola kazakhstan indonesia russia uzbekistan turkmenistan azerbaijan among countries april 26 2007 court also accepted plea guilty subsidiary baker hughes services international inc “bhsii” pursuant plea agreement bhsii doj “plea agreement” based similar charges relating conduct pursuant plea agreement bhsii agreed threeyear term organizational probation plea agreement contains provisions requiring bhsii cooperate government comply federal criminal law adopt compliance code similar one dpa requires company also april 26 2007 sec filed complaint “sec complaint” proposed order “2007 order” us court sec complaint 2007 order filed part settled civil enforcement action sec resolve civil baker hughes incorporated notes consolidated financial statements continued portion government’s investigation us part agreement sec consented filing sec complaint without admitting denying allegations complaint also consented entry 2007 order sec complaint alleged civil violations fcpa’s antibribery provisions related operations kazakhstan fcpa’s booksandrecords internalcontrols provisions related operations nigeria angola kazakhstan indonesia russia uzbekistan cease desist order entered sec september 12 2001 “2001 order” entering 2001 order neither admitted denied factual allegations contained therein including alleged violations section 13b2a section 13b2b securities exchange act 1934 require issuers x make keep books records accounts reasonable detail accurately fairly reflect transactions dispositions assets issuer devise maintain system internal accounting controls sufficient provide reasonable assurances transactions executed accordance management’s general specific authorization ii transactions recorded necessary permit preparation financial statements conformity generally accepted accounting principles criteria applicable statements ii maintain accountability assets 2007 order became effective may 1 2007 date confirmed court 2007 order enjoins us violating fcpa’s antibribery booksandrecords internalcontrols provisions dpa required retain independent monitor assess fcpa compliance policies procedures terms settlements doj sec company bhsii paid second quarter 2007 44 million 11 million criminal penalties 10 million civil penalties 20 million disgorgement profits 3 million prejudgment interest settle investigations fourth quarter 2006 recorded financial charge potential settlement derivative lawsuits may 4 2007 may 15 2007 sheetmetal workers’ national pension fund chris larson respectively instituted shareholder derivative lawsuits company’s behalf certain current former members board directors certain current former officers company nominal defendant following company’s settlement doj sec april 2007 august 17 2007 alaska plumbing pipefitting industry pension trust also instituted shareholder derivative lawsuit company’s behalf certain current former members board directors certain current former officers company nominal defendant june 6 2008 midwestern teamsters pension trust fund oppenheim kapitalanlagegesellschaft mbh instituted shareholder derivative lawsuit company’s behalf certain current former members board directors certain current former officers company nominal defendant complaints four lawsuits allege among things individual defendants failed implement adequate controls compliance procedures prevent events addressed settlement doj sec relief sought lawsuits includes declaration defendants breached fiduciary duties award damages sustained company result alleged breach monetary injunctive relief well attorneys’ experts’ fees may 15 2008 consolidated complaint sheetmetal workers’ national pension fund alaska plumbing pipefitting industry pension trust dismissed lack subject matter jurisdiction houston division united states district court southern district texas lawsuit brought chris larson 215th district court harris county texas dismissed september 15 2008 lawsuit brought midwestern teamsters pension trust fund oppenheim kapitalanlagegesellschaft mbh houston division united states district court southern district texas dismissed may 26 2009 time period plaintiffs file notice appeal cases expired bj services merger related stockholder lawsuits delaware cases september 1 2009 three purported stockholder class action lawsuits styled laborers local 235 benefit fund v stewart et al booth family trust v huff et al dugdale v huff et al filed court chancery state delaware “delaware chancery court” behalf public stockholders bj services respect merger agreement dated august 30 2009 among baker hughes wholly owned subsidiary bsa acquisition llc delaware limited liability company “merger sub” bj services whereby subject satisfaction conditions closing bj services merge merger sub “merger” merger sub continuing surviving entity merger action names bj services current members bj services board directors “bj services board” company defendants collectively “defendants” baker hughes incorporated notes consolidated financial statements continued delaware actions followon actions discussed plaintiffs allege among things members bj services board breached fiduciary duties failing properly value bj services failing take steps maximize value bj services public stockholders avoiding competitive bidding process actions allege company aided abetted purported breaches bj services board plaintiffs lawsuit seek among things injunctive relief respect merger date six additional purported class action lawsuits filed delaware chancery court behalf public stockholders bj services company bj services bj services board including myers v bj services et al filed september 4 2009 garden city employees’ retirement system v bj services et al filed september 8 2009 saratoga advantage trustenergy basic materials portfolio v huff et al filed september 8 2009 stationary engineers local 39 pension trust fund v stewart et al filed september 11 2009 jacobs v stewart et al filed september 23 2009 lyle v bj services company et al filed october 1 2009 september 25 2009 delaware chancery court entered order consolidating lawsuits filed delaware chancery court october 6 2009 delaware chancery court entered order implementing bench ruling october 5 2009 resolving competing motions appointment lead counsel delaware chancery court designating law firm faruqi llp new york new york lead counsel rosenthal monhait goddess pa wilmington delaware liaison counsel october 14 2009 delaware chancery court entered supplemental consolidation order adding october 1 2009 lyle complaint consolidated action october 16 2009 lead counsel plaintiffs consolidated class action bj services company shareholders litigation ca 4851vcn served verified consolidated amended class action complaint “amended complaint” delaware court chancery amended complaint among things adds officer bj services jeffrey e smith executive vice presidentfinance cfo bj services defendant contains new factual allegations negotiations bj services company alleges form s4 registration statement preliminary joint proxy statementprospectus filed securities exchange commission october 14 2009 omits misrepresents material information texas cases september 4 2009 purported stockholder class action lawsuit styled garden city employees’ retirement system v bj services company et al filed 80th judicial district court harris county texas behalf public stockholders bj services respect merger agreement naming bj services current members bj services board company merger sub defendants date three additional actions filed company bj services board district courts harris county texas 1 johnson v stewart et al filed september 11 2009 2 saratoga advantage trust energy basic materials portfolio v huff et al filed september 11 2009 3 matt v huff et al filed september 21 2009 lead plaintiff’s counsel garden city saratoga advantage trust cases filed texas also filed cases name delaware listed texas actions make substantially allegations initially asserted delaware actions seek relief october 9 2009 harris county court consolidated texas actions restyled action garden city employees’ retirement system et al v bj services company et al cause 200957320 80th judicial district harris county texas amended consolidated complaint filed date annual report form 10k october 20 2009 court appeals first district texas houston granted defendants’ emergency motion stay texas cases pending decision defendants’ mandamus petition seeking stay texas litigation pending adjudication firstfiled cases delaware proposed settlement delaware texas cases company believes delaware texas actions without merit valid defenses claims nevertheless effort minimize cost expense burden distraction litigation relating lawsuits february 9 2010 parties delaware texas actions entered memorandum understanding regarding terms baker hughes incorporated notes consolidated financial statements continued settlement lawsuits memorandum understanding resolves allegations plaintiffs defendants connection merger provides release settlement purported class bj services stockholders claims bj services directors officer baker hughes affiliates agents connection merger exchange release settlement parties agreed discussions arms’ length basis baker hughes bj services provide additional supplemental disclosures joint proxy statementprospectus included registration statement form s4 filed baker hughes february 9 2010 sec proposed settlement includes agreement neither bj services baker hughes oppose plaintiff’s counsel’s application bj services pay attorneys’ fees costs amount determined court 700000 general terms memorandum understanding become legally binding unless definitive documentation entered court approval obtained settlement contingent upon consummation merger assurance whether foregoing conditions satisfied event conditions satisfied company intends continue vigorously defend actions environmental matters past present operations include activities subject extensive domestic including us federal state local international environmental regulations regard air land water quality environmental matters environmental procedures policies practices designed ensure compliance existing laws regulations minimize possibility significant environmental damage involved voluntary remediation projects present former manufacturing locations facilities majority relate properties obtained acquisitions sites longer actively used operations rare occasions remediation activities conducted specified government agencyissued consent decree agreed order remediation costs accrued based estimates probable exposure using currently available facts existing environmental permits technology presently enacted laws regulations remediation cost estimates include direct costs related environmental investigation external consulting activities governmental oversight fees treatment equipment costs associated longterm operation maintenance monitoring remediation project also identified potentially responsible party “prp” remedial activities related various superfund sites participate process set joint participation defense agreement negotiate government agencies identify prps determine prp’s allocation estimate remediation costs accrued believe prorata share total estimated cost remediation associated management superfund sites share based upon ratio estimated volume waste contributed site bears total estimated volume waste disposed site applicable united states federal law imposes joint several liability prp cleanup sites leaving us uncertainty may responsible remediation cost attributable prps unable pay share accrual made joint several liability concept superfund sites participation de minimis since believe probability pay material costs volumetric share remote believe prps greater involvement volumetric calculation basis substantial assets may reasonably expected pay share cost remediation superfund sites significant prp remediation costs estimated include recalcitrant parties cases insurance coverage contractual indemnities third parties cover portion ultimate liability total accrual environmental remediation 18 million 17 million includes accruals 6 million 6 million various superfund sites december 31 2009 2008 respectively determination required accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity utilized believe likelihood material losses excess amounts accrued remote connection settlement litigation reedhycalog june 2008 company paid reedhycalog 70 million royalties prior use certain patented technologies reedhycalog paid company 8 million royalties license certain company patented technologies net pretax charge 62 million settlement litigation reflected 2008 consolidated statement operations normal course business customers vendors others entered offbalance sheet arrangements letters credit bank issued guarantees totaled approximately 692 million december 31 2009 also commitments outstanding purchase obligations related capital expenditures inventory purchase orders contracts baker hughes incorporated notes consolidated financial statements continued approximately 221 million december 31 2009 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements note 16 accumulated comprehensive loss following reconciliation accumulated comprehensive loss note 17 quarterly data unaudited 1 represents revenues less cost sales cost services rentals research engineering item 9item 8 financial statements supplementary data management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rules 13a15f internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles control environment foundation system internal control embodied business code conduct sets tone company includes core values integrity teamwork performance learning included system internal control written policies organizational structure providing division responsibilities selection training qualified personnel program financial operations reviews professional staff internal auditors internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition assets could material effect financial statements supervision participation management including principal executive officer principal financial officer conducted evaluation effectiveness internal control financial reporting evaluation based framework internal control integrated framework issued committee sponsoring organizations treadway commission based evaluation framework internal control integrated framework principal executive officer principal financial officer concluded internal control financial reporting effective december 31 2010 conclusion principal executive officer principal financial officer based recognition inherent limitations systems internal control inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate april 28 2010 company acquired bj services company “bj services” purposes determining effectiveness internal control financial reporting management excluded bj services evaluation matters acquired business represented approximately 46 consolidated total assets december 31 2010 approximately 36 consolidated net income attributable baker hughes year ended december 31 2010 deloitte touche llp company’s independent registered public accounting firm issued attestation report effectiveness company’s internal control financial reporting chad c deaton peter ragauss alan j keifer chad c deaton peter ragauss alan j keifer chairman senior vice president vice president chief executive officer chief financial officer controller houston texas february 23 2011 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited internal control financial reporting baker hughes incorporated subsidiaries “company” december 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion company maintained material respects effective internal control financial reporting december 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission described management’s report internal control financial reporting company acquired bj services company “bj services” april 28 2010 purpose assessing internal control financial reporting management excluded bj services whose financial statements constitute 46 consolidated total assets 36 consolidated net income attributable baker hughes consolidated financial statements year ended december 31 2010 audit internal control financial reporting company also excluded evaluation internal control financial reporting bj services also audited accordance standards public company accounting oversight board united states consolidated financial statements financial statement schedule ii year ended december 31 2010 company report dated february 23 2011 expressed unqualified opinion consolidated financial statements financial statement schedule houston texas february 23 2011 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited accompanying consolidated balance sheets baker hughes incorporated subsidiaries “company” december 31 2010 2009 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2010 audits also included financial statement schedule ii valuation qualifying accounts listed index item 15 consolidated financial statements financial statement schedule responsibility company’s management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position baker hughes incorporated subsidiaries december 31 2010 2009 results operations cash flows three years period ended december 31 2010 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting december 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 23 2011 expressed unqualified opinion company’s internal control financial reporting houston texas february 23 2011 baker hughes incorporated consolidated statements operations millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated balance sheets millions except par value see notes consolidated financial statements baker hughes incorporated consolidated statements stockholders’ equity millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated statements cash flows millions except per share amounts see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements note 1 summary significant accounting policies nature operations baker hughes incorporated “baker hughes” engaged oilfield services industry leading supplier wellborerelated products technology services systems provide products services drilling pressure pumping formation evaluation completion production reservoir technology consulting worldwide oil natural gas industry also provide products services downstream refining process pipeline industries basis presentation consolidated financial statements include accounts baker hughes majority owned subsidiaries “company” “we” “our” “us” investments ability exercise significant influence operating financial policies hold controlling interest accounted using equity method accounting significant intercompany accounts transactions eliminated consolidation notes consolidated financial statements dollar share amounts tabulations millions dollars shares respectively unless otherwise indicated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period base estimates judgments historical experience various assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained operating environment changes believe estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts inventory valuation reserves recoverability longlived assets useful lives used depreciation amortization income taxes related valuation allowances insurance environmental legal pensions postretirement benefit obligations stockbased compensation fair value assets acquired liabilities assumed acquisitions revenue recognition products services generally sold based upon purchase orders contracts customer include fixed determinable prices include right return similar provisions significant postdelivery obligations products produced standard manufacturing operation even produced customer’s specifications sold ordinary course business regular marketing channels recognize revenue products upon delivery title passes collectability reasonably assured significant obligations future performance provisions estimated warranty returns similar types items made time related revenue recognized revenue services recognized services rendered collectability reasonably assured rates services typically priced per day per meter per man hour similar basis certain situations revenue generated transactions may include multiple products services one contract agreement may delivered customer extended period time revenue arrangements recognized accordance criteria item service delivered based relative fair value research engineering research engineering expenses include costs associated research development new products services costs associated sustaining engineering existing products services costs expensed incurred include research development costs new products services 283 million 231 million 263 million year ended december 31 2010 2009 2008 respectively cash equivalents highly liquid investments original maturity three months less time purchase reported cash equivalents baker hughes incorporated notes consolidated financial statements continued shortterm investments shortterm investments original maturity greater three months december 31 2010 held 250 million shortterm investments consisting us treasury bills mature may 2011 investments classified availableforsale recorded fair value approximates cost inventories stated lower cost market cost determined using firstin firstout “fifo” method average cost method approximates fifo includes cost materials labor manufacturing overhead property plant equipment accumulated depreciation property plant equipment “ppe” stated cost less accumulated depreciation generally provided using straightline method estimated useful lives individual assets significant improvements betterments capitalized extend useful life asset manufacture substantial portion rental tools equipment cost items includes direct indirect manufacturing costs capitalized carried inventory tool completed tool completed cost tool reflected capital expenditures tool classified rental tools equipment ppe maintenance repairs charged expense incurred capitalized costs computer software developed purchased internal use classified machinery equipment ppe goodwill intangible assets amortization goodwill intangible assets indefinite lives amortized intangible assets finite useful lives amortized basis reflects pattern economic benefits intangible assets realized generally straightline basis asset’s estimated useful life impairment goodwill longlived assets review ppe intangible assets certain assets impairment whenever events changes circumstances indicate carrying amount may recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense amount impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets perform annual impairment test goodwill reporting units october 1 frequently circumstances indicate impairment may exist reporting units based organizational reporting structure corporate assets liabilities allocated reporting units extent relate operations reporting units determining carrying amount determination impairment made comparing carrying amount fair value calculated using combination market comparable transaction discounted cash flow approach income taxes use liability method determining income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered future tax benefits recognized extent realization benefits likely deferred income taxes provided estimated income tax effect temporary differences financial tax bases assets liabilities deferred tax assets also provided certain tax credit carryforwards valuation allowance reduce deferred tax assets established likely portion deferred tax assets realized intend indefinitely reinvest certain earnings foreign subsidiaries operations outside us accordingly provided us income taxes earnings provide us additional nonus taxes earnings anticipated repatriated nonus subsidiaries operate 80 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different baker hughes incorporated notes consolidated financial statements continued jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenues rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability tax jurisdiction could impact upon amount income taxes provide given year tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law received tax assessments various tax authorities currently varying stages appeals andor litigation regarding matters provided amounts believe ultimately result proceedings believe substantial defenses questions raised pursue legal remedies unfavorable outcome result however resolution matters involves uncertainties assurances outcomes favorable addition aforementioned assessments received various tax authorities also provide taxes uncertain tax positions formal assessments received believe tax reserves adequate relation potential additional assessments classify interest penalties related uncertain tax positions income taxes financial statements environmental matters estimated remediation costs accrued using currently available facts existing environmental permits technology enacted laws regulations sites primarily responsible remediation cost estimates developed based internal evaluations discounted accruals recorded probable obligated pay environmental site evaluation remediation related activities costs reasonably estimated accruals recorded even significant uncertainties exist ultimate cost remediation additional accurate information becomes available accruals adjusted reflect current cost estimates ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party united states federal state “superfund” site accrue share estimated remediation costs site share based ratio estimated volume waste contributed site total volume waste disposed site foreign currency number significant foreign subsidiaries designated local currency functional currency gains losses resulting balance sheet translation foreign operations included separate component accumulated comprehensive loss within stockholders’ equity gains losses foreign currency transactions resulting settlement receivables payables nonfunctional currency included marketing general administrative “mga” expenses consolidated statements operations incurred foreign subsidiaries designated us dollar functional currency gains losses resulting balance sheet remeasurement foreign operations also included mga expense consolidated statements operations incurred derivative financial instruments monitor exposure various business risks including commodity prices foreign currency exchange rates interest rates occasionally use derivative financial instruments manage risks policies permit use derivative financial instruments speculative purposes use foreign currency forward contracts hedge certain firm commitments transactions denominated foreign currencies use interest rate swaps manage interest rate risk inception new derivative designate derivative hedge determine derivative undesignated hedging instrument facts dictate document relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions assess whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item inception hedge ongoing basis baker hughes incorporated notes consolidated financial statements continued new accounting standards accounting standards updates october 2009 financial accounting standards board “fasb” issued update accounting standards codification “asc” 605 revenue recognition multiple deliverable revenue arrangements accounting standards update “asu” addresses accounting multipledeliverable arrangements enable vendors account deliverables separately provision establishes selling price hierarchy determining selling price deliverable update requires expanded disclosures multiple deliverable revenue arrangements asu effective us revenue arrangements entered materially modified june 15 2010 adopted provisions update material impact consolidated financial statements december 2010 fasb issued update asc 805 business combinations asu addresses disclosure comparative financial statements expands supplementary pro forma information business combinations adopt asu prospectively business combinations occurring december 15 2010 note 2 acquisitions acquisition bj services april 28 2010 acquired 100 outstanding common stock bj services company including successor “bj services” cash stock transaction valued 6897 million bj services leading provider pressure pumping oilfield services acquired expand suite service product offerings revenues net income bj services acquisition date included consolidated statement operations 2010 3686 million 290 million respectively pursuant final agreement antitrust division us department justice “doj” connection governmental approval acquisition required divest two leased stimulation vessels hr hughes blue ray certain assets used perform sand control services us gulf mexico additionally pursuant hold separate stipulation order operation us business us business bj services required operated separately assets divested august 30 2010 completed sale assets approximately 55 million cash upon completion sale hold separate stipulation order terminated commenced integration activities global basis consideration terms acquisition agreement bj services stockholders received 269 per share cash 040035 baker hughes shares common stock bj services share common stock owned total paid 793 million cash issued 118 million shares valued 6048 million based upon closing price common stock acquisition date 5124 also assumed outstanding stock options held bj services employees directors bj services stock options outstanding closing converted baker hughes options conversion ratio estimated fair value associated baker hughes options issued exchange bj services options 58 million based blackscholes valuation model bj services stock options became fully vested exercisable accordance preexisting changeincontrol provisions accordingly 56 million estimated fair value recorded part consideration transferred remaining 2 million recorded expense date acquisition options vested service required total consideration transferred acquiring bj services summarized follows recording assets acquired liabilities assumed transaction accounted using acquisition method accounting requires among things assets acquired liabilities assumed recorded fair values acquisition date excess consideration transferred fair values recorded goodwill substantially completed determination fair values baker hughes incorporated notes consolidated financial statements continued assets acquired liabilities assumed estimated fair values set forth subject adjustment valuations completed finalize items obtain information necessary complete analysis expect completed first quarter 2011 us generally accepted accounting principles companies one year date acquisition finalize acquisition accounting following table summarizes estimated amounts recognized assets acquired liabilities assumed acquisition date property plant equipment “ppe” stepup adjustment 418 million recorded present ppe acquired fair value weighted average useful life used calculate depreciation stepup related ppe approximately six years intangible assets identified intangible assets including trade names technology inprocess research development “iprd” customer relationships consider bj services trade name indefinite life intangible asset amortized subject annual impairment test account iprd indefinitelived intangible asset completion abandonment associated project therefore assets would amortized would tested impairment research development activities completed assets would amortized related product’s useful life project abandoned assets would written alternative future use following table summarizes fair values recorded identifiable intangible assets estimated useful lives deferred taxes provided deferred taxes tax liabilities part acquisition accounting related fair market value adjustments acquired intangible assets ppe well uncertain tax positions taken prior year tax returns adjustment 1283 million recorded present deferred taxes tax liabilities fair value included adjustment deferred taxes 575 million outside basis difference associated shares certain bj services foreign baker hughes incorporated notes consolidated financial statements continued subsidiaries taxes previously provided expect reverse outside basis difference primarily repatriating earnings subsidiaries lieu permanently reinvesting reorganization subsidiaries still assessing certain factors impact outside basis difference related bj services foreign subsidiaries uncertain tax positions deferred tax liabilities tax liabilities revised assessment finalized expect completed first quarter 2011 debt acquisition subsidiary assumed obligations bj services respect 250 million principal amount 575 senior notes due june 2011 250 million principal amount 600 senior notes due june 2018 stepup adjustment 34 million recorded present notes fair value liabilities pensions postretirement benefits assumed several defined benefit pension plans covering certain employees primarily uk norway canada additionally assumed nonqualified supplemental executive retirement plan well postretirement benefit plans provide certain health care life insurance benefits retired employees primarily us meet specified age service requirements stepup adjustment 32 million recorded present liabilities fair value following summary funded position assumed bj services plans acquisition date well associated weightedaverage assumptions used determine benefit obligations weighted average assumptions used determine benefit obligations acquisition date net periodic benefit cost acquisition date december 31 2010 follows noncontrolling interests conjunction acquisition bj services obtained certain entities wholly owned bj services stepup adjustment 134 million recorded preliminary estimate present noncontrolling interests entities fair value estimate represents noncontrolling interest’s share fair value net assets acquired including share goodwill subject change obtain information necessary complete valuation first quarter 2011 goodwill 4336 million recognized acquisition calculated excess consideration transferred net assets recognized represents future economic benefits arising assets acquired could individually identified separately recognized specifically includes expected synergies benefits believe result combining operations bj services operations baker hughes intangible assets qualify separate recognition assembled workforce allocated goodwill reporting units based provisional amounts baker hughes incorporated notes consolidated financial statements continued recognized fair value assets acquired liabilities assumed see note 10 goodwill intangible assets goodwill amount 43 million deductible tax purposes result previous taxable acquisitions made bj services acquisitionrelated costs acquisitionrelated costs expensed incurred include expenses directly related acquiring bj services integration expenses incurred combining companies costs classified acquisitionrelated costs consolidated statements operations pro forma impact acquisition following unaudited supplemental pro forma results present consolidated information acquisition completed january 1 2010 january 1 2009 pro forma results include amortization associated estimate acquired intangible assets ii interest expense associated debt used fund portion acquisition reduced interest income associated cash used fund portion acquisition iii impact certain fair value adjustments additional depreciation expense adjustments property plant equipment reduction interest expense adjustments debt iv costs directly related acquiring bj services pro forma results include potential synergies cost savings expected benefits acquisition accordingly pro forma results considered indicative results would occurred acquisition related borrowings consummated january 1 2009 january 1 2010 indicative future results acquisitions 2010 completed several acquisitions aggregate purchase price approximately 208 million net cash acquired 4 million result acquisitions recorded 91 million goodwill subject final acquisition accounting adjustments pro forma results operations acquisitions presented effect acquisitions material consolidated financial statements note 3 gain sale product line february 2008 sold assets associated surface safety systems “sss” product line 31 million recorded pretax gain 28 million 18 million aftertax sss assets sold included hydraulic pneumatic actuators bonnet assemblies control systems note 4 segment information baker hughes operates five reportable segments detailed four geographic segments represent oilfield operations • north america canada us trinidad • latin america central south america including mexico excluding trinidad • europeafricarussia caspian “earc” europe africa excluding egypt russia republics former soviet union • middle eastasia pacific “meap” including egypt • industrial services downstream chemicals process pipeline services reservoir technology consulting businesses baker hughes incorporated notes consolidated financial statements continued 2010 changed internal reporting structure align new geographical product line organization separate financial information available results evaluated regularly chief operating decision makers “codm” accordingly prior period segment disclosures recast reflect new segments financial results bj services included five reportable segments date acquisition april 28 2010 december 31 2010 manner consistent internal reporting structure performance segments evaluated based segment profit loss defined income taxes interest expense interest income certain gains losses allocated segments summarized financial information shown following table years ended december 31 2010 2009 2008 revenues attributable one customer accounted 10 total revenues assets supply chain products technology enterprise organizations included industrial services segment certain assets carried enterprise level benefit operating segments allocated segments baker hughes incorporated notes consolidated financial statements continued following table presents details “corporate other” segment loss years ended december 31 following table presents details “corporate other” total assets december 31 following table presents geographic consolidated revenues years ended december 31 following table presents consolidated revenues group similar products services years ended december 31 following table presents net property plant equipment geographic location december 31 baker hughes incorporated notes consolidated financial statements continued note 5 stockbased compensation stockbased compensation cost measured date grant based calculated fair value award recognized expense employee’s service period generally vesting period equity grant additionally compensation cost recognized based awards ultimately expected vest therefore reduced cost estimated forfeitures based historical forfeiture rates forfeitures estimated time grant revised necessary subsequent periods reflect actual forfeitures following table summarizes stockbased compensation costs years ended december 31 2010 2009 2008 stockbased compensation costs capitalized amounts material stock options restricted stock awards units currently 25 million shares authorized issuance december 31 2010 approximately 89 million shares available future grants policy issue new shares exercises stock options restricted stock awards granted vesting restricted stock units issuances employee stock purchase plan stock options stock option plans provide issuance incentive nonqualified stock options directors officers key employees exercise price equal fair market value stock date grant although subject terms stock option agreement substantially stock options become exercisable three equal annual installments beginning year date grant generally expire ten years date grant stock option plans provide acceleration vesting upon employee’s retirement therefore service period reduced employees become retirement eligible vesting period accordingly recognition compensation expense employees accelerated compensation cost related stock options recognized straightline basis vesting service period net forfeitures fair value stock option granted estimated using blackscholes option pricing model following table presents weighted average assumptions used option pricing model options granted expected life options represents period time options expected outstanding expected life based historical exercise trends postvest termination data incorporated forwardlooking stock price model expected volatility based implied volatility forecast implied prices actively traded options purchase stock observed market riskfree interest rate based observed us treasury yield curve effect time options granted dividend yield based history dividend payouts baker hughes incorporated notes consolidated financial statements continued following table presents changes stock options outstanding related information thousands except per option prices total intrinsic value stock options defined amount market price common stock date exercise exceeds exercise price option exercised 2010 2009 2008 18 million 04 million 13 million respectively income tax benefit realized stock options exercised 09 million 01 million 7 million 2010 2009 2008 respectively total fair value options vested 2010 2009 2008 20 million 17 million 17 million respectively december 31 2010 15 million total unrecognized compensation cost related nonvested stock options expected recognized weighted average period two years following table summarizes information stock options outstanding december 31 2010 thousands except per option prices remaining life total intrinsic value stock options outstanding december 31 2010 124 million 82 million relates options vested exercisable intrinsic value stock options outstanding calculated amount quoted price 5717 common stock end 2010 exceeds exercise price options restricted stock awards units addition stock options officers directors key employees may granted restricted stock awards “rsa” award common stock exercise price restricted stock units “rsu” unit represents right receive end stipulated period one unrestricted share stock exercise price rsas rsus subject cliff graded vesting generally ranging three five year period determine fair value restricted stock awards restricted stock units based market price common stock date grant compensation cost rsas rsus primarily recognized straightline basis vesting service period net forfeitures baker hughes incorporated notes consolidated financial statements continued following table presents changes rsas rsus related information thousands except per shareunit prices weighted average grant date fair value per share rsas 2010 2009 2008 4768 3118 7282 respectively weighted average grant date fair value per unit rsus 2010 2009 2008 4730 3154 7596 respectively total fair value rsas rsus vested 2010 2009 2008 36 million 18 million 30 million respectively december 31 2010 34 million 33 million total unrecognized compensation cost related nonvested rsas rsus respectively expected recognized weighted average period two years employee stock purchase plan employee stock purchase plan “espp” provides eligible employees purchase shares aftertax basis june 30 year 15 discount fair market value common stock january 1 june 30 whichever lower ii december 31 year 15 discount fair market value common stock july 1 december 31 whichever lower employee may purchase 5000 either sixmonth measurement periods described 10000 annually currently 225 million shares authorized issuance espp december 31 2010 56 million shares reserved future issuance espp compensation expense years ended december 31 calculated using blackscholes option pricing model following assumptions calculated estimated volatility using historical daily prices based expected life stock purchase plan riskfree interest rate based observed us treasury yield curve effect time espp shares granted dividend yield based history dividend payouts baker hughes incorporated notes consolidated financial statements continued note 6 income taxes provision income taxes comprised following years ended december 31 geographic sources income taxes follows years ended december 31 provision income taxes differs amount computed applying us statutory income tax rate income taxes reasons set forth years ended december 31 baker hughes incorporated notes consolidated financial statements continued deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards tax effects temporary differences carryforwards follows december 31 record valuation allowance likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions provided valuation allowance operating loss foreign tax credit carryforwards certain nonus jurisdictions majority 90 million net increase valuation allowance 2010 represents net tax charges related foreign losses operating loss carryforwards without valuation allowance expire varying amounts next twenty years provided us additional foreign taxes anticipated repatriation certain earnings foreign subsidiaries consider undistributed earnings foreign subsidiaries amount taxes already provided indefinitely reinvested current intention repatriate earnings deferred income taxes provided temporary differences approximately 25 billion 23 billion 22 billion december 31 2010 2009 2008 respectively representing earnings nonus subsidiaries intended permanently reinvested additional foreign earnings could become subject additional tax remitted deemed remitted dividend computation potential deferred tax liability associated undistributed earnings basis differences practicable december 31 2010 approximately 64 million foreign tax credits may carried forward indefinitely applicable foreign law 263 million foreign tax credits available offset future payments us federal income taxes primarily expiring 2018 2020 addition december 31 2010 approximately 2 million state tax credits expiring varying amounts 2016 2021 december 31 2010 438 million tax liabilities gross unrecognized tax benefits includes liabilities interest penalties 96 million 18 million respectively prevail uncertain tax positions net effect would benefit effective tax rate approximately 383 million remaining approximately 55 million offset deferred tax assets represent tax benefits would received different taxing jurisdictions event prevail uncertain tax positions baker hughes incorporated notes consolidated financial statements continued following table presents changes unrecognized tax benefits associated interest penalties included consolidated balance sheet expected amount unrecognized tax benefits change next twelve months due expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate december 31 2010 approximately 239 million tax liabilities net 40 million tax assets related uncertain tax positions individually insignificant reasonably possible settled within next twelve months primarily result audit settlements statute expirations several taxing jurisdictions december 31 2010 approximately 159 million gross unrecognized tax benefits included noncurrent portion income tax liabilities settlement period cannot determined however expected within next twelve months operate 80 countries subject income taxes taxing jurisdictions operate following table summarizes earliest tax years remain subject examination major taxing jurisdictions operate jurisdictions project highest tax liability 2011 baker hughes incorporated notes consolidated financial statements continued note 7 earnings per share reconciliation number shares used basic diluted eps computations follows years ended december 31 note 8 inventories net reserves 322 million 297 million 2010 2009 respectively comprised following december 31 note 9 property plant equipment property plant equipment comprised following december 31 note 10 goodwill intangible assets connection change reportable segments discussed note 4 segment information reallocated goodwill existed march 31 2010 new reportable segments relative fair value basis goodwill 4336 million recognized bj services acquisition see note 2 acquisitions allocated reporting units based provisional amounts recognized fair value assets acquired liabilities assumed baker hughes incorporated notes consolidated financial statements continued changes carrying amount goodwill detailed reportable segment perform annual impairment test goodwill october 1 every year impairments goodwill 2010 2009 2008 related annual impairment test intangible assets comprised following december 31 intangible assets amortized either straightline basis estimated useful lives ranging 1 20 years basis reflects pattern economic benefits intangible assets expected realized range 15 30 years result acquisition bj services recognized intangible assets 1404 million see note 2 acquisitions amortization expense included net income years ended december 31 2010 2009 2008 76 million 31 million 20 million respectively estimated amortization expense subsequent five fiscal years expected follows 2011 100 million 2012 107 million 2013 108 million 2014 107 million 2015 99 million note 11 financial instruments fair value financial instruments financial instruments include cash shortterm investments accounts receivable accounts payable debt foreign currency forward contracts foreign currency option contracts interest rate swaps except described estimated fair value financial instruments december 31 2010 2009 approximates carrying value reflected consolidated balance sheets fair value debt foreign currency forward contracts interest rate swaps estimated based quoted year end market prices shortterm investments year ended december 31 2010 purchased 250 million shortterm investments consisting us treasury bills mature may 2011 baker hughes incorporated notes consolidated financial statements continued debt estimated fair value total debt december 31 2010 2009 4298 million 2126 million respectively differs carrying amounts 3885 million 1800 million respectively included consolidated balance sheets foreign currency forward contracts conduct business 80 countries around world exposed market risks resulting fluctuations foreign currency exchange rates number significant foreign subsidiaries designated local currency functional currency transact various foreign currencies established program primarily utilizes foreign currency forward contracts reduce risks associated effects certain foreign currency exposures program strategy gains losses foreign currency forward contracts mitigate foreign currency transaction gains losses extent practical foreign currency exposures typically arise changes value assets liabilities denominated currencies functional currency foreign currency forward contracts generally settle within 90 days use forward contracts trading speculative purposes designate forward contracts fair value hedging instruments accordingly record fair value contracts end reporting period consolidated balance sheet changes fair value recorded consolidated statement operations along change fair value hedged item december 31 2010 2009 outstanding foreign currency forward contracts notional amounts aggregating 156 million 153 million respectively hedge exposure currency fluctuations various foreign currencies contracts designated qualify fair value hedging instruments fair value determined using model level 2 inputs including quoted market prices contracts similar terms maturity dates interest rate swaps subject interest rate risk debt investment cash equivalents arising normal course business engage speculative trading strategies maintain interest rate management strategy primarily uses mix fixed variable rate debt intended mitigate exposure changes interest rates aggregate investment portfolio addition currently using interest rate swaps manage economic effect fixed rate obligations associated senior notes interest payable senior notes effectively becomes linked variable rates june 2009 entered two interest rate swap agreements “the swap agreements” notional amount 250 million order hedge changes fair market value 500 million 65 senior notes maturing november 15 2013 swap agreements receive interest fixed rate 65 pay interest floating rate onemonth libor plus spread 367 one swap threemonth libor plus spread 354 second swap november 15 2013 counterparties primarily lenders credit facilities swap agreements designated qualifies fair value hedging instrument swap threemonth libor deemed 100 percent effective resulting gain loss recorded consolidated statement operations effectiveness swap onemonth libor highly effective calculated period end ineffective portion recognized consolidated statement operations fair value swap agreements determined using model level 2 inputs including quoted market prices contracts similar terms maturity dates fair value derivative instruments fair value derivative instruments included consolidated balance sheet follows december 31 baker hughes incorporated notes consolidated financial statements continued effects derivative instruments consolidated statement operations follows year ended december 31 amounts exclude income tax effects concentration credit risk sell products services numerous companies oil natural gas industry although concentration could affect overall exposure credit risk believe risk minimized since majority business conducted major companies within industry perform periodic credit evaluations customers’ financial condition generally require collateral accounts receivable cases require payment advance security form letter credit bank guarantee maintain cash deposits financial institutions may exceed federally insured limits monitor credit ratings concentration risk financial institutions continuing basis safeguard cash deposits note 12 indebtedness total debt consisted following december 31 net unamortized discount debt issuance costs march 19 2010 entered credit agreement “2010 credit agreement” 2010 credit agreement threeyear committed 12 billion revolving credit facility expires march 19 2013 december 31 2010 17 billion committed revolving credit facilities commercial banks consisting 2010 credit agreement 12 billion 500 million facility expiring july 7 2012 facilities contain certain covenants among things require maintenance funded indebtedness total capitalization ratio defined formula per agreement restrict certain merger transactions sale substantially assets significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations facilities may accelerated events default include payment defaults lenders facilities covenant defaults customary defaults december 31 2010 compliance covenants committed credit facilities direct borrowings committed credit facilities 2010 also outstanding commercial paper program may issue time 10 billion commercial paper maturity 270 days extent commercial paper outstanding ability borrow facilities reduced december 31 2010 outstanding commercial paper concurrent acquisition bj services acquisition subsidiary assumed guaranteed bj services outstanding notes namely 250 million principal amount 575 senior notes due june 2011 250 million principal amount 600 senior notes due june 2018 baker hughes incorporated notes consolidated financial statements continued august 24 2010 sold 1500 million 5125 senior notes mature september 15 2040 “notes” indenture dated october 28 2008 net proceeds offering approximately 1479 million deducting underwriting discounts expenses offering used 511 million net proceeds repay outstanding commercial paper use 250 million net proceeds purchase us treasury bills used repay bj services 575 senior notes maturing june 2011 remaining net proceeds offering used general corporate purposes interest notes payable march 15 september 15 year first interest payment made march 15 2011 consist accrued interest august 24 2010 notes senior unsecured obligations rank equal right payment existing future senior indebtedness senior right payment future subordinated indebtedness effectively junior future secured indebtedness structurally subordinated existing future indebtedness subsidiaries may redeem option part notes time applicable makewhole redemption prices plus accrued unpaid interest date redemption maturities debt december 31 2010 follows 2011 331 million 2012 3 million 2013 522 million 2014 0 million 2015 0 million 3029 million thereafter note 13 employee benefit plans defined benefit plans funded unfunded noncontributory defined benefit pension plans “pension benefits” covering certain employees primarily us canada uk germany several countries middle east asia pacific region provisions us qualified pension plan hypothetical cash balance account established participant accounts receive pay credits quarterly basis quarterly pay credit based percentage according employee’s age last day quarter applied quarterly eligible compensation addition quarterly pay credits cash balance account receives interest credits based balance account last day quarter us qualified pension plan also includes frozen accrued benefits participants legacy defined benefit plans canada pension plan frozen december 31 2010 longer accrue defined benefit basis majority participants uk pension plans accrue benefits plans frozen however limited number members still accrue future benefits defined benefit basis germany pension plan unfunded plan benefits based creditable years service creditable pay accrual rates also provide certain postretirement health care benefits “other postretirement benefits” unfunded plan substantially us employees retire met certain age service requirements baker hughes incorporated notes consolidated financial statements continued funded status reconciliation beginning ending balances benefit obligations fair value plan assets funded status plans pension plans benefit obligation projected benefit obligation “pbo” postretirement benefit plan benefit obligation accumulated postretirement benefit obligation “apbo” amounts recognized consolidated balance sheet consist following december 31 funded status position represents difference benefit obligation plan assets pbo pension benefits represents actuarial present value benefits attributed employee services compensation includes assumption future compensation levels accumulated benefit obligation “abo” actuarial present value pension benefits attributed employee service date present compensation levels abo differs pbo abo include assumptions future compensation levels baker hughes incorporated notes consolidated financial statements continued information plans abos excess plan assets follows december 31 weighted average assumptions used determine benefit obligations plans follows years ended december 31 development discount rate us plans based bond matching model whereby hypothetical bond portfolio highquality fixedincome securities selected match cash flows underlying projected benefit obligation discount rate assumption nonus plans reflects market rate highquality fixedincome securities accumulated comprehensive loss amounts recognized accumulated comprehensive loss consist following december 31 estimated net loss prior service cost defined benefit pension plans amortized accumulated comprehensive loss net periodic benefit cost next fiscal year 14 million 1 million respectively estimated prior service credit postretirement benefits amortized accumulated comprehensive loss net periodic benefit cost next fiscal year 2 million net periodic benefit costs components net periodic cost benefit follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued weighted average assumptions used determine net periodic benefit costs plans follows years ended december 31 selecting expected rate return plan assets consider average rate earnings expected funds invested provide benefits plans includes considering trusts’ asset allocation expected returns likely earned life plans health care cost trend rates assumed health care cost trend rates significant effect amounts reported postretirement benefits december 31 2010 health care cost trend rate 80 employees age 65 participants age 65 declining gradually successive year reaches 45 employees age 65 age 65 2021 one percentage point change assumed health care cost trend rates would following effects 2010 plan assets us pension plan investment committees meet regularly review portfolio returns determine assetmix targets based assetliability studies thirdparty investment consultants assist us developing asset allocation strategies determine expected rates return expected risk various investment portfolios investment committees considered strategies formal establishment current assetmix targets based projected risk return levels major asset classes investment policy us pension plan “us plan” developed examining historical relationships risk return among asset classes relationship expected behavior us plan’s assets liabilities investment policy us plan designed provide greatest probability meeting exceeding us plan’s objectives lowest possible risk establishing risk tolerance investment committee us plan “us committee” considers ability withstand shortterm intermediateterm volatility market conditions us committee also reviews longterm characteristics various asset classes focusing balancing risk expected return accordingly us committee selected following four asset classes allowable investments assets us plan us equities real estate us fixedincome securities nonus equities baker hughes incorporated notes consolidated financial statements continued table presents fair values assets us plan asset category levels fair value december 31 pooled fund strategy investing fixed income securities current allocation includes 35 corporate bonds 24 government bonds 16 government agencies 10 assetbacked securities 8 government mortgagebacked securities 7 cash b multimanager strategy investing common stocks nonus listed companies using value growth approaches c multimanager strategy investing common stocks smaller us listed companies using value growth approaches passively managed commingled fund investing common stocks sp 500 index e multimanager growth strategy investing common stocks us listed large capitalization companies f multimanager value strategy investing common stocks us listed large capitalization companies g commingled fund investing diversified portfolio us based properties current allocation includes 30 apartments 27 office 24 retail 11 industrial 8 hotel plan assets nonus pension plans investment policies pension plans plan assets primarily canada uk “nonus plans” cover asset allocations governing boards believe appropriate nonus plans long term taking account nature liabilities expect incur suitability asset allocations investment policies reviewed periodically ensure alignment plan liabilities table presents fair values assets nonus plans asset category levels fair value december 31 invests mixes global common stocks bonds achieve broad diversification b invests passively sterlingdenominated investment grade corporate bonds baker hughes incorporated notes consolidated financial statements continued c invests passively sterlingdenominated government issued bonds invests broad equity funds based securities offered various regions countries equity funds allocated region follows 47 global 25 uk 8 north america 8 asia pacific 7 europe excluding uk 3 us 2 canada small cap e invests diversified range property throughout uk principally retail office industrialwarehouse sectors following table presents changes fair value assets using level 3 unobservable inputs expected cash flows pension plans make annual contributions plans amounts equal greater amounts necessary meet minimum governmental funding requirements 2011 expect contribute 40 million 50 million us pension plans 25 million 35 million nonus pension plans 2011 also expect make benefit payments related postretirement welfare plans 16 million 18 million following table presents expected benefit payments next ten years us nonus pension benefit payments made respective pension trust funds postretirement benefits net expected medicare subsidies approximately 2 million per year payments expected made us defined contribution plans periods reported generally us employees eligible participate sponsored thrift plans 401k plans internal revenue code 1986 amended “the code” thrift plans allow eligible employees elect contribute portions salaries investment trust employee contributions matched company cash rate 100 per 100 employee contribution first 5 6 employee’s salary contributions vest immediately addition make cash contributions eligible employees 2 5 salary depending employee’s age contributions fully vested employee three years employment thrift plans provide several investment options employee sole investment discretion thrift plans offer baker hughes common stock investment option contributions thrift plans several nonus defined contribution plans amounted 169 million 129 million 137 million 2010 2009 2008 respectively certain nonus employees eligible participate thrift plan provide nonqualified defined contribution plan provides basically benefits thrift plan addition provide nonqualified supplemental retirement plan “srp” certain officers employees whose benefits thrift plan andor us defined benefit pension plan limited federal tax law srp also allows eligible employees defer portion eligible compensation provides employer matching base contributions pursuant limitations nonqualified plans baker hughes incorporated notes consolidated financial statements continued invested trusts assets corresponding liabilities included consolidated balance sheet contributions nonqualified plans 11 million 11 million 9 million 2010 2009 2008 respectively 2011 estimate contribute 185 million 200 million defined contribution plans increase prior years due acquisition bj services postemployment benefits provide certain postemployment disability income medical benefits substantially qualifying former inactive us employees income benefits longterm disability provided fullyinsured plan continuation medical benefits disability “continuation benefits” provided qualified selfinsured plan accrued postemployment liability continuation benefits december 31 2010 2009 15 million 13 million respectively included liabilities consolidated balance sheet note 14 commitments contingencies leases december 31 2010 longterm noncancelable operating leases covering certain facilities equipment minimum annual rental commitments net amounts due subleases five years period ending december 31 2015 186 million 135 million 93 million 67 million 49 million respectively 151 million aggregate thereafter rent expense generally includes vessels transportation equipment warehouse facilities 355 million 241 million 227 million years ended december 31 2010 2009 2008 respectively entered significant capital leases three years ended december 31 2010 litigation involved litigation proceedings arisen ordinary business activities insure risks extent deemed prudent management extent insurance available assurance given nature amount insurance sufficient fully indemnify us liabilities arising pending future legal proceedings many insurance policies contain deductibles selfinsured retentions amounts deem prudent responsible payment determining amount selfinsurance policy selfinsure losses predictable measurable recurring nature claims automobile liability general liability workers compensation accruals losses calculated estimating losses claims using historical claim data specific loss development factors information necessary bj services acquisition related stockholder lawsuits stockholder lawsuits filed connection bj services acquisition settled july 15 2010 delaware chancery court certified class bj services stockholders approved settlement terms awarded 500000 attorneys’ fees 36000 costs class counsel entered final judgment dismissing class claims prejudice bj services company shareholders litigation ca 4851vcn july 23 2010 80th judicial district court harris county texas entered final judgment dismissing plaintiff’s claims prejudice consolidated actions styled garden city employees’ retirement system et al v bj services company et al cause 200957320 80th judicial district court harris county texas customer claim november 19 2009 bj services received correspondence customer operating north sea claiming bj services’ decision move stimulation vessel north sea market constituted breach contract customer alleges forced purchase well stimulation services providers higher cost original agreement customer bj services customer alleges incurred actual estimated future damages 38 million customer initiated request arbitration responding accordingly believe claim without merit intend vigorously defend matter based information available us time expect outcome matter material adverse effect consolidated financial statements however assurance ultimate outcome matter baker hughes incorporated notes consolidated financial statements continued environmental matters past present operations include activities subject extensive domestic including us federal state local international environmental regulations regard air land water quality environmental matters environmental procedures policies practices designed ensure compliance existing laws regulations minimize possibility significant environmental damage involved voluntary remediation projects present former manufacturing locations facilities majority relate properties obtained acquisitions sites longer actively used operations rare occasions remediation activities conducted specified government agencyissued consent decree agreed order remediation costs accrued based estimates probable exposure using currently available facts existing environmental permits technology presently enacted laws regulations remediation cost estimates include direct costs related environmental investigation external consulting activities governmental oversight fees treatment equipment costs associated longterm operation maintenance monitoring remediation project also identified potentially responsible party “prp” remedial activities related various superfund sites participate process set joint participation defense agreement negotiate government agencies identify prps determine prp’s allocation estimate remediation costs accrued believe prorata share total estimated cost remediation associated management superfund sites share based upon ratio estimated volume waste contributed site bears total estimated volume waste disposed site applicable united states federal law imposes joint several liability prp cleanup sites leaving us uncertainty may responsible remediation cost attributable prps unable pay share accrual made joint several liability concept superfund sites participation de minimis since believe probability pay material costs volumetric share remote believe prps greater involvement volumetric calculation basis substantial assets may reasonably expected pay share cost remediation superfund sites significant prp remediation costs estimated include recalcitrant parties cases insurance coverage contractual indemnities third parties cover portion ultimate liability total accrual environmental remediation 32 million 18 million includes accruals 7 million 6 million various superfund sites december 31 2010 2009 respectively approximately 11 million total environmental accrual december 31 2010 relates properties liabilities acquired connection bj services acquisition determination required accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity necessary believe likelihood material losses excess amounts accrued remote connection settlement litigation reedhycalog june 2008 company paid reedhycalog 70 million royalties prior use certain patented technologies reedhycalog paid company 8 million royalties license certain company patented technologies net pretax charge 62 million settlement litigation reflected 2008 consolidated statement operations normal course business customers vendors others entered offbalance sheet arrangements letters credit bank issued guarantees totaled approximately 116 billion december 31 2010 also commitments outstanding purchase obligations related capital expenditures inventory purchase orders contracts approximately 264 million december 31 2010 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements baker hughes incorporated notes consolidated financial statements continued note 15 accumulated comprehensive loss following table presents changes accumulated comprehensive loss net tax note 16 quarterly data unaudited 1 represents revenues less cost sales cost services research engineering item 9item 8 financial statements supplementary data management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rules 13a15f internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles supervision participation management including principal executive officer principal financial officer assessed effectiveness internal control financial reporting based framework internal control integrated framework issued committee sponsoring organizations treadway commission based assessment principal executive officer principal financial officer concluded internal control financial reporting effective december 31 2011 conclusion based recognition inherent limitations systems internal control inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate deloitte touche llp company’s independent registered public accounting firm issued attestation report effectiveness company’s internal control financial reporting martin craighead martin craighead president chief executive officer peter ragauss peter ragauss senior vice president chief financial officer alan j keifer alan j keifer vice president controller houston texas february 22 2012 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited accompanying consolidated balance sheets baker hughes incorporated subsidiaries “company” december 31 2011 2010 related consolidated statements operations changes equity cash flows three years period ended december 31 2011 audits also included financial statement schedule ii valuation qualifying accounts listed index item 15 also audited company’s internal control financial reporting december 31 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements financial statement schedule opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position baker hughes incorporated subsidiaries december 31 2011 2010 results operations cash flows three years period ended december 31 2011 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also opinion company maintained material respects effective internal control financial reporting december 31 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission deloitte touche llp houston texas february 22 2012 baker hughes incorporated consolidated statements operations millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated balance sheets millions except par value see notes consolidated financial statements baker hughes incorporated consolidated statements changes equity millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated statements cash flows millions see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements note 1 summary significant accounting policies nature operations baker hughes incorporated “baker hughes” “company” “we” “our” “us” leading supplier oilfield services products technology systems used drilling formation evaluation completion production pressure pumping reservoir development worldwide oil natural gas industry also provide products services downstream refining process pipeline industries basis presentation consolidated financial statements include accounts baker hughes subsidiaries exercise control investments subsidiaries whollyowned exercise control equity held minority owners portion net income loss reflected noncontrolling interests investments ability exercise significant influence operating financial policies hold controlling interest accounted using equity method accounting significant intercompany accounts transactions eliminated consolidation notes consolidated financial statements dollar share amounts tabulations millions dollars shares respectively unless otherwise indicated use estimates preparation financial statements conformity accounting principles generally accepted united states america “us” requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period base estimates judgments historical experience various assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained operating environment changes believe estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts inventory valuation reserves recoverability longlived assets useful lives used depreciation amortization income taxes related valuation allowances accruals contingencies actuarial assumptions determine costs liabilities related employee benefit plans stockbased compensation fair value assets acquired liabilities assumed acquisitions revenue recognition products services generally sold based upon purchase orders contracts customer include fixed determinable prices include right return similar provisions significant postdelivery obligations products produced standard manufacturing operation even produced customer’s specifications sold ordinary course business recognize revenue products upon delivery title passes collectability reasonably assured significant obligations future performance provisions estimated warranty returns similar types items made time related revenue recognized revenue services recognized services rendered collectability reasonably assured rates services typically priced per day per meter per man hour similar basis certain situations revenue generated transactions may include multiple products services one contract agreement may delivered customer extended period time revenue arrangements recognized accordance criteria item service delivered based relative fair value research engineering research engineering expenses include costs associated research development new products services costs associated sustaining engineering existing products services costs expensed incurred include research development costs new products services 324 million 283 million 231 million years ended december 31 2011 2010 2009 respectively baker hughes incorporated notes consolidated financial statements cash equivalents shortterm investments maintain cash deposits financial institutions may exceed federally insured limits monitor credit ratings concentration risk financial institutions continuing basis safeguard cash deposits cash equivalents include investments original maturity three months less shortterm investments original maturity greater three months less one year allowance doubtful accounts establish allowance doubtful accounts based various factors including historical experience current aging status customer accounts payment history financial condition customers provisions doubtful accounts recorded becomes evident customer make required payments either contractual due dates future concentration credit risk grant credit customers operate primarily oil natural gas industry although concentration could affect overall exposure credit risk believe risk minimized majority business conducted major companies many geographically diverse thus spreading credit risk manage risk perform periodic credit evaluations customers’ financial condition including monitoring customers’ payment history current credit worthiness generally require collateral support trade receivables may require payment advance security form letter credit bank guarantee 2011 2010 2009 individual customer accounted 10 consolidated revenue inventories stated lower cost market cost determined using firstin firstout “fifo” method average cost method approximates fifo includes cost materials labor manufacturing overhead necessary record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments property plant equipment accumulated depreciation property plant equipment “ppe” stated cost less accumulated depreciation generally provided using straightline method estimated useful lives individual assets significant improvements betterments capitalized extend useful life asset manufacture substantial portion tools equipment cost items includes direct indirect manufacturing costs capitalized carried inventory completed complete cost reflected capital expenditures classified machinery equipment ppe maintenance repairs charged expense incurred upon sale disposition applicable amounts asset cost accumulated depreciation removed balance sheet net amount less proceeds disposal charged credited income capitalized costs computer software developed purchased internal use classified machinery equipment goodwill intangible assets amortization goodwill excess consideration transferred fair value tangible identifiable intangible assets liabilities recognized goodwill intangible assets indefinite lives amortized intangible assets finite useful lives amortized basis reflects pattern economic benefits intangible assets realized generally straightline basis asset’s estimated useful life impairment ppe goodwill intangibles longlived assets review ppe intangible assets certain longlived assets impairment whenever events changes circumstances indicate carrying amount may recoverable least annually certain intangible assets determination recoverability made based upon estimated undiscounted future net cash flows amount impairment loss baker hughes incorporated notes consolidated financial statements determined comparing fair value determined discounted cash flow analysis carrying value related assets perform annual impairment test goodwill reporting units october 1 frequently circumstances indicate impairment may exist reporting units based organizational reporting structure corporate assets liabilities allocated reporting units extent relate operations reporting units determining carrying amount determination impairment made comparing carrying amount fair value generally calculated using combination market comparable transaction discounted cash flow approaches income taxes use liability method determining income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates deferred tax liabilities assets computed estimated income tax effect temporary differences financial tax bases assets liabilities determined using tax rate expected effect taxes actually paid recovered future tax benefits recognized extent realization benefits likely valuation allowance reduce deferred tax assets established likely portion deferred tax assets realized intend indefinitely reinvest certain earnings foreign subsidiaries operations outside us accordingly provided us income taxes earnings provide us additional nonus taxes earnings anticipated repatriated nonus subsidiaries tax filings various periods subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts provided amounts believe ultimately result proceedings addition assessments received various tax authorities also provide taxes uncertain tax positions formal assessments received classify interest penalties related uncertain tax positions income taxes financial statements environmental matters estimated remediation costs accrued using currently available facts existing environmental permits technology enacted laws regulations sites primarily responsible remediation cost estimates developed based internal evaluations discounted accruals recorded probable obligated pay environmental site evaluation remediation related activities costs reasonably estimated additional information becomes available accruals adjusted reflect current cost estimates ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party us federal state “superfund” site accrue share estimated remediation costs site share based ratio estimated volume waste contributed site total volume waste disposed site foreign currency number significant foreign subsidiaries designated local currency functional currency gains losses resulting balance sheet translation foreign operations included separate component accumulated comprehensive loss within stockholders’ equity gains losses foreign currency transactions resulting settlement receivables payables nonfunctional currency included marketing general administrative “mga” expenses consolidated statements operations incurred foreign subsidiaries designated us dollar functional currency monetary assets liabilities remeasured periodend exchange rates nonmonetary items remeasured historical exchange rates gains losses resulting balance sheet remeasurement also included mga expenses consolidated statements operations incurred derivative financial instruments monitor exposure various business risks including commodity prices foreign currency exchange rates interest rates regularly use derivative financial instruments manage risks policies permit use derivative financial instruments speculative purposes use foreign currency forward contracts hedge certain firm commitments transactions baker hughes incorporated notes consolidated financial statements denominated foreign currencies use interest rate swap contracts manage interest rate risk inception new derivative designate derivative hedge determine derivative undesignated hedging instrument facts dictate document relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions assess whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item inception hedge ongoing basis new accounting standards updates may 2011 financial accounting standards board “fasb” issued update accounting standards codification “asc” 820 fair value measurement accounting standards update “asu” conforms certain sections asc 820 international financial reporting standards order provide single converged guidance measurement fair value update also expands existing disclosure requirements fair value measurements asu effective interim annual periods beginning december 15 2011 adopt asu prospectively first quarter 2012 currently expect asu material impact consolidated financial statements june 2011 fasb issued update asc 220 comprehensive income asu requires entities present components comprehensive income either continuous statement comprehensive income two separate consecutive statements would include reclassification adjustments component items reclassified comprehensive income net income face financial statements december 2011 fasb issued update asu indefinitely deferring implementation reclassification adjustments component requirement asu issued june 2011 asus effective fiscal years interim periods within years beginning december 15 2011 adopt new presentation requirements asus retrospectively first quarter 2012 september 2011 fasb issued update asc 350 intangibles goodwill asu amends guidance asc 35020 testing goodwill impairment revised guidance allows entities testing goodwill impairment option performing qualitative assessment calculating fair value reporting unit asu change goodwill calculated assigned reporting units revise requirement test annually impairment asu limited goodwill amend annual requirement testing indefinitelived intangible assets impairment asu effective annual interim goodwill impairment tests performed fiscal years beginning december 15 2011 adopt asu 2012 goodwill impairment testing expect asu material impact consolidated financial statements note 2 acquisitions acquisition bj services april 28 2010 acquired 100 outstanding common stock bj services company “bj services” cash stock transaction valued 6897 million acquisition provided us proven leader areas pressure pumping stimulation fracturing expanded suite service product offerings total consideration consisted 793 million cash 118 million shares valued 6048 million baker hughes options fair value 56 million exchange bj services options held bj services employees directors assumed revenue net income bj services acquisition date included consolidated statement operations 2010 3686 million 290 million respectively pursuant agreement antitrust division us department justice connection governmental approval acquisition august 2010 sold two leased stimulation vessels certain assets used perform sand control services us gulf mexico approximately 55 million cash recording assets acquired liabilities assumed transaction accounted using acquisition method accounting accordingly assets acquired liabilities assumed recorded fair values acquisition date excess consideration transferred fair values totaling 4406 million recorded goodwill baker hughes incorporated notes consolidated financial statements following table summarizes amounts recognized assets acquired liabilities assumed significant stepup adjustments recorded present asset liability fair value 406 million property plant equipment depreciable life approximately six years 1262 million deferred taxes tax liabilities 202 million noncontrolling interests table summarizes fair values recorded identifiable intangible assets estimated useful lives acquisition date pro forma impact acquisition following unaudited supplemental pro forma results present consolidated information acquisition completed january 1 2010 january 1 2009 pro forma results include amortization associated estimate acquired intangible assets ii interest expense associated debt used fund portion acquisition reduced interest income associated cash used fund portion acquisition iii impact certain fair value adjustments additional depreciation expense adjustments property plant equipment reduction interest expense adjustments debt iv costs directly related acquiring bj services pro forma results include potential synergies cost savings expected benefits acquisition accordingly pro forma results considered indicative results would occurred acquisition related borrowings consummated january 1 2009 january 1 2010 indicative future results baker hughes incorporated notes consolidated financial statements acquisitions material acquisitions 2011 2010 completed several acquisitions aggregate purchase price approximately 208 million net cash acquired 4 million result acquisitions recorded 91 million goodwill pro forma results operations acquisitions presented effect acquisitions material consolidated financial statements note 3 stockbased compensation stockbased compensation cost measured date grant based calculated fair value award recognized expense employee’s service period generally vesting period equity grant additionally compensation cost recognized based awards ultimately expected vest therefore reduced cost estimated forfeitures based historical forfeiture rates forfeitures estimated time grant revised necessary subsequent periods reflect actual forfeitures following table summarizes stockbased compensation costs years ended december 31 2011 2010 2009 stockbased compensation costs capitalized amounts material stock options restricted stock awards units currently 325 million shares authorized issuance december 31 2011 approximately 12 million shares available future grants policy issue new shares exercises stock options restricted stock awards granted vesting restricted stock units issuances employee stock purchase plan stock options stock option plans provide issuance stock options directors officers key employees exercise price equal fair market value stock date grant although subject terms stock option agreement substantially stock options become exercisable three equal annual installments beginning year date grant generally expires ten years date grant stock option plans provide acceleration vesting upon employee’s retirement therefore service period reduced employees become retirement eligible vesting period accordingly recognition compensation expense employees accelerated compensation cost related stock options recognized straightline basis vesting service period net forfeitures fair value stock option granted estimated using blackscholes option pricing model following table presents weighted average assumptions used option pricing model options granted expected life options represents period time options expected outstanding expected life based historical exercise trends postvest termination data incorporated forwardlooking stock price model expected volatility based implied volatility forecast implied prices actively traded options purchase stock observed market riskfree interest rate based observed us treasury yield curve effect time options granted dividend yield based history dividend payouts baker hughes incorporated notes consolidated financial statements following table presents changes stock options outstanding related information thousands except per option prices total intrinsic value stock options defined amount market price common stock date exercise exceeds exercise price option exercised 2011 2010 2009 74 million 18 million 04 million respectively income tax benefit realized stock options exercised 20 million 09 million 01 million 2011 2010 2009 respectively total fair value options vested 2011 2010 2009 22 million 20 million 17 million respectively december 31 2011 14 million total unrecognized compensation cost related unvested stock options expected recognized weighted average period two years following table summarizes information stock options outstanding december 31 2011 thousands except per option prices remaining life total intrinsic value stock options outstanding december 31 2011 45 million 36 million relates options vested exercisable intrinsic value stock options outstanding calculated amount quoted price 4864 common stock end 2011 exceeds exercise price options restricted stock awards units addition stock options officers directors key employees may granted restricted stock awards “rsa” award common stock exercise price restricted stock units “rsu” unit represents right receive end stipulated period one unrestricted share stock exercise price rsas rsus subject cliff graded vesting generally ranging three five year period determine fair value restricted stock awards restricted stock units based market price common stock date grant compensation cost rsas rsus primarily recognized straightline basis vesting period net forfeitures baker hughes incorporated notes consolidated financial statements following table presents changes rsas rsus related information thousands except per shareunit prices weighted average grant date fair value per share rsas granted 2011 2010 2009 6285 4768 3118 respectively weighted average grant date fair value per unit rsus granted 2011 2010 2009 6333 4730 3154 respectively total fair value rsas rsus vested 2011 2010 2009 52 million 36 million 18 million respectively december 31 2011 40 million 29 million total unrecognized compensation cost related unvested rsas rsus respectively expected recognized weighted average period two years employee stock purchase plan employee stock purchase plan “espp” provides eligible employees purchase shares aftertax basis amount 1 10 annual pay june 30 year 15 discount fair market value common stock january 1 june 30 whichever lower ii december 31 year 15 discount fair market value common stock july 1 december 31 whichever lower employee may purchase 5000 either sixmonth measurement periods described 10000 annually currently 225 million shares authorized issuance december 31 2011 41 million shares reserved future issuance compensation cost years ended december 31 calculated using blackscholes option pricing model following assumptions calculated estimated volatility using historical daily prices based expected life stock purchase plan riskfree interest rate based observed us treasury yield curve effect time espp shares granted dividend yield based history dividend payouts baker hughes incorporated notes consolidated financial statements note 4 income taxes provision income taxes comprised following years ended december 31 geographic sources income taxes follows years ended december 31 provision income taxes differs amount computed applying us statutory income tax rate income taxes reasons set forth years ended december 31 third quarter 2011 reorganized certain foreign subsidiaries result reorganization previously accrued us deferred income taxes related subsidiaries reduced 214 million account certain foreign tax credits existed prior acquisition bj services available offset future us taxes deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards baker hughes incorporated notes consolidated financial statements tax effects temporary differences carryforwards follows december 31 record valuation allowance likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions provided valuation allowance operating loss foreign tax credit carryforwards certain nonus jurisdictions increase valuation allowances 86 million resulted primarily net tax charges related foreign losses operating loss carryforwards without valuation allowance expire varying amounts next twenty years provided us additional foreign taxes anticipated repatriation certain earnings foreign subsidiaries reduction deferred tax liability undistributed earnings foreign subsidiaries 217 million resulted primarily reorganization certain foreign subsidiaries resulted certain foreign tax credits existed prior acquisition bj services available offset future us taxes consider undistributed earnings foreign subsidiaries amount taxes already provided indefinitely reinvested current intention repatriate earnings deferred income taxes provided temporary differences approximately 10 billion 25 billion 23 billion december 31 2011 2010 2009 respectively representing earnings nonus subsidiaries intended permanently reinvested additional foreign earnings could become subject additional tax remitted deemed remitted dividend computation potential deferred tax liability associated undistributed earnings basis differences practicable reduction deferred tax liability goodwill intangibles 155 million includes reduction 95 million related impairment bj services trade name december 31 2011 approximately 92 million foreign tax credits may carried forward indefinitely applicable foreign law 278 million foreign tax credits available offset future payments us federal income taxes primarily expiring 2018 2021 addition december 31 2011 approximately 2 million state tax credits expiring varying amounts 2016 2021 december 31 2011 379 million tax liabilities gross unrecognized tax benefits includes liabilities interest penalties 64 million 32 million respectively prevail uncertain tax positions net effect would benefit effective tax rate approximately 349 million remaining approximately 30 million offset deferred tax assets represent tax benefits would received different taxing jurisdictions event prevail uncertain tax positions baker hughes incorporated notes consolidated financial statements following table presents changes unrecognized tax benefits associated interest penalties included consolidated balance sheet expected amount unrecognized tax benefits change next twelve months due expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate december 31 2011 approximately 159 million tax liabilities net 17 million tax assets related uncertain tax positions individually insignificant reasonably possible settled within next twelve months december 31 2011 approximately 203 million total gross unrecognized tax benefits included noncurrent portion income tax liabilities settlement period cannot determined however expected within next twelve months operate 80 countries subject income taxes taxing jurisdictions operate following table summarizes earliest tax years remain subject examination major taxing jurisdictions operate jurisdictions project highest tax liability 2012 baker hughes incorporated notes consolidated financial statements note 5 earnings per share reconciliation number shares used basic diluted earnings per share “eps” computations follows years ended december 31 note 6 inventories net reserves 304 million 322 million 2011 2010 respectively comprised following december 31 note 7 property plant equipment property plant equipment comprised following december 31 depreciation expense relating property plant equipment 1221 million 991 million 680 million 2011 2010 2009 respectively note 8 goodwill intangible assets changes carrying amount goodwill detailed reportable segment baker hughes incorporated notes consolidated financial statements perform annual impairment test goodwill october 1 every year impairments goodwill three years ended december 31 2011 related annual impairment test intangible assets comprised following december 31 fourth quarter 2011 recorded charge 315 million beforetax 220 million net tax related impairment certain trade names majority related impairment bj services trade name bj services trade name classified indefinite lived intangible asset therefore amortized impairment bj services trade name due decision minimize use bj services trade name part overall branding strategy bj services trade name revalued resulting revised fair value 61 million remaining useful life three years begin amortizing 2012 accelerated basis estimated fair value intangible asset based income approach using relieffromroyalty method dependent number estimates assumptions future growth trends royalty rates discount rates variables based fair value estimates assumptions believe reasonable unpredictable inherently uncertain following table details impairment charge reportable segment intangible assets generally amortized straightline basis estimated useful lives ranging 2 20 years amortization expense included net income years ended december 31 2011 2010 2009 96 million 76 million 31 million respectively estimated amortization expense subsequent five fiscal years expected follows 2012 135 million 2013 113 million 2014 98 million 2015 90 million 2016 89 million note 9 financial instruments fair value financial instruments financial instruments include cash equivalents shortterm investments accounts receivable accounts payable debt foreign currency forward contracts foreign currency option contracts interest rate swaps except described estimated fair value financial instruments december 31 2011 2010 approximates carrying value reflected consolidated balance sheet shortterm investments 2010 purchased shortterm investments consisting 250 million us treasury bills matured may 2011 used repay 250 million principal amount 575 notes matured june 2011 fair value december 31 2010 determined using level 1 inputs including quoted period end market prices investments classified availableforsale recorded fair value approximated cost baker hughes incorporated notes consolidated financial statements debt estimated fair value total debt december 31 2011 2010 4910 million 4298 million respectively differs carrying amounts 4069 million 3885 million respectively included consolidated balance sheet fair value determined using level 2 inputs including quoted period end market prices foreign currency forward contracts conduct business 80 countries around world exposed market risks resulting fluctuations foreign currency exchange rates number significant foreign subsidiaries designated local currency functional currency transact various foreign currencies established program primarily utilizes foreign currency forward contracts reduce risks associated effects certain foreign currency exposures program strategy gains losses foreign currency forward contracts mitigate foreign currency transaction gains losses extent practical foreign currency exposures typically arise changes value assets liabilities denominated currencies functional currency foreign currency forward contracts generally settle less 180 days use forward contracts trading speculative purposes designate forward contracts fair value hedging instruments hold contracts undesignated hedging instruments accordingly record fair value contracts end reporting period consolidated balance sheet changes fair value recorded consolidated statement operations along change fair value hedged item outstanding foreign currency forward contracts notional amounts aggregating 117 million 156 million hedge exposure currency fluctuations various foreign currencies december 31 2011 2010 respectively contracts either undesignated hedging instruments designated qualify fair value hedging instruments fair value determined using level 2 inputs including quoted market prices contracts similar terms maturity dates interest rate swaps subject interest rate risk debt investment cash equivalents arising normal course business engage speculative trading strategies maintain interest rate management strategy primarily uses mix fixed variable rate debt intended mitigate exposure changes interest rates aggregate investment portfolio may use interest rate swaps manage economic effect fixed rate obligations associated certain debt september 2011 redeemed full 500 million 65 senior notes maturing november 2013 conjunction debt redemption terminated two related interest rate swap agreements resulting net gain swap agreements 25 million two swap agreements entered june 2009 notional amount 250 million order hedge changes fair market value debt swap agreements designated qualified fair value hedging instrument fair value derivative instruments fair value derivative instruments included consolidated balance sheet follows december 31 effects derivative instruments consolidated statement operations follows years ended december 31 amounts exclude income tax effects baker hughes incorporated notes consolidated financial statements note 10 indebtedness total debt consisted following december 31 net unamortized discount debt issuance cost august 2011 completed private placement 750 million 32 unsecured senior notes existing indenture dated october 28 2008 registration rights mature august 2021 net proceeds offering approximately 742 million deducting underwriting discount expense offering interest payable february 15 august 15 year 32 notes senior unsecured obligations rank equal right payment existing future indebtedness senior right payment future subordinated indebtedness effectively junior future secured indebtedness structurally subordinated existing future indebtedness subsidiaries may redeem option part 32 notes time applicable makewhole redemption prices plus accrued unpaid interest date redemption september 2011 used 563 million net proceeds offering redeem full 65 notes remainder used general corporate purposes could include funding ongoing operations business acquisitions repurchases common stock redemption 65 notes resulted payment redemption premium 63 million pretax loss early extinguishment debt 40 million includes redemption premium write remaining original debt issuance cost debt discount partially offset 25 million gain termination two related interest rate swap agreements june 2011 repaid 250 million principal amount 575 notes using proceeds us treasury bills matured may 2011 september 2011 entered fiveyear committed 25 billion revolving credit facility maturing september 2016 new revolving credit facility replaced existing committed revolving credit facilities 500 million maturing july 2012 12 billion maturing march 2013 terminated september 2011 direct borrowings committed revolving credit facilities 2011 also commercial paper program may issue 25 billion commercial paper maturities 270 days maximum combined borrowing point time commercial paper program credit facility 25 billion december 31 2011 130 million commercial paper outstanding maturities debt december 31 2011 follows 2012 224 million 2013 8 million 2014 10 million 2015 13 million 2016 15 million 3799 million thereafter note 11 segment information conduct business primarily operating segments aligned geographic regions aggregated following five reportable segments • north america us land gulf mexico canada • latin america • europeafricarussia caspian • middle eastasia pacific • industrial services baker hughes incorporated notes consolidated financial statements aggregate operating segments within reportable segment similar economic characteristics longterm financial performance segments affected similar economic conditions performance operating segments evaluated based profit tax defined income following income taxes net interest expense corporate expenses certain gains losses allocated segments 2011 operating segment profit includes charge 315 million related impairment trade names discussion trade name impairments breakdown reportable segment see note 8 goodwill intangible assets summarized financial information shown following table following table presents details “corporate other” segment loss years ended december 31 following tables present capital expenditures depreciation amortization segment years ended december 31 total assets segment december 31 assets supply chain products technology enterprise organizations included industrial services segment certain assets carried enterprise level benefit operating segments allocated segments baker hughes incorporated notes consolidated financial statements following table presents details “corporate other” total assets december 31 following tables present geographic consolidated revenue consolidated revenue group similar products services years ended december 31 following table presents net property plant equipment geographic location december 31 note 12 employee benefit plans defined benefit plans funded unfunded noncontributory defined benefit pension plans “pension benefits” covering certain employees primarily us uk germany canada provisions us qualified pension plan hypothetical cash balance account established participant accounts receive pay credits quarterly basis based percentage according employee’s age last day quarter applied quarterly eligible compensation addition cash balance account receives interest credits based balance account last day quarter us qualified pension plan also includes frozen accrued benefits participants legacy defined benefit plans majority participants uk pension plans accrue benefits plans frozen however limited number members still accrue future benefits defined benefit basis germany pension plan unfunded plan benefits based creditable years service creditable pay accrual rates canada pension plan frozen december 31 2010 longer accrue defined benefit basis also provide certain postretirement health care benefits “other postretirement benefits” unfunded plan substantially us employees retire met certain age service requirements baker hughes incorporated notes consolidated financial statements funded status reconciliation beginning ending balances benefit obligations fair value plan assets funded status plans pension plans benefit obligation projected benefit obligation “pbo” postretirement benefit plan benefit obligation accumulated postretirement benefit obligation amounts recognized consolidated balance sheet consist following december 31 funded status position represents difference benefit obligation plan assets pbo pension benefits represents actuarial present value benefits attributed employee services compensation includes assumption future compensation levels accumulated benefit obligation “abo” actuarial present value pension benefits attributed employee service date present compensation levels abo differs pbo abo include assumptions future compensation levels baker hughes incorporated notes consolidated financial statements information plans abos excess plan assets follows december 31 weighted average assumptions used determine benefit obligations plans follows years ended december 31 development discount rate us plans substantially nonus plans based bond matching model whereby hypothetical bond portfolio highquality fixedincome securities selected match cash flows underlying projected benefit obligation accumulated comprehensive loss amount recorded beforetax accumulated comprehensive loss related employee benefit plans consists following december 31 estimated net loss prior service cost defined benefit pension plans amortized accumulated comprehensive loss included net periodic benefit cost 2012 22 million less one million respectively estimated net loss prior service credit postretirement benefits amortized accumulated comprehensive loss included net periodic benefit cost 2012 1 million 2 million respectively net periodic benefit cost components net periodic cost benefit follows years ended december 31 baker hughes incorporated notes consolidated financial statements weighted average assumptions used determine net periodic cost benefit plans follows years ended december 31 selecting expected rate return plan assets consider average rate earnings expected funds invested provide benefits plans includes considering trusts’ asset allocation expected returns likely earned life plans health care cost trend rates assumed health care cost trend rates significant effect amounts reported postretirement benefits december 31 2011 health care cost trend rate 85 employees age 65 70 participants age 65 declining gradually successive year reaches 45 employees age 65 age 65 2022 one percentage point change assumed health care cost trend rates would following effects 2011 plan assets investment committees meet regularly review portfolio returns determine assetmix targets based assetliability studies thirdparty investment consultants assist us developing asset allocation strategies determine expected rates return expected risk various investment portfolios investment committees considered strategies formal establishment current assetmix targets based projected risk return levels major asset classes investments held form units funds hold underlying securities redeemable measurement date investments equities fixedincome funds generally measured fair value based daily closing prices provided active exchanges basis observable marketbased inputs investments hedge funds generally measured fair value basis net asset values provided investment sponsor third party administrator fair values investments real estate funds based appraised values developed using comparable market transactions discounted cash flows us qualified pension plan investment policy us qualified pension plan “us plan” developed examining historical relationships risk return among asset classes relationship expected behavior us plan’s assets liabilities investment policy us plan designed provide greatest probability meeting exceeding us plan’s objectives lowest possible risk establishing risk tolerance investment committee us plan “us committee” considers ability withstand shortterm intermediateterm volatility market conditions us committee also reviews longterm characteristics various asset classes focusing balancing risk expected return accordingly us committee selected following five asset classes allowable investments assets us plan us equities us fixedincome securities nonus equities real estate hedge funds baker hughes incorporated notes consolidated financial statements table presents fair values assets us plan asset category levels fair value december 31 1 multimanager strategy investing fixed income securities current allocation includes 22 corporate bonds 17 mutual funds corporate bonds 16 government mortgagebacked securities 14 mutual funds nonus government bonds 10 government bonds 6 mutual funds government bonds 5 assetbacked securities 4 municipal bonds 6 cash securities 2 multimanager strategy investing common stocks nonus listed companies using value growth approaches 3 multimanager strategy investing common stocks us listed companies using value growth approaches 4 strategies taking long short positions equities fixed income securities currencies derivative contracts 5 strategy investing global private real estate secondary market using valuebased investment approach 6 multimanager strategy investing common stocks smaller us listed companies using value growth approaches nonus pension plans investment policies pension plans plan assets primarily canada uk “nonus plans” cover asset allocations governing boards believe appropriate nonus plans long term taking account nature liabilities expect incur suitability asset allocations investment policies reviewed periodically ensure alignment plan liabilities table presents fair values assets nonus plans asset category levels fair value december 31 1 invests mixes global common stocks bonds achieve broad diversification 2 invests passively sterlingdenominated investment grade corporate bonds 3 invests passively sterlingdenominated government issued bonds 4 invests broad equity funds based securities offered various regions countries equity funds allocated region follows 48 global 28 uk 8 north america 8 asia pacific 8 europe 5 invests diversified range property throughout uk principally retail office industrialwarehouse sectors baker hughes incorporated notes consolidated financial statements following table presents changes fair value assets using level 3 unobservable inputs expected cash flows pension plans make annual contributions plans amounts equal greater amounts necessary meet minimum governmental funding requirements 2012 expect contribute 60 million 65 million us pension plans 20 million 30 million nonus pension plans 2012 also expect make benefit payments related postretirement benefits 16 million 18 million following table presents expected benefit payments next ten years us nonus pension benefit payments made respective pension trust funds postretirement benefits net expected medicare subsidies approximately 2 million per year payments expected made us defined contribution plans periods reported generally us employees eligible participate sponsored 401k plans internal revenue code 1986 amended “thrift plans” thrift plans allow eligible employees elect contribute portions salaries investment trust employee contributions matched company cash rate 100 per 100 employee contribution first 5 6 employee’s salary contributions vest immediately addition make cash contributions eligible employees 2 5 salary depending employee’s age contributions fully vested employee three years employment thrift plans provide several investment options employee sole investment discretion thrift plans offer baker hughes common stock investment option contributions thrift plans several nonus defined contribution plans amounted 189 million 169 million 129 million 2011 2010 2009 respectively certain nonus employees eligible participate thrift plans provide nonqualified defined contribution plan provides basically benefits provided thrift plans addition provide nonqualified supplemental retirement plan “srp” certain officers employees whose benefits thrift plans andor us qualified pension plan limited federal tax law srp also allows eligible employees defer portion eligible compensation provides employer matching base contributions pursuant limitations nonqualified plans baker hughes incorporated notes consolidated financial statements invested trusts assets corresponding liabilities included consolidated balance sheet contributions nonqualified plans 11 million three years period ended december 31 2011 2012 estimate contribute 263 million 286 million defined contribution plans postemployment benefits provide certain postemployment disability income medical benefits substantially qualifying former inactive us employees income benefits longterm disability provided fullyinsured plan continuation medical benefits disability “continuation benefits” provided qualified selfinsured plan accrued postemployment liability continuation benefits december 31 2011 2010 23 million 15 million respectively included liabilities consolidated balance sheet note 13 commitments contingencies leases december 31 2011 longterm noncancelable operating leases covering certain facilities equipment minimum annual rental commitments net amounts due subleases five years period ending december 31 2016 148 million 112 million 91 million 70 million 33 million respectively 124 million aggregate thereafter rent expense 401 million 355 million 241 million years ended december 31 2011 2010 2009 respectively entered significant capital leases three years ended december 31 2011 litigation involved litigation proceedings arisen ordinary business activities insure risks extent deemed prudent management extent insurance available assurance given nature amount insurance sufficient fully indemnify us liabilities arising pending future legal proceedings many insurance policies contain deductibles selfinsured retentions amounts deem prudent responsible payment determining amount selfinsurance policy selfinsure losses predictable measurable recurring nature claims automobile liability general liability workers compensation accruals losses calculated estimating losses claims using historical claim data specific loss development factors information necessary among several unrelated companies received subpoena office new york attorney general dated june 17 2011 subpoena received company seeks information documents relating among things natural gas development hydraulic fracturing reviewing subpoena discussing contents new york attorney general’s office anticipation responding appropriate july 2011 settled previously reported customer claim bj services relating move stimulation vessel north sea market settlement material effect consolidated financial statements environmental matters past present operations include activities subject extensive domestic including us federal state local international environmental regulations regard air land water quality environmental matters environmental procedures policies practices designed ensure compliance existing laws regulations minimize possibility significant environmental damage involved voluntary remediation projects present former manufacturing locations facilities majority relate properties obtained acquisitions sites longer actively used operations rare occasions remediation activities conducted specified government agencyissued consent decree agreed order remediation costs accrued based estimates probable exposure using currently available facts existing environmental permits technology presently enacted laws regulations remediation cost estimates include direct costs related environmental investigation external consulting activities governmental oversight fees treatment equipment costs associated longterm operation maintenance monitoring remediation project also identified potentially responsible party “prp” remedial activities related various superfund sites baker hughes incorporated notes consolidated financial statements participate process set joint participation defense agreement negotiate government agencies identify prps determine prp’s allocation estimate remediation costs accrued believe prorata share total estimated cost remediation associated management superfund sites share based upon ratio estimated volume waste contributed site bears total estimated volume waste disposed site applicable us federal law imposes joint several liability prp cleanup sites leaving us uncertainty may responsible remediation cost attributable prps unable pay share accrual made joint several liability concept superfund sites participation de minimis since believe probability pay material costs volumetric share remote believe prps greater involvement volumetric calculation basis substantial assets may reasonably expected pay share cost remediation superfund sites significant prp remediation costs estimated include recalcitrant parties cases insurance coverage contractual indemnities third parties cover portion ultimate liability total accrual environmental remediation 29 million 32 million includes accruals 5 million 7 million various superfund sites december 31 2011 2010 respectively determination required accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity necessary normal course business customers vendors others entered offbalance sheet arrangements surety bonds performance letters credit bank issued guarantees totaled approximately 13 billion december 31 2011 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements also commitments outstanding purchase obligations related capital expenditures inventory contracts approximately 21 billion december 31 2011 note 14 accumulated comprehensive loss following table presents changes accumulated comprehensive loss net tax baker hughes incorporated notes consolidated financial statements note 15 quarterly data unaudited 1 represents revenue less cost sales cost services research engineering 2 net income attributable baker hughes 2011 includes tax benefit 214 million associated reorganization certain foreign subsidiaries discussion see note 4 income taxes notes consolidated financial statements 3 net income attributable baker hughes 2011 includes charge 315 million 220 million net tax majority relates impairment associated decision minimize use bj services trade name discussion see note 8 goodwill intangible assets notes consolidated financial statements item 9item 8 financial statements supplementary data management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rules 13a15f internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles supervision participation management including principal executive officer principal financial officer assessed effectiveness internal control financial reporting based framework internal control integrated framework issued committee sponsoring organizations treadway commission based assessment principal executive officer principal financial officer concluded internal control financial reporting effective december 31 2012 conclusion based recognition inherent limitations systems internal control inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate deloitte touche llp company’s independent registered public accounting firm issued attestation report effectiveness company’s internal control financial reporting martin craighead martin craighead president chief executive officer peter ragauss peter ragauss senior vice president chief financial officer alan j keifer alan j keifer vice president controller houston texas february 13 2013 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited accompanying consolidated balance sheets baker hughes incorporated subsidiaries “company” december 31 2012 2011 related consolidated statements income comprehensive income changes equity cash flows three years period ended december 31 2012 audits also included financial statement schedule ii valuation qualifying accounts listed index item 15 also audited company’s internal control financial reporting december 31 2012 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements financial statement schedule opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position baker hughes incorporated subsidiaries december 31 2012 2011 results operations cash flows three years period ended december 31 2012 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also opinion company maintained material respects effective internal control financial reporting december 31 2012 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission deloitte touche llp houston texas february 13 2013 baker hughes incorporated consolidated statements income see notes consolidated financial statements baker hughes incorporated consolidated statements comprehensive income see notes consolidated financial statements baker hughes incorporated consolidated balance sheets see notes consolidated financial statements baker hughes incorporated consolidated statements changes equity see notes consolidated financial statements baker hughes incorporated consolidated statements cash flows see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements note 1 summary significant accounting policies nature operations baker hughes incorporated “baker hughes” “company” “we” “our” “us” leading supplier oilfield services products technology systems used drilling formation evaluation completion production pressure pumping reservoir development worldwide oil natural gas industry also provide products services businesses including downstream refining process pipeline industries basis presentation consolidated financial statements include accounts baker hughes subsidiaries exercise control investments subsidiaries whollyowned exercise control equity held minority owners portion net income loss reflected noncontrolling interests investments ability exercise significant influence operating financial policies hold controlling interest accounted using equity method accounting significant intercompany accounts transactions eliminated consolidation notes consolidated financial statements dollar share amounts tabulations millions dollars shares respectively unless otherwise indicated use estimates preparation financial statements conformity accounting principles generally accepted united states america “us” requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period base estimates judgments historical experience various assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained operating environment changes believe estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts inventory valuation reserves recoverability longlived assets useful lives used depreciation amortization income taxes related valuation allowances accruals contingencies actuarial assumptions determine costs liabilities related employee benefit plans stockbased compensation fair value assets acquired liabilities assumed acquisitions revenue recognition products services sold based upon purchase orders contracts agreements customer include fixed determinable prices include right return similar provisions significant postdelivery obligations products produced standard manufacturing operation even produced customer’s specifications recognize revenue products upon delivery title passes collectability reasonably assured significant obligations future performance provisions estimated warranty returns similar types items made time related revenue recognized revenue services recognized services rendered collectability reasonably assured rates services typically priced per day per meter per man hour similar basis certain situations revenue generated transactions may include multiple products services one contract agreement may delivered customer extended period time revenue arrangements recognized accordance criteria item service delivered based relative fair value research engineering research engineering expenses expensed incurred include costs associated research development new products services costs associated sustaining engineering existing baker hughes incorporated notes consolidated financial statements products services costs research development 337 million 324 million 283 million years ended december 31 2012 2011 2010 respectively cash equivalents shortterm investments cash equivalents include investments original maturity three months less shortterm investments original maturity greater three months less one year maintain cash deposits financial institutions may exceed federally insured limits monitor credit ratings concentration risk financial institutions continuing basis safeguard cash deposits allowance doubtful accounts establish allowance doubtful accounts based various factors including historical experience current aging status customer accounts payment history financial condition customers provisions doubtful accounts recorded becomes evident customer make required payments either contractual due dates future concentration credit risk grant credit customers operate primarily oil natural gas industry although concentration could affect overall exposure credit risk believe risk minimized majority business conducted major companies many geographically diverse thus spreading credit risk manage risk perform periodic credit evaluations customers’ financial condition including monitoring customers’ payment history current credit worthiness generally require collateral support trade receivables may require payment advance security form letter credit bank guarantee 2012 2011 2010 individual customer accounted 10 consolidated revenue inventories stated lower cost market cost determined using firstin firstout “fifo” method average cost method approximates fifo includes cost materials labor manufacturing overhead necessary record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments property plant equipment accumulated depreciation property plant equipment “ppe” stated cost less accumulated depreciation generally provided using straightline method estimated useful lives individual assets significant improvements betterments capitalized extend useful life asset manufacture substantial portion tools equipment cost items includes direct indirect manufacturing costs capitalized carried inventory completed complete cost reflected capital expenditures classified machinery equipment ppe maintenance repairs charged expense incurred upon sale disposition applicable amounts asset cost accumulated depreciation removed balance sheet net amount less proceeds disposal charged credited income capitalized costs computer software developed purchased internal use classified machinery equipment goodwill intangible assets amortization goodwill excess consideration transferred fair value tangible identifiable intangible assets liabilities recognized goodwill intangible assets indefinite lives amortized intangible assets finite useful lives amortized basis reflects pattern economic baker hughes incorporated notes consolidated financial statements benefits intangible assets realized generally straightline basis asset’s estimated useful life impairment ppe goodwill intangibles longlived assets review ppe intangible assets certain longlived assets impairment whenever events changes circumstances indicate carrying amount may recoverable least annually certain intangible assets determination recoverability made based upon estimated undiscounted future net cash flows amount impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets perform annual impairment test goodwill reporting units october 1 frequently circumstances indicate impairment may exist reporting units based organizational reporting structure corporate assets liabilities allocated reporting units extent relate operations reporting units determining carrying amount determination impairment made comparing carrying amount reporting unit fair value generally calculated using combination market comparable transaction discounted cash flow approaches income taxes use liability method determining provision liabilities income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates deferred tax liabilities assets computed estimated income tax effect temporary differences financial tax bases assets liabilities determined using tax rate expected effect taxes actually paid recovered valuation allowance reduce deferred tax assets established likely portion deferred tax assets realized intend indefinitely reinvest certain earnings foreign subsidiaries operations outside us accordingly provided us income taxes earnings provide us additional nonus taxes earnings anticipated repatriated nonus subsidiaries tax filings various periods subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts provided amounts believe ultimately result proceedings addition assessments received various tax authorities also provide taxes uncertain tax positions formal assessments received classify interest penalties related uncertain tax positions income taxes financial statements environmental matters estimated remediation costs accrued using currently available facts existing environmental permits technology enacted laws regulations sites primarily responsible remediation cost estimates developed based internal evaluations discounted accruals recorded probable obligated pay environmental site evaluation remediation related activities costs reasonably estimated additional information becomes available accruals adjusted reflect current cost estimates ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party us federal state “superfund” site accrue share estimated remediation costs site share based ratio estimated volume waste contributed site total volume waste disposed site foreign currency number significant foreign subsidiaries designated local currency functional currency gains losses resulting balance sheet translation foreign operations included baker hughes incorporated notes consolidated financial statements separate component accumulated comprehensive loss within stockholders’ equity gains losses foreign currency transactions resulting settlement receivables payables nonfunctional currency included marketing general administrative “mga” expenses consolidated statements income incurred foreign subsidiaries designated us dollar functional currency monetary assets liabilities remeasured periodend exchange rates nonmonetary items remeasured historical exchange rates gains losses resulting balance sheet remeasurement also included mga expenses consolidated statements income incurred financial instruments financial instruments include cash equivalents accounts receivable accounts payable debt derivative financial instruments except debt estimated fair value financial instruments december 31 2012 2011 approximates carrying value reflected consolidated balance sheets monitor exposure various business risks including commodity prices foreign currency exchange rates interest rates regularly use derivative financial instruments manage risks policies permit use derivative financial instruments speculative purposes inception new derivative designate derivative hedge determine derivative undesignated hedging instrument facts dictate document relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions assess whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item inception hedge ongoing basis program primarily utilizes foreign currency forward contracts reduce risks associated effects certain foreign currency exposures program strategy gains losses foreign currency forward contracts mitigate foreign currency transaction gains losses extent practical foreign currency exposures typically arise changes value assets liabilities denominated currencies functional currency foreign currency forward contracts generally settle less 180 days record derivatives end reporting period consolidated balance sheet fair value forward contracts designated fair value hedging instruments held undesignated hedging instruments record changes fair value consolidated statements income along change fair value hedged item changes fair value forward contracts designated cash flow hedging instruments recognized comprehensive income hedged item recognized earnings ineffective portion derivatives change fair value recognized earnings recognized gains losses derivatives entered manage foreign currency exchange risk included mga expenses consolidated statements income outstanding foreign currency forward contracts notional amounts aggregating 207 million 117 million hedge exposure currency fluctuations various foreign currencies december 31 2012 2011 respectively contracts either undesignated hedging instruments designated qualify fair value hedging instruments fair value determined using quoted market prices contracts similar terms maturity dates material either december 31 2012 2011 effects derivative instruments consolidated statements income material three years ended december 31 2012 new accounting standards updates june 2011 financial accounting standards board “fasb” issued update accounting standards codification “asc” 220 comprehensive income accounting standards update “asu” requires entities present components comprehensive income either continuous statement comprehensive income two separate consecutive statements would include reclassification adjustments component items reclassified comprehensive income net income face financial statements december 2011 fasb issued update asu indefinitely deferring implementation reclassification adjustments component requirement asu issued june 2011 adopted new presentation requirement first quarter 2012 using twostatement approach baker hughes incorporated notes consolidated financial statements september 2011 fasb issued update asc 350 intangibles goodwill asu amends guidance asc 35020 testing goodwill impairment revised guidance allows entities testing goodwill impairment option performing qualitative assessment calculating fair value reporting unit asu change goodwill calculated assigned reporting units revise requirement test annually impairment asu limited goodwill amend annual requirement testing indefinitelived intangible assets impairment asu effective goodwill impairment tests performed fiscal years beginning december 15 2011 adopted asu effective january 1 2012 impact consolidated financial statements july 2012 fasb issued update asc 350 intangibles goodwill asu amends guidance asc 35030 testing indefinitelived intangible assets impairment revised guidance permits entity first assess qualitative factors determine whether likely indefinitelived intangible asset impaired basis determining whether necessary perform quantitative impairment test asu effective impairment tests performed fiscal years beginning september 15 2012 adopt asu 2013 impairment testing expect material impact consolidated financial statements note 2 stockbased compensation stockbased compensation cost measured date grant based calculated fair value award generally recognized straightline basis vesting period equity grant net forfeitures compensation cost determined based awards ultimately expected vest therefore reduced cost estimated forfeitures based historical forfeiture rates forfeitures estimated time grant revised necessary subsequent periods reflect actual forfeitures stockbased compensation costs capitalized amounts material stockbased compensation costs follows years ended december 31 stock options restricted stock awards units currently 325 million authorized issuance december 31 2012 approximately 7 million shares available future grants policy issue new shares exercises stock options restricted stock awards granted vesting restricted stock units issuances employee stock purchase plan stock options stock option plans provide issuance stock options directors officers key employees exercise price equal fair market value stock date grant although subject terms stock option agreement substantially stock options become exercisable three equal annual installments beginning year date grant generally expire ten years date grant stock option plans provide acceleration vesting upon employee’s retirement therefore service period reduced employees become retirement eligible vesting period accordingly recognition compensation expense employees accelerated fair value stock option granted estimated using blackscholes option pricing model following table presents weighted average assumptions used option pricing model options granted expected life options represents period time options expected outstanding expected life based historical exercise trends postvest termination data incorporated forwardlooking stock price model expected volatility based implied volatility forecast implied prices actively traded options purchase stock observed market riskfree baker hughes incorporated notes consolidated financial statements interest rate based observed us treasury yield curve effect time options granted dividend yield based history dividend payouts following table presents changes stock options outstanding related information thousands except per option prices weighted average remaining contractual term options outstanding options exercisable december 31 2012 58 years 53 years respectively total intrinsic value stock options defined amount market price common stock date exercise exceeds exercise price option exercised 2012 2011 2010 3 million 74 million 18 million respectively income tax benefit realized stock options exercised 08 million 20 million 09 million 2012 2011 2010 respectively total fair value options vested 2012 2011 2010 28 million 22 million 20 million respectively december 31 2012 18 million total unrecognized compensation cost related unvested stock options expected recognized weighted average period two years total intrinsic value stock options outstanding december 31 2012 21 million 19 million relates options vested exercisable intrinsic value stock options outstanding calculated amount quoted price 4085 common stock end 2012 exceeds exercise price options restricted stock awards units addition stock options officers directors key employees may granted restricted stock awards “rsa” award common stock exercise price restricted stock units “rsu” unit represents right receive end stipulated period one unrestricted share stock exercise price rsas rsus subject cliff graded vesting generally ranging three five year period determine fair value restricted stock awards restricted stock units based market price common stock date grant baker hughes incorporated notes consolidated financial statements following table presents combined changes rsas rsus related information thousands except per shareunit prices weighted average grant date fair value per share rsas rsus granted 2012 2011 2010 4710 6301 4746 respectively total fair value rsas rsus vested 2012 2011 2010 55 million 52 million 36 million respectively december 31 2012 72 million total unrecognized compensation cost related unvested rsas rsus expected recognized weighted average period two years employee stock purchase plan employee stock purchase plan “espp” provides eligible employees purchase shares aftertax basis amount 1 10 annual pay june 30 year 15 discount fair market value common stock january 1 june 30 whichever lower ii december 31 year 15 discount fair market value common stock july 1 december 31 whichever lower employee may purchase 5000 either sixmonth measurement periods described 10000 annually currently 225 million shares authorized issuance december 31 2012 19 million shares reserved future issuance compensation cost years ended december 31 calculated using blackscholes option pricing model following assumptions calculated estimated volatility using historical daily prices based expected life stock purchase plan riskfree interest rate based observed us treasury yield curve effect time espp shares granted dividend yield based history dividend payouts baker hughes incorporated notes consolidated financial statements note 3 income taxes provision income taxes comprised following years ended december 31 geographic sources income taxes follows years ended december 31 provision income taxes differs amount computed applying us statutory income tax rate income taxes reasons set forth years ended december 31 2011 reorganized certain foreign subsidiaries result reorganization previously accrued us deferred income taxes related subsidiaries reduced 214 million account certain foreign tax credits existed prior acquisition bj services available offset future us taxes deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards baker hughes incorporated notes consolidated financial statements tax effects temporary differences carryforwards follows december 31 record valuation allowance likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions provided valuation allowance operating loss foreign tax credit carryforwards certain nonus jurisdictions increase valuation allowances 71 million resulted primarily net tax charges related foreign losses operating loss carryforwards without valuation allowance expire varying amounts next twenty years provided relevant us foreign taxes anticipated repatriation certain earnings foreign subsidiaries consider undistributed earnings foreign subsidiaries amount taxes already provided indefinitely reinvested current intention repatriate earnings deferred income taxes provided temporary differences approximately 26 billion december 31 2012 representing earnings nonus subsidiaries intended indefinitely reinvested additional foreign earnings could become subject additional tax remitted deemed remitted dividend computation potential deferred tax liability associated undistributed earnings basis differences practicable december 31 2012 approximately 109 million foreign tax credits may carried forward indefinitely applicable foreign law 349 million foreign tax credits available offset future payments us federal income taxes primarily expiring 2019 2023 addition december 31 2012 approximately 2 million state tax credits expiring varying amounts 2016 2021 december 31 2012 267 million tax liabilities gross unrecognized tax benefits includes liabilities interest penalties 47 million 24 million respectively prevail uncertain tax positions net effect would decrease income tax provision approximately 243 million remaining approximately 24 million offset deferred tax assets represent tax benefits would received different taxing jurisdictions event prevail uncertain tax positions baker hughes incorporated notes consolidated financial statements following table presents changes unrecognized tax benefits associated interest penalties included consolidated balance sheets expected amount unrecognized tax benefits change next twelve months due expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate december 31 2012 approximately 29 million tax liabilities net 20 million tax assets related uncertain tax positions individually insignificant reasonably possible settled within next twelve months december 31 2012 approximately 218 million total gross unrecognized tax benefits included noncurrent portion income tax liabilities settlement period cannot determined however expected within next twelve months operate 80 countries subject income taxes taxing jurisdictions operate following table summarizes earliest tax years remain subject examination major taxing jurisdictions operate jurisdictions project highest tax liability 2013 baker hughes incorporated notes consolidated financial statements note 4 earnings per share reconciliation number shares used basic diluted earnings per share “eps” computations follows years ended december 31 note 5 inventories net reserves 346 million 304 million 2012 2011 respectively comprised following december 31 note 6 property plant equipment property plant equipment comprised following december 31 depreciation expense relating property plant equipment 1427 million 1221 million 991 million 2012 2011 2010 respectively baker hughes incorporated notes consolidated financial statements note 7 goodwill intangible assets changes carrying amount goodwill detailed reportable segment perform annual impairment test goodwill october 1 every year impairments goodwill three years ended december 31 2012 related annual impairment test intangible assets comprised following december 31 2011 recognized impairments certain trade names majority related impairment bj services trade name result recorded charge 315 million beforetax 220 million net tax net income bj services trade name classified indefinite lived intangible asset therefore amortized impairment bj services trade name due decision minimize use bj services trade name part overall branding strategy bj services trade name revalued resulting revised fair value 61 million remaining useful life three years began amortizing 2012 accelerated basis following table details impairment charge reportable segment baker hughes incorporated notes consolidated financial statements intangible assets generally amortized straightline basis estimated useful lives ranging 2 30 years amortization expense included net income years ended december 31 2012 2011 2010 140 million 96 million 76 million respectively estimated amortization expense subsequent five fiscal years expected follows 2013 116 million 2014 101 million 2015 94 million 2016 92 million 2017 88 million note 8 indebtedness total debt consisted following december 31 net unamortized discount debt issuance cost estimated fair value total debt december 31 2012 2011 5829 million 4910 million respectively differs carrying amounts 4916 million 4069 million respectively included consolidated balance sheets fair value determined using quoted period end market prices december 31 2012 25 billion committed revolving credit facility maturing september 2016 december 31 2012 compliance facilitys covenants direct borrowings committed revolving credit facility 2012 also commercial paper program may issue 25 billion commercial paper maturities 270 days maximum combined borrowing point time commercial paper program credit facility 25 billion december 31 2012 925 million commercial paper outstanding maturities debt december 31 2012 follows 2013 1079 million 2014 10 million 2015 13 million 2016 15 million 2017 8 million 3791 million thereafter 2011 redeemed full 65 senior notes due november 2013 resulted payment redemption premium 63 million pretax loss early extinguishment debt 40 million included redemption premium write remaining original debt issuance cost debt discount partially offset gain 25 million termination two related interest rate swap agreements note 9 segment information conduct business primarily operating segments aligned geographic regions aggregated following five reportable segments • north america us canada • latin america • europeafricarussia caspian • middle eastasia pacific • industrial services baker hughes incorporated notes consolidated financial statements aggregate operating segments within reportable segment similar economic characteristics longterm financial performance operating segments affected similar economic conditions performance operating segments evaluated based profit tax defined income taxes following net interest expense corporate expenses certain gains losses allocated operating segments first quarter 2012 changed reporting structure include reservoir development services business “rds” within four oilfield geographic segments prior period segment disclosures revenue profit tax reclassified include rds within four oilfield geographic segments impact changes industrial services segment reduce revenue 108 million 92 million year ended december 31 2011 2010 respectively increase profit tax 42 million 28 million year ended december 31 2011 2010 respectively 2011 segment profit tax includes charge 315 million related impairment trade names discussion trade name impairments breakdown reportable segment see note 7 goodwill intangible assets summarized financial information shown following table following table presents details “corporate other” segment loss years ended december 31 baker hughes incorporated notes consolidated financial statements following tables present capital expenditures depreciation amortization segment years ended december 31 total assets segment december 31 assets global products services group includes product line marketing technology supply chain information technology organizations included industrial services segment costs expenses including depreciation amortization global products services group allocated segments enterprise organizations support global operations corporate assets include cash certain property plant equipment certain noncurrent assets following tables present geographic consolidated revenue consolidated revenue group similar products services years ended december 31 baker hughes incorporated notes consolidated financial statements following table presents net property plant equipment geographic location december 31 note 10 employee benefit plans defined benefit plans funded unfunded noncontributory defined benefit pension plans “pension benefits” covering certain employees primarily us uk germany canada provisions us qualified pension plan “us plan” hypothetical cash balance account established participant accounts receive quarterly credits based percentage according employee’s age last day quarter applied quarterly eligible compensation interest credits based balance account last day quarter majority participants uk pension plans accrue benefits plans frozen germany pension plan unfunded plan benefits based creditable years service creditable pay accrual rates canada pension plan frozen longer accrue defined benefit basis also provide certain postretirement health care benefits “other postretirement benefits” unfunded plan closed group us employees retire met certain age service requirements plan amended 2012 result closed new participants december 31 2012 amendment resulted reduction benefit obligation 69 million recorded prior service credit accumulated comprehensive loss baker hughes incorporated notes consolidated financial statements funded status reconciliation beginning ending balances benefit obligations fair value plan assets funded status plans amounts recognized consolidated balance sheets consist following december 31 funded status position represents difference benefit obligation plan assets projected benefit obligation “pbo” pension benefits represents actuarial present value benefits attributed employee services compensation includes assumption future compensation levels accumulated benefit obligation “abo” actuarial present value pension benefits attributed employee baker hughes incorporated notes consolidated financial statements service date present compensation levels abo differs pbo abo include assumptions future compensation levels information plans abos excess plan assets follows december 31 weighted average assumptions used determine benefit obligations plans follows years ended december 31 development discount rate us plans substantially nonus plans based bond matching model whereby hypothetical bond portfolio highquality fixedincome securities selected match cash flows underlying projected benefit obligation accumulated comprehensive loss amount recorded beforetax accumulated comprehensive loss related employee benefit plans consists following december 31 estimated net actuarial loss prior service cost defined benefit pension plans amortized accumulated comprehensive loss included net periodic benefit cost 2013 21 million 1 million respectively estimated net actuarial loss prior service credit postretirement benefits amortized accumulated comprehensive loss included net periodic benefit cost 2013 3 million 7 million respectively baker hughes incorporated notes consolidated financial statements net periodic benefit cost components net periodic cost benefit follows years ended december 31 weighted average assumptions used determine net periodic cost benefit plans follows years ended december 31 selecting expected rate return plan assets consider average rate earnings expected funds invested provide benefits plans includes considering trusts’ asset allocation expected returns likely earned life plans health care cost trend rates assumed health care cost trend rates significant effect amounts reported postretirement benefits december 31 2012 health care cost trend rate 81 employees age 65 declining gradually successive year reaches 45 one percentage point change assumed health care cost trend rates would following effects 2012 plan assets investment committees meet regularly review portfolio returns determine assetmix targets based assetliability studies thirdparty investment consultants assist us developing asset allocation strategies determine expected rates return expected risk various investment portfolios baker hughes incorporated notes consolidated financial statements investment committees considered strategies formal establishment current assetmix targets based projected risk return levels major asset classes investments held form units funds hold underlying securities redeemable measurement date investments equities fixedincome funds generally measured fair value based daily closing prices provided active exchanges basis observable marketbased inputs investments hedge funds generally measured fair value basis net asset values provided investment sponsor third party administrator fair values investments real estate funds based appraised values developed using comparable market transactions discounted cash flows us qualified pension plan investment policy us plan developed examining historical relationships risk return among asset classes relationship expected behavior us plan’s assets liabilities investment policy us plan designed provide greatest probability meeting exceeding us plan’s objectives lowest possible risk evaluating risk investment committee us plan “us committee” reviews longterm characteristics various asset classes focusing balancing risk expected return accordingly us committee selected following five asset classes allowable investments assets us plan us equities us fixedincome securities nonus equities real estate hedge funds fair value assets us plan december 31 2012 2011 asset category presented determined based valuation techniques categorized follows • level one use quoted prices active markets identical financial instruments • level two use quoted prices similar instruments active markets quoted prices identical similar instruments markets active inputs observable market corroborated observable market data • level three use significantly unobservable inputs typically require use managements estimates assumptions market participants would use pricing 1 multimanager strategy investing fixed income securities current allocation includes 24 corporate bonds 20 mutual funds government agencies 18 mutual funds corporate bonds 16 government mortgagebacked securities 14 government bonds 5 assetbacked securities 3 cash securities 2 multimanager strategy investing common stocks nonus listed companies using value growth approaches 3 multimanager strategy investing common stocks us listed companies using value growth approaches baker hughes incorporated notes consolidated financial statements 4 strategies taking long short positions equities fixed income securities currencies derivative contracts 5 strategy investing global private real estate secondary market using valuebased investment approach 6 partnership making opportunistic investments global basis across asset classes capital structures geographies nonus pension plans investment policies pension plans plan assets primarily canada uk “nonus plans” cover asset allocations governing boards believe appropriate nonus plans long term taking account nature liabilities expect incur suitability asset allocations investment policies reviewed periodically ensure alignment plan liabilities table presents fair value assets nonus plans asset category valuation technique december 31 1 invests mixes global common stocks bonds achieve broad diversification 2 invests passively sterlingdenominated investment grade corporate bonds 3 invests passively sterlingdenominated government issued bonds 4 invests broad equity funds based securities offered various regions countries equity funds allocated region follows 57 global 15 uk 9 emerging markets 7 north america 6 asia pacific 6 europe 5 invests diversified range property throughout uk principally retail office industrialwarehouse sectors baker hughes incorporated notes consolidated financial statements following table presents changes fair value assets determined using level 3 unobservable inputs expected cash flows pension plans make annual contributions plans amounts equal greater amounts necessary meet minimum governmental funding requirements 2013 expect contribute 40 million 45 million us pension plans 75 million 80 million nonus pension plans 2013 also expect make benefit payments related postretirement benefits 14 million 16 million following table presents expected benefit payments next ten years us nonus pension benefit payments made respective pension trust funds defined contribution plans periods reported generally us employees eligible participate sponsored 401k plans “thrift plans” thrift plans allow eligible employees elect contribute portions salaries investment trust employee contributions matched company cash rate 100 per 100 employee contribution first 5 6 dependent plan employee’s salary contributions vest immediately addition make cash contributions eligible employees 2 5 salary depending employee’s age contributions fully vested employee three years employment thrift plans provide several investment options employee sole baker hughes incorporated notes consolidated financial statements investment discretion thrift plans offer companys common stock investment option contributions thrift plans several nonus defined contribution plans amounted 232 million 189 million 169 million 2012 2011 2010 respectively certain nonus employees eligible participate thrift plans provide nonqualified defined contribution plan provides basically benefits provided thrift plans addition provide nonqualified supplemental retirement plan “srp” certain officers employees whose benefits thrift plans andor us qualified pension plan limited federal tax law srp also allows eligible employees defer portion eligible compensation provides employer matching base contributions pursuant limitations nonqualified plans invested trusts assets corresponding liabilities included consolidated balance sheets contributions nonqualified plans amounted 17 million 11 million 11 million 2012 2011 2010 respectively 2013 estimate contribute 255 million 280 million defined contribution plans postemployment benefits provide certain postemployment disability income medical benefits substantially qualifying former inactive us employees income benefits longterm disability provided fullyinsured plan continuation medical benefits disability “continuation benefits” provided qualified selfinsured plan accrued postemployment liability continuation benefits december 31 2012 2011 26 million 23 million respectively included liabilities consolidated balance sheets note 11 commitments contingencies leases december 31 2012 longterm noncancelable operating leases covering certain facilities equipment minimum annual rental commitments net amounts due subleases five years period ending december 31 2017 204 million 156 million 99 million 63 million 35 million respectively 119 million aggregate thereafter rent expense 559 million 401 million 355 million years ended december 31 2012 2011 2010 respectively entered significant capital leases three years ended december 31 2012 litigation involved litigation proceedings arisen ordinary business activities insure risks extent deemed prudent management extent insurance available assurance given nature amount insurance sufficient fully indemnify us liabilities arising pending future legal proceedings many insurance policies contain deductibles selfinsured retentions amounts deem prudent responsible payment determining amount selfinsurance policy selfinsure losses predictable measurable recurring nature claims automobile liability general liability workers compensation accruals losses calculated estimating losses claims using historical claim data specific loss development factors information necessary september 19 2012 subsidiary baker hughes oilfield operations inc “bhoo” terminated sand supply agreement entered hicrush operating llc “hicrush” october 28 2011 amended first amendment supply agreement may 10 2012 collectively “supply agreement” result hicrushs breach supply agreement november 12 2012 hicrush filed lawsuit bhoo 129th judicial district court harris county texas cause 201267261 hicrush operating llc v baker hughes oilfield operations inc petition hicrush claims bhoos termination “invalid” constituting breach bhoo “anticipatorily repudiated supply agreement without excuse” hicrush claims entitled recover liquidated damages 187 million based undelivered minimum purchase requirement provision defined supply agreement alternative hicrush seeks unspecified amount actual damages december 17 2012 bhoo filed responsive pleading denying hicrushs allegations also filed baker hughes incorporated notes consolidated financial statements counter claim breach contract bhoo intends vigorously defend seeks recover damages incurred result hicrushs breach contract expect outcome matter material adverse effect financial position results operations cash flows however assurance ultimate outcome matter among several unrelated companies received subpoena office new york attorney general dated june 17 2011 subpoena received company seeks information documents relating among things natural gas development hydraulic fracturing discussing subpoena new york attorney generals office february 2012 subsidiary company entered compromise agreement pipeline hazardous materials safety administration “phmsa” within united states department transportation august 2009 phmsa alleged nine violations one subsequently dismissed hazardous material regulations facility operated subsidiary compromise agreement phmsa found corrective actions taken subsidiary corrected alleged violations corrective actions required compromise agreement provides civil penalty 100000 subsidiary agreed pay within 30 days date compromise agreement environmental matters past present operations include activities subject extensive domestic including us federal state local international environmental regulations regard air land water quality environmental matters environmental procedures policies practices designed ensure compliance existing laws regulations minimize possibility significant environmental damage involved voluntary remediation projects present former manufacturing locations facilities majority relate properties obtained acquisitions sites longer actively used operations rare occasions remediation activities conducted specified government agencyissued consent decree agreed order remediation costs accrued based estimates probable exposure using currently available facts existing environmental permits technology presently enacted laws regulations remediation cost estimates include direct costs related environmental investigation external consulting activities governmental oversight fees treatment equipment costs associated longterm operation maintenance monitoring remediation project also identified potentially responsible party “prp” remedial activities related various superfund sites participate process set joint participation defense agreement negotiate government agencies identify prps determine prp’s allocation estimate remediation costs accrued believe prorata share total estimated cost remediation associated management superfund sites share based upon ratio estimated volume waste contributed site bears total estimated volume waste disposed site applicable us federal law imposes joint several liability prp cleanup sites leaving us uncertainty may responsible remediation cost attributable prps unable pay share accrual made joint several liability concept superfund sites participation de minimis since believe probability pay material costs volumetric share remote believe prps greater involvement volumetric calculation basis substantial assets may reasonably expected pay share cost remediation superfund sites significant prp remediation costs estimated include recalcitrant parties cases insurance coverage contractual indemnities third parties cover portion ultimate liability total accrual environmental remediation 32 million 29 million includes accruals 4 million 5 million various superfund sites december 31 2012 2011 respectively determination required accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity necessary baker hughes incorporated notes consolidated financial statements normal course business customers vendors others entered offbalance sheet arrangements surety bonds performance letters credit bank issued guarantees totaled approximately 15 billion december 31 2012 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements also commitments outstanding purchase obligations related capital expenditures inventory contracts approximately 15 billion december 31 2012 note 12 accumulated comprehensive loss following table presents changes accumulated comprehensive loss net tax note 13 subsequent events 2012 initiated plan sell process pipeline services “pps” business part industrial services segment previously reported financial results discontinued operations february 2013 decision made retain pps business accordingly included financial results pps continuing operations years presented february 2013 venezuelas currency devalued prior exchange rate 43 bolivars fuertes per us dollar 63 bolivars fuertes per us dollar apply local currency denominated balances transactions estimate impact devaluation loss approximately 25 million recorded first quarter 2013 going forward although devaluation result reduction us dollar reported amount local currency denominated revenues expenses believe impact material consolidated financial statements baker hughes incorporated notes consolidated financial statements note 14 quarterly data unaudited 1 represents revenue less cost sales cost services research engineering 2 net income attributable baker hughes 2011 includes tax benefit 214 million associated reorganization certain foreign subsidiaries discussion see note 3 income taxes notes consolidated financial statements 3 net income attributable baker hughes 2011 includes charge 315 million beforetax 220 million net tax majority relates impairment associated decision minimize use bj services trade name discussion see note 7 goodwill intangible assets notes consolidated financial statements item 9item 8 financial statements supplementary data management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rules 13a15f internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles supervision participation management including principal executive officer principal financial officer assessed effectiveness internal control financial reporting based framework internal control integrated framework issued committee sponsoring organizations treadway commission based assessment principal executive officer principal financial officer concluded internal control financial reporting effective december 31 2013 conclusion based recognition inherent limitations systems internal control inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate deloitte touche llp company’s independent registered public accounting firm issued attestation report effectiveness company’s internal control financial reporting martin craighead martin craighead chairman chief executive officer peter ragauss peter ragauss senior vice president chief financial officer alan j keifer alan j keifer vice president controller houston texas february 12 2014 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited accompanying consolidated balance sheets baker hughes incorporated subsidiaries company december 31 2013 2012 related consolidated statements income comprehensive income changes equity cash flows three years period ended december 31 2013 audits also included financial statement schedule ii valuation qualifying accounts listed index item 15 also audited companys internal control financial reporting december 31 2013 based criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission companys management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements financial statement schedule opinion companys internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions companys internal control financial reporting process designed supervision companys principal executive principal financial officers persons performing similar functions effected companys board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position baker hughes incorporated subsidiaries december 31 2013 2012 results operations cash flows three years period ended december 31 2013 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also opinion company maintained material respects effective internal control financial reporting december 31 2013 based criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission deloitte touche llp houston texas february 12 2014 baker hughes incorporated consolidated statements income see notes consolidated financial statements baker hughes incorporated consolidated statements comprehensive loss income see notes consolidated financial statements baker hughes incorporated consolidated balance sheets see notes consolidated financial statements baker hughes incorporated consolidated statements changes equity see notes consolidated financial statements baker hughes incorporated consolidated statements cash flows see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements note 1 summary significant accounting policies nature operations baker hughes incorporated “baker hughes” “company” “we” “our” “us” leading supplier oilfield services products technology systems used drilling formation evaluation completion production pressure pumping reservoir development worldwide oil natural gas industry also provide products services businesses including downstream chemicals process pipeline industries basis presentation consolidated financial statements include accounts baker hughes subsidiaries exercise control investments subsidiaries whollyowned exercise control equity held minority owners portions net income loss reflected noncontrolling interests investments ability exercise significant influence operating financial policies hold controlling interest accounted using equity method accounting significant intercompany accounts transactions eliminated consolidation notes consolidated financial statements dollar share amounts tabulations millions dollars shares respectively unless otherwise indicated use estimates preparation financial statements conformity accounting principles generally accepted united states america “us” requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period base estimates judgments historical experience various assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained operating environment changes believe estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts inventory valuation reserves recoverability longlived assets useful lives used depreciation amortization income taxes related valuation allowances accruals contingencies actuarial assumptions determine costs liabilities related employee benefit plans stockbased compensation fair value assets acquired liabilities assumed acquisitions revenue recognition products services sold based upon purchase orders contracts agreements customer include fixed determinable prices include right return similar provisions significant postdelivery obligations products produced standard manufacturing operation even produced customer’s specifications recognize revenue products upon delivery title passes collectability reasonably assured significant obligations future performance provisions estimated warranty returns similar types items made time related revenue recognized revenue services recognized services rendered collectability reasonably assured rates services typically priced per day per meter per man hour similar basis certain situations revenue generated transactions may include multiple products services one contract agreement may delivered customer extended period time revenue arrangements recognized accordance criteria item service delivered based relative fair value baker hughes incorporated notes consolidated financial statements research engineering research engineering expenses expensed incurred include costs associated research development new products services costs associated sustaining engineering existing products services costs research development new products services 370 million 337 million 324 million years ended december 31 2013 2012 2011 respectively cash equivalents shortterm investments cash equivalents include investments original maturity three months less shortterm investments original maturity greater three months less one year maintain cash deposits financial institutions may exceed federally insured limits monitor credit ratings concentration risk financial institutions continuing basis safeguard cash deposits allowance doubtful accounts establish allowance doubtful accounts based various factors including historical experience current aging status customer accounts payment history financial condition customers provisions doubtful accounts recorded becomes evident customer make required payments either contractual due dates future provision doubtful accounts recorded cost sales 75 million 100 million 84 million years ended december 31 2013 2012 2011 respectively concentration credit risk grant credit customers operate primarily oil natural gas industry although concentration could affect overall exposure credit risk believe risk minimized majority business conducted major companies many geographically diverse thus spreading credit risk manage risk perform periodic credit evaluations customers’ financial condition including monitoring customers’ payment history current credit worthiness generally require collateral support trade receivables may require payment advance security form letter credit bank guarantee 2013 2012 2011 individual customer accounted 10 consolidated revenue inventories stated lower cost market cost determined using firstin firstout “fifo” method average cost method approximates fifo includes cost materials labor manufacturing overhead necessary record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments property plant equipment accumulated depreciation property plant equipment “ppe” stated cost less accumulated depreciation generally provided using straightline method estimated useful lives individual assets significant improvements betterments capitalized extend useful life asset manufacture substantial portion tools equipment cost items includes direct indirect manufacturing costs capitalized carried inventory completed complete cost reflected capital expenditures classified machinery equipment ppe maintenance repairs charged expense incurred upon sale disposition applicable amounts asset cost accumulated depreciation removed balance sheet net amount less proceeds disposal charged credited income capitalized costs computer software developed purchased internal use classified machinery equipment baker hughes incorporated notes consolidated financial statements goodwill intangible assets amortization goodwill excess consideration transferred fair value tangible identifiable intangible assets liabilities recognized goodwill intangible assets indefinite lives amortized intangible assets finite useful lives amortized basis reflects pattern economic benefits intangible assets realized generally straightline basis asset’s estimated useful life impairment ppe intangibles longlived assets goodwill review ppe intangible assets certain longlived assets impairment whenever events changes circumstances indicate carrying amount may recoverable least annually certain intangible assets determination recoverability made based upon estimated undiscounted future net cash flows amount impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets perform annual impairment test goodwill reporting units october 1 frequently circumstances indicate impairment may exist reporting units based organizational reporting structure corporate assets liabilities allocated reporting units extent relate operations reporting units determining carrying amount determination impairment made comparing carrying amount reporting unit fair value generally calculated using combination market comparable transaction discounted cash flow approaches income taxes use liability method determining provision liabilities income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates deferred tax liabilities assets computed estimated income tax effect temporary differences financial tax bases assets liabilities determined using tax rate expected effect taxes actually paid recovered valuation allowance reduce deferred tax assets established likely portion deferred tax assets realized intend indefinitely reinvest certain earnings foreign subsidiaries operations outside us accordingly provided us income taxes earnings provide us additional nonus taxes earnings anticipated repatriated nonus subsidiaries tax filings various periods subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts provided amounts believe ultimately result proceedings addition assessments received various tax authorities also provide taxes uncertain tax positions formal assessments received classify interest penalties related uncertain tax positions income taxes financial statements environmental matters estimated remediation costs accrued using currently available facts existing environmental permits technology enacted laws regulations sites primarily responsible remediation cost estimates developed based internal evaluations discounted accruals recorded probable obligated pay environmental site evaluation remediation related activities costs reasonably estimated additional information becomes available accruals adjusted reflect current cost estimates ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party us federal state comprehensive environmental response compensation liability act “superfund” site accrue share estimated remediation costs baker hughes incorporated notes consolidated financial statements site share based ratio estimated volume waste contributed site total volume waste disposed site foreign currency number significant foreign subsidiaries designated local currency functional currency gains losses resulting balance sheet translation foreign operations included separate component accumulated comprehensive loss within stockholders’ equity gains losses foreign currency transactions resulting settlement receivables payables nonfunctional currency included marketing general administrative “mga” expenses consolidated statements income incurred foreign subsidiaries designated us dollar functional currency monetary assets liabilities remeasured periodend exchange rates nonmonetary items remeasured historical exchange rates gains losses resulting balance sheet remeasurement also included mga expenses consolidated statements income incurred february 2013 venezuelas currency devalued prior exchange rate 43 bolivars fuertes per us dollar 63 bolivars fuertes per us dollar applies local currency denominated balances impact devaluation loss 23 million recorded marketing general administrative expense first quarter 2013 financial instruments financial instruments include cash equivalents accounts receivable accounts payable debt derivative financial instruments except debt estimated fair value financial instruments december 31 2013 2012 approximates carrying value reflected consolidated balance sheets information fair value debt see note 8 indebtedness monitor exposure various business risks including commodity prices foreign currency exchange rates interest rates regularly use derivative financial instruments manage risks policies permit use derivative financial instruments speculative purposes inception new derivative designate derivative hedge determine derivative undesignated hedging instrument facts dictate document relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions assess whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item inception hedge ongoing basis program primarily utilizes foreign currency forward contracts reduce risks associated effects certain foreign currency exposures program strategy gains losses foreign currency forward contracts mitigate foreign currency transaction translation gains losses extent practical foreign currency exposures typically arise changes value assets liabilities denominated currencies functional currency foreign currency forward contracts generally settle less 180 days record derivatives end reporting period consolidated balance sheet fair value forward contracts designated fair value hedging instruments held undesignated hedging instruments record changes fair value consolidated statements income along change fair value hedged item changes fair value forward contracts designated cash flow hedging instruments recognized comprehensive income hedged item recognized earnings derivatives designated cash flow hedge ineffective portion derivatives change fair value recognized earnings recognized gains losses derivatives entered manage foreign currency exchange risk included mga expenses consolidated statements income outstanding foreign currency forward contracts notional amounts aggregating 486 million 207 million hedge exposure currency fluctuations various foreign currencies december 31 2013 2012 respectively contracts either undesignated hedging instruments designated qualify fair value hedging instruments fair value determined using quoted market prices contracts similar terms maturity dates material either december 31 2013 2012 effects derivative baker hughes incorporated notes consolidated financial statements instruments consolidated statements income material three years ended december 31 2013 new accounting standards updates february 2013 fasb issued asu 201302 reporting amounts reclassified accumulated comprehensive income asu requires entities present separately among items amount change due reclassifications amount due current period comprehensive income adopted new presentation requirements notes financial statements first quarter 2013 additional information see note 12 accumulated comprehensive loss july 2012 fasb issued update asc 350 intangibles goodwill asu amends guidance asc 35030 testing indefinitelived intangible assets impairment revised guidance permits entity first assess qualitative factors determine whether likely indefinitelived intangible asset impaired basis determining whether necessary perform quantitative impairment test asu effective impairment tests performed fiscal years beginning september 15 2012 adopted asu 2013 impairment testing material impact consolidated financial statements note 2 stockbased compensation stockbased compensation cost measured date grant based calculated fair value award generally recognized straightline basis vesting period equity grant net forfeitures compensation cost determined based awards ultimately expected vest therefore reduced cost estimated forfeitures based historical forfeiture rates forfeitures estimated time grant revised necessary subsequent periods reflect actual forfeitures stockbased compensation costs capitalized amounts material stockbased compensation costs follows years ended december 31 stock options restricted stock awards units currently 325 million authorized issuance december 31 2013 approximately 2 million shares available future grants policy issue new shares exercises stock options restricted stock awards granted vesting restricted stock units issuances employee stock purchase plan stock options stock option plans provide issuance stock options directors officers key employees exercise price equal fair market value stock date grant although subject terms stock option agreement substantially stock options become exercisable three equal annual installments beginning year date grant generally expire ten years date grant stock option plans provide acceleration vesting upon employee’s retirement therefore service period reduced employees become retirement eligible vesting period accordingly recognition compensation expense employees accelerated fair value stock option granted estimated using blackscholes option pricing model following table presents weighted average assumptions used option pricing model options granted expected life options represents period time options expected outstanding expected life based historical exercise trends postvest termination data incorporated forward baker hughes incorporated notes consolidated financial statements looking stock price model expected volatility based implied volatility forecast implied prices actively traded options purchase stock observed market riskfree interest rate based observed us treasury yield curve effect time options granted dividend yield based history dividend payouts following table presents changes stock options outstanding related information thousands except per option prices weighted average remaining contractual term options outstanding options exercisable december 31 2013 59 years 52 years respectively total intrinsic value stock options defined amount market price common stock date exercise exceeds exercise price option exercised 2013 2012 2011 11 million 3 million 74 million respectively income tax benefit realized stock options exercised 20 million 08 million 20 million 2013 2012 2011 respectively total fair value options vested 2013 2012 2011 31 million 28 million 22 million respectively december 31 2013 20 million total unrecognized compensation cost related unvested stock options expected recognized weighted average period two years total intrinsic value stock options outstanding december 31 2013 108 million 67 million relates options vested exercisable intrinsic value stock options outstanding calculated amount quoted price 5526 common stock end 2013 exceeds exercise price options restricted stock awards units addition stock options officers directors key employees may granted restricted stock awards “rsa” award common stock exercise price restricted stock units “rsu” unit represents right receive end stipulated period one unrestricted share stock exercise price rsas rsus subject cliff graded vesting generally ranging three five year period determine fair value restricted stock awards restricted stock units based market price baker hughes incorporated notes consolidated financial statements common stock date grant following table presents combined changes rsas rsus related information thousands except per shareunit prices weighted average grant date fair value per share rsas rsus granted 2013 2012 2011 4558 4710 6301 respectively total fair value rsas rsus vested 2013 2012 2011 58 million 55 million 52 million respectively december 31 2013 70 million total unrecognized compensation cost related unvested rsas rsus expected recognized weighted average period two years employee stock purchase plan employee stock purchase plan “espp” provides eligible employees purchase shares aftertax basis amount 1 10 annual pay june 30 year 15 discount fair market value common stock january 1 june 30 whichever lower ii december 31 year 15 discount fair market value common stock july 1 december 31 whichever lower employee may purchase 5000 either sixmonth measurement periods described 10000 annually currently 305 million shares authorized issuance december 31 2013 78 million shares reserved future issuance compensation cost years ended december 31 calculated using blackscholes option pricing model following assumptions calculated estimated volatility using historical daily prices based expected life stock purchase plan riskfree interest rate based observed us treasury yield curve effect time espp shares granted dividend yield based history dividend payouts baker hughes incorporated notes consolidated financial statements note 3 income taxes provision income taxes comprised following years ended december 31 geographic sources income taxes follows years ended december 31 provision income taxes differs amount computed applying us statutory income tax rate income taxes reasons set forth years ended december 31 fourth quarter 2013 recognized net tax benefit 18 million result reorganization certain foreign subsidiaries included 360 million tax benefit resulting reversal deferred tax liability related decision indefinitely reinvest earnings certain foreign subsidiaries made conjunction reorganization occurred fourth quarter 2013 due fact undistributed foreign earnings longer source future income foreign tax credits utilized also recognized tax charge 342 million record valuation allowance certain foreign tax credit carryforwards 2011 reorganized certain foreign subsidiaries result reorganization previously accrued us deferred income taxes related subsidiaries reduced 214 million account certain foreign tax credits existed prior acquisition bj services available offset future us taxes baker hughes incorporated notes consolidated financial statements deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards tax effects temporary differences carryforwards follows december 31 record valuation allowance likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions december 31 2013 valuation allowances totaled 949 million consisting 382 million operating loss carryforwards 459 million foreign tax credit carryforwards 108 million deferred tax assets various jurisdictions increase valuation allowances 560 million 2013 resulted net tax charges 342 million related foreign tax credit carryforwards us described 218 million primarily related foreign losses 21 million operating loss carryforwards without valuation allowance expire varying amounts next twenty years provided relevant us foreign taxes anticipated repatriation certain earnings foreign subsidiaries december 31 2013 2012 deferred tax liability undistributed earnings foreign subsidiaries totaled 14 million 374 million respectively decrease primarily due decision indefinitely reinvest earnings certain foreign subsidiaries consider undistributed earnings foreign subsidiaries amount taxes already provided indefinitely reinvested current intention repatriate earnings deferred income taxes provided temporary differences approximately 59 billion december 31 2013 representing earnings nonus subsidiaries intended indefinitely reinvested additional foreign earnings could become subject additional tax remitted deemed remitted dividend computation potential deferred tax liability associated undistributed earnings basis differences practicable december 31 2013 approximately 117 million foreign tax credits may carried forward indefinitely applicable foreign law 342 million foreign tax credits expire 2015 2024 us tax law addition december 31 2013 approximately 3 million state tax credits expire 2018 december 31 2013 282 million tax liabilities total gross unrecognized tax benefits related uncertain tax positions includes liabilities interest penalties 37 million 17 million baker hughes incorporated notes consolidated financial statements respectively prevail uncertain tax positions net effect would decrease income tax provision approximately 244 million remaining approximately 38 million offset deferred tax assets represent tax benefits would received different taxing jurisdictions event prevail uncertain tax positions following table presents changes gross unrecognized tax benefits associated interest penalties included consolidated balance sheets expected amount unrecognized tax benefits change next twelve months due expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate december 31 2013 approximately 99 million tax liabilities net 20 million tax assets related uncertain tax positions individually insignificant reasonably possible settled within next twelve months december 31 2013 approximately 163 million tax liabilities total gross unrecognized tax benefits included noncurrent portion income tax liabilities settlement period cannot determined however expected within next twelve months operate 80 countries subject income taxes taxing jurisdictions operate following table summarizes earliest tax years remain subject examination major taxing jurisdictions operate jurisdictions project highest tax liability 2014 baker hughes incorporated notes consolidated financial statements note 4 earnings per share reconciliation number shares used basic diluted earnings per share “eps” computations follows years ended december 31 note 5 inventories net reserves 382 million 346 million 2013 2012 respectively comprised following december 31 note 6 property plant equipment property plant equipment comprised following december 31 depreciation expense relating property plant equipment 1579 million 1427 million 1221 million 2013 2012 2011 respectively baker hughes incorporated notes consolidated financial statements note 7 goodwill intangible assets changes carrying amount goodwill detailed segment perform annual impairment test goodwill october 1 every year impairments goodwill three years ended december 31 2013 related annual impairment test intangible assets comprised following december 31 1 includes indefinitelived intangibles 27 million 44 million december 31 2013 2012 respectively related inprocess research development projects 2011 recognized impairments certain trade names majority related impairment bj services trade name result recorded charge 315 million beforetax 220 million net tax net income bj services trade name classified indefinite lived intangible asset therefore amortized impairment bj services trade name due decision minimize use bj services trade name part overall branding strategy bj services trade name revalued resulting revised fair value 61 million remaining useful life 3 years began amortizing 2012 accelerated basis following table details impairment charge segment baker hughes incorporated notes consolidated financial statements intangible assets generally amortized straightline basis estimated useful lives ranging 3 30 years amortization expense included net income years ended december 31 2013 2012 2011 119 million 140 million 96 million respectively estimated amortization expense subsequent five fiscal years expected follows note 8 indebtedness total debt consisted following december 31 net unamortized discount debt issuance cost estimated fair value total debt december 31 2013 2012 4857 million 5829 million respectively differs carrying amounts 4381 million 4916 million respectively included consolidated balance sheets fair value determined using quoted period end market prices december 31 2013 25 billion committed revolving credit facility maturing september 2016 december 31 2013 compliance facilitys covenants direct borrowings committed revolving credit facility 2013 also commercial paper program may issue 25 billion commercial paper maturities 270 days maximum combined borrowing point time commercial paper program credit facility 25 billion december 31 2013 254 million commercial paper outstanding maturities debt december 31 2013 follows 2014 499 million 2015 21 million 2016 17 million 2017 11 million 2018 1018 million 2815 million thereafter 2011 redeemed full 65 senior notes due november 2013 resulted payment redemption premium 63 million pretax loss early extinguishment debt 40 million included redemption premium write remaining original debt issuance cost debt discount partially offset gain 25 million termination two related interest rate swap agreements baker hughes incorporated notes consolidated financial statements note 9 segment information supplier oilfield services products technology systems worldwide oil natural gas business referred oilfield operations managed operating segments aligned geographic regions also provide services products downstream chemicals process pipeline industries referred industrial services fourth quarter 2013 realigned oilfield operations organizational management structure internal reporting process oilfield operations managed organized four geographic regions consisting north america latin america europeafricarussia caspian middle eastasia pacific four regions represent operating reportable segments oilfield operations previously consisted eight geographic regions represented operating segments aggregated four reportable segments however four reportable segments historically disclosed new reporting structure therefore change prior period disclosures relates realignment addition industrial services businesses reported fifth operating segment revenue profit tax performance operating segments evaluated based profit tax defined income taxes following net interest expense corporate expenses certain gains losses allocated operating segments summarized financial information shown following table first quarter 2012 changed reporting structure include reservoir development services business “rds” within four geographic segments prior period segment disclosures revenue profit tax reclassified include rds within four geographic segments impact changes industrial services segment reduce revenue 108 million year ended december 31 2011 increase profit tax 42 million year ended december 31 2011 segment profit tax includes charge 315 million related impairment trade names discussion trade name impairments breakdown segment see note 7 goodwill intangible assets fourth quarter 2013 revised reporting related certain shared assets carried enterprise level support global operations result report separately shared assets along related capital expenditures previously assets reported within industrial services baker hughes incorporated notes consolidated financial statements segment allocated among geographical regions within oilfield operations accordingly prior period segment disclosures related assets capital expenditures revised reflect change following table presents total assets segment december 31 shared assets consist primarily assets carried enterprise level include supply chain product line technology information technology organizations assets used support operating segments consist primarily manufacturing inventory property plant equipment used manufacturing information technology intangible assets related technology certain deferred tax assets costs expenses organizations including depreciation amortization allocated operating segments enterprise organizations support global operations corporate assets include cash certain facilities certain noncurrent assets impact changes previously reported segment assets shown following table baker hughes incorporated notes consolidated financial statements capital expenditures depreciation amortization following table presents capital expenditures depreciation amortization segment years ended december 31 impact changes previously reported segment capital expenditures reflect change reporting shared assets shown following table baker hughes incorporated notes consolidated financial statements following table presents geographic consolidated revenue based product shipped services performed years ended december 31 1 latin america includes mexico central south america following table presents consolidated revenue category similar products services years ended december 31 following table presents net property plant equipment geographic location december 31 1 latin america includes mexico central south america baker hughes incorporated notes consolidated financial statements note 10 employee benefit plans defined benefit plans funded unfunded noncontributory defined benefit pension plans “pension benefits” covering certain employees primarily us uk germany canada provisions us qualified pension plan “us plan” hypothetical cash balance account established participant accounts receive quarterly credits based percentage according employee’s age last day quarter applied quarterly eligible compensation interest credits based balance account last day quarter plans frozen majority participants uk canada pension plans therefore accrue benefits participants germany pension plan unfunded plan benefits based creditable years service creditable pay accrual rates also provide certain postretirement health care benefits “other postretirement benefits” unfunded plan closed group us employees retire met certain age service requirements plan amended 2012 result closed new participants december 31 2012 amendment resulted reduction benefit obligation 69 million recorded prior service credit accumulated comprehensive loss 2012 funded status reconciliation beginning ending balances benefit obligations fair value plan assets funded status plans baker hughes incorporated notes consolidated financial statements amounts recognized consolidated balance sheets consist following december 31 funded status position represents difference benefit obligation plan assets projected benefit obligation “pbo” pension benefits represents actuarial present value benefits attributed employee services compensation includes assumption future compensation levels accumulated benefit obligation “abo” actuarial present value pension benefits attributed employee service date present compensation levels abo differs pbo abo include assumptions future compensation levels information plans abos excess plan assets follows december 31 weighted average assumptions used determine benefit obligations plans follows years ended december 31 development discount rate us plans substantially nonus plans based bond matching model whereby hypothetical bond portfolio highquality fixedincome securities selected match cash flows underlying projected benefit obligation baker hughes incorporated notes consolidated financial statements accumulated comprehensive loss amount recorded beforetax accumulated comprehensive loss related employee benefit plans consists following december 31 estimated net actuarial loss prior service cost defined benefit pension plans amortized accumulated comprehensive loss included net periodic benefit cost 2014 13 million 1 million respectively estimated net actuarial loss prior service credit postretirement benefits amortized accumulated comprehensive loss included net periodic benefit cost 2014 2 million 7 million respectively net periodic cost components net periodic cost follows years ended december 31 weighted average assumptions used determine net periodic cost plans follows years ended december 31 selecting expected rate return plan assets consider average rate earnings expected funds invested provide benefits plans includes considering trusts’ asset allocation expected returns likely earned life plans baker hughes incorporated notes consolidated financial statements health care cost trend rates assumed health care cost trend rates significant effect amounts reported postretirement benefits december 31 2013 health care cost trend rate 77 employees age 65 declining gradually successive year reaches 45 one percentage point change assumed health care cost trend rates would following effects 2013 plan assets investment committees meet regularly review portfolio returns determine assetmix targets based assetliability studies thirdparty investment consultants assist committees developing asset allocation strategies determine expected rates return expected risk various investment portfolios investment committees considered strategies formal establishment current assetmix targets based projected risk return levels major asset classes majority investments held form units funds hold underlying securities redeemable measurement date investments equities fixedincome funds generally measured fair value based daily closing prices provided active exchanges basis observable marketbased inputs investments hedge funds generally measured fair value basis net asset values provided investment sponsor third party administrator fair values private equity investments real estate funds based appraised values developed using comparable market transactions discounted cash flows us qualified pension plan investment policy us plan developed examining historical relationships risk return among asset classes relationship expected behavior us plan’s assets liabilities investment policy us plan designed provide greatest probability meeting exceeding us plan’s objectives lowest possible risk evaluating risk investment committee us plan “us committee” reviews longterm characteristics various asset classes focusing balancing risk expected return accordingly us committee selected following six asset classes allowable investments assets us plan us equities nonus equities global fixedincome securities real estate hedge funds private equity fair value assets us plan december 31 2013 2012 asset category presented determined based valuation techniques categorized follows • level one use quoted prices active markets identical financial instruments • level two use quoted prices similar instruments active markets quoted prices identical similar instruments markets active inputs observable market corroborated observable market data • level three use significantly unobservable inputs typically require use managements estimates assumptions market participants would use pricing baker hughes incorporated notes consolidated financial statements 1 multimanager strategy investing fixed income securities current allocation includes 40 corporate bonds 20 government agencies 15 government bonds 15 government mortgagebacked securities 5 municipal bonds 3 assetbacked securities 2 cash securities 2 multimanager strategy investing common stocks nonus listed companies using value growth approaches 3 multimanager strategy investing common stocks us listed companies using value growth approaches 4 strategies taking long short positions equities fixed income securities currencies derivative contracts 5 strategy investing global private real estate secondary market using valuebased investment approach 6 partnership making opportunistic investments global basis across asset classes capital structures geographies nonus pension plans investment policies pension plans plan assets primarily canada uk “nonus plans” cover asset allocations governing boards believe appropriate nonus plans longterm taking account nature liabilities expect incur suitability asset allocations investment policies reviewed periodically ensure alignment plan liabilities baker hughes incorporated notes consolidated financial statements table presents fair value assets nonus plans asset category valuation technique december 31 1 invests mixes global common stocks bonds achieve broad diversification 2 invests canadian dollardenominated government issued bonds intended match duration plan liabilities 3 invests passively british pound sterlingdenominated investment grade corporate bonds 4 invests passively british pound sterlingdenominated government issued bonds 5 invests broad equity funds based securities offered various regions countries equity funds allocated region follows 57 global 15 uk 9 emerging markets 7 north america 6 asia pacific 6 europe 6 invests diversified range property throughout uk principally retail office industrialwarehouse sectors following table presents changes fair value assets determined using level 3 unobservable inputs baker hughes incorporated notes consolidated financial statements expected cash flows pension plans make annual contributions plans amounts equal greater amounts necessary meet minimum governmental funding requirements 2014 expect contribute 30 million 34 million us pension plans 72 million 80 million nonus pension plans 2014 also expect make benefit payments related postretirement benefits 13 million 15 million following table presents expected benefit payments next ten years us nonus pension benefit payments made respective pension trust funds defined contribution plans periods reported generally us employees eligible participate sponsored 401k plan “thrift plan” thrift plan allows eligible employees elect contribute portions salaries investment trust employee contributions matched company cash rate 100 per 100 employee contribution first 5 employee’s salary contributions vest immediately addition make cash contributions eligible employees 2 5 salary depending employee’s age contributions fully vested employee three years employment thrift plan provides several investment options employee sole investment discretion thrift plan offer companys common stock investment option contributions thrift plan several nonus defined contribution plans amounted 240 million 232 million 189 million 2013 2012 2011 respectively certain nonus employees eligible participate thrift plan provide nonqualified defined contribution international retirement plan provides basically benefits provided thrift plan addition provide nonqualified supplemental retirement plan “srp” certain officers employees whose benefits thrift plans andor us qualified pension plan limited federal tax law srp also allows eligible employees defer portion eligible compensation provides employer matching base contributions pursuant limitations nonqualified plans invested trusts assets corresponding liabilities included consolidated balance sheets contributions nonqualified plans amounted 15 million 17 million 11 million 2013 2012 2011 respectively 2014 estimate contribute 270 million 293 million defined contribution plans postemployment benefits provide certain postemployment disability income medical benefits substantially qualifying former inactive us employees income benefits longterm disability provided fullyinsured plan continuation medical benefits disability “continuation benefits” provided qualified selfinsured plan accrued postemployment liability continuation benefits december 31 2013 2012 23 million 26 million respectively included liabilities consolidated balance sheets baker hughes incorporated notes consolidated financial statements note 11 commitments contingencies leases december 31 2013 longterm noncancelable operating leases covering certain facilities equipment minimum annual rental commitments net amounts due subleases five years period ending december 31 2018 405 million 258 million 150 million 84 million 30 million respectively 122 million aggregate thereafter rent expense 702 million 559 million 401 million years ended december 31 2013 2012 2011 respectively entered significant capital leases three years ended december 31 2013 litigation subject number lawsuits claims arising conduct business ability predict ultimate outcome matters involves judgments estimates inherent uncertainties record liability contingencies incurrence loss probable amount reasonably estimated including accruals selfinsured losses calculated based historical claim data specific loss development factors information range total possible losses litigation matters cannot reasonably estimated based consideration relevant facts circumstances expect ultimate outcome currently pending lawsuits claims us material adverse effect financial position results operations cash flows however assurance ultimate outcome matters insure risks arising business extent deemed prudent management extent insurance available assurance given nature amount insurance sufficient fully indemnify us liabilities arising pending future legal proceedings claims insurance policies contain deductibles selfinsured retentions amounts deem prudent responsible payment determining amount selfinsurance policy selfinsure losses predictable measurable recurring nature claims automobile liability general liability workers compensation october 21 2013 collective action lawsuit alleging failed pay asyetundetermined class workers overtime compliance fair labor standards act filed titled zamora et al v baker hughes incorporated civil action 213cv00326 us district court southern district texas corpus christi division october 10 2013 class collective action lawsuit alleging failed pay nationwide class workers overtime compliance fair labor standards act certain state laws filed titled lea et al v baker hughes inc civil action 313cv00447 us district court southern district texas galveston division evaluating background facts time cannot provide evaluation likelihood unfavorable outcome potential settlement terms may 30 2013 received civil investigative demand cid united states department justice doj pursuant antitrust civil process act cid seeks documents information us period may 29 2011 date cid connection doj investigation related pressure pumping services united states working doj provide requested documents information able predict action might taken future doj governmental authorities result investigation september 19 2012 subsidiary baker hughes oilfield operations inc “bhoo” terminated sand supply agreement entered hicrush operating llc “hicrush” october 28 2011 amended first amendment supply agreement may 10 2012 collectively “supply agreement” result hicrushs breach supply agreement november 12 2012 hicrush filed lawsuit bhoo 129th judicial district court harris county texas cause 201267261 hicrush operating llc v baker hughes oilfield operations inc petition hicrush claimed bhoos termination “invalid” constituting breach bhoo “anticipatorily repudiated supply agreement without excuse” hicrush claimed entitled recover liquidated damages 187 million based undelivered minimum purchase baker hughes incorporated notes consolidated financial statements requirement provision defined supply agreement alternative hicrush sought unspecified amount actual damages december 17 2012 bhoo filed responsive pleading denying hicrushs allegations also filed counter claim breach contract october 10 2013 bhoo hicrush entered settlement agreement pursuant parties agreed jointly dismiss litigation connection settlement agreement parties entered new supply agreement settlement agreement material impact financial position results operations cash flows among several unrelated companies received subpoena office new york attorney general dated june 17 2011 subpoena received company seeks information documents relating among things natural gas development hydraulic fracturing discussing subpoena new york attorney generals office environmental matters past present operations include activities subject extensive domestic including us federal state local international environmental regulations regard air land water quality environmental matters environmental procedures policies practices designed ensure compliance existing laws regulations minimize possibility significant environmental damage involved voluntary remediation projects present former manufacturing locations facilities majority relate properties longer actively used operations rare occasions remediation activities conducted specified government agencyissued consent decree agreed order remediation costs accrued based estimates probable exposure using currently available facts existing environmental permits technology presently enacted laws regulations remediation cost estimates include direct costs related environmental investigation external consulting activities governmental oversight fees treatment equipment costs associated longterm operation maintenance monitoring remediation project also identified potentially responsible party “prp” remedial activities related various superfund sites instances participate process set joint participation defense agreement negotiate government agencies identify prps determine prp’s allocation estimate remediation costs accrued believe prorata share total estimated cost remediation associated management superfund sites share based upon ratio estimated volume waste contributed site bears total estimated volume waste disposed site applicable us federal law imposes joint several liability prp cleanup sites leaving us uncertainty may responsible remediation cost attributable prps unable pay share accrual made joint several liability concept superfund sites participation de minimis since believe probability pay material costs volumetric share remote believe prps greater involvement volumetric calculation basis substantial assets may reasonably expected pay share cost remediation superfund sites significant prp remediation costs estimated include recalcitrant parties cases insurance coverage contractual indemnities third parties cover portion ultimate liability total accrual environmental remediation 34 million 32 million includes accruals 4 million 4 million various superfund sites december 31 2013 2012 respectively determination required accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity necessary normal course business customers vendors others entered offbalance sheet arrangements surety bonds performance letters credit bank issued guarantees totaled approximately 15 billion december 31 2013 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect baker hughes incorporated notes consolidated financial statements consolidated financial statements also commitments outstanding purchase obligations related capital expenditures inventory services contracts five years period ending december 31 2018 483 million 419 million 259 million 222 million 121 million respectively 168 million aggregate thereafter note 12 accumulated comprehensive loss following table presents changes accumulated comprehensive loss net tax amounts reclassified accumulated comprehensive loss twelve months ended december 31 2013 2012 represent amortization net actuarial loss prior service credit curtailments settlements included computation net periodic pension cost see note 10 employee benefit plans additional details net periodic pension cost recorded cost sales services research engineering marketing general administrative expenses baker hughes incorporated notes consolidated financial statements note 13 quarterly data unaudited 1 represents revenue less cost sales cost services research engineering item 9item 8 financial statements supplementary data management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rules 13a15f internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles supervision participation management including principal executive officer principal financial officer assessed effectiveness internal control financial reporting based 2013 framework internal control integrated framework issued committee sponsoring organizations treadway commission based assessment principal executive officer principal financial officer concluded internal control financial reporting effective december 31 2014 conclusion based recognition inherent limitations systems internal control inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate deloitte touche llp company’s independent registered public accounting firm issued attestation report effectiveness company’s internal control financial reporting martin craighead martin craighead chairman chief executive officer kimberly ross kimberly ross senior vice president chief financial officer alan j keifer alan j keifer vice president controller houston texas february 25 2015 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited accompanying consolidated balance sheets baker hughes incorporated subsidiaries company december 31 2014 2013 related consolidated statements income comprehensive income changes equity cash flows three years period ended december 31 2014 audits also included financial statement schedule ii valuation qualifying accounts listed index item 15 also audited companys internal control financial reporting december 31 2014 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission companys management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements financial statement schedule opinion companys internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions companys internal control financial reporting process designed supervision companys principal executive principal financial officers persons performing similar functions effected companys board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position baker hughes incorporated subsidiaries december 31 2014 2013 results operations cash flows three years period ended december 31 2014 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also opinion company maintained material respects effective internal control financial reporting december 31 2014 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission deloitte touche llp houston texas february 25 2015 baker hughes incorporated consolidated statements income see notes consolidated financial statements baker hughes incorporated consolidated statements comprehensive income see notes consolidated financial statements baker hughes incorporated consolidated balance sheets see notes consolidated financial statements baker hughes incorporated consolidated statements changes equity see notes consolidated financial statements baker hughes incorporated consolidated statements cash flows see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements note 1 summary significant accounting policies nature operations baker hughes incorporated “baker hughes” “company” “we” “our” “us” leading supplier oilfield services products technology systems used drilling formation evaluation completion production pressure pumping reservoir development worldwide oil natural gas industry also provide products services businesses including downstream chemicals process pipeline services basis presentation consolidated financial statements prepared conformity united states generally accepted accounting principles gaap consolidated financial statements include accounts baker hughes subsidiaries exercise control investments subsidiaries whollyowned exercise control equity held minority owners portions net income loss reflected noncontrolling interests investments ability exercise significant influence operating financial policies hold controlling interest accounted using equity method accounting intercompany accounts transactions eliminated consolidation notes consolidated financial statements dollar share amounts tabulations millions dollars shares respectively unless otherwise indicated use estimates preparation financial statements conformity gaap requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period base estimates judgments historical experience various assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained operating environment changes believe estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts inventory valuation reserves recoverability longlived assets useful lives used depreciation amortization income taxes related valuation allowances accruals contingencies actuarial assumptions determine costs liabilities related employee benefit plans stockbased compensation fair value assets acquired liabilities assumed acquisitions revenue recognition products services sold based upon purchase orders contracts agreements customer include fixed determinable prices include right return similar provisions significant postdelivery obligations products produced standard manufacturing operation even produced customers specifications recognize revenue products sold upon delivery title passes collectability reasonably assured significant obligations future performance provisions estimated warranty returns similar arrangements made time related revenue recognized revenue services recognized services rendered collectability reasonably assured rates services typically priced per day per distance drilled per man hour similar basis certain situations revenue generated transactions may include multiple products services one contract agreement may delivered customer extended period time revenue arrangements recognized accordance criteria item service delivered based relative fair value baker hughes incorporated notes consolidated financial statements research engineering research engineering expenses expensed incurred include costs associated research development new products services costs associated sustaining engineering existing products services costs research development new products services 430 million 370 million 337 million years ended december 31 2014 2013 2012 respectively cash equivalents shortterm investments cash equivalents include investments original maturity three months less shortterm investments original maturity greater three months less one year maintain cash deposits financial institutions may exceed federally insured limits monitor credit ratings concentration risk financial institutions continuing basis safeguard cash deposits allowance doubtful accounts establish allowance doubtful accounts based various factors including historical experience current aging status customer accounts payment history financial condition customers economic environment provisions doubtful accounts recorded becomes evident customer make required payments either contractual due dates future provision doubtful accounts recorded cost sales 102 million 75 million 100 million years ended december 31 2014 2013 2012 respectively concentration credit risk grant credit customers operate primarily oil natural gas industry although concentration could affect overall exposure credit risk believe risk minimized due large number customers many geographically diverse thus spreading credit risk manage risk perform periodic credit evaluations customers’ financial condition including monitoring customers’ payment history current credit worthiness generally require collateral support trade receivables may require payment advance security form letter credit bank guarantee 2014 2013 2012 individual customer accounted 10 consolidated revenue inventories stated lower cost market cost determined using firstin firstout “fifo” method average cost method approximates fifo includes cost materials labor manufacturing overhead necessary record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments property plant equipment accumulated depreciation property plant equipment “ppe” stated cost less accumulated depreciation generally provided using straightline method estimated useful lives individual assets significant improvements betterments capitalized extend useful life asset manufacture substantial portion tools equipment cost items includes direct indirect manufacturing costs capitalized carried inventory completed complete cost reflected capital expenditures classified machinery equipment ppe maintenance repairs charged expense incurred upon sale disposition applicable amounts asset cost accumulated depreciation removed balance sheet net amount less proceeds disposal charged credited income capitalized costs computer software developed purchased internal use classified machinery equipment baker hughes incorporated notes consolidated financial statements goodwill intangible assets amortization goodwill excess consideration transferred fair value tangible identifiable intangible assets liabilities recognized acquisitions goodwill intangible assets indefinite lives amortized intangible assets finite useful lives amortized basis reflects pattern economic benefits intangible assets realized generally straightline basis asset’s estimated useful life impairment ppe intangibles longlived assets goodwill review ppe intangible assets certain longlived assets impairment whenever events changes circumstances indicate carrying amount may recoverable least annually certain intangible assets determination recoverability made based upon estimated undiscounted future net cash flows amount impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets perform annual impairment test goodwill reporting units october 1 frequently circumstances indicate impairment may exist reporting units based organizational reporting structure five reportable segments corporate assets liabilities allocated reporting units extent relate operations reporting units determining carrying amount option first performing qualitative assessment determine existence events circumstances would lead determination likely fair value reporting unit less carrying amount conclusion reached would required perform quantitative impairment assessment goodwill however assessment leads determination likely fair value reporting unit greater carrying amount assessments required 2014 performed qualitative assessment annual goodwill impairment test 2013 2012 quantitative assessment determination impairment made comparing carrying amount reporting unit fair value generally calculated using combination market comparable transaction discounted cash flow approaches income taxes use liability method determining provision liabilities income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates deferred tax liabilities assets computed estimated income tax effect temporary differences financial tax bases assets liabilities determined using tax rate expected effect taxes actually paid recovered valuation allowance reduce deferred tax assets established likely portion deferred tax assets realized intend indefinitely reinvest certain earnings foreign subsidiaries operations outside us accordingly provided us income taxes earnings provide us additional nonus taxes earnings anticipated repatriated nonus subsidiaries tax filings various periods subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts provided amounts believe ultimately result proceedings addition assessments received various tax authorities also provide taxes uncertain tax positions formal assessments received classify interest penalties related uncertain tax positions income taxes financial statements environmental matters estimated remediation costs accrued using currently available facts existing environmental permits technology enacted laws regulations cost estimates developed based internal evaluations discounted accruals recorded probable obligated pay environmental site evaluation remediation related activities costs reasonably estimated additional information baker hughes incorporated notes consolidated financial statements becomes available accruals adjusted reflect current cost estimates ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party us federal state comprehensive environmental response compensation liability act “superfund” site accrue share estimated remediation costs site share based ratio estimated volume waste contributed site total volume waste disposed site foreign currency number significant foreign subsidiaries designated local currency functional currency gains losses resulting balance sheet translation foreign operations included separate component accumulated comprehensive loss within stockholders’ equity gains losses foreign currency transactions resulting settlement receivables payables nonfunctional currency included marketing general administrative “mga” expenses consolidated statements income incurred foreign subsidiaries designated us dollar usd functional currency monetary assets liabilities remeasured periodend exchange rates nonmonetary items remeasured historical exchange rates gains losses resulting balance sheet remeasurement also included mga expenses incurred early 2014 venezuelan government established two new exchange mechanisms sicad 1 sicad 2 participation auction process mechanism controlled venezuelan government depending economic sector within company operates mechanisms addition existing official exchange rate eligible apply exchange official rate allowed participate sicad 1 auctions successfully participated sicad 2 auctions result second quarter 2014 adopted sicad 2 exchange rate approximately 50 bolivars fuertes bsf per usd purposes remeasuring bsf denominated assets liabilities revenue expenses prior change using official exchange rate 63 bsf per usd impact devaluation currency loss 12 million resulting adjustment bsf denominated monetary assets liabilities loss recorded mga expenses second quarter 2014 early 2013 venezuelas currency devalued prior exchange rate 43 bsf per usd 63 bsf per usd impact devaluation loss 23 million recorded mga expenses first quarter 2013 financial instruments financial instruments include cash equivalents accounts receivable accounts payable short longterm debt derivative financial instruments except longterm debt estimated fair value financial instruments december 31 2014 2013 approximates carrying value reflected consolidated balance sheets information fair value debt see note 11 indebtedness monitor exposure various business risks including commodity prices foreign currency exchange rates interest rates regularly use derivative financial instruments manage risks policies permit use derivative financial instruments speculative purposes inception new derivative designate derivative hedge determine derivative undesignated hedging instrument facts dictate document relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions assess whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item inception hedge ongoing basis program utilizes foreign currency forward contracts reduce risks associated effects certain foreign currency exposures program strategy gains losses foreign currency forward contracts mitigate foreign currency transaction translation gains losses extent practical foreign currency exposures typically arise changes value assets liabilities denominated currencies functional currency foreign currency forward contracts generally settle less 180 days record derivatives end reporting period baker hughes incorporated notes consolidated financial statements consolidated balance sheet fair value forward contracts designated fair value hedging instruments held undesignated hedging instruments record changes fair value forward contracts consolidated statements income along change fair value hedged item changes fair value forward contracts designated cash flow hedging instruments recognized comprehensive income hedged item recognized earnings derivatives designated cash flow hedge ineffective portion derivatives change fair value recognized earnings recognized gains losses derivatives entered manage foreign currency exchange risk included mga expenses consolidated statements income outstanding foreign currency forward contracts notional amounts aggregating 580 million 486 million hedge exposure currency fluctuations various foreign currencies december 31 2014 2013 respectively based quoted market prices december 31 2014 2013 forward contracts similar terms maturity dates recorded loss 11 million gain 2 million respectively adjust forward contracts fair market value new accounting standards updates may 2014 financial accounting standards board “fasb” issued accounting standards update asu 201409 revenue contracts customers asu supersede existing revenue recognition requirements us gaap require entities recognize revenue amount reflects consideration company expects entitled exchange transferring goods services customer new standard also requires significantly expanded disclosures regarding qualitative quantitative information entitys nature amount timing uncertainty revenue cash flows arising contracts customers pronouncement effective annual reporting periods beginning december 15 2016 including interim periods within reporting period applied retrospectively early application permitted currently evaluating impact pronouncement consolidated financial statements related disclosures april 2014 fasb issued asu 201408 presentation financial statements property plant equipment reporting discontinued operations disclosures disposals components entity amends definition discontinued operation raising threshold disposal qualify discontinued operations asu also require entities provide additional disclosures discontinued operations well disposal transactions meet discontinued operations criteria pronouncement effective prospectively disposals except disposals classified held sale adoption date components initially classified held sale periods beginning december 15 2014 early adoption permitted adopted asu second quarter 2014 impact consolidated financial statements notes financial statements note 2 halliburton merger agreement november 16 2014 baker hughes halliburton company “halliburton” wholly owned subsidiary halliburton “merger sub” entered agreement plan merger “merger agreement” halliburton acquire outstanding shares baker hughes merger baker hughes merger sub merger subject certain specified exceptions effective time merger share baker hughes common stock converted right receive 112 shares halliburton common stock ii 1900 cash obligation parties consummate merger subject customary closing conditions including among others approval baker hughes’ stockholders merger agreement ii approval halliburton’s stockholders issuance halliburton common stock issued merger “stock issuance” iii applicable regulatory approvals including termination expiration applicable waiting period us hartscottrodino antitrust improvements act 1976 amended iv absence legal restraints prohibitions v customary closing conditions halliburton required take actions necessary obtain regulatory approvals including agreeing divestitures unless assets businesses product lines subject actions would account 75 billion 2013 revenue baker hughes incorporated notes consolidated financial statements baker hughes halliburton made customary representations warranties covenants merger agreement including among others covenants baker hughes halliburton subject certain exceptions conduct business ordinary course particular among restrictions subject certain exceptions baker hughes agreed generally refrain acquiring new businesses incurring new indebtedness repurchasing shares issuing new common stock equity awards equity awards granted employees officers directors materially consistent historical longterm incentive awards granted entering new material contracts commitments outside normal course business without consent halliburton period execution merger agreement consummation merger respect equity awards granted merger agreement officers employees awards vest solely result merger converted equivalent halliburton equity award however vest entirely officer employee terminated within one year following closing merger halliburton baker hughes halliburton permitted pay regular quarterly cash dividends period addition terms merger agreement halliburton baker hughes agreed coordinate declaration payment dividends respect partys common stock including record dates payment dates relating thereto expect third month quarter merger agreement agreed increase quarterly dividend merger pending merger agreement contains certain termination rights baker hughes halliburton merger agreement terminated halliburton result change recommendation baker hughes’ board directors baker hughes’ stockholders approve merger agreement ii baker hughes order enter definitive agreement third party certain alternative transactions either case baker hughes would required pay halliburton termination fee 1 billion merger agreement terminated baker hughes’ stockholders approved merger agreement upon vote taken thereon prior baker hughes stockholder meeting proposal alternative transaction publicly announced withdrawn baker hughes would required pay halliburton 1 billion termination fee baker hughes enters agreement respect consummates alternative transaction third party within 12 months termination baker hughes also reimburse halliburton certain expenses 40 million merger agreement terminated baker hughes’ stockholders approved merger agreement upon vote taken thereon prior baker hughes stockholder meeting proposal alternative transaction publicly announced withdrawn within 12 months termination baker hughes enters agreement providing consummates alternative transaction third party thereby triggering 1 billion termination fee described termination fee reduced amount expenses previously reimbursed merger agreement terminated baker hughes result change recommendation halliburton’s board directors halliburton’s stockholders approve stock issuance ii halliburton order enter definitive agreement third party certain alternative transactions iii either party halliburton’s stockholders approved merger agreement upon vote taken thereon case halliburton would required pay baker hughes termination fee 15 billion event merger agreement terminated either party result failure merger occur end date may extended due failure achieve certain specified antitrustrelated approvals closing conditions receipt antitrust specified regulatory approvals conditions nature cannot satisfied closing subject conditions capable satisfied closing date termination satisfied ii either party result antitrustrelated final nonappealable order injunction prohibiting closing iii baker hughes result halliburton’s material breach obligations obtain regulatory approval antitrustrelated condition closing incapable satisfied case halliburton would required pay baker hughes termination fee 35 billion baker hughes halliburton expect merger completed second half 2015 however baker hughes cannot predict certainty merger completed completion merger subject conditions beyond control baker hughes baker hughes incurred costs 11 million related merger recorded mga expenses fourth quarter 2014 baker hughes incorporated notes consolidated financial statements note 3 acquisitions deconsolidation september 2014 completed acquisition pipeline specialty services business weatherford international ltd pss total cash consideration 248 million subject finalization postclosing working capital adjustments pss provides expanded range precommissioning deepwater inline inspection services worldwide included industrial services segment transaction accounted using acquisition method accounting accordingly assets acquired liabilities assumed recorded fair values acquisition date result acquisition recorded approximately 73 million goodwill approximately 37 million intangible assets pro forma results operations acquisition presented effect acquisition material consolidated financial statements fourth quarter 2014 sold portion ownership interest jointly owned legal entity result longer controlling financial interest accordingly deconsolidated joint venture resulted net gain 34 million net gain primarily result carrying amount noncontrolling interest equity exceeding carrying amount net assets included mga expenses statement operations note 4 segment information supplier oilfield services products technology systems worldwide oil natural gas business referred oilfield operations managed operating segments aligned geographic regions also provide services products downstream chemicals process pipeline services referred industrial services 2014 certain north african entities previously reported middle eastasia pacific segment realigned reported within europeafricarussia caspian segment reflect manage business accordingly prior segment disclosures recast reflect realignment performance operating segments evaluated based profit tax defined income taxes following net interest expense corporate expenses certain gains losses allocated operating segments following table presents revenue profit loss tax segment december 31 baker hughes incorporated notes consolidated financial statements following table presents total assets segment december 31 shared assets consist primarily assets carried enterprise level include supply chain product line technology information technology organizations assets used support operating segments consist primarily manufacturing inventory property plant equipment used manufacturing information technology intangible assets related technology certain deferred tax assets costs expenses organizations including depreciation amortization allocated operating segments enterprise organizations support global operations corporate assets include cash certain facilities certain noncurrent assets following table presents capital expenditures depreciation amortization segment years ended december 31 baker hughes incorporated notes consolidated financial statements following tables present geographic consolidated revenue based location product shipped services performed years ended december 31 net property plant equipment geographic location december 31 1 latin america includes mexico central south america following table presents consolidated revenue category similar products services years ended december 31 note 5 stockbased compensation stockbased compensation cost measured date grant based calculated fair value award generally recognized straightline basis vesting period equity grant compensation cost determined based awards ultimately expected vest therefore reduced cost estimated forfeitures based historical forfeiture rates forfeitures estimated time grant revised necessary subsequent periods reflect actual forfeitures stockbased compensation costs capitalized amounts material baker hughes incorporated notes consolidated financial statements stockbased compensation costs follows years ended december 31 stock options restricted stock awards units currently 607 million authorized issuance december 31 2014 approximately 257 million shares available future grants policy issue new shares exercises stock options restricted stock awards granted vesting restricted stock units issuances employee stock purchase plan stock options stock option plans provide issuance stock options directors officers key employees exercise price equal fair market value stock date grant although subject terms stock option agreement substantially stock options become exercisable three equal annual installments beginning year date grant generally expire ten years date grant stock option plans provide acceleration vesting upon employee’s retirement therefore service period reduced employees become retirement eligible vesting period accordingly recognition compensation expense employees accelerated fair value stock option granted estimated using blackscholes option pricing model following table presents weighted average assumptions used option pricing model options granted expected life options represents period time options expected outstanding expected life based historical exercise trends postvest termination data incorporated forwardlooking stock price model expected volatility based implied volatility forecast implied prices actively traded options purchase stock observed market riskfree interest rate based observed us treasury yield curve effect time options granted dividend yield based history dividend payouts baker hughes incorporated notes consolidated financial statements following table presents changes stock options outstanding related information thousands except per option prices weighted average remaining contractual term options outstanding options exercisable december 31 2014 57 years 45 years respectively total intrinsic value stock options defined amount market price common stock date exercise exceeds exercise price option exercised 2014 2013 2012 70 million 11 million 3 million respectively income tax benefit realized stock options exercised 196 million 20 million 08 million 2014 2013 2012 respectively total fair value options vested 2014 2013 2012 29 million 31 million 28 million respectively december 31 2014 15 million total unrecognized compensation cost related unvested stock options expected recognized weighted average period two years total intrinsic value stock options outstanding december 31 2014 74 million 53 million relates options vested exercisable intrinsic value stock options outstanding calculated amount quoted price 5607 common stock end 2014 exceeds exercise price options restricted stock awards units addition stock options officers directors key employees may granted restricted stock awards “rsa” award common stock exercise price restricted stock units “rsu” unit represents right receive end stipulated period one unrestricted share stock exercise price rsas rsus subject cliff graded vesting generally ranging three year period one year period nonemployee directors determine fair value restricted stock awards restricted stock units based market price common stock date grant following table presents combined changes rsas rsus related information thousands except per awardunit prices baker hughes incorporated notes consolidated financial statements weighted average grant date fair value per share rsas rsus granted 2014 2013 2012 6967 4558 4710 respectively total fair value rsas rsus vested 2014 2013 2012 60 million 58 million 55 million respectively december 31 2014 90 million total unrecognized compensation cost related unvested rsas rsus expected recognized weighted average period two years employee stock purchase plan employee stock purchase plan “espp” provides eligible employees purchase shares aftertax basis amount 1 10 annual pay june 30 year 15 discount fair market value common stock january 1 june 30 whichever lower ii december 31 year 15 discount fair market value common stock july 1 december 31 whichever lower employee may contribute 5000 either sixmonth measurement periods described 10000 annually currently 305 million shares authorized issuance december 31 2014 6 million shares reserved future issuance compensation cost years ended december 31 calculated using blackscholes option pricing model following assumptions calculated estimated volatility using historical daily prices based expected life stock purchase plan riskfree interest rate based observed us treasury yield curve effect time espp shares granted dividend yield based history dividend payouts baker hughes incorporated notes consolidated financial statements note 6 income taxes provision income taxes comprised following years ended december 31 geographic sources income taxes follows years ended december 31 provision income taxes differs amount computed applying us statutory income tax rate income taxes reasons set forth years ended december 31 fourth quarter 2013 recognized net tax benefit 18 million result reorganization certain foreign subsidiaries included 360 million tax benefit resulting reversal deferred tax liability related decision indefinitely reinvest earnings certain foreign subsidiaries made conjunction reorganization occurred fourth quarter 2013 due fact undistributed foreign earnings longer source future income foreign tax credits utilized also recognized tax charge 342 million record valuation allowance certain foreign tax credit carryforwards deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards baker hughes incorporated notes consolidated financial statements tax effects temporary differences carryforwards follows december 31 record valuation allowance likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions december 31 2014 valuation allowances totaled 1051 million consisting 465 million operating loss carryforwards 471 million foreign tax credit carryforwards 115 million deferred tax assets various jurisdictions 28 million operating loss carryforwards without valuation allowance majority expire varying amounts next twenty years provided relevant us foreign taxes anticipated repatriation certain earnings foreign subsidiaries consider undistributed earnings foreign subsidiaries amount taxes already provided indefinitely reinvested current intention repatriate earnings december 31 2014 cumulative amount earnings upon us income taxes provided approximately 61 billion additional foreign earnings could become subject additional tax remitted deemed remitted dividend computation potential deferred tax liability associated undistributed earnings basis differences practicable december 31 2014 approximately 134 million foreign tax credits may carried forward indefinitely applicable foreign law 347 million foreign tax credits expire 2015 2024 us tax law december 31 2014 291 million tax liabilities total gross unrecognized tax benefits related uncertain tax positions includes liabilities interest penalties 36 million 13 million respectively prevail uncertain tax positions net effect would decrease income tax provision approximately 273 million remaining approximately 18 million offset deferred tax assets represent tax benefits would received different taxing jurisdictions event prevail uncertain tax positions baker hughes incorporated notes consolidated financial statements following table presents changes gross unrecognized tax benefits associated interest penalties included consolidated balance sheets expected amount unrecognized tax benefits change next twelve months due expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate december 31 2014 approximately 110 million tax liabilities net 7 million tax assets related uncertain tax positions individually insignificant reasonably possible settled within next twelve months december 31 2014 approximately 174 million tax liabilities total gross unrecognized tax benefits included noncurrent portion income tax liabilities settlement period cannot determined however expected within next twelve months operate 80 countries subject income taxes taxing jurisdictions operate following table summarizes earliest tax years remain subject examination major taxing jurisdictions operate jurisdictions project highest tax liability 2015 baker hughes incorporated notes consolidated financial statements note 7 earnings per share reconciliation number shares used basic diluted earnings per share “eps” computations follows years ended december 31 note 8 inventories net reserves 319 million 382 million 2014 2013 respectively comprised following december 31 note 9 property plant equipment property plant equipment comprised following december 31 depreciation expense relating property plant equipment 1706 million 1579 million 1427 million 2014 2013 2012 respectively baker hughes incorporated notes consolidated financial statements note 10 goodwill intangible assets changes carrying amount goodwill detailed segment perform annual impairment test goodwill october 1 every year impairments goodwill three years ended december 31 2014 related annual impairment test intangible assets comprised following december 31 1 includes indefinitelived intangibles 7 million 27 million december 31 2014 2013 respectively related inprocess research development projects intangible assets generally amortized straightline basis estimated useful lives ranging 3 30 years amortization expense included net income years ended december 31 2014 2013 2012 107 million 119 million 140 million respectively estimated amortization expense subsequent five fiscal years expected follows baker hughes incorporated notes consolidated financial statements note 11 indebtedness total debt consisted following december 31 net unamortized discount debt issuance cost estimated fair value total debt december 31 2014 2013 4663 million 4857 million respectively differs carrying amounts 4133 million 4381 million respectively included consolidated balance sheets fair value determined using quoted period end market prices december 31 2014 committed revolving credit facility “credit facility” commercial banks related commercial paper program maximum combined borrowing time credit facility commercial paper program 25 billion credit facility matures september 2016 december 31 2014 compliance credit facilitys covenants direct borrowings credit facility 2014 commercial paper program may issue time 25 billion commercial paper maturities 270 days amount available borrow credit facility reduced amount commercial paper outstanding december 31 2014 borrowings outstanding commercial paper program maturities debt december 31 2014 follows 2015 220 million 2016 27 million 2017 20 million 2018 1026 million 2019 22 million 2818 million thereafter weighted average interest rate shortterm borrowings outstanding december 31 2014 2013 100 43 respectively note 12 employee benefit plans defined benefit plans funded unfunded noncontributory defined benefit pension plans “pension benefits” covering certain employees primarily us uk germany canada provisions us qualified pension plan “us pension plan” hypothetical cash balance account established participant accounts receive quarterly credits based percentage according employee’s age last day quarter applied quarterly eligible compensation interest credits based balance account last day quarter uk canada plans frozen majority participants therefore accrue benefits participants germany pension plan unfunded plan benefits based creditable years service creditable pay accrual rates also provide certain postretirement health care benefits “other postretirement benefits” unfunded plan closed group us employees retire met certain age service requirements baker hughes incorporated notes consolidated financial statements funded status reconciliation beginning ending balances benefit obligations fair value plan assets funded status plans amounts recognized consolidated balance sheets consist following december 31 funded status position represents difference benefit obligation plan assets projected benefit obligation “pbo” pension benefits represents actuarial present value benefits attributed employee services compensation includes assumption future compensation levels accumulated benefit obligation “abo” actuarial present value pension benefits attributed employee service date present compensation levels abo differs pbo abo include assumptions future compensation levels baker hughes incorporated notes consolidated financial statements information plans abos excess plan assets follows december 31 weighted average assumptions used determine benefit obligations plans follows years ended december 31 development discount rate us plans substantially nonus plans based bond matching model whereby hypothetical bond portfolio highquality fixedincome securities selected match cash flows underlying projected benefit obligation accumulated comprehensive loss amount recorded beforetax accumulated comprehensive loss related employee benefit plans consists following december 31 estimated net actuarial loss prior service cost defined benefit pension plans amortized accumulated comprehensive loss included net periodic benefit cost 2015 15 million 04 million respectively estimated net actuarial loss prior service credit postretirement benefits amortized accumulated comprehensive loss included net periodic benefit cost 2015 2 million 12 million respectively baker hughes incorporated notes consolidated financial statements net periodic cost components net periodic cost follows years ended december 31 weighted average assumptions used determine net periodic cost plans follows years ended december 31 selecting expected rate return plan assets consider average rate earnings expected funds invested provide benefits plans includes considering trusts’ asset allocation expected returns likely earned life plans health care cost trend rates assumed health care cost trend rates significant effect amounts reported postretirement benefits december 31 2014 health care cost trend rate 73 employees age 65 declining gradually successive year reaches 45 one percentage point change assumed health care cost trend rates would following effects 2014 plan assets investment committees meet regularly review portfolio returns determine assetmix targets based assetliability studies thirdparty investment consultants assist committees developing asset allocation strategies determine expected rates return expected risk various investment portfolios investment committees considered strategies formal establishment current assetmix targets based projected risk return levels major asset classes baker hughes incorporated notes consolidated financial statements majority investments held form units funds hold underlying securities redeemable measurement date investments equities fixedincome funds generally measured fair value based daily closing prices provided active exchanges basis observable marketbased inputs investments hedge funds generally measured fair value basis net asset values provided investment sponsor third party administrator fair values private equity investments real estate funds based appraised values developed using comparable market transactions discounted cash flows us pension plan investment policy us pension plan developed examining historical relationships risk return among asset classes relationship expected behavior us plan’s assets liabilities investment policy us plan designed provide greatest probability meeting exceeding us plan’s objectives lowest possible risk evaluating risk investment committee us pension plan “us committee” reviews longterm characteristics various asset classes focusing balancing risk expected return accordingly us committee selected following six asset classes allowable investments assets us pension plan us equities nonus equities global fixedincome securities real estate hedge funds private equity fair value assets us pension plan december 31 2014 2013 asset category presented determined based valuation techniques categorized follows • level one use quoted prices active markets identical financial instruments • level two use quoted prices similar instruments active markets quoted prices identical similar instruments markets active inputs observable market corroborated observable market data • level three use significantly unobservable inputs typically require use managements estimates assumptions market participants would use pricing 1 multimanager strategy investing fixed income securities funds current allocation includes 39 unconstrained bond funds 30 government bonds 11 corporate bonds 10 government mortgagebacked securities 6 government agencies 2 assetbacked securities 2 cash securities 2 multimanager strategy investing common stocks nonus listed companies using value growth approaches 3 multimanager strategy investing common stocks us listed companies using value growth approaches 4 strategies taking long short positions equities fixed income securities currencies derivative contracts baker hughes incorporated notes consolidated financial statements 5 strategy investing global private real estate secondary market using valuebased investment approach 6 partnership making opportunistic investments global basis across asset classes capital structures geographies nonus pension plans investment policies pension plans plan assets primarily canada uk “nonus plans” cover asset allocations governing boards believe appropriate nonus plans longterm taking account nature liabilities expect incur suitability asset allocations investment policies reviewed periodically ensure alignment plan liabilities table presents fair value assets nonus plans asset category valuation technique december 31 1 invests mixes global common stocks bonds achieve broad diversification 2 invests canadian dollardenominated government issued bonds intended match duration plan liabilities 3 invests passively british pound sterlingdenominated investment grade corporate bonds 4 invests passively british pound sterlingdenominated government issued bonds 5 invests broad equity funds based securities offered various regions countries equity funds allocated region follows 70 global 10 uk 6 emerging markets 5 north america 5 asia pacific 4 europe 6 invests diversified range property throughout uk principally retail office industrialwarehouse sectors 7 invests range pooled funds include positions swap contracts uk sovereign bonds pooled funds categorized maturities underlying positions pooled funds employ leverage order match uk plans duration inflation baker hughes incorporated notes consolidated financial statements following table presents changes fair value assets determined using level 3 unobservable inputs expected cash flows pension plans make annual contributions plans amounts equal greater amounts necessary meet minimum governmental funding requirements 2015 expect contribute 75 million 85 million funded unfunded pension plans 2015 also expect make benefit payments related postretirement benefits 10 million 15 million following table presents expected benefit payments next ten years us nonus pension benefit payments made respective pension trust funds defined contribution plans periods reported generally us employees eligible participate sponsored 401k plan “thrift plan” thrift plan allows eligible employees elect contribute portions salaries investment trust employee contributions matched company cash rate 100 per 100 employee contribution first 5 employee’s salary contributions vest immediately addition make cash contributions eligible employees 2 5 salary depending employee’s age contributions fully vested employee three years employment baker hughes incorporated notes consolidated financial statements thrift plan provides several investment options employee sole investment discretion thrift plan offer companys common stock investment option contributions thrift plan several nonus defined contribution plans amounted 263 million 240 million 232 million 2014 2013 2012 respectively certain nonus employees eligible participate thrift plan provide nonqualified defined contribution international retirement plan provides basically benefits provided thrift plan addition provide nonqualified supplemental retirement plan “srp” certain officers employees whose benefits thrift plans andor us qualified pension plan limited federal tax law srp also allows eligible employees defer portion eligible compensation provides employer matching base contributions pursuant limitations nonqualified plans invested trusts assets corresponding liabilities included consolidated balance sheets contributions nonqualified plans amounted 17 million 15 million 17 million 2014 2013 2012 respectively 2015 estimate contribute 265 million 290 million defined contribution plans postemployment benefits provide certain postemployment disability income medical benefits substantially qualifying former inactive us employees income benefits longterm disability provided fullyinsured plan continuation medical benefits disability “continuation benefits” provided qualified selfinsured plan accrued postemployment liability continuation benefits december 31 2014 2013 30 million 23 million respectively included liabilities consolidated balance sheets note 13 commitments contingencies leases december 31 2014 longterm noncancelable operating leases covering certain facilities equipment minimum annual rental commitments net amounts due subleases five years period ending december 31 2019 284 million 187 million 118 million 64 million 39 million respectively 114 million aggregate thereafter rent expense 747 million 702 million 559 million years ended december 31 2014 2013 2012 respectively entered significant capital leases three years ended december 31 2014 litigation subject number lawsuits claims arising conduct business ability predict ultimate outcome matters involves judgments estimates inherent uncertainties record liability contingencies incurrence loss probable amount reasonably estimated including accruals selfinsured losses calculated based historical claim data specific loss development factors information range total possible losses litigation matters cannot reasonably estimated based consideration relevant facts circumstances expect ultimate outcome currently pending lawsuits claims us material adverse effect financial position results operations cash flows however assurance ultimate outcome matters insure risks arising business extent deemed prudent management extent insurance available assurance given nature amount insurance sufficient fully indemnify us liabilities arising pending future legal proceedings claims insurance policies contain deductibles selfinsured retentions amounts deem prudent responsible payment determining amount selfinsurance policy selfinsure losses predictable measurable recurring nature claims automobile liability general liability workers compensation baker hughes incorporated notes consolidated financial statements following lawsuits filed delaware connection pending merger halliburton • november 24 2014 gary molenda purported shareholder company filed class action lawsuit court chancery state delaware chancery court baker hughes company’s board directors halliburton red tiger llc wholly owned subsidiary halliburton “red tiger” together defendants “defendants” styled gary r molenda v baker hughes inc et al case 10390cb • november 26 2014 second purported shareholder company booth family trust filed substantially similar class action lawsuit delaware chancery court • december 1 2014 new jersey building laborers annuity fund james rice two additional purported shareholders company filed substantially similar class action lawsuits delaware chancery court • december 10 2014 fifth purported shareholder company iron workers midsouth pension fund filed another substantially similar class action lawsuit delaware chancery court • december 24 2014 sixth purported shareholder company annette shipp filed another substantially similar class action lawsuit delaware chancery court lawsuits make substantially similar claims plaintiffs generally allege members company’s board directors breached fiduciary duties shareholders connection merger negotiations entering merger agreement approving merger company halliburton red tiger aided abetted purported breaches fiduciary duties specifically lawsuits allege merger agreement provides inadequate consideration shareholders process resulting merger agreement flawed company’s directors engaged selfdealing certain provisions merger agreement improperly favor halliburton red tiger precluding impeding third parties submitting potentially superior proposals among things lawsuit filed annettee shipp also alleges board directors failed disclose material information concerning proposed merger preliminary registration statement form s4 january 7 2015 james rice amended complaint adding similar allegations regarding disclosures preliminary registration statement form s4 lawsuits seek unspecified damages injunctive relief enjoining merger rescission merger agreement among relief january 23 2015 delaware lawsuits consolidated caption baker hughes inc stockholders litigation consolidated ca 10390cb pursuant court’s consolidation order plaintiffs filed consolidated complaint february 4 2015 alleges substantially similar claims seeks substantially similar relief raised six individual complaints except baker hughes named defendant claims asserted company november 26 2014 seventh class action challenging merger filed purported company shareholder united states district court southern district texas houston division lawsuit styled marc rovner v baker hughes inc et al cause 414cv03416 asserts claims company current board directors halliburton red tiger lawsuit asserts substantially similar claims seeks substantially similar relief sought delaware lawsuits defendants currently scheduled respond complaint february 13 2015 october 9 2014 subsidiary filed request arbitration customer london court international arbitration pursuing claims nonpayment invoices goods services provided amount provisionally quantified exceed 679 million request arbitration also noted invoices amount exceeding 57 million issued customer would added claim event became overdue due date payment invoices passed november 6 2014 customer filed response counterclaim denying liability counterclaiming damages breach contract approximately 182 million deny liability customer intend pursue claims customer defend claims made counterclaim timetable conduct arbitration yet established 2014 investigated customer notifications related possible equipment failure natural gas storage system europeafricarussia caspian region includes certain products currently investigating cause possible failure necessary possible repair replacement options products similar products utilized natural gas storage systems customers baker hughes incorporated notes consolidated financial statements time able predict whether products need repaired replaced able reasonably estimate impact repairs replacements damages would financial position results operations cash flows defendant various labor claims including following matters april 28 2014 collective action lawsuit alleging failed pay class workers overtime compliance fair labor standards act flsa filed titled michael ciamillo individually etc et al vs baker hughes incorporated us district court district alaska “ciamillo” fourth quarter 2014 parties agreed settle ciamillo lawsuit including certain state law claims 5 million subject final court approval december 10 2013 class collective action lawsuit alleging failed pay nationwide class workers overtime compliance flsa certain state laws filed titled lea et al v baker hughes inc us district court southern district texas galveston division lea second quarter 2014 parties agreed settle lea lawsuit subject final court approval recorded charge 62 million includes lea settlement amount associated costs amount settlement another wage hour lawsuit october 21 2013 collective action lawsuit alleging failed pay class workers overtime compliance flsa filed titled zamora et al v baker hughes incorporated us district court southern district texas corpus christi division “zamora” october 2014 parties agreed settle zamora lawsuit amount material financial position results operations cash flows may 30 2013 received civil investigative demand cid us department justice doj pursuant antitrust civil process act cid seeks documents information us period may 29 2011 date cid connection doj investigation related pressure pumping services us working doj provide requested documents information able predict action might taken future doj governmental authorities result investigation among several unrelated companies received subpoena office new york attorney general dated june 17 2011 subpoena received sought information documents relating among things natural gas development hydraulic fracturing responded environmental matters past present operations include activities subject extensive domestic including us federal state local international environmental regulations regard air land water quality environmental matters environmental procedures policies practices designed ensure compliance existing laws regulations minimize possibility significant environmental damage involved voluntary remediation projects present former manufacturing locations facilities majority relate properties longer actively used operations rare occasions remediation activities conducted specified government agencyissued consent decree agreed order remediation costs accrued based estimates probable exposure using currently available facts existing environmental permits technology presently enacted laws regulations remediation cost estimates include direct costs related environmental investigation external consulting activities governmental oversight fees treatment equipment costs associated longterm operation maintenance monitoring remediation project also identified potentially responsible party “prp” remedial activities related various superfund sites instances participate process set joint participation defense agreement negotiate government agencies identify prps determine prp’s allocation estimate remediation costs accrued believe prorata share total estimated cost remediation associated management superfund sites share based upon ratio estimated volume waste contributed site total estimated volume waste disposed site applicable us federal law imposes joint several liability prp cleanup sites leaving us uncertainty may responsible remediation cost attributable prps unable pay share accrual made joint several liability concept superfund sites participation de minimis since believe probability pay material costs baker hughes incorporated notes consolidated financial statements volumetric share remote believe prps greater involvement volumetric calculation basis substantial assets may reasonably expected pay share cost remediation superfund sites significant prp remediation costs estimated include recalcitrant parties cases insurance coverage contractual indemnities third parties cover portion ultimate liability total accrual environmental remediation 35 million 34 million includes accruals 3 million 4 million various superfund sites december 31 2014 2013 respectively determination required accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity necessary normal course business customers vendors others entered offbalance sheet arrangements surety bonds performance letters credit bank issued guarantees totaled approximately 13 billion december 31 2014 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements also commitments outstanding purchase obligations related capital expenditures inventory services contracts five years period ending december 31 2019 532 million 312 million 256 million 156 million 72 million respectively 99 million aggregate thereafter baker hughes incorporated notes consolidated financial statements note 14 accumulated comprehensive loss following table presents changes accumulated comprehensive loss net tax amounts reclassified accumulated comprehensive loss twelve months ended december 31 2014 2013 represent amortization net actuarial loss prior service credit curtailments settlements included computation net periodic pension cost see note 12 employee benefit plans additional details net periodic pension cost recorded cost sales services research engineering marketing general administrative expenses baker hughes incorporated notes consolidated financial statements note 15 quarterly data unaudited 1 represents revenue less cost sales cost services research engineering item 9item 8 financial statements supplementary data management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rules 13a15f internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles supervision participation management including principal executive officer principal financial officer assessed effectiveness internal control financial reporting based 2013 framework internal control integrated framework issued committee sponsoring organizations treadway commission based assessment principal executive officer principal financial officer concluded internal control financial reporting effective december 31 2015 conclusion based recognition inherent limitations systems internal control inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate deloitte touche llp company’s independent registered public accounting firm issued attestation report effectiveness company’s internal control financial reporting martin craighead martin craighead chairman chief executive officer kimberly ross kimberly ross senior vice president chief financial officer alan j keifer alan j keifer vice president controller houston texas february 16 2016 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited accompanying consolidated balance sheets baker hughes incorporated subsidiaries company december 31 2015 2014 related consolidated statements income loss comprehensive income loss changes equity cash flows three years period ended december 31 2015 audits also included financial statement schedule ii valuation qualifying accounts listed index item 15 also audited companys internal control financial reporting december 31 2015 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission companys management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements financial statement schedule opinion companys internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions companys internal control financial reporting process designed supervision companys principal executive principal financial officers persons performing similar functions effected companys board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position baker hughes incorporated subsidiaries december 31 2015 2014 results operations cash flows three years period ended december 31 2015 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also opinion company maintained material respects effective internal control financial reporting december 31 2015 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission deloitte touche llp houston texas february 16 2016 baker hughes incorporated consolidated statements income loss see notes consolidated financial statements baker hughes incorporated consolidated statements comprehensive income loss see notes consolidated financial statements baker hughes incorporated consolidated balance sheets see notes consolidated financial statements baker hughes incorporated consolidated statements changes equity see notes consolidated financial statements baker hughes incorporated consolidated statements cash flows see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements note 1 summary significant accounting policies nature operations baker hughes incorporated “baker hughes” “company” “we” “our” “us” leading supplier oilfield services products technology systems used worldwide oil natural gas industry also provide products services businesses including downstream chemicals process pipeline services basis presentation consolidated financial statements prepared conformity united states generally accepted accounting principles gaap consolidated financial statements include accounts baker hughes subsidiaries exercise control investments subsidiaries whollyowned exercise control equity held minority owners portions net income loss reflected noncontrolling interests investments ability exercise significant influence operating financial policies hold controlling interest accounted using equity method accounting intercompany accounts transactions eliminated consolidation notes consolidated financial statements dollar share amounts tabulations millions dollars shares respectively unless otherwise indicated use estimates preparation financial statements conformity gaap requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period base estimates judgments historical experience various assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained operating environment changes believe estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts inventory valuation reserves recoverability longlived assets useful lives used depreciation amortization income taxes related valuation allowances accruals contingencies actuarial assumptions determine costs liabilities related employee benefit plans stockbased compensation expense fair value assets acquired liabilities assumed acquisitions revenue recognition products services sold based upon purchase orders contracts agreements customer include fixed determinable prices include right return similar provisions significant postdelivery obligations recognize revenue products sold upon delivery title passes collectability reasonably assured significant obligations future performance provisions estimated warranty returns similar arrangements made time related revenue recognized revenue services recognized services rendered collectability reasonably assured rates services typically priced per day per distance drilled per man hour similar basis certain situations revenue generated transactions may include multiple products services one contract agreement may delivered customer extended period time revenue arrangements recognized accordance criteria item service delivered based relative fair value research engineering research engineering expenses expensed incurred include costs associated research development new products services costs associated sustaining engineering existing baker hughes incorporated notes consolidated financial statements products services costs research development new products services 347 million 430 million 370 million years ended december 31 2015 2014 2013 respectively cash equivalents cash equivalents include investments original maturity three months less maintain cash deposits financial institutions may exceed federally insured limits monitor credit ratings concentration risk financial institutions continuing basis safeguard cash deposits allowance doubtful accounts establish allowance doubtful accounts based various factors including payment history financial condition customers economic environment provisions doubtful accounts recorded based aging status customer accounts becomes evident customer make required payments either contractual due dates future provision doubtful accounts recorded cost sales 193 million 102 million 75 million years ended december 31 2015 2014 2013 respectively concentration credit risk grant credit customers primarily operate oil natural gas industry although concentration affects overall exposure credit risk trade receivables spread diverse group customers across many countries mitigates risk perform periodic credit evaluations customers’ financial condition including monitoring customers’ payment history current credit worthiness manage risk generally require collateral support trade receivables may require payment advance security form letter credit bank guarantee 2015 2014 2013 individual customer accounted 10 consolidated revenue inventories stated lower cost market cost determined using average cost method includes cost materials labor manufacturing overhead necessary record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments property plant equipment accumulated depreciation property plant equipment “ppe” stated cost less accumulated depreciation generally provided using straightline method estimated useful lives individual assets significant improvements betterments capitalized extend useful life asset manufacture substantial portion tools equipment cost items includes direct indirect manufacturing costs capitalized carried inventory completed complete cost reflected capital expenditures classified machinery equipment ppe maintenance repairs charged expense incurred upon sale disposition applicable amounts asset cost accumulated depreciation removed balance sheet net amount less proceeds disposal charged credited income capitalized costs computer software developed purchased internal use classified machinery equipment goodwill intangible assets amortization goodwill excess consideration transferred fair value tangible identifiable intangible assets liabilities recognized acquisitions goodwill intangible assets indefinite lives amortized intangible assets finite useful lives amortized basis reflects pattern economic benefits intangible assets realized generally straightline basis asset’s estimated useful life baker hughes incorporated notes consolidated financial statements impairment ppe intangibles longlived assets goodwill review ppe intangible assets certain longlived assets impairment whenever events changes circumstances indicate carrying amount may recoverable least annually certain intangible assets determination recoverability made based upon estimated undiscounted future net cash flows amount impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets perform annual impairment test goodwill reporting units october 1 frequently event occurs circumstances change indicate likely impairment may exist reporting units based organizational reporting structure five reportable segments corporate assets liabilities allocated reporting units extent relate operations reporting units determining carrying amount performing annual impairment test option first performing qualitative assessment determine existence events circumstances would lead determination likely fair value reporting unit less carrying amount conclusion reached would required perform quantitative impairment assessment goodwill however assessment leads determination likely fair value reporting unit greater carrying amount assessments required 2015 2014 performed qualitative assessment annual goodwill impairment test 2013 quantitative assessment determination impairment made comparing carrying amount reporting unit fair value generally calculated using combination market comparable transaction discounted cash flow approaches performing annual goodwill impairment analysis 2015 qualitative assessment included consideration current industry market conditions circumstances well mitigating factors would affect fair value company reporting units among mitigating factors considered value consideration received closing merger defined based terms merger agreement defined compared carrying value company reporting units based assessment consideration totality facts circumstances including business environment fourth quarter 2015 determined likely fair value company reporting units less respective carrying amounts however decline stock price could require impairment future periods impairments goodwill recorded year ended december 31 2015 prior years included accompanying financial statements income taxes use liability method determining provision liabilities income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates deferred tax liabilities assets computed estimated income tax effect temporary differences financial tax bases assets liabilities determined using tax rate expected effect taxes actually paid recovered valuation allowance reduce deferred tax assets established likely portion deferred tax assets realized intend indefinitely reinvest certain earnings foreign subsidiaries operations outside us accordingly provided us income taxes earnings provide us additional nonus taxes earnings anticipated repatriated nonus subsidiaries tax filings various periods subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts provided amounts believe ultimately result proceedings addition assessments received various tax authorities also provide taxes uncertain tax positions formal assessments received classify interest penalties related uncertain tax positions income taxes financial statements baker hughes incorporated notes consolidated financial statements environmental matters estimated remediation costs accrued using currently available facts existing environmental permits technology enacted laws regulations cost estimates developed based internal evaluations discounted accruals recorded probable obligated pay environmental site evaluation remediation related activities costs reasonably estimated additional information becomes available accruals adjusted reflect current cost estimates ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party us federal state comprehensive environmental response compensation liability act “superfund” site accrue share estimated remediation costs site share based ratio estimated volume waste contributed site total volume waste disposed site foreign currency number significant foreign subsidiaries designated local currency functional currency gains losses resulting balance sheet translation foreign operations included separate component accumulated comprehensive loss within stockholders’ equity gains losses foreign currency transactions resulting settlement receivables payables nonfunctional currency included marketing general administrative “mga” expenses consolidated statements income loss incurred foreign subsidiaries designated us dollar usd functional currency monetary assets liabilities remeasured periodend exchange rates nonmonetary items remeasured historical exchange rates gains losses resulting balance sheet remeasurement also included mga expenses incurred 2015 2014 venezuelan government modified currency exchange systems impacted rate could reasonably expect exchange venezuelan bolivars fuertes bsf us dollar result change exchange rate 2015 2014 recognized foreign currency loss approximately 5 million 12 million respectively related remeasurement bsf denominated assets liabilities loss recorded mga expenses believe devaluation venezuelas currency would material impact financial position results operations cash flows 2013 venezuelas currency devalued prior exchange rate 43 bsf per usd 63 bsf per usd impact devaluation loss 23 million recorded mga expenses fair value measurement company defines fair value price would received selling asset paid transfer liability orderly transaction market participants measurement date company applies following fair value hierarchy prioritizes inputs used measure fair value three levels bases categorization within hierarchy upon lowest level input available significant fair value measurement • level one use quoted prices active markets identical financial instruments • level two use quoted prices similar instruments active markets quoted prices identical similar instruments markets active inputs observable market corroborated observable market data • level three use significantly unobservable inputs typically require use managements estimates assumptions market participants would use pricing financial instruments financial instruments include cash equivalents accounts receivable investments accounts payable short longterm debt derivative financial instruments except longterm debt estimated fair value financial instruments december 31 2015 2014 approximates carrying value baker hughes incorporated notes consolidated financial statements reflected consolidated balance sheets information fair value debt see note 12 indebtedness monitor exposure various business risks including commodity prices foreign currency exchange rates interest rates regularly use derivative financial instruments manage risks policies permit use derivative financial instruments speculative purposes inception new derivative designate derivative hedge determine derivative undesignated hedging instrument document relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions assess whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item inception hedge ongoing basis program utilizes foreign currency forward contracts reduce risks associated effects certain foreign currency exposures program strategy gains losses foreign currency forward contracts mitigate foreign currency transaction translation gains losses extent practical foreign currency exposures typically arise changes value assets liabilities denominated currencies functional currency foreign currency forward contracts generally settle less 180 days record derivatives end reporting period consolidated balance sheet fair value forward contracts designated fair value hedging instruments held undesignated hedging instruments record changes fair value forward contracts consolidated statements income loss along change fair value hedged item changes fair value forward contracts designated cash flow hedging instruments recognized comprehensive income hedged item recognized earnings derivatives designated cash flow hedge ineffective portion derivatives change fair value recognized earnings recognized gains losses derivatives entered manage foreign currency exchange risk included mga expenses consolidated statements income loss outstanding foreign currency forward contracts notional amounts aggregating 499 million 580 million hedge exposure currency fluctuations various foreign currencies december 31 2015 2014 respectively based quoted market prices december 31 2015 2014 forward contracts similar terms maturity dates recorded losses 1 million 11 million respectively adjust forward contracts fair market value new accounting standards updates may 2014 financial accounting standards board “fasb” issued accounting standards update asu 201409 revenue contracts customers asu supersede existing revenue recognition requirements us gaap require entities recognize revenue amount reflects consideration company expects entitled exchange transferring goods services customer new standard also requires significantly expanded disclosures regarding qualitative quantitative information entitys nature amount timing uncertainty revenue cash flows arising contracts customers pronouncement applied retrospectively effective annual reporting periods beginning december 15 2017 early adoption permitted january 1 2017 completed evaluation impact pronouncement consolidated financial statements related disclosures april 2015 fasb issued asu 20153 simplifying presentation debt issuance costs asu requires debt issuance costs related recognized debt liability presented balance sheet direct deduction carrying amount debt liability consistent debt discounts pronouncement effective annual reporting periods beginning december 15 2015 currently report debt issuance costs consistent guidance asu therefore impact consolidated financial statements related disclosures upon adoption april 2015 fasb issued asu 20155 customers accounting fees paid cloud computing arrangement asu provides guidance customers whether cloud computing arrangement includes software license related accounting treatment pronouncement effective annual reporting periods baker hughes incorporated notes consolidated financial statements beginning december 15 2015 adoption pronouncement expected material impact consolidated financial statements related disclosures july 2015 fasb issued asu 201511 simplifying measurement inventory requires inventory measured using fifo average cost methods subsequently measured lower cost net realizable value net realizable value estimated selling price ordinary course business less reasonably predictable costs completion disposal transportation currently inventory measured using methods required subsequently measured lower cost market defined replacement cost net realizable value net realizable value less normal profit margin pronouncement effective annual reporting periods beginning december 15 2016 prospective basis early adoption permitted completed evaluation impact pronouncement consolidated financial statements related disclosures november 2015 fasb issued asu 201517 balance sheet classification deferred taxes amends existing guidance income taxes require classification deferred tax assets liabilities noncurrent balance sheet pronouncement effective annual reporting periods beginning december 15 2016 may applied either prospectively retrospectively completed evaluation impact pronouncement consolidated financial statements related disclosures note 2 halliburton merger agreement november 16 2014 baker hughes halliburton company “halliburton” wholly owned subsidiary halliburton “merger sub” entered agreement plan merger “merger agreement” halliburton acquire outstanding shares baker hughes merger baker hughes merger sub merger subject certain specified exceptions effective time merger share baker hughes common stock converted right receive 112 shares halliburton common stock ii 1900 cash march 27 2015 halliburtons stockholders approved proposal issue shares halliburton common stock contemplated merger agreement addition baker hughes’ stockholders adopted merger agreement thereby approved proposed combination two companies obligation parties consummate merger still subject additional customary closing conditions including applicable regulatory approvals ii absence legal restraints prohibitions iii customary closing conditions halliburton required take actions necessary obtain regulatory approvals including agreeing divestitures unless assets businesses product lines subject actions would account 75 billion 2013 revenue us hartscottrodino antitrust improvements act 1976 amended hsr act rules promulgated thereunder federal trade commission “ftc” merger cannot completed halliburton baker hughes filed notification report form ftc antitrust division department justice “doj” hsr act applicable waiting period expired terminated halliburton baker hughes filed initial notification report form december 8 2014 halliburton withdrew filing january 7 2015 refiled january 9 2015 order provide ftc doj additional 30day period review filings february 9 2015 doj issued request additional information hsr act “second request” july 10 2015 halliburton baker hughes entered timing agreement doj september 28 2015 halliburton baker hughes announced amendment timing agreement extended period dojs review merger later december 15 2015 30 days following date companies certified final substantial compliance second request december 16 2015 baker hughes halliburtons timing agreement doj expired without reaching settlement doj initiating litigation block pending merger companies intend continue discussions doj competition agencies expressed interest transaction remain focused completing merger early possible 2016 regard baker hughes halliburton agreed extend period parties obtain required competition approvals april 30 baker hughes incorporated notes consolidated financial statements 2016 permitted merger agreement though parties would proceed closing prior date relevant competition approvals obtained review relevant competition authorities extends beyond april 30 2016 merger agreement terminate automatically parties may continue seek relevant competition approvals either parties may terminate merger agreement baker hughes cannot predict certainty merger completed completion merger subject conditions beyond control baker hughes baker hughes halliburton made customary representations warranties covenants merger agreement including among others covenants baker hughes halliburton subject certain exceptions conduct business ordinary course particular among restrictions subject certain exceptions baker hughes agreed generally refrain acquiring new businesses incurring new indebtedness repurchasing shares issuing new common stock equity awards equity awards granted employees officers directors materially consistent historical longterm incentive awards granted entering new material contracts commitments outside normal course business without consent halliburton period execution merger agreement consummation merger respect equity awards granted merger agreement officers employees awards vest solely result merger converted equivalent halliburton equity award however vest entirely officer employee terminated within one year following closing merger halliburton baker hughes halliburton permitted pay regular quarterly cash dividends period addition terms merger agreement halliburton baker hughes agreed coordinate declaration payment dividends respect partys common stock including record dates payment dates relating thereto expect third month quarter merger agreement agreed increase quarterly dividend merger pending event merger agreement terminated either party result failure merger occur end date may extended due failure achieve certain specified antitrustrelated approvals closing conditions receipt antitrust specified regulatory approvals conditions nature cannot satisfied closing subject conditions capable satisfied closing date termination satisfied ii either party result antitrustrelated final nonappealable order injunction prohibiting closing iii baker hughes result halliburton’s material breach obligations obtain regulatory approval antitrustrelated condition closing incapable satisfied case halliburton would required pay baker hughes termination fee 35 billion baker hughes incurred costs related merger 295 million 2015 including costs retention program obligations minimum incentive compensation costs based meeting eligibility criteria treated merger related expenses note 3 impairment restructuring charges impairment charges conduct impairment tests longlived assets whenever events changes circumstances indicate carrying value may recoverable based estimated future cash flows fourth quarter 2015 negative market sentiment increased oil prices fell seven year low additionally current market outlook prolonged recovery considered events possible impairment indicators performed testing longlived assets impairment result testing certain machinery equipment total carrying value 164 billion written estimated fair value resulting impairment charge 105 billion additionally certain intangible assets comprised customer relationships trade names total carrying value 178 million written estimated fair values resulting impairment charge 116 million total impairment charges 2015 116 billion majority machinery equipment intangible assets impaired related pressure pumping business north america estimated fair values assets determined using discounted future cash flows significant level 3 unobservable inputs used baker hughes incorporated notes consolidated financial statements determination fair value assets estimated future cash flows weighted average cost capital 98 restructuring charges beginning second half 2014 throughout 2015 oil natural gas market experienced significant supply capacity leading substantial rapid decline oil prices resulting significantly lower activity customer spending accordingly adjust lower level activity beginning first quarter 2015 initiated actions restructure adjust operations cost structure reflect current expected nearterm activity levels restructuring activities included workforce reductions contract terminations facility closures removal excess machinery equipment resulted asset impairments result restructuring activities recorded restructuring charges 830 million 2015 depending future market conditions activity levels actions may necessary adjust operations may result additional charges restructuring charges summarized workforce reduction costs 2015 initiated workforce reductions result elimination approximately 18000 positions worldwide december 31 2015 eliminated approximately 17000 positions result workforce reductions recorded charge severance expense 436 million 2015 net related employee benefit plan gains 10 million december 31 2015 made payments totaling 365 million relating workforce reductions expect substantially accrued severance remaining paid middle 2016 contract termination costs 2015 incurred costs 121 million terminate restructure various contracts primarily north america includes accrual costs settle leases closed facilities certain equipment estimated exit costs net expected sublease income also includes costs terminate restructure certain takeorpay supply contracts related purchase materials used pressure pumping operations north america including writeoff 14 million prepayments made 2014 december 31 2015 made payments totaling 81 million relating contract termination costs impairment buildings improvements consolidating facilities shutting certain operations result closing abandoning selling certain facilities owned leased 2015 recognized 82 million impairment charges related facilities primarily north america latin america leased facilities charge includes impairment leasehold improvements made facilities impairment machinery equipment exiting substantially downsizing presence select markets primarily pressure pumping product line north america latin america 2015 recognized 191 million impairment losses adjust carrying value certain machinery equipment fair value net costs dispose currently process disposing machinery equipment sale scrap charges addition matters described 2015 also recorded charges 194 million 37 million reported cost sales 157 million reported cost services writedown carrying value baker hughes incorporated notes consolidated financial statements certain inventory writedown primarily north america includes lower cost market adjustments due significant decline activity related prices products coupled declines replacement costs addition adjustments include provisions excess inventory levels based estimates current future market demand product lines impacted primarily pressure pumping drilling completion fluids note 4 acquisitions september 2014 completed acquisition pipeline specialty services business weatherford international ltd pss total cash consideration 248 million subject finalization postclosing working capital adjustments pss provides expanded range precommissioning deepwater inline inspection services worldwide included industrial services segment transaction accounted using acquisition method accounting accordingly assets acquired liabilities assumed recorded fair values acquisition date result acquisition recorded approximately 73 million goodwill approximately 37 million intangible assets pro forma results operations acquisition presented effect acquisition material consolidated financial statements note 5 segment information supplier oilfield services products technology systems worldwide oil natural gas business referred oilfield operations managed operating segments aligned geographic regions also provide services products downstream chemicals process pipeline services referred industrial services performance operating segments evaluated based profit loss tax defined income loss income taxes following net interest expense corporate expenses certain gains losses including impairment restructuring charges allocated operating segments following table presents revenue profit loss tax segment years ended december 31 baker hughes incorporated notes consolidated financial statements following table presents total assets segment december 31 shared assets consist primarily assets carried enterprise level include supply chain product line technology information technology organizations assets used support operating segments consist primarily manufacturing inventory property plant equipment used manufacturing information technology intangible assets related technology certain deferred tax assets costs expenses organizations including depreciation amortization allocated operating segments enterprise organizations support global operations corporate assets include cash certain facilities certain noncurrent assets following table presents capital expenditures depreciation amortization segment years ended december 31 baker hughes incorporated notes consolidated financial statements following tables present geographic consolidated revenue based location product shipped services performed years ended december 31 net property plant equipment geographic location december 31 amounts industrial services included applicable geographic locations 1 latin america includes mexico central south america following table presents consolidated revenue category similar products services years ended december 31 note 6 stockbased compensation stockbased compensation cost measured date grant based calculated fair value award generally recognized straightline basis vesting period equity grant compensation cost determined based awards ultimately expected vest therefore reduced cost estimated forfeitures based historical forfeiture rates forfeitures estimated time grant revised necessary subsequent periods reflect actual forfeitures stockbased compensation costs capitalized amounts material baker hughes incorporated notes consolidated financial statements stockbased compensation costs follows years ended december 31 stock options restricted stock awards units currently 607 million shares authorized issuance december 31 2015 approximately 213 million shares available future grants policy issue new shares exercises stock options restricted stock awards granted vesting restricted stock units issuances employee stock purchase plan stock options stock option plans provide issuance stock options directors officers key employees exercise price equal fair market value stock date grant although subject terms stock option agreement substantially stock options become exercisable three equal annual installments beginning year date grant generally expire ten years date grant stock option plans provide acceleration vesting upon employee’s retirement therefore service period reduced employees become retirement eligible vesting period accordingly recognition compensation expense employees accelerated stock options granted 2015 fair value stock option granted estimated using blackscholes option pricing model following table presents weighted average assumptions used option pricing model options granted expected life options represents period time options expected outstanding expected life based historical exercise trends postvest termination data incorporated forwardlooking stock price model expected volatility based implied volatility forecast implied prices actively traded options purchase stock observed market riskfree interest rate based observed us treasury yield curve effect time options granted dividend yield based history dividend payouts baker hughes incorporated notes consolidated financial statements following table presents changes stock options outstanding related information thousands except per option prices weighted average remaining contractual term options outstanding options exercisable december 31 2015 47 years 42 years respectively total intrinsic value stock options defined amount market price common stock date exercise exceeds exercise price option exercised 2015 2014 2013 15 million 70 million 11 million respectively income tax benefit realized stock options exercised 38 million 196 million 20 million 2015 2014 2013 respectively total fair value options vested 2015 2014 2013 24 million 29 million 31 million respectively december 31 2015 5 million total unrecognized compensation cost related unvested stock options expected recognized weighted average period one year total intrinsic value stock options outstanding december 31 2015 151 million 148 million relates options vested exercisable intrinsic value stock options outstanding calculated amount quoted price 4615 common stock end 2015 exceeds exercise price options restricted stock awards units addition stock options officers directors key employees may granted restricted stock awards “rsa” award common stock exercise price restricted stock units “rsu” unit represents right receive end stipulated period one unrestricted share stock exercise price rsas rsus subject cliff graded vesting generally ranging three year period one year period nonemployee directors determine fair value restricted stock awards restricted stock units based market price common stock date grant following table presents combined changes rsas rsus related information thousands except per awardunit prices baker hughes incorporated notes consolidated financial statements weighted average grant date fair value per share rsas rsus granted 2015 2014 2013 5737 6967 4558 respectively total fair value rsas rsus vested 2015 2014 2013 72 million 60 million 58 million respectively december 31 2015 117 million total unrecognized compensation cost related unvested rsas rsus expected recognized weighted average period two years employee stock purchase plan employee stock purchase plan “espp” provides eligible employees purchase shares aftertax basis amount 1 10 annual pay june 30 year 15 discount fair market value common stock january 1 june 30 whichever lower ii december 31 year 15 discount fair market value common stock july 1 december 31 whichever lower employee may contribute 5000 either sixmonth measurement periods described 10000 annually currently 305 million shares authorized issuance december 31 2015 42 million shares reserved future issuance compensation cost years ended december 31 calculated using blackscholes option pricing model following assumptions calculated estimated volatility using historical daily prices based expected life stock purchase plan riskfree interest rate based observed us treasury yield curve effect time espp shares granted dividend yield based history dividend payouts baker hughes incorporated notes consolidated financial statements note 7 income taxes benefit provision income taxes comprised following years ended december 31 geographic sources loss income taxes follows years ended december 31 benefit provision income taxes differs amount computed applying us statutory income tax rate loss income taxes reasons set forth years ended december 31 fourth quarter 2013 recognized net tax benefit 18 million result reorganization certain foreign subsidiaries included 360 million tax benefit resulting reversal deferred tax liability related decision indefinitely reinvest earnings certain foreign subsidiaries made conjunction reorganization occurred fourth quarter 2013 due fact undistributed foreign earnings longer source future income foreign tax credits utilized also recognized tax charge 342 million record valuation allowance certain foreign tax credit carryforwards deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards baker hughes incorporated notes consolidated financial statements tax effects temporary differences carryforwards follows december 31 record valuation allowance likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions december 31 2015 valuation allowances totaled 1210 million consisting 672 million operating loss carryforwards 425 million foreign tax credit carryforwards 113 million deferred tax assets various jurisdictions 481 million deferred tax assets related operating loss carryforwards without valuation allowance expect deferred tax assets realized within carryforward period majority deferred tax assets expire varying amounts next twenty years provided relevant us foreign taxes anticipated repatriation certain earnings foreign subsidiaries consider undistributed earnings foreign subsidiaries amount taxes already provided indefinitely reinvested current intention repatriate earnings december 31 2015 cumulative amount earnings upon us income taxes provided approximately 56 billion additional foreign earnings could become subject additional tax remitted deemed remitted dividend computation potential deferred tax liability associated undistributed earnings basis differences practicable december 31 2015 approximately 126 million foreign tax credits may carried forward indefinitely applicable foreign law 310 million foreign tax credits 22 million credits expire 2016 2035 us tax law december 31 2015 312 million tax liabilities total gross unrecognized tax benefits related uncertain tax positions includes liabilities interest penalties 30 million 21 million respectively prevail uncertain tax positions net effect would increase income tax benefit approximately 289 million remaining approximately 23 million offset deferred tax assets represent tax benefits would received different taxing jurisdictions event prevail uncertain tax positions baker hughes incorporated notes consolidated financial statements following table presents changes gross unrecognized tax benefits associated interest penalties included consolidated balance sheets expected amount unrecognized tax benefits change next twelve months due expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate december 31 2015 approximately 80 million tax liabilities net 13 million tax assets related uncertain tax positions individually insignificant reasonably possible settled within next twelve months december 31 2015 approximately 219 million tax liabilities total gross unrecognized tax benefits included noncurrent portion income tax liabilities settlement period cannot determined however expected within next twelve months operate 80 countries subject income taxes taxing jurisdictions operate following table summarizes earliest tax years remain subject examination major taxing jurisdictions operate addition us include foreign jurisdictions project highest tax liability 2016 baker hughes incorporated notes consolidated financial statements note 8 earnings per share reconciliation number shares used basic diluted loss earnings per share “eps” computations follows years ended december 31 1 calculation diluted net loss per share 2015 excludes shares potentially issuable stockbased incentive compensation plans employee stock purchase plan effect included would antidilutive 2 options exercise price exceeds average market price excluded calculation diluted net loss earnings per share effect would antidilutive note 9 inventories net reserves 278 million 319 million 2015 2014 respectively comprised following december 31 2015 recorded charge 194 million adjust carrying value certain inventory see note 3 impairment restructuring charges discussion note 10 property plant equipment property plant equipment comprised following december 31 depreciation expense relating property plant equipment 1637 million 1706 million 1579 million 2015 2014 2013 respectively 2015 recorded impairment charges relating property plant equipment totaling 132 billion see note 3 impairment restructuring charges discussion baker hughes incorporated notes consolidated financial statements note 11 goodwill intangible assets changes carrying amount goodwill detailed segment perform annual impairment test goodwill october 1 every year impairments goodwill three years ended december 31 2015 related annual impairment test intangible assets comprised following december 31 1 2015 recorded impairments relating customer relationships trade names intangible assets totaling 116 million see note 3 impairment restructuring charges discussion intangible assets generally amortized straightline basis estimated useful lives ranging 3 30 years amortization expense years ended december 31 2015 2014 2013 104 million 107 million 119 million respectively estimated amortization expense subsequent five fiscal years expected follows baker hughes incorporated notes consolidated financial statements note 12 indebtedness total debt consisted following december 31 net unamortized discount debt issuance cost estimated fair value total debt december 31 2015 2014 4321 million 4663 million respectively differs carrying amounts 4041 million 4133 million respectively included consolidated balance sheets fair value determined using quoted period end market prices december 31 2015 committed revolving credit facility “credit facility” commercial banks related commercial paper program maximum combined borrowing time credit facility commercial paper program 25 billion credit facility matures september 2016 december 31 2015 compliance credit facilitys covenants direct borrowings credit facility 2015 commercial paper program may issue time 25 billion commercial paper maturities 270 days amount available borrow credit facility reduced amount commercial paper outstanding december 31 2015 borrowings outstanding commercial paper program maturities debt december 31 2015 follows 2016 151 million 2017 24 million 2018 1024 million 2019 22 million 2020 12 million 2808 million thereafter weighted average interest rate shortterm borrowings outstanding december 31 2015 2014 120 100 respectively note 13 employee benefit plans defined benefit plans funded unfunded noncontributory defined benefit pension plans “pension benefits” covering certain employees primarily us uk germany canada provisions us qualified pension plan “us pension plan” hypothetical cash balance account established participant accounts receive quarterly credits based percentage according employee’s age last day quarter applied quarterly eligible compensation interest credits based balance account last day quarter uk canada plans frozen majority participants therefore accrue benefits participants germany pension plan unfunded plan benefits based creditable years service creditable pay accrual rates also provide certain postretirement health care benefits “other postretirement benefits” unfunded plan closed group us employees retire met certain age service requirements 2015 result workforce reductions stemming restructuring activities remeasured certain pension postretirement benefit obligations resulted reductions projected benefit obligations 28 million curtailment gains 18 million baker hughes incorporated notes consolidated financial statements funded status reconciliation beginning ending balances benefit obligations fair value plan assets funded status plans amounts recognized consolidated balance sheets consist following december 31 funded status position represents difference benefit obligation plan assets projected benefit obligation “pbo” pension benefits represents actuarial present value benefits attributed employee services compensation includes assumption future compensation levels accumulated benefit obligation “abo” actuarial present value pension benefits attributed employee service date present compensation levels abo differs pbo abo include assumptions future compensation levels baker hughes incorporated notes consolidated financial statements information plans abos excess plan assets follows december 31 weighted average assumptions used determine benefit obligations plans follows years ended december 31 development discount rate us plans substantially nonus plans based bond matching model whereby hypothetical bond portfolio highquality fixedincome securities selected match cash flows underlying projected benefit obligation accumulated comprehensive loss amount recorded beforetax accumulated comprehensive loss related employee benefit plans consists following december 31 estimated net actuarial loss prior service cost defined benefit pension plans amortized accumulated comprehensive loss included net periodic benefit cost 2016 17 million 03 million respectively estimated prior service credit postretirement benefits amortized accumulated comprehensive loss included net periodic benefit cost 2016 9 million amortization net actuarial loss postretirement benefits accumulated comprehensive loss expected 2016 baker hughes incorporated notes consolidated financial statements net periodic cost components net periodic cost follows years ended december 31 weighted average assumptions used determine net periodic cost plans follows years ended december 31 selecting expected rate return plan assets consider average rate earnings expected funds invested provide benefits plans includes considering trusts’ asset allocation expected returns likely earned life plans health care cost trend rates assumed health care cost trend rates significant effect amounts reported postretirement benefits december 31 2015 health care cost trend rate 73 employees age 65 declining gradually successive year reaches 45 one percentage point change assumed health care cost trend rates would following effects 2015 plan assets investment committees meet regularly review portfolio returns determine assetmix targets based assetliability studies thirdparty investment consultants assist committees developing asset allocation strategies determine expected rates return expected risk various investment portfolios investment committees considered strategies formal establishment current assetmix targets based projected risk return levels major asset classes baker hughes incorporated notes consolidated financial statements majority investments held form units funds hold underlying securities redeemable measurement date investments equities fixedincome funds generally measured fair value based daily closing prices provided active exchanges basis observable marketbased inputs investments hedge funds generally measured fair value basis net asset values provided investment sponsor third party administrator fair values private equity investments real estate funds based appraised values developed using comparable market transactions discounted cash flows us pension plan investment policy us pension plan developed examining historical relationships risk return among asset classes relationship expected behavior us plan’s assets liabilities investment policy us plan designed provide greatest probability meeting exceeding us plan’s objectives lowest possible risk evaluating risk investment committee us pension plan “us committee” reviews longterm characteristics various asset classes focusing balancing risk expected return accordingly us committee selected following six asset classes allowable investments assets us pension plan us equities nonus equities global fixedincome securities real estate hedge funds private equity table presents fair value assets us pension plan asset category valuation technique december 31 1 multimanager strategy investing fixed income securities funds current allocation includes 29 government bonds 24 government agencies 20 unconstrained bond funds 11 corporate bonds 11 government mortgagebacked securities 3 assetbacked securities 2 cash securities 2 multimanager strategy investing common stocks nonus listed companies using value growth approaches 3 multimanager strategy investing common stocks us listed companies using value growth approaches 4 strategies taking long short positions equities fixed income securities currencies derivative contracts 5 strategy investing global private real estate secondary market using valuebased investment approach 6 partnership making opportunistic investments global basis across asset classes capital structures geographies baker hughes incorporated notes consolidated financial statements nonus pension plans investment policies pension plans plan assets primarily canada uk “nonus plans” cover asset allocations governing boards believe appropriate nonus plans longterm taking account nature liabilities expect incur suitability asset allocations investment policies reviewed periodically ensure alignment plan liabilities table presents fair value assets nonus plans asset category valuation technique december 31 1 invests mixes global common stocks bonds achieve broad diversification 2 invests canadian dollardenominated high quality corporate bonds 3 invests canadian dollardenominated government issued bonds intended match duration plan liabilities 4 invests passively british pound sterlingdenominated investment grade corporate bonds 5 invests passively british pound sterlingdenominated government issued bonds 6 invests globally high quality corporate bonds 7 invests broad equity funds based securities offered various regions countries equity funds allocated region follows 49 global 31 uk 6 emerging markets 5 north america 5 asia pacific 4 europe 8 invests diversified range property throughout uk principally retail office industrialwarehouse sectors 9 invests range pooled funds include positions swap contracts uk sovereign bonds pooled funds categorized maturities underlying positions pooled funds employ leverage order match uk plans duration inflation baker hughes incorporated notes consolidated financial statements following table presents changes fair value assets determined using level 3 unobservable inputs expected cash flows pension plans make annual contributions plans amounts equal greater amounts necessary meet minimum governmental funding requirements 2016 expect contribute 65 million 75 million funded unfunded pension plans 2016 also expect make benefit payments related postretirement benefits 15 million 20 million following table presents expected benefit payments next ten years us nonus pension benefit payments made respective pension trust funds defined contribution plans periods reported generally us employees eligible participate sponsored 401k plan “thrift plan” thrift plan allows eligible employees elect contribute portions salaries investment trust employee contributions matched company cash rate 100 per 100 employee contribution first 5 employee’s salary contributions vest immediately addition make cash contributions eligible employees 2 5 salary depending baker hughes incorporated notes consolidated financial statements employee’s age contributions fully vested employee three years employment thrift plan provides several investment options employee sole investment discretion thrift plan offer companys common stock investment option contributions thrift plan several nonus defined contribution plans amounted 202 million 263 million 240 million 2015 2014 2013 respectively certain nonus employees eligible participate thrift plan provide nonqualified defined contribution international retirement plan provides basically benefits provided thrift plan addition provide nonqualified supplemental retirement plan “srp” certain officers employees whose benefits thrift plans andor us qualified pension plan limited federal tax law srp also allows eligible employees defer portion eligible compensation provides employer matching base contributions pursuant limitations nonqualified plans invested trusts assets corresponding liabilities included consolidated balance sheets contributions nonqualified plans amounted 15 million 17 million 15 million 2015 2014 2013 respectively 2016 estimate contribute 165 million 180 million defined contribution plans postemployment benefits provide certain postemployment disability income medical benefits substantially qualifying former inactive us employees income benefits longterm disability provided fullyinsured plan continuation medical benefits disability “continuation benefits” provided qualified selfinsured plan accrued postemployment liability continuation benefits december 31 2015 2014 34 million 30 million respectively included liabilities consolidated balance sheets note 14 commitments contingencies leases december 31 2015 longterm noncancelable operating leases covering certain facilities equipment minimum annual rental commitments net amounts due subleases five years period ending december 31 2020 183 million 119 million 65 million 51 million 21 million respectively 151 million aggregate thereafter rent expense 514 million 747 million 702 million years ended december 31 2015 2014 2013 respectively enter significant capital leases three years ended december 31 2015 litigation subject number lawsuits claims arising conduct business ability predict ultimate outcome matters involves judgments estimates inherent uncertainties record liability contingencies incurrence loss probable amount reasonably estimated including accruals selfinsured losses calculated based historical claim data specific loss development factors information range total possible losses litigation matters cannot reasonably estimated based consideration relevant facts circumstances expect ultimate outcome currently pending lawsuits claims us material adverse effect financial position results operations cash flows however assurance ultimate outcome matters insure risks arising business extent deemed prudent management extent insurance available assurance given nature amount insurance sufficient fully indemnify us liabilities arising pending future legal proceedings claims insurance policies contain deductibles selfinsured retentions amounts deem prudent responsible payment determining amount selfinsurance policy selfinsure losses predictable measurable recurring nature claims automobile liability general liability workers compensation baker hughes incorporated notes consolidated financial statements following lawsuits filed delaware connection pending merger halliburton • november 24 2014 gary molenda purported shareholder company filed class action lawsuit court chancery state delaware chancery court baker hughes company’s board directors halliburton red tiger llc wholly owned subsidiary halliburton “red tiger” together defendants “defendants” styled gary r molenda v baker hughes inc et al case 10390cb • november 26 2014 second purported shareholder company booth family trust filed substantially similar class action lawsuit delaware chancery court • december 1 2014 new jersey building laborers annuity fund james rice two additional purported shareholders company filed substantially similar class action lawsuits delaware chancery court • december 10 2014 fifth purported shareholder company iron workers midsouth pension fund filed another substantially similar class action lawsuit delaware chancery court • december 24 2014 sixth purported shareholder company annette shipp filed another substantially similar class action lawsuit delaware chancery court lawsuits make substantially similar claims plaintiffs generally allege members company’s board directors breached fiduciary duties shareholders connection merger negotiations entering merger agreement approving merger company halliburton red tiger aided abetted purported breaches fiduciary duties specifically lawsuits allege merger agreement provides inadequate consideration shareholders process resulting merger agreement flawed company’s directors engaged selfdealing certain provisions merger agreement improperly favor halliburton red tiger precluding impeding third parties submitting potentially superior proposals among things lawsuit filed annettee shipp also alleges board directors failed disclose material information concerning proposed merger preliminary registration statement form s4 january 7 2015 james rice amended complaint adding similar allegations regarding disclosures preliminary registration statement form s4 lawsuits seek unspecified damages injunctive relief enjoining merger rescission merger agreement among relief january 23 2015 delaware lawsuits consolidated caption baker hughes inc stockholders litigation consolidated ca 10390cb consolidated case pursuant court’s consolidation order plaintiffs filed consolidated complaint february 4 2015 alleges substantially similar claims seeks substantially similar relief raised six individual complaints except baker hughes named defendant claims asserted company march 18 2015 parties reached agreement principle settle consolidated case exchange company making certain additional disclosures contained form 8k filed sec march 18 2015 settlement remains subject certain conditions including consummation merger final documentation court approval november 26 2014 seventh class action challenging merger filed purported shareholder company united states district court southern district texas houston division lawsuit styled marc rovner v baker hughes inc et al cause 414cv03416 rovner lawsuit asserts claims company current board directors halliburton red tiger lawsuit asserts substantially similar claims seeks substantially similar relief sought delaware lawsuits march 20 2015 counsel mr rovner filed notice voluntary dismissal march 23 2015 court entered order dismissing rovner lawsuit without prejudice october 9 2014 subsidiary filed request arbitration customer london court international arbitration pursuing claims nonpayment invoices goods services provided amount provisionally quantified exceed 679 million request arbitration also noted invoices amount exceeding 57 million issued customer would added claim event became overdue due date payment invoices passed november 6 2014 customer filed response counterclaim denying liability counterclaiming damages breach contract approximately 182 million deny liability customer intend pursue claims customer defend claims made counterclaim parties applied baker hughes incorporated notes consolidated financial statements arbitration tribunal extend suspension arbitral proceedings march 31 2016 pending ongoing settlement discussions timetable conduct arbitration yet established 2014 received customer notifications related possible equipment failure natural gas storage system northern germany includes certain products currently investigating cause possible failure necessary possible repair replacement options products similar products utilized natural gas storage systems customers customer initiated arbitral proceedings us june 19 2015 rules german institute arbitration ev dis customer alleges damages approximately 170 million plus interest annual rate prime 5 procedural schedule arbitration yet set addition september 21 2015 triuva kapitalverwaltungsgesellschaft mbh filed lawsuit united states district court southern district texas houston division company baker hughes oilfield operations inc alleging plaintiff owner gas storage caverns etzel germany company provided certain equipment connection development gas storage caverns plaintiff alleges company supplied equipment either defectively designed failed warn risks equipment posed alleged defects caused damage plaintiff’s property plaintiff seeks recovery alleged compensatory punitive damages unspecified amount addition reasonable attorneys’ fees court costs prejudgment postjudgment interest allegations lawsuit related claims made june 19 2015 german arbitration referenced december 15 2015 district court entered order staying lawsuit favor pending german arbitration time able predict outcome claims whether either material impact financial position results operations cash flows august 31 2015 customer one company’s subsidiaries issued letter claim pursuant construction engineering contract customer claimed 369 million plus loss production resulting breach contract related five electric submersible pumps installed subsidiary europe investigation ongoing merits claim time able predict outcome claim whether material impact financial position results operations cash flows october 30 2015 chieftain sand proppant barron llc initiated arbitration subsidiary baker hughes oilfield operations inc american arbitration association claimant alleges company failed purchase required sand tonnage contract year 20142015 alleges company repudiated yearly purchase obligations remaining contract term claimant alleges damages approximately 110 million plus interest attorneys’ fees costs procedural schedule arbitrations yet set company intends vigorously defend claim time able predict outcome claim whether material impact financial position results operations cash flows second quarter 2014 recorded charge 62 million related previously disclosed litigation settlements wage hour lawsuits portion settlement paid claims made basis second quarter 2015 date passed class members could file claim provision settlement agreement amount claims made less estimated accordingly reduced accrual approximately 13 million recorded adjustment litigation settlements second quarter 2015 april 30 2015 class collective action lawsuit alleging failed pay nationwide class workers overtime compliance fair labor standards act north dakota law filed titled williams et al v baker hughes oilfield operations inc us district court district north dakota evaluating background facts time able predict outcome lawsuit whether material impact financial position results operations cash flows july 31 2015 rapid completions llc filed lawsuit federal court eastern district texas baker hughes incorporated baker hughes oilfield operations inc others claiming infringement us patent nos 6907936 7134505 7543634 7861774 8657009 august 6 2015 rapid completions amended complaint allege infringement us patent 9074451 september 17 2015 rapid completions llc packers plus energy services inc sued baker hughes canada company canada baker hughes incorporated notes consolidated financial statements federal court related canadian patent 2412072 patents relate primarily certain specific downhole completions equipment case set jury trial september 25 2017 tyler texas plaintiff requested permanent injunction alleged infringement damages unspecified amount supplemental enhanced damages additional relief attorney’s fees costs time able predict outcome claims whether either material impact financial position results operations cash flows may 30 2013 received civil investigative demand cid us department justice doj pursuant antitrust civil process act cid seeks documents information us period may 29 2011 date cid connection doj investigation related pressure pumping services us working doj provide requested documents information able predict action might taken future doj governmental authorities result investigation environmental matters past present operations include activities subject extensive domestic including us federal state local international environmental regulations regard air land water quality environmental matters environmental procedures policies practices designed ensure compliance existing laws regulations minimize possibility significant environmental damage involved voluntary remediation projects certain facilities rare occasions remediation activities conducted specified government agencyissued consent decree agreed order remediation costs accrued based estimates probable exposure using currently available facts existing environmental permits technology presently enacted laws regulations remediation cost estimates include direct costs related environmental investigation external consulting activities governmental oversight fees treatment equipment costs associated longterm operation maintenance monitoring remediation project also identified potentially responsible party “prp” remedial activities related various superfund sites instances participate process set joint participation defense agreement negotiate government agencies identify prps determine prp’s allocation estimate remediation costs accrued believe prorata share total estimated cost remediation associated management superfund sites share based upon ratio estimated volume waste contributed site total estimated volume waste disposed site applicable us federal law imposes joint several liability prp cleanup sites leaving us uncertainty may responsible remediation cost attributable prps unable pay share accrual made joint several liability concept superfund sites participation de minimis since believe probability pay material costs volumetric share remote believe prps greater involvement volumetric calculation basis substantial assets may reasonably expected pay share cost remediation superfund sites significant prp remediation costs estimated include recalcitrant parties cases insurance coverage contractual indemnities third parties cover portion ultimate liability total accrual environmental remediation 35 million 35 million includes accruals 2 million 3 million various superfund sites december 31 2015 2014 respectively determination required accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity necessary normal course business customers vendors others entered offbalance sheet arrangements surety bonds performance letters credit bank issued guarantees totaled approximately 12 billion december 31 2015 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect baker hughes incorporated notes consolidated financial statements consolidated financial statements also commitments outstanding purchase obligations related capital expenditures inventory services contracts five years period ending december 31 2020 202 million 187 million 162 million 124 million 106 million respectively 67 million aggregate thereafter note 15 accumulated comprehensive loss following table presents changes accumulated comprehensive loss net tax amounts reclassified accumulated comprehensive loss twelve months ended december 31 2015 2014 represent amortization net actuarial loss prior service credit curtailments included computation net periodic pension cost see note 13 employee benefit plans additional details net periodic pension cost recorded across various cost expense line items within consolidated statement income loss baker hughes incorporated notes consolidated financial statements note 16 quarterly data unaudited 1 represents revenue less cost sales cost services research engineering 2 impairment restructuring charges associated asset impairments workforce reductions facility closures contract terminations recorded 2015 see note 3 impairment restructuring charges discussion item 9item 8 financial statements supplementary data managements report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rules 13a15f internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles supervision participation management including principal executive officer principal financial officer assessed effectiveness internal control financial reporting based 2013 framework internal control integrated framework issued committee sponsoring organizations treadway commission based assessment principal executive officer principal financial officer concluded internal control financial reporting effective december 31 2017 conclusion based recognition inherent limitations systems internal control inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate kpmg llp companys independent registered public accounting firm issued attestation report effectiveness companys internal control financial reporting lorenzo simonelli lorenzo simonelli president chief executive officer brian worrell brian worrell chief financial officer kurt camilleri kurt camilleri vice president controller chief accounting officer houston texas february 23 2018 bhge llc 2017 form 10k 44 report independent registered public accounting firm members baker hughes ge company llc opinion consolidated combined financial statements audited accompanying consolidated combined statement financial position baker hughes ge company llc subsidiaries “company” december 31 2017 related consolidated combined statements income loss comprehensive income loss changes members’ equity cash flows year ended december 31 2017 related notes collectively “consolidated combined financial statements” opinion consolidated combined financial statements present fairly material respects financial position company december 31 2017 results operations cash flows year ended december 31 2017 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states “pcaob” company’s internal control financial reporting december 31 2017 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission report dated february 23 2018 expressed unqualified opinion effectiveness company’s internal control financial reporting basis opinion consolidated combined financial statements responsibility company’s management responsibility express opinion consolidated combined financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether consolidated combined financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement consolidated combined financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated combined financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated combined financial statements believe audits provide reasonable basis opinion kpmg llp served company’s auditor since 2017 houston texas february 23 2018 bhge llc 2017 form 10k 45 report independent registered public accounting firm members baker hughes ge company llc audited accompanying combined statement financial position ge oil gas business within general electric company december 31 2016 related combined statements income loss comprehensive income loss changes equity cash flows years twoyear period ended december 31 2016 combined financial statements responsibility company’s management responsibility express opinion combined financial statements based audits conducted audits accordance standards public company accounting oversight board united states accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion combined financial statements referred present fairly material respects combined financial position company december 31 2016 results operations cash flows years twoyear period ended december 31 2016 conformity us generally accepted accounting principles kpmg spa florence italy march 16 2017 except note 13 december 4 2017 bhge llc 2017 form 10k 46 report independent registered public accounting firm members baker hughes ge company llc opinion internal control financial reporting audited baker hughes ge company llc subsidiaries’ “company” internal control financial reporting december 31 2017 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission opinion company maintained material respects effective internal control financial reporting december 31 2017 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states “pcaob” consolidated combined statement financial position company december 31 2017 related consolidated combined statements income loss comprehensive income loss changes members’ equity cash flows year ended december 31 2017 related notes collectively “consolidated combined financial statements” report dated february 23 2018 expressed unqualified opinion consolidated combined financial statements basis opinion company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audit accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audit also included performing procedures considered necessary circumstances believe audit provides reasonable basis opinion definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statementsbecause inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate kpmg llp houston texas february 23 2018 bhge llc 2017 form 10k 47 baker hughes ge company llc consolidated combined statements income loss see accompanying notes consolidated combined financial statements bhge llc 2017 form 10k 48 baker hughes ge company llc consolidated combined statements comprehensive income loss see notes consolidated combined financial statements bhge llc 2017 form 10k 49 baker hughes ge company llc consolidated combined statements financial position 1 total assets include 1124 million assets held behalf ge 997 million cash equivalents 127 million investment securities december 31 2017 corresponding amount liability reported shortterm borrowings see note 14 related party transactions details see notes consolidated combined financial statements bhge llc 2017 form 10k 50 baker hughes ge company llc consolidated combined statements changes members equity see notes consolidated combined financial statements bhge llc 2017 form 10k 51 baker hughes ge company llc consolidated combined statements cash flows see notes consolidated combined financial statements bhge llc 2017 form 10k 52 baker hughes ge company llc notes consolidated combined financial statements note 1 basis presentation summary significant accounting policies description business baker hughes ge company llc delaware limited liability company bhge llc us successor baker hughes incorporated delaware corporation baker hughes fullstream oilfield technology provider unique mix equipment service capabilities conduct business 120 countries employ 64000 employees basis presentation july 3 2017 closed previously announced business combination transactions combine oil gas business ge og general electric company ge baker hughes refer note 2 business acquisition details transactions connection transactions entered governed amended restated limited liability company agreement dated july 3 2017 bhge llc agreement bhge llc agreement ehhc newco llc ehhc wholly owned subsidiary baker hughes ge company bhge sole managing member bhge sole managing member ehhc managing member ehhc conducts directs exercises full control activities including daytoday business affairs decisionmaking without approval member ehhc responsible operational administrative decisions daytoday management business ge owns approximately 625 common units bhge owns approximately 375 common units indirectly two wholly owned subsidiaries current year results balances may comparable prior years include results baker hughes july 3 2017 transactions treated reverse acquisition accounting purposes historical financial statements accounting acquirer ge og historical financial statements company accompanying consolidated combined financial statements company prepared accordance accounting principles generally accepted united states america us principles us gaap pursuant rules regulations sec annual financial information intercompany accounts transactions eliminated companys financial statements prepared consolidated basis effective july 3 2017 basis presentation financial statements consolidate subsidiaries entities controlling financial interest often hold majority voting interest subsequent periods also presented consolidated basis periods prior july 3 2017 companys financial statements prepared combined basis combined financial statements combine certain accounts ge subsidiaries historically managed part oil gas business contributed bhge llc part transactions additionally also includes certain assets liabilities results operations businesses ge also contributed bhge llc part transactions fully retrospective basis accordance guidance applicable transactions entities common control based carrying values reflected accounting records ge consolidated combined statements income reflect intercompany expense allocations made us ge certain corporate functions shared services provided ge possible allocations made specific identification basis cases expenses allocated ge based relative percentages net operating costs basis depending nature allocated cost see note 16 related party transactions information expenses allocated ge historical financial results consolidated combined financial statements presented may indicative results would achieved ge og operated separate standalone entity periods ge og numbers consolidated combined statements income loss reclassed conform current presentation believe current presentation appropriate presentation combined businesses merger related costs includes costs associated transactions described note 2 refer note 2 business acquisition details bhge llc 2017 form 10k 53 baker hughes ge company llc notes consolidated combined financial statements notes consolidated combined financial statements dollar members units tabulations millions dollars members units respectively unless otherwise indicated certain columns rows may add due use rounded numbers summary significant accounting policies use estimates preparation financial statements conformity us gaap requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period base estimates judgments historical experience various assumptions information believe reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained operating environment changes believe estimates assumptions used preparation consolidated combined financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts inventory valuation reserves recoverability longlived assets including revenue recognition long term contracts valuation goodwill useful lives used depreciation amortization income taxes related valuation allowances accruals contingencies actuarial assumptions determine costs liabilities related employee benefit plans stockbased compensation expense valuation derivatives fair value assets acquired liabilities assumed acquisitions expense allocations certain corporate functions shared services provided ge foreign currency assets liabilities nonus operations functional currency us dollar translated us dollars quarterly exchange rates revenue expenses cash flows translated average rates respective periods resulting translation gains losses included comprehensive income loss gains losses foreign currency transactions resulting settlement receivables payables nonfunctional currency resulting remeasurements monetary items included consolidated combined statement income loss cost equity method investment investments privately held companies ability exercise significant influence often hold voting interest 0 20 accounted using cost method associated companies entities controlling financial interest significant influence often hold voting interest 20 50 associated companies accounted equity method investments results associated companies presented oneline basis caption equity loss affiliate consolidated combined statements income loss investments advances associated companies presented oneline basis caption assets consolidated combined statement financial position sales goods services record sales goods services firm sales agreement place delivery occurred services rendered collectability fixed determinable sales price reasonably assured except goods sold longterm construction type contracts service agreements recognize sales goods provisions sec staff accounting bulletin sab 104 revenue recognition situations arrangements include customer acceptance provisions based seller customerspecified objective bhge llc 2017 form 10k 54 baker hughes ge company llc notes consolidated combined financial statements criteria recognize revenue reliably demonstrated specified acceptance criteria met formal acceptance occurs respectively provide anticipated losses record sales recognize revenue larger construction equipment contracts using longterm construction accounting estimate total longterm contract revenue net price concessions well total contract costs larger construction equipment contracts recognize sales based progress toward contract completion measured actual costs incurred relation estimate total expected costs routinely update estimates future costs agreements process report cumulative effects adjustments current operations provide loss expect incur agreements loss probable sell product services longterm product maintenance agreements costs performing services incurred straightline basis recognize related sales based extent progress toward completion measured actual costs incurred relation estimate total expected costs routinely update estimates future costs agreements process report cumulative effects adjustments current operations longterm product maintenance agreements regularly assess customer credit risk inherent carrying amounts receivables contract costs estimated earnings including risk contractual penalties may sufficient offset accumulated costs event customer termination gain insight expected future utilization cost trends well credit risk knowledge installed base equipment close interaction customers comes supplying critical services parts extended periods revisions applying cumulative catch basis accounting may affect product services agreements total estimated profitability resulting adjustment earnings provide probable losses become evident arrangements sale goods services sometimes include multiple components arrangements multiple components usually involve upfront deliverable equipment future service deliverables installation commissioning training future delivery ancillary products cases relative values undelivered components significant overall arrangement typically delivered within three six months core product delivered agreements selling price determined component difference total separate selling prices total contract consideration ie discount allocated pro rata across components arrangement value assigned component objectively determined obtained primarily sources separate selling price similar item competitor prices similar items evidence available use best estimate selling price established consistent pricing strategy business considers product configuration geography customer type market specific factors research development research development costs expensed incurred relate research development new products services costs amounted 501 million 352 million 408 million years ended december 31 2017 2016 2015 respectively research development expenses reported cost goods sold cost services sold cash equivalents shortterm investments original maturities three months less included cash equivalents unless designated availableforsale classified investment securities december 31 2017 december 31 2016 1190 million 752 million respectively cash equivalents considered restricted held bank accounts cannot released transferred otherwise converted currency regularly transacted internationally due lack market liquidity capital controls similar monetary exchange limitations limiting flow capital jurisdiction cash equivalents includes 997 million cash december 31 2017 held behalf ge 764 million bhge llc 2017 form 10k 55 baker hughes ge company llc notes consolidated combined financial statements restricted corresponding liability reported shortterm borrowings see note 16 related party transactions details allowance doubtful accounts establish allowance doubtful accounts based various factors including payment history financial condition debtors economic environment provisions doubtful accounts recorded based aging status debtor accounts becomes evident debtor make required payments either contractual due dates future concentration credit risk grant credit customers primarily operate oil natural gas industry although concentration affects overall exposure credit risk current receivables spread diverse group customers across many countries mitigates risk perform periodic credit evaluations customers financial conditions including monitoring customers payment history current credit worthiness manage risk generally require collateral support current receivables may require payment advance security form letter credit bank guarantee inventories stated lower cost net realizable values measured firstin firstout fifo basis average cost basis necessary record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments property plant equipment ppe property plant equipment initially stated cost depreciated estimated economic life subsequently property plant equipment measured cost less accumulated depreciation impairment losses manufacture substantial portion tools equipment cost items includes direct indirect manufacturing costs capitalized carried inventory completed intangible assets amortize cost intangible assets estimated useful lives unless lives deemed indefinite cost intangible assets generally amortized straightline basis assets estimated economic life amortizable intangible assets reviewed impairment whenever events changes circumstances indicate related carrying amounts may recoverable circumstances tested impairment based undiscounted cash flows impaired written fair value based either discounted cash flows appraised values intangible assets indefinite lives tested annually impairment written fair value required refer impairment goodwill longlived assets accounting policy impairment goodwill longlived assets perform annual impairment test goodwill qualitative quantitative basis reporting units july 1 frequently circumstances indicate impairment may exist reporting unit level performing annual impairment test option first performing qualitative assessment determine existence events circumstances would lead determination likely fair value reporting unit less carrying amount conclusion reached would required perform quantitative impairment assessment goodwill however assessment leads determination likely fair value reporting unit greater carrying amount assessments required quantitative assessment determination impairment made comparing carrying amount reporting unit fair value generally calculated using bhge llc 2017 form 10k 56 baker hughes ge company llc notes consolidated combined financial statements combination market comparable transaction discounted cash flow approaches see note 6 goodwill intangible assets information valuation methodology impairment goodwill review ppe intangible assets certain longlived assets impairment whenever events changes circumstances indicate carrying amount may recoverable least annually indefinitelived intangible assets testing impairment group longlived assets liabilities lowest level identifiable cash flows largely independent cash flows assets liabilities asset group determination recoverability made based upon estimated undiscounted future net cash flows amount impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets financial instruments financial instruments include cash equivalents current receivables investments accounts payables short longterm debt derivative financial instruments monitor exposure various business risks including commodity prices foreign currency exchange rates regularly use derivative financial instruments manage risks inception new derivative designate derivative hedge determine derivative undesignated hedging instrument document relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions assess whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item inception hedge ongoing basis program utilizes foreign currency forward contracts reduce risks associated effects certain foreign currency exposures program strategy gains losses foreign currency forward contracts mitigate foreign currency transaction translation gains losses extent practical foreign currency exposures typically arise changes value assets example current receivables liabilities example current payables denominated currencies functional currency respective entity record derivatives end reporting period consolidated combined statement financial position fair value forward contracts held undesignated hedging instruments record changes fair value forward contracts consolidated combined statements income along change fair value related foreign exchange movements hedged item changes fair value forward contracts designated cash flow hedging instruments recognized comprehensive income hedged item recognized earnings derivatives designated cash flow hedge determined ineffective portion derivatives change fair value recognized earnings fair value measurements financial assets liabilities measured fair value recurring basis fair value price would receive sell asset pay transfer liability orderly transaction market participant measurement date absence active markets identical assets liabilities measurements involve developing assumptions based market observable data absence data internal information consistent market participants would use hypothetical transaction occurs measurement date observable inputs reflect market data obtained independent sources unobservable inputs reflect market assumptions preference given observable inputs two types inputs create following fair value hierarchy • level 1 quoted prices identical instruments active markets • level 2 quoted prices similar instruments active markets quoted prices identical similar instruments markets active modelderived valuations whose inputs observable whose significant value drivers observable bhge llc 2017 form 10k 57 baker hughes ge company llc notes consolidated combined financial statements • level 3 significant inputs valuation model unobservable maintain policies procedures value instruments using best relevant data available addition perform reviews assess reasonableness valuations regard level 3 valuations including instruments valued third parties perform variety procedures assess reasonableness valuations reviews include evaluation instruments whose fair value change exceeds predefined thresholds andor change consider current interest rate currency credit environment well published data rating agency market reports current appraisals recurring fair value measurements derivatives level 1 derivatives traded either exchanges liquid overthecounter markets use closing prices valuation majority derivatives valued using internal models included level 2 internal models maximize use market observable inputs including interest rate curves forward spot prices currencies commodities derivative assets liabilities included level 2 primarily represent foreign currency commodity forward contracts company investments debt equity securities available use quoted market prices determine fair value investment securities included level 1 level 1 securities primarily include publicly traded equity securities investment securities market prices observable identical similar investment securities readily accessible investments individually difficult obtain pricing information individual investment security measurement date use pricing models consistent market participants would use inputs assumptions models derived market observable sources including benchmark yields reported trades brokerdealer quotes issuer spreads benchmark securities bids offers marketrelated data thus certain securities may priced using quoted prices rather determined market observable information investments included level 2 use valuations based significant unobservable inputs classify investment securities level 3 nonrecurring fair value measurements certain assets measured fair value nonrecurring basis assets measured fair value ongoing basis subject fair value adjustments certain circumstances assets include longlived assets reduced fair value held sale cost equity method investments longlived assets written fair value impaired remeasurement retained investments formerly consolidated subsidiaries upon change control results deconsolidation subsidiary sell controlling interest retain noncontrolling stake entity assets written fair value impaired retained investments subsequently adjusted fair value unless impairment occurs cost equity method investments cost equity method investments valued using market observable data quoted prices available market observable data unavailable investments valued using discounted cash flow model comparative market multiples combination approaches appropriate thirdparty pricing sources longlived assets fair values longlived assets including real estate primarily derived internally based observed sales transactions similar assets instances example collateral types bhge llc 2017 form 10k 58 baker hughes ge company llc notes consolidated combined financial statements comparable observed sales transaction data collateral values developed internally corroborated external appraisal information adjustments thirdparty valuations may performed circumstances market comparables specific attributes specific collateral appraisal information may reflective current market conditions due passage time occurrence market events since receipt information income taxes treated partnership us federal income tax purposes except certain us corporations owned company subject us federal income tax current us tax laws members required take account us federal income tax purposes distributive share items income gain loss deduction generally include us operations baker hughes ge og bhge ge taxed distributive share income gain whether corresponding amount cash property distributed assets held indirectly us subsidiaries including foreign us taxes attributable subsidiaries reflected consolidated combined financial statements account taxes asset liability method deferred income taxes recognized temporary differences financial statement tax return bases assets liabilities well net operating losses tax credit carryforwards based enacted tax rates expected effect taxes actually paid recovered provisions tax law effect change tax laws rates deferred tax assets liabilities recognized income period change enacted future tax benefits recognized extent realization benefits likely valuation allowance established portion deferred tax asset management believes may realized due enactment us tax reform repatriations foreign earnings generally free us federal tax may incur taxes withholding state taxes indefinite reinvestment determined management’s judgment intentions concerning future operations company earnings reinvested active nonus business operations december 31 2017 changed indefinite reinvestment decision result us tax reform reassess course 2018 accordingly provided income tax earnings practicable determine income tax liability would payable earnings reinvested indefinitely significant judgment required determining tax expense evaluating tax positions including evaluating uncertainties operate 120 countries tax filings subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved tax authorities courts provided amounts believe ultimately result proceedings recognize uncertain tax positions “more likely not” sustained relevant tax authority audit position full knowledge relevant facts information tax positions meet threshold measure amount tax benefit based largest amount tax benefit greater 50 chance realized final settlement relevant authority classify interest penalties associated uncertain tax positions income tax expense effects tax adjustments settlements taxing authorities presented combined financial statements period recorded additionally part us tax reform us enacted tax base eroding payments us minimum tax foreign earnings global intangible lowtaxed income aspects new minimum tax effect operations uncertain aspects accounting rules associated provision resolved made provisional accrual deferred tax aspects provision consequently made accounting policy election deferred tax treatment tax environmental liabilities involved numerous remediation actions clean hazardous waste required federal state laws liabilities remediation costs exclude possible insurance recoveries dates amounts bhge llc 2017 form 10k 59 baker hughes ge company llc notes consolidated combined financial statements costs known discounted appears range possible costs equal likelihood liabilities based low end range reasonably possible environmental remediation exposure exceed amounts accrued however due uncertainties status laws regulations technology information related individual sites amounts reasonably estimable determination required accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity necessary new accounting standards adopted asu 201409 revenue contracts customers background may 2014 financial accounting standards board fasb issued new comprehensive set revenue recognition principles accounting standards update asu 201409 revenue contracts customers supersedes existing us gaap revenue recognition guidance including asc 60535 revenue recognition constructiontype productiontype contracts new standard become effective annual reporting periods beginning december 15 2017 adopted standard january 1 2018 apply retrospectively periods presented elect practical expedient contract modifications since issuance new standard fasb engaged collaborative process industry peers worked standard setters important interpretive matters objective ensuring consistency application standard change timing presentation impact cash economics new standard requires companies identify contractual performance obligations determine whether revenue recognized point time based control goods services transfer customer result expect changes presentation financial statements including 1 timing revenue recognition 2 changes classification revenue costs new standard cash impact affect economics underlying customer contracts effect applying new guidance existing book contracts result lower reported earnings 2018 comparative periods previously reported early years adoption however expect experience increase reported earnings existing book contracts mature current estimate financial statement effect adopted new standard january 1 2018 report 2018 results comparative results 2017 2016 updated reflect application requirements new standard periods based assessment best estimates date expect aftertax reduction january 1 2016 retained earnings balance approximately 04 billion estimated aftertax reduction 01 billion 01 billion 2016 2017 earnings respectively adjustments primarily relate timing revenue recognition longterm product service agreements beyond effects expect application new guidance result increases decreases revenue within segments largely offset immaterial total company level following adoption 2018 books records reflect results required new standard limiting ability estimate effect standard earnings given inherent difficulty ongoing estimation effect standard future periods plan continue assess effect 2018 discussed anticipate dilutive effect new standard year adoption consistent effect restated 2016 2017 results effect less dilutive years initial adoption however expectation based many variables including underlying business performance subject change making effect standard future periods difficult estimate importantly application new guidance effect cash expect receive economics contracts bhge llc 2017 form 10k 60 baker hughes ge company llc notes consolidated combined financial statements asu 201602 leases february 2016 fasb issued asu 201602 leases new standard establishes rightofuse rou model requires lessee record rou asset lease liability balance sheet leases terms longer 12 months leases classified either finance operating classification affecting pattern expense recognition similarly lessors required classify leases salestype finance operating classification affecting pattern income recognition classification lessees lessors based assessment whether risks rewards well substantive control transferred lease contract new standard effective fiscal years beginning december 15 2018 including interim periods within fiscal years early adoption permitted modified retrospective transition approach required leases existing entered beginning earliest comparative period presented financial statements certain practical expedients available continue evaluate effect standard ongoing financial reporting anticipate adoption asu may materially affect consolidated combined financial statements asu 201616 accounting income taxes intraentity asset transfers assets inventory october 2016 fasb issued asu 201616 accounting income taxes intraentity asset transfers assets inventory asu eliminates deferral tax effects intraentity asset transfers inventory result tax expense intercompany sale assets inventory associated changes deferred taxes recognized sale occurs even though pretax effects transaction recognized new standard effective annual periods beginning december 15 2017 interim periods within annual periods effect adoption standard depend nature amount future transactions currently expected increase retained earnings approximately 03 billion future earnings reduced total amount effect change future transactions depend nature amount future transactions affect timing recognition tax expenses tax benefits change associated cash flows asu 201707 improving presentation net periodic pension cost net periodic postretirement benefit cost march 2017 fasb issued asu 201707 improving presentation net periodic pension cost net periodic postretirement benefit cost changes income statement presentation net periodic benefit cost requiring separation service cost component components service cost component required presented operating expense similar compensation costs arising services rendered pertinent employees period nonoperating components must presented outside income operations pronouncement effective annual reporting periods beginning december 15 2017 presentation disclosure applied using retrospective approach early adoption permitted adopted standard january 1 2018 effect adoption standard material impact consolidated combined financial statement new accounting pronouncements issued yet effective currently evaluated time expected material impact financial position results operations note 2 business acquisition july 3 2017 closed transactions combine ge og baker hughes creating world leading fullstream oilfield technology provider unique mix equipment service capabilities transactions executed using partnership structure pursuant ge og baker hughes contributed operating assets company partnership subject us federal income tax current us tax laws foreign subsidiaries however expected incur current deferred foreign income taxes ge holds approximate 625 controlling interest us former baker hughes shareholders hold approximate 375 interest ownership 100 class common stock bhge ge holds voting interest class b common stock bhge economic interest corresponding number common units bhge llc former baker hughes shareholders bhge llc 2017 form 10k 61 baker hughes ge company llc notes consolidated combined financial statements immediately completion transactions also received special dividend 1750 per share paid bhge holders record companys class common stock ge contributed 74 billion us fund substantially special dividend prior transactions shares baker hughes common stock registered pursuant section 12b securities exchange act 1934 amended exchange act listed new york stock exchange six swiss exchange shares baker hughes common stock suspended trading new york stock exchange six swiss exchange prior open trading july 5 2017 new york stock exchange filed form 25 baker hughes behalf provide notice sec regarding withdrawal shares baker hughes common stock listing terminate registration shares section 12b exchange act result transactions july 3 2017 company issued 428 million common units bhge 717 million common units ge based relative voting rights former baker hughes shareholders ge immediately following completion transactions taking consideration relevant facts ge og considered acquirer accounting purposes result transactions reported business combination using acquisition method accounting ge og treated acquirer baker hughes treated acquired company tables present fair value consideration exchanged preliminary estimates fair value assets acquired liabilities assumed associated fair value noncontrolling interest related acquired net assets baker hughes final determination fair value certain assets liabilities completed soon information necessary complete analysis obtained amounts may differ materially preliminary estimates continue refined finalized soon possible later one year acquisition date primary areas preliminary estimates yet finalized relate inventory property plant equipment identifiable intangible assets equitymethod investments deferred income taxes uncertain tax positions contingencies bhge llc 2017 form 10k 62 baker hughes ge company llc notes consolidated combined financial statements 1 includes 87 million adjustments writeup acquired inventory estimated fair value cost goods sold 2017 reflects increased valuation inventory used sold period july 3 2017 december 31 2017 2 intangible assets provided table recorded estimated fair value determined management based available information includes preliminary valuation estimated useful lives intangible assets determined based upon remaining useful economic lives intangible assets expected contribute directly indirectly future cash flows consider baker hughes trade name indefinite life intangible asset amortized subject annual impairment test 3 includes approximately 160 million net deferred tax liabilities related estimated fair value intangible assets included preliminary purchase consideration approximately 117 million net deferred tax assets including nonus loss carryforwards net valuation allowances offsetting liabilities unrecognized benefits 4 goodwill represents excess total purchase consideration fair value net assets recognized represents future economic benefits believe result combining operations ge og baker hughes including expected future synergies operating efficiencies goodwill resulting transactions preliminarily allocated oilfield services segment 67 million deductible tax purposes fourth quarter 2017 company made measurement period adjustments reflect facts circumstances existence acquisition date adjustments resulted decrease goodwill approximately 366 million mostly due stepup fair value property plant equipment 682 million partially offset reduction intangible assets 367 million result increase property plant equipment reduction intangible assets fourth quarter 2017 recorded net increase bhge llc 2017 form 10k 63 baker hughes ge company llc notes consolidated combined financial statements depreciation amortization expense 63 million adjusts depreciation amortization expense amount would recorded previous interim reporting periods adjustment provisional amounts recognized acquisition date addition reclassified certain balances conform current presentation acquisition baker hughes contributed revenue approximately 5184 million pretax segment operating income approximately 256 million period july 3 2017 december 31 2017 income taxes treated partnership us federal income tax purposes subject us federal income tax current us tax laws members required take account us federal income tax purposes distributive share items income gain loss deduction generally include us operations baker hughes ge og bhge ge taxed distributive share income gain whether corresponding amount cash property distributed assets held indirectly us subsidiaries taxes attributable subsidiaries reflected consolidated combined financial statements merger related costs 2017 2016 2015 acquisition costs 373 million 33 million 27 million respectively expensed incurred reported merger related costs 2017 include severance separation payments made certain executive officers baker hughes related changeincontrol double trigger provisions existing employment agreements professional fees advisors integration synergy costs related combination baker hughes ge og doubletrigger provisions resulted payments executives baker hughes following two events changeincontrol termination reduction responsibilities executives terminated employment certain executives following business combination unaudited actual pro forma information following unaudited pro forma information presented transactions occurred january 1 2016 information prepared combining historical results ge og historical results baker hughes unaudited pro forma combined financial data periods presented adjusted give effect pro forma events 1 directly attributable aforementioned transactions 2 factually supportable 3 expected continuing impact consolidated results operations adjustments based information available company time accordingly adjustments subject change impact changes may material unaudited pro forma results include incremental cost savings may result integration unaudited combined pro forma information informational purposes necessarily indicative combined companys results actually would acquisition completed beginning periods indicated addition unaudited pro forma information purport project future results combined company significant adjustments pro forma information include recognition nonrecurring direct incremental acquisition costs 2016 exclusion costs years presented amortization associated estimate acquired intangible assets depreciation associated estimate fair value stepup property plant equipment reduction interest expense fair value adjustments debt nonrecurring contractually obligated termination fee 3500 million 3301 million net related costs incurred received baker hughes due inability obtain antitrust related approvals prior merger agreement recognized 2016 bhge llc 2017 form 10k 64 baker hughes ge company llc notes consolidated combined financial statements note 3 current receivables current receivables comprised following december 31 customer receivables recorded invoiced amount category primarily consists advance payments suppliers indirect taxes tax receivables note 4 inventories net reserves 360 million 260 million 2017 2016 respectively comprised following december 31 2017 2016 recorded 157 million 138 million inventory impairments result certain restructuring activities initiated company charges inventory impairments reported cost goods sold caption consolidated combined statements income loss bhge llc 2017 form 10k 65 baker hughes ge company llc notes consolidated combined financial statements note 5 property plant equipment property plant equipment comprised following december 31 1 useful life excludes land depreciation expense relating property plant equipment 716 million 311 million 351 million 2017 2016 2015 respectively see note 16 restructuring impairment additional information property plant equipment impairments note 6 goodwill intangible assets goodwill changes carrying value goodwill detailed segment 1 includes goodwill associated acquisition baker hughes amount allocations segments preliminary subsequent close acquisition baker hughes realigned reporting units oilfield services ofs oilfield equipment ofe turbomachinery process solutions tps digital solutions ds refer note 13 segment information reallocated goodwill existed june 30 2017 new reportable segments historical periods presented majority baker hughes business combined ge og surface business create new oilfield services reporting segment reporting units four reportable segments test goodwill impairment annually third quarter year using data july 1 year would include consideration segment realignment impairment test consists two steps step bhge llc 2017 form 10k 66 baker hughes ge company llc notes consolidated combined financial statements one carrying value reporting unit compared fair value step two applied carrying value fair value amount goodwill impairment derived deducting fair value reporting units assets liabilities fair value equity comparing amount carrying amount goodwill determined fair values reporting units using combination market approach income approach assessed valuation methodologies based upon relevance available data weighted results appropriately valuations using market approach derived metrics publicly traded companies historically completed transactions comparable businesses selection comparable businesses based markets reporting units operate giving consideration risk profiles size geography diversity products services market approach limited reporting units publicly traded companies characteristics similar businesses income approach fair value determined based present value estimated future cash flows discounted appropriate riskadjusted rate used internal forecasts estimate future cash flows included estimate longterm future growth rates based recent views longterm outlook business actual results may differ assumed forecasts derived discount rates using capital asset pricing model analyzing published rates industries relevant reporting units estimate cost equity financing used discount rates commensurate risks uncertainty inherent respective businesses internally developed forecasts discount rates used reporting unit valuations ranged 10 11 estimating fair value reporting units requires use estimates significant judgments based number factors including actual operating results reasonably possible judgments estimates described could change future periods performing annual impairment test goodwill third quarter 2015 using data july 1 year determined step two test required reporting unit within ofs operating segment consequence continued pressure oil prices revised expected cash flows reporting unit resulted goodwill impairment charge 2080 million impairment charge included part “impairment goodwill” consolidated combined statement income loss performed annual impairment test goodwill july 1 2017 july 1 2016 reporting units based results step one testing fair values reporting units exceeded carrying values therefore second step impairment test required performed reporting units goodwill impairment recognized addition annual impairment testing also test goodwill impairment annual impairment testing dates whenever events circumstances occur judgment could likely reduce fair value one reporting units carrying amount assessing possibility reporting unit’s fair value reduced carrying amount due occurrence events circumstances annual impairment testing dates consider available evidence including limited results impairment testing prior annual impairment testing date particular magnitude excess fair value carrying value observed ii downward revisions internal forecasts magnitude thereof iii declines market capitalization book value magnitude duration declines july 1 2017 december 31 2017 identified events circumstances could likely reduce fair value one reporting units carrying amount however assurances sustained declines macroeconomic business conditions affecting industry businesses occur ii occur sustained declines result additional impairments future periods december 31 2017 believe goodwill recoverable reporting units however assurances goodwill impaired future periods bhge llc 2017 form 10k 67 baker hughes ge company llc notes consolidated combined financial statements intangible assets intangible assets comprised following december 31 1 indefinitelived intangible assets principally comprise trade names trademarks acquired business combinations finitelived intangible assets increased 1764 million year ended december 31 2017 primarily result acquired baker hughes intangible assets offset amortization periods refer note 2 business acquisition indefinitelived intangible assets increased year ended december 31 2017 result acquisition baker hughes trade name preliminarily valued 2100 million using relieffromroyalty method indefinitelived intangible assets december 31 2016 comprise trademarks acquired previous years vetco bently nevada trademarks 42 million 10 million respectively intangible assets generally amortized straightline basis estimated useful lives ranging one 30 years amortization expense years ended december 31 2017 2016 2015 387 million 239 million 179 million respectively incurred additional amortization expense 75 million year ended december 31 2017 due acquisition baker hughes estimated amortization expense subsequent five fiscal years expected follows bhge llc 2017 form 10k 68 baker hughes ge company llc notes consolidated combined financial statements note 7 contract assets majority longterm product service agreements relate turbomachinery process solutions segment contract assets comprised following december 31 1 reflects revenue earned excess billings longterm product service agreements 2 reflects revenue earned excess billings longterm contracts construct technically complex equipment 3 represents cost deferral shipped goods costs criteria revenue recognition yet met note 8 borrowings shortterm longterm borrowings comprised following december 31 1 weighted average effective interest rate based carrying value including stepup adjustment recorded upon acquisition baker hughes 2 represents longterm fixed rate debt obligations assumed connection acquisition baker hughes net amounts repurchased subsequent closing transactions bhge llc 2017 form 10k 69 baker hughes ge company llc notes consolidated combined financial statements july 3 2017 connection transactions entered new fiveyear 3 billion committed unsecured revolving credit facility 2017 credit agreement commercial banks maturing july 2022 2017 credit agreement contains certain customary representations warranties certain affirmative covenants negative covenants upon occurrence certain events default obligations 2017 credit agreement may accelerated events default include payment defaults lenders 2017 credit agreement customary defaults events default occurred year ended december 31 2017 borrowings 2017 credit agreement november 3 2017 entered commercial paper program may issue time 3 billion commercial paper maturities 397 days december 31 2017 borrowings outstanding commercial paper program maximum combined borrowing time 2017 credit agreement commercial paper program 3 billion december 11 2017 completed private placement offering 3950 million aggregate principal amount senior notes consisting 1250 million aggregate principal amount 2773 senior notes due 2022 1350 million aggregate principal amount 3337 senior notes due 2027 1350 million aggregate principal amount 4080 senior notes due 2047 senior notes presented net issuance costs 26 million consolidated combined statement financial position pay interest series exchange notes june 15 december 15 year beginning june 15 2018 notes senior unsecured obligations rank equal right payment existing future senior indebtedness senior right payment future subordinated indebtedness effectively junior future secured indebtedness existing future indebtedness subsidiaries may redeem option part notes time applicable makewhole redemption prices plus accrued unpaid interest date redemption senior notes contain covenants restrict ability take certain actions including limited creation certain liens securing debt entry certain saleleaseback transactions engaging certain merger consolidation asset sale transactions excess specified limits used portion net proceeds private placement senior notes fund purchase 82 million 75 senior notes due 2018 25 million 60 senior notes due 2018 6 million 855 debentures due 2024 62 million 6875 notes due 2029 validly tendered connection cash tender offers commenced bhge llc december 4 2017 cash tender offer bhge llc purchased 3 million 6875 notes due 2029 january 2018 bhge llc also redeemed january 2018 remaining aggregate principal amount 2018 senior notes 615 million tendered purchase accordance relevant indentures transactions resulted total repurchase senior notes 793 million intend use remaining net proceeds offering senior notes general corporate purposes may include purchases common units bhge ge connection share repurchase authorization announced bhge november 6 2017 january 2 2018 commenced offering exchange 3950 million outstanding unregistered senior notes issued private offering december 11 2017 identical registered 2773 senior notes due 2022 3337 senior notes due 2027 4080 senior notes due 2047 exchange offer completed january 31 2018 concurrent transactions associated acquisition baker hughes july 3 2017 baker hughes coobligor inc became coobligor jointly severally us registered debt securities coobligor 100owned finance subsidiary incorporated sole purpose serving coobligor debt securities assets operations related sole purpose baker hughes coobligor inc also coobligor 3950 million senior notes issued december 11 2017 us private placement bhge llc 2017 form 10k 70 baker hughes ge company llc notes consolidated combined financial statements connection acquisition baker hughes assumed outstanding borrowings including notes senior notes debentures baker hughes stepup adjustment 364 million recorded upon acquisition baker hughes present borrowings fair value estimated fair value total borrowings december 31 2017 december 31 2016 8466 million 303 million respectively majority borrowings fair value determined using quoted periodend market prices market prices available estimate fair values based valuation methodologies using current market interest rate data adjusted nonperformance risk maturities debt five years period ended december 31 2022 aggregate thereafter listed table see note 14 related party transactions additional information shortterm borrowings ge see note 12 financial instruments additional information borrowings associated swaps note 9 employee benefit plans ge multiemployer plans certain us employees covered various us ge employee benefit plans including ges retirement plans pension retiree health life insurance savings benefit plans addition certain united kingdom uk employees participate ge uk pension plan allocated relevant participation costs ge employee benefit plans part multiemployer plans recorded liabilities associated participation plans expenses associated participation plans 132 million 140 million 148 million years ended december 31 2017 2016 2015 respectively 2016 two uk pension plans sponsored us 1987 vetco gray hughes pension plan uk dresser pension scheme merged ge uk pension plan agreed pay deficit contributions next 10 years estimated present value payments approximately 15 million recorded consolidated combined statement financial position “all liabilities” subsequent merger plan participants respective plans participate ge uk pension plan defined benefit plans addition ge plans certain employees also covered company sponsored pension plans pension plans 2017 included seven us plans six nonus pension plans primarily uk germany canada pension assets obligations greater 20 million use december 31 measurement date plans defined benefit plans generally provide benefits employees based formulas recognizing length service earnings also provide certain postretirement health care benefits postretirement benefits unfunded plan closed group us employees retire met certain age service requirements funded status funded status position represents difference benefit obligation plan assets projected benefit obligation pbo pension benefits represents actuarial present value benefits attributed employee services compensation includes assumption future compensation levels accumulated benefit obligation abo actuarial present value pension benefits attributed employee service date present compensation levels abo differs pbo abo include assumptions future compensation levels bhge llc 2017 form 10k 71 baker hughes ge company llc notes consolidated combined financial statements reconciliation beginning ending balances benefit obligations fair value plan assets funded status plans 1 relates acquisition baker hughes july 3 2017 2 two uk pension plans merged ge uk pension plan 2016 amounts recognized consolidated combined statements financial position consist following december 31 bhge llc 2017 form 10k 72 baker hughes ge company llc notes consolidated combined financial statements information plans abos excess plan assets follows december 31 net periodic cost components net periodic cost follows years ended december 31 1 primarily associated two uk plans merging ge uk pension plan 2 result acquisition baker hughes obtained noncontributory pension plan baker hughes incorporated pension plan bhipp fourth quarter 2017 compensation committee board directors approved amendments bhipp close plan new participants freeze accruals future servicerelated benefits effective december 31 2017 result actions company recorded curtailment gain 45 million curtailment recorded company fourth quarter 2017 included “other nonoperating income loss net” consolidated combined statement income loss assumptions used benefit calculations accounting requirements necessitate use assumptions reflect uncertainties length time pension obligations paid actual amount future benefit payments depend upon participants retire amount benefit retirement long live reflect obligation today’s dollars discount future payments using rate matches time frame payments made also need assume longterm rate return earned investments used fund payments weighted average assumptions used determine benefit obligations plans follows years ended december 31 bhge llc 2017 form 10k 73 baker hughes ge company llc notes consolidated combined financial statements weighted average assumptions used determine net periodic cost plans follows years ended december 31 determine discount rate using bond matching model whereby weighted average yields highquality fixedincome securities maturities consistent timing benefit payments lower discount rates increase size benefit obligations pension expense following year higher discount rates reduce size benefit obligation subsequentyear pension expense expected return plan assets estimated longterm rate return earned investments used fund pension obligations determine rate consider current target composition plan investments historical returns earned expectations future compensation assumption used estimate annual rate pay plan participants grow rate growth assumed increases size pension obligations increase amount recorded equity attributable parent amortized income subsequent periods assumed health care cost trend rates significant effect amounts reported postretirement benefits december 31 2017 health care cost trend rate 681 declining gradually successive year reaches 481 one percentage point change assumed health care cost trend rates would following effects 2017 accumulated comprehensive loss amount recorded beforetax accumulated comprehensive loss related employee benefit plans consists following december 31 estimated net actuarial loss defined benefit pension plans amortized accumulated comprehensive loss included net periodic benefit cost 2018 9 million estimated net actuarial gain prior service credit postretirement benefits amortized accumulated comprehensive loss included net periodic benefit cost 2018 2 million 5 million respectively plan assets investment committees meet regularly review portfolio returns determine assetmix targets based assetliability studies thirdparty investment consultants assist committees developing asset allocation strategies determine expected rates return expected risk various investment bhge llc 2017 form 10k 74 baker hughes ge company llc notes consolidated combined financial statements portfolios investment committees considered strategies formal establishment current assetmix targets based projected risk return levels major asset classes table presents fair value pension assets asset category december 31 1 include direct investments investment funds 2 substantially represented hedge fund asset allocation fund investments plan assets valued using net asset value nav practical expedient amounted 1684 million 228 million december 31 2017 2016 respectively percentages plan assets valued using nav investment fund type equity securities fixed income cash alternative investments 30 28 24 december 31 2017 respectively 20 7 13 december 31 2016 respectively investments measured fair value using nav practical expedient excluded fair value hierarchy practical expedient applied investments fair value 86 million 25 million 2017 2016 respectively investments classified within level 3 remaining investments considered level 1 2 funding policy funding policy pension benefits contribute amounts sufficient meet minimum funding requirements set forth employee benefit tax laws plus additional amounts may determine appropriate 2017 contributed approximately 50 million expect contribute approximately 44 million pension plans 2018 fund postretirement benefits payasyougo basis 2017 contributed 13 million plans 2018 expect contribute approximately 24 million fund benefits bhge llc 2017 form 10k 75 baker hughes ge company llc notes consolidated combined financial statements following table presents expected benefit payments next 10 years us nonus pension benefit payments made respective pension trust funds part baker hughes acquisition obtained two nonqualified defined contribution plans invested trusts assets corresponding liabilities 278 million december 31 2017 included consolidated combined statement financial position note 10 income taxes treated partnership us federal income tax purposes except certain us corporations owned company subject us federal income tax current us tax laws members required take account us federal income tax purposes distributive share items income gain loss deduction generally include us operations baker hughes ge og bhge ge taxed distributive share income gain whether corresponding amount cash property distributed assets held indirectly us subsidiaries including foreign us taxes attributable subsidiaries reflected consolidated combined financial statements december 22 2017 us enacted tax cuts jobs act us tax reform lowers statutory tax rate us earnings taxes historic foreign earnings previously deferred us taxation reduced rate tax transition tax establishes territorial tax system enacts new taxes associated global operations transition tax associated nonus operations borne members impact us tax reform recorded provisional basis legislation provides additional guidance issued us department treasury several provisions including computation transition tax guidance 2018 could impact information required calculation transition tax charge could affect decisions affect tax various us foreign items would impact final amounts included transition tax charge impact revaluation deferred taxes addition analysis performed conclusions reached part tax return filing process additional guidance accounting tax reform could affect provisional amount part purchase accounting baker hughes acquisition made preliminary estimates fair value assets acquired liabilities assumed accordingly changes estimates resulting finalization fair values may also require us adjust provisional impact us tax reform additionally part us tax reform us enacted tax base eroding payments us minimum tax foreign earnings global intangible lowtaxed income would borne members aspects new law effect operations uncertain aspects accounting rules associated provision resolved members made provisional accrual deferred tax aspects provision consequently made accounting policy election deferred tax treatment tax bhge llc 2017 form 10k 76 baker hughes ge company llc notes consolidated combined financial statements result enactment us tax reform recorded net tax benefit 32 million 2017 reflect provisional estimate revaluation deferred taxes related us subsidiaries file separate returns provision benefit income taxes comprised following years ended december 31 geographic sources income loss income taxes inclusive equity loss affiliate follows years ended december 31 benefit provision income taxes differs amount computed applying us statutory income tax rate loss income taxes reasons set forth years ended december 31 deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards bhge llc 2017 form 10k 77 baker hughes ge company llc notes consolidated combined financial statements tax effects temporary differences carryforwards follows december 31 december 31 2017 approximately 129 million foreign tax credits may carried forward indefinitely applicable foreign law 18 million credits majority expire tax year 2027 us tax law increase tax credit carryforwards approximately 142 million primarily related business acquisition referred note 2 additionally 1376 million net operating loss carryforwards approximately 319 million expire within five years 293 million expire six 20 years remainder carried forward indefinitely record valuation allowance likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions december 31 2017 1822 million valuation allowances recorded various deferred tax assets including foreign net operating losses nol 1125 million us federal foreign tax credit carryforwards 129 million us nols tax credit carryforwards 44 million certain us foreign deferred tax assets 524 million increase 1736 million valuation allowances primarily related business acquisition 192 million deferred tax assets related foreign net operating loss carryforwards without valuation allowance expect deferred tax assets realized within carryforward period substantially undistributed earnings foreign subsidiaries indefinitely reinvested due enactment us tax reform repatriations foreign earnings generally free us federal tax may incur taxes withholding state taxes indefinite reinvestment determined management’s intentions concerning future operations company earnings reinvested active nonus business operations however result us tax reform substantially prior unrepatriated foreign earnings subject us tax accordingly expect ability repatriate earnings without incremental us federal tax cost expect foreign withholding taxes repatriation would generate us foreign tax credit update analysis investment foreign earnings 2018 consider impact us tax reform december 31 2017 cumulative amount indefinitely reinvested foreign earnings approximately 80 billion computation potential deferred tax liability associated undistributed earnings basis differences practicable bhge llc 2017 form 10k 78 baker hughes ge company llc notes consolidated combined financial statements december 31 2017 395 million tax liabilities total gross unrecognized tax benefits related uncertain tax positions addition uncertain tax positions 95 million 53 million related interest penalties respectively total liabilities 543 million uncertain positions prevail uncertain positions net effect would result income tax benefit approximately 522 million remaining 21 million offset deferred tax assets represent tax benefits would received different taxing jurisdictions event prevail uncertain tax positions provided unrecognized tax benefits related us tax reform provisional estimate analysis performed conclusions reached part tax return filing process additional guidance accounting us tax reform could affect provisional estimate following table presents changes gross unrecognized tax benefits included consolidated combined statements financial position expected amount unrecognized tax benefits change next twelve months due expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate december 31 2017 approximately 105 million tax liabilities net 2 million tax assets related uncertain tax positions individually insignificant reasonably possible settled within next twelve months december 31 2017 approximately 288 million tax liabilities total gross unrecognized tax benefits included noncurrent portion income tax liabilities settlement period cannot determined however expected within next twelve months conduct business 120 countries subject income taxes taxing jurisdictions operate believe jurisdictions outcome unresolved issues claims likely material results operations financial position cash flows believe made adequate provision income tax uncertainties note 11 memebers equity common units bhge llc agreement provides initially one class common units currently held bhge indirectly ehhc cfc holdings llc cfc holdings ge certain indirectly whollyowned subsidiaries ge bhge issues share class common stock including connection equity incentive similar plan bhge llc also issue corresponding common unit bhge one direct subsidiaries year ended december 31 2017 issued 546 thousand common units bhge connection issuance class common stock bhge december 31 2017 ge owns approximately 625 common units bhge owns approximately 375 common units bhge llc 2017 form 10k 79 baker hughes ge company llc notes consolidated combined financial statements following table presents changes number common units outstanding thousands 1 november 6 2017 bhge announced board directors authorized us repurchase 3 billion common units bhge ge three months ended december 31 2017 repurchased 16173202 units total consideration 501 million accumulated comprehensive loss aocl following table presents changes accumulated comprehensive loss net tax amounts reclassified accumulated comprehensive loss years ended december 31 2017 2016 represent realized gains losses investment securities recorded non operating income loss ii gains losses reclassified cash flow hedges hedged transaction occurs iii amortization net actuarial loss prior service credit curtailments included computation net periodic pension cost see note 9 employee benefit plans additional details net periodic pension cost recorded across various cost expense line items within consolidated combined statement income loss bhge llc 2017 form 10k 80 baker hughes ge company llc notes consolidated combined financial statements note 12 financial instruments recurring fair value measurements assets liabilities measured fair value recurring basis consists derivative instruments investment securities transfers level 1 2 3 2017 following table provides reconciliation recurring level 3 fair value measurements investment securities significant unobservable input used valuation level 3 instruments discount rate discount rates determined based inputs market participants would use pricing investments including credit liquidity risk increase discount rate would result decrease fair value investment securities unrealized gains losses recognized consolidated combined statement income loss account level 3 instrument still held reporting date hold 127 million investment securities behalf ge investment securities classified available sale instruments nonus debt securities mature three years fair value disclosure financial instruments financial instruments include cash equivalents current receivables investments accounts payable short longterm debt derivative financial instruments except longterm debt estimated fair value bhge llc 2017 form 10k 81 baker hughes ge company llc notes consolidated combined financial statements financial instruments december 31 2017 december 31 2016 approximates carrying value reflected consolidated combined financial statements information fair value debt see note 8 borrowings derivatives hedging use derivatives manage risks use derivatives speculation table summarizes fair value derivatives including hedging instruments embedded derivatives classified captions current assets current liabilities depending respective maturity date risk management strategy buy manufacture sell components products well provide services across global markets activities expose us changes foreign currency exchange rates commodity prices adversely affect revenue earned costs operating business currency sell equipment differs primary currency known functional currency exchange rate fluctuates affect revenue earn sale sales purchase transactions also create receivables payables denominated foreign currencies along monetary assets liabilities expose us foreign currency gains losses based changes exchange rates changes price raw material use manufacturing affect cost manufacturing use derivatives mitigate eliminate exposures forms hedging cash flow hedges use cash flow hedging primarily reduce eliminate effects foreign exchange rate changes purchase sale contracts accordingly vast majority derivative activity category consists currency exchange contracts also use commodity derivatives reduce eliminate price risk raw materials purchased use manufacturing hedge accounting derivative carrying amount measured fair value period resulting gain loss recorded separate component equity differences derivative hedged item may cause changes fair values offset completely referred ineffectiveness hedged transaction occurs amounts released equity order transaction reflected earnings rate locked derivative effect hedge reported financial statement line item earnings effects hedged transaction bhge llc 2017 form 10k 82 baker hughes ge company llc notes consolidated combined financial statements following table explains effect changes market rates fair value derivatives use commonly cash flow hedging arrangements currency forwardsswaps us dollar strengthens us dollar weakens pay us dollarsreceive foreign currency fair value decreases fair value increases economic hedges derivatives designated hedges accounting standpoint therefore apply hedge accounting relationship otherwise serve economic purpose hedging arrangements economic hedges used changes carrying amount hedged item already recorded earnings period derivative making hedge accounting unnecessary types economic hedges changes fair value derivative recorded earnings currently changes value forecasted foreign currency cash flows recognized earnings occur result even though derivative effective economic hedge net effect earnings period due differences timing earnings recognition derivative hedged item derivatives marked fair value earnings period effects reported selling general administrative expenses consolidated combined statement income loss general income loss effects hedged item recorded consolidated combined financial statement line derivative income loss effect economic hedges considering offsets related income loss effects hedged assets liabilities substantially offset changes fair value forecasted transactions yet affected income loss table explains effects market rate changes fair value derivatives use commonly economic hedges currency forwardsswaps us dollar strengthens us dollar weakens pay us dollarsreceive foreign currency fair value decreases fair value increases receive us dollarspay foreign currency fair value increases fair value decreases commodity derivatives price increases price decreases receive commodity pay fixed price fair value increases fair value decreases notional amount derivatives notional amount derivative number units underlying example notional principal amount debt interest rate swap substantial majority outstanding notional amount 102 billion 71 billion december 31 2017 december 31 2016 respectively related hedges anticipated sales purchases foreign currency commodity purchases contractual terms contracts considered embedded derivatives intercompany borrowings foreign currencies generally disclose derivative notional amounts gross basis indicate total counterparty risk gross purchase sale derivative contracts particular currency look execute contracts counterparty reduce exposure corresponding net notional amounts 33 billion december 31 2017 06 billion december 31 2016 bhge llc 2017 form 10k 83 baker hughes ge company llc notes consolidated combined financial statements table provides additional information derivatives reflected consolidated combined financial statements effects derivatives earnings derivatives marked fair value consolidated combined statement financial position whether designated hedging relationship accounting purposes used economic hedges discussed previous sections type hedge affects financial statements differently economic hedges hedged item hedging derivative offset earnings period economic hedges hedged item hedging derivative offset earnings different periods cash flow effective portion hedging derivative offset separate components equity ineffectiveness recognized earnings table summarizes offsets net effect pretax earnings 1 cash flow hedges effect earnings primarily related ineffectiveness economic hedges forecasted transactions effect earnings substantially offset future earnings economically hedged items changes fair value cash flow hedges recorded separate component equity referred accumulated comprehensive income aoci recorded earnings period hedged transaction occurs table summarizes activity hedging instrument expect transfer insignificant amount earnings expense next 12 months contemporaneously earnings effects related forecast transactions december 31 2017 2016 maximum term derivative instruments hedge forecast transactions threeyears twoyears respectively see note 11 members equity additional information reclassification accumulated comprehensive income cash flow hedges amount ineffectiveness hedging relationship amount changes fair value derivatives included measurement ineffectiveness insignificant reporting period counterparty credit risk fair values derivatives change significantly period based among factors market movements changes positions manage counterparty credit risk counterparties default make payments us according terms agreements individual counterparty basis bhge llc 2017 form 10k 84 baker hughes ge company llc notes consolidated combined financial statements note 13 segment information operating segments organized based nature markets customers following transactions revised segment structure began manage report operating results four operating segments defined reflected revised structure historical periods presented oilfield services oilfield services provides products services onshore offshore operations across lifecycle well ranging drilling evaluation completion production intervention products services include diamond tricone drill bits drilling services including directional drilling technology measurement drilling logging drilling downhole completion tools systems wellbore intervention tools services wireline services drilling completions fluids oilfield industrial chemicals pressure pumping artificial lift technologies including electrical submersible pumps oilfield equipment oilfield equipment provides broad portfolio products services required facilitate safe reliable flow hydrocarbons subsea wellhead surface products services include pressure control equipment services subsea production systems services drilling equipment flexible pipeline systems oilfield equipment designs manufactures onshore offshore drilling production systems equipment floating production platforms provides full range services related onshore offshore drilling activities turbomachinery process solutions turbomachinery process solutions provides equipment related services mechanicaldrive compression powergeneration applications across oil gas industry well products services serve downstream segments industry including refining petrochemical distributed gas flow process control industrial applications turbomachinery process solutions portfolio includes drivers aeroderivative gas turbines heavyduty gas turbines synchronous induction electric motors compressors centrifugal axial direct drive high speed integrated subsea compressors turbo expanders reciprocating turnkey solutions industrial modules waste heat recovery pumps valves compressed natural gas cng smallscale liquefied natural gas lng solutions used primarily shale oil gas field development digital solutions digital solutions provides equipment services wide range industries including oil gas power generation aerospace metals transportation offerings include sensorbased measurement nondestructive testing inspection turbine generator plant controls condition monitoring well pipeline integrity solutions segment results summarized financial information shown following tables consistent accounting policies applied segments within company reporting periods current year results balances may comparable prior years current year includes results baker hughes july 3 2017 bhge llc 2017 form 10k 85 baker hughes ge company llc notes consolidated combined financial statements performance operating segments evaluated based segment operating income loss defined income loss income taxes equity loss affiliate following net interest expense net non operating income loss corporate expenses restructuring impairment charges inventory impairments merger related costs goodwill impairments certain gains losses allocated operating segments 1 inventory impairments related charges reported cost goods sold caption consolidated combined statements income loss 2017 includes 87 million adjustments writeup acquired inventory estimated fair value acquisition baker hughes inventory used sold six months ended december 31 2017 following table presents total assets segment december 31 1 goodwill acquired result baker hughes acquisition preliminarily allocated oilfield services see note 6 goodwill intangible assets details 2 corporate eliminations total segment assets includes adjustments intercompany investments receivables reflected within total assets four reportable segments bhge llc 2017 form 10k 86 baker hughes ge company llc notes consolidated combined financial statements following table presents depreciation amortization segment years ended december 31 following tables present consolidated revenue based location product shipped services performed years ended december 31 net property plant equipment geographic location december 31 note 14 related party transactions significant related party transactions entered members affiliates ge affiliates provided continue provide variety services us also enter certain transactions bhge provided bhge llc agreement connection transactions july 3 2017 entered various agreements ge affiliates govern relationship ge following transactions including intercompany services agreement pursuant ge affiliates company provide certain services ge provide certain administrative services ge proprietary technology use certain ge trademarks consideration payment 55 million per year ge may also provide us certain additional administrative services intercompany services agreement included consideration 55 million per year payment fees services based actual usage services historical ge intercompany pricing addition provide ge affiliates confidential access certain proprietary technology related developments enhancements thereto related ges operations products service offerings recognized cost 28 million year ended december 31 2017 services provided ge affiliates subsequent close transactions prior transactions ge affiliates provided variety services funding us cost services either recognized allocated portion ges corporate overhead b billed directly us costs 103 million 210 million 180 million year ended december 31 2017 2016 2015 respectively recorded consolidated combined statement income loss respect services provided ge affiliates prior close transactions sold 639 million 374 million 329 million products services various ge affiliates year ended december 31 2017 2016 2015 respectively purchases ge affiliates bhge llc 2017 form 10k 87 baker hughes ge company llc notes consolidated combined financial statements 1512 million 978 million 1225 million year ended december 31 2017 2016 2015 respectively employee benefits certain employees covered various ge sponsored employee benefit plans including ges retirement plans pension retiree health life insurance savings benefit plans active health life insurance benefit plans details provided note 9 employee benefit plans related party balances connection transactions july 3 2017 required repay cash excess 100 million net thirdparty debt ge og ge due restricted nature majority excess cash continue hold cash behalf ge cash unrestricted available repayment ge restriction arises majority cash cannot released transferred otherwise converted nonrestricted market currency due lack market liquidity capital controls similar monetary exchange limitations government entity jurisdiction cash situated accordingly july 3 2017 executed promissory note ge maturity date promissory note remain obligated repay ge excess cash together income loss may incur therefore obligation reflected shortterm borrowings december 31 2017 amount due ge 1124 million 997 million held form cash 127 million held form investment securities corresponding liability reported shortterm borrowings consolidated combined statements financial position receivables monetization monetized portion current receivables programs established ge various ge subsidiaries three months ended december 31 2017 ceased participate ge receivables monetization program receivable monetization program factored us nonus receivables ge capital recourse nonrecourse basis pursuant various factoring services agreements purchased directly working capital solutions wcs operating unit ge capital sold external investors wcs agent arranger buysell structures factoring programs ge capital performed risk analysis allocated nonrecourse credit limit customer portfolio exceeded credit limit receivable factored recourse evaluation whether recourse transactions qualify accounting derecognition based part upon legal jurisdiction sales majority recourse transactions outside us qualify sale treatment company 116 million 198 million december 31 2017 december 31 2016 respectively accounts payable ge relate cash collected current receivables monetization program addition prior transactions participated ge accounts receivable gear program transferred receivables securitization structure administered ge capital ge receivables sale contribution agreement outstanding balances receivables transferred ge wcs administered programs accounted sales 225 million 2168 million december 31 2017 2016 respectively programs retain responsibility servicing receivables remitting collections owner lenders fee equal prevailing market rate services outsourced servicing responsibilities ge capital marketbased fee accordingly servicing asset liability recorded consolidated combined statements financial position december 31 2017 december 31 2016 programs incurred interest expense finance charges 59 million 91 million 93 million years ended december 31 2017 2016 2015 respectively reflected consolidated combined statements income loss trade payables accelerated payment program north american operations participate accounts payable programs ge capital invoices settled vendors per payment terms obtain cash discounts ge capital provides funding invoices eligible bhge llc 2017 form 10k 88 baker hughes ge company llc notes consolidated combined financial statements cash discount liability associated funded participation accounts payable programs presented accounts payable within consolidated combined statements financial position 293 million 104 million december 31 2017 december 31 2016 respectively parents net investment december 31 2016 remainder ges total investment excess debt ge reflected equity caption parents net investment consolidated combined statements financial position december 31 2017 ges equity ownership reflected noncontrolling interest consolidated combined statements financial position company 575 million 228 million accounts payable december 31 2017 2016 respectively services provided ge ordinary course business company 801 million 392 million current receivables december 31 2017 2016 respectively services provided ge ordinary course business additionally company 113 million current receivables december 31 2017 bhge prior transactions ge provided guarantees letters credit support arrangements behalf provide guarantees ge capital behalf customers entered financing arrangements ge capital prior transactions certain number employees granted ge stock options rsus ges 2007 longterm incentive plan consolidated combined financial statements include compensation expense related awards portion employees vesting period accrued employment us income taxes closing bhge ge bhge llc entered tax matters agreement tax matters agreement governs administration allocation parties tax liabilities benefits arising prior result subsequent transactions including certain restructuring transactions connection therewith respective rights responsibilities obligations ge bhge respect various tax matters ge responsible certain taxes related formation transaction undertaken ge baker hughes respective subsidiaries ge assumed approximately 33 million tax obligations baker hughes related formation transaction following closing transactions bhge llc respective subsidiaries may included group tax returns ge extent included group tax returns ge required pay bhge llc extent separate tax returns include net operating losses used reduce taxes payable ge respect applicable group tax return ii bhge llc required make tax sharing payments ge amount intended approximate amount entity would paid included group tax returns filed separate tax returns tax matters agreement also provides sharing certain tax benefits arising transactions including restructuring transactions ii resulting allocations tax items bhge llc ge entitled 100 tax benefits extent ge borne certain taxes related formation transaction currently estimated 33 million thereafter tax benefits shared ge bhge accordance economic ownership bhge llc initially approximately 625 approximately 375 respectively sharing tax benefits generally expected result cash payments bhge llc members cash payments may subject adjustment based certain subsequent events including tax audits determinations availability tax benefits respect cash payments previously made bhge llc 2017 form 10k 89 baker hughes ge company llc notes consolidated combined financial statements note 15 commitments contingencies leases december 31 2017 longterm noncancelable operating leases covering certain facilities equipment minimum annual rental commitments net amounts due subleases five years period ending december 31 2021 156 million 119 million 95 million 76 million 54 million respectively 188 million aggregate thereafter rent expense 360 million 200 million 206 million years ended december 31 2017 2016 2015 respectively enter significant capital leases three years ended december 31 2017 litigation subject number lawsuits claims arising conduct business ability predict ultimate outcome matters involves judgments estimates inherent uncertainties record liability contingencies incurrence loss probable amount reasonably estimated including accruals selfinsured losses calculated based historical claim data specific loss development factors information range total possible losses litigation matters cannot reasonably estimated based consideration relevant facts circumstances expect ultimate outcome currently pending lawsuits claims us discussed material adverse effect financial position results operations cash flows however assurance ultimate outcome matters respect litigation matters adverse outcome individually collectively could material impact business financial condition results operations expected year litigation matters subject inherent uncertainties managements view matters may change future therefore assurance ultimate outcome matters 2014 received notification customer related possible equipment failure natural gas storage system northern germany includes certain products currently investigating cause possible failure necessary possible repair replacement options products similar products utilized natural gas storage systems customers customer initiated arbitral proceedings us june 19 2015 rules german institute arbitration ev dis august 3 2016 customer amended claims alleges damages approximately 224 million plus interest annual rate prime 5 hearings arbitration panel held january 16 2017 january 23 2017 march 20 2017 march 21 2017 addition september 21 2015 triuva kapitalverwaltungsgesellschaft mbh filed lawsuit united states district court southern district texas houston division company baker hughes oilfield operations inc alleging plaintiff owner gas storage caverns etzel germany company provided certain equipment connection development gas storage caverns plaintiff alleges company supplied equipment either defectively designed failed warn risks equipment posed alleged defects caused damage plaintiffs property plaintiff seeks recovery alleged compensatory punitive damages unspecified amount addition reasonable attorneys fees court costs prejudgment postjudgment interest allegations lawsuit related claims made june 19 2015 german arbitration referenced time able predict outcome claims april 30 2015 class collective action lawsuit alleging failed pay nationwide class workers overtime compliance fair labor standards act north dakota law filed titled williams et al v baker hughes oilfield operations inc us district court district north dakota february 8 2016 court conditionally certified certain subclasses employees collective action treatment parties entered settlement agreement approved court december 7 2017 amount settlement material impact financial results reported company bhge llc 2017 form 10k 90 baker hughes ge company llc notes consolidated combined financial statements july 31 2015 rapid completions llc filed lawsuit federal court eastern district texas baker hughes incorporated baker hughes oilfield operations inc others claiming infringement us patent nos 6907936 7134505 7543634 7861774 8657009 august 6 2015 rapid completions amended complaint allege infringement us patent 9074451 september 17 2015 rapid completions packers plus energy services inc sued baker hughes canada company canada federal court related canadian patent 2412072 april 1 2016 rapid completions removed us patent 6907936 claims lawsuit april 5 2016 rapid completions filed second lawsuit federal court eastern district texas baker hughes incorporated baker hughes oilfield operations inc others claiming infringement us patent 9303501 patents relate primarily certain specific downhole completions equipment plaintiff requested permanent injunction alleged infringement damages unspecified amount supplemental enhanced damages additional relief attorneys fees costs august september 2016 united states patent trademark office uspto agreed institute interpartes review us patent nos 7861774 7134505 7534634 6907936 8657009 9074451 august 29 2017 uspto issued final written decisions interpartes reviews us patent nos 8657009 9074451 finding claims patents unpatentable august 31 2017 uspto issued final written decision interpartes review us patent 6907936 patent dropped lawsuit plaintiffs finding claims patent patentable october 27 2017 rapid completions filed notices appeal uspto’s final written decision interpartes review us patent nos 8657009 9074451 trial validity asserted claims canada patent 2412072 completed march 9 2017 december 7 2017 canadian court issued judgment finding patent claims asserted canada patent 2412072 baker hughes canada company invalid january 5 2018 rapid completions filed notice appeal canadian court’s judgment invalidity time able predict outcome claims may 10 2017 putative class action complaint filed behalf purported baker hughes stockholders us district court southern district texas challenging transaction agreement plan merger combining baker hughes ge og complaint captioned booth family trust v baker hughes inc et al civil action 417cv01457 sd tex 2017 complaint asserted among things claims sections 14a 20a securities exchange act 1934 amended exchange act baker hughes members board directors challenged adequacy disclosures made combined proxy statementprospectus dated may 9 2017 addition certain unspecified damages reimbursement costs plaintiff sought enjoin consummation transactions june 21 2017 parties reached agreement principle settle booth family trust litigation exchange company making certain additional disclosures contained 8k filed sec june 22 2017 september 14 2017 parties filed stipulation dismissal court dismissing remaining claims booth family trust prejudice parties agreed award attorney’s fees amount material impact financial results reported company following consummation transactions two purported holders shares baker hughes common stock representing total 1875000 shares common stock baker hughes filed petitions court chancery state delaware seeking appraisal shares pursuant section 262 delaware general corporation law action captioned follows gkc strategic value master fund lp fka gkc appraisal rights master fund lp walleye trading llc v baker hughes incorporated case 20170769 time able predict outcome action february 17 2017 ge infrastructure sensing inc known ge infrastructure sensing llc geis subsidiary company served lawsuit filed eastern district new york company named saniteq llc claiming compensatory damages totalling 500 million plus punitive damages unspecified amount complaint captioned saniteq llc v ge infrastructure sensing inc 17cv771 edny 2017 complaint generally alleges geis breached contract negotiated parties misappropriated unspecified trade secrets time able predict outcome claims january 2013 ineos naphtachimie initiated expertise proceedings aixenprovence france arising fire chemical plant owned ineos lavera france resulted 15day plant shutdown destruction steam turbine part compressor train owned naphtachimie ineos naphtachimie claim approximately €195 million losses result incident two companys bhge llc 2017 form 10k 91 baker hughes ge company llc notes consolidated combined financial statements subsidiaries 17 companies notified participate proceedings ongoing time indication companys subsidiaries involved incident time able predict outcome claims late november 2017 staff boston office sec notified ge conducting investigation ge’s revenue recognition practices internal controls financial reporting related longterm service agreements scope sec’s request may include bhge contracts mainly tps business provided documents ge cooperating response sec company reporting following matter compliance sec requirements disclose environmental proceedings government party potentially involve monetary sanctions 100000 greater january 2018 kern county california issued administrative enforcement order proposed penalty 130000 alleged violations process safety management regulations manufacturing facility taft california indirectly owned company insure risks arising business extent deemed prudent management extent insurance available assurance given nature amount insurance sufficient fully indemnify us liabilities arising pending future legal proceedings claims insurance policies contain deductibles selfinsured retentions amounts deem prudent responsible payment determining amount selfinsurance policy selfinsure losses predictable measurable recurring nature claims automobile liability general liability workers compensation environmental matters estimated remediation costs accrued using currently available facts existing environmental permits technology enacted laws regulations cost estimates developed based internal evaluations discounted accruals recorded probable obligated pay environmental site evaluation remediation related activities costs reasonably estimated additional information becomes available accruals adjusted reflect current cost estimates ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party us federal state comprehensive environmental response compensation liability act “superfund” site accrue share estimated remediation costs site share based ratio estimated volume waste contributed site total volume waste disposed site normal course business customers vendors others entered offbalance sheet arrangements surety bonds performance letters credit bank issued guarantees totaled approximately 34 billion december 31 2017 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect financial position results operations cash flows also commitments outstanding purchase obligations five years period ending december 31 2022 962 million 45 million 42 million 36 million 23 million respectively 13 million aggregate thereafter note 16 restructuring impairment recorded restructuring impairment charges 412 million 516 million 411 million years ended december 31 2017 2016 2015 respectively details charges discussed restructuring impairment charges current prior periods approved various restructuring plans globally mainly consolidate manufacturing service facilities rationalize product lines rooftops reduce headcount across bhge llc 2017 form 10k 92 baker hughes ge company llc notes consolidated combined financial statements various functions result recognized charge 385 million 293 million 314 million years ended december 31 2017 2016 2015 respectively restructuring initiatives generate charges post 2017 related estimated remaining charges approximately 150 million charges included part restructuring impairment consolidated combined statements income loss amount costs included reported segment results follows costs primarily related product line terminations plant closures related expenses property plant equipment impairments contract terminations costs assets employees relocation employeerelated termination benefits incremental costs direct result restructuring plans charges included restructuring impairment caption consolidated combined statements income loss 27 million 223 million 97 million years ended december 31 2017 2016 2015 respectively charges include currency devaluation charges 12 million 138 million 63 million years ended december 31 2017 2016 2015 respectively largely driven significant currency devaluations angola nigeria markets minimal currency derivative liquidity limits ability offset exposures note 17 supplementary information current liabilities current liabilities december 31 2017 2016 include approximately 881 million 318 million respectively employee related liabilities bhge llc 2017 form 10k 93 baker hughes ge company llc notes consolidated combined financial statements product warranties provide estimated product warranty expenses sell related products warranty estimates forecasts based best available information primarily historical claims experience claims costs may differ amounts provided analysis changes liability product warranties follows 1 includes increase 93 million year ended december 31 2017 result baker hughes acquisition note 18 quarterly data unaudited 1 represents revenue less cost sales cost services 2 restructuring impairment costs associated asset impairments workforce reductions facility closures contract terminations recorded 2017 2016 see note 16 restructuring impairment discussion bhge llc 2017 form 10k 94 item 9item 8 financial statements supplementary data managements report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rules 13a15f internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles supervision participation management including principal executive officer principal financial officer assessed effectiveness internal control financial reporting based 2013 framework internal control integrated framework issued committee sponsoring organizations treadway commission based assessment principal executive officer principal financial officer concluded internal control financial reporting effective december 31 2018 conclusion based recognition inherent limitations systems internal control inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate kpmg llp companys independent registered public accounting firm issued attestation report effectiveness companys internal control financial reporting lorenzo simonelli lorenzo simonelli president chief executive officer brian worrell brian worrell chief financial officer kurt camilleri kurt camilleri vice president controller chief accounting officer houston texas february 19 2019 bhge llc 2018 form 10k 45 report independent registered public accounting firm members baker hughes ge company llc opinion consolidated combined financial statements audited accompanying consolidated combined statement financial position baker hughes ge company llc subsidiaries company december 31 2018 2017 related consolidated combined statements income loss comprehensive income loss changes members equity cash flows years twoyear period ended december 31 2018 related notes collectively consolidated combined financial statements opinion consolidated combined financial statements present fairly material respects financial position company december 31 2018 2017 results operations cash flows years twoyear period ended december 31 2018 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 31 2018 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission report dated february 19 2019 expressed unqualified opinion effectiveness company’s internal control financial reporting change accounting principle discussed note 1 consolidated combined financial statements company changed method accounting revenue recognition 2018 due adoption accounting standards codification 606 revenue contracts customers basis opinion consolidated combined financial statements responsibility company’s management responsibility express opinion consolidated combined financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether consolidated combined financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement consolidated combined financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated combined financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated combined financial statements believe audits provide reasonable basis opinion kpmg llp served company’s auditor since 2017 houston texas february 19 2019 bhge llc 2018 form 10k 46 report independent registered public accounting firm members baker hughes ge company llc audited accompanying combined statements income loss comprehensive income loss changes members equity cash flows ge oil gas company business within general electric company year ended december 31 2016 combined financial statements responsibility company’s management responsibility express opinion combined financial statements based audits conducted audit accordance standards public company accounting oversight board united states accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion combined financial statements referred present fairly material respects combined results operations cash flows company year ended december 31 2016 conformity us generally accepted accounting principles change accounting principle discussed note 1 combined financial statements company changed method accounting revenue recognition 2018 due adoption accounting standards codification 606 revenue contracts customers kpmg spa florence italy march 16 2017 except note 15 december 4 2017 note 1 november 13 2018 bhge llc 2018 form 10k 47 report independent registered public accounting firm members baker hughes ge company llc opinion internal control financial reporting audited baker hughes ge company llc subsidiaries’ company internal control financial reporting december 31 2018 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission opinion company maintained material respects effective internal control financial reporting december 31 2018 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states pcaob consolidated combined statement financial position company december 31 2018 2017 related consolidated combined statements income loss comprehensive income loss changes members equity cash flows years twoyear period ended december 31 2018 related notes collectively consolidated combined financial statements report dated february 19 2019 expressed unqualified opinion consolidated combined financial statements basis opinion company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audit accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audit also included performing procedures considered necessary circumstances believe audit provides reasonable basis opinion definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate kpmg llp houston texas february 19 2019 bhge llc 2018 form 10k 48 baker hughes ge company llc consolidated combined statements income loss see accompanying notes consolidated combined financial statements bhge llc 2018 form 10k 49 baker hughes ge company llc consolidated combined statements comprehensive income loss see accompanying notes consolidated combined financial statements bhge llc 2018 form 10k 50 baker hughes ge company llc consolidated combined statements financial position 1 total assets include 896 million 1124 million assets held behalf ge 747 million 997 million cash equivalents 149 million 127 million investment securities december 31 2018 december 31 2017 respectively corresponding amount liability reported shortterm borrowings see note 16 related party transactions details see accompanying notes consolidated combined financial statements bhge llc 2018 form 10k 51 baker hughes ge company llc consolidated combined statements changes members equity see accompanying notes consolidated combined financial statements bhge llc 2018 form 10k 52 baker hughes ge company llc consolidated combined statements cash flows see accompanying notes consolidated combined financial statements bhge llc 2018 form 10k 53 baker hughes ge company llc notes consolidated combined financial statements note 1 basis presentation summary significant accounting policies description business baker hughes ge company llc delaware limited liability company bhge llc us successor baker hughes incorporated delaware corporation baker hughes fullstream oilfield technology provider unique mix equipment service capabilities conduct business 120 countries employ approximately 66000 employees july 3 2017 completed combination ge og baker hughes transactions december 31 2018 ge owns approximately 504 common units bhge owns approximately 496 common units basis presentation connection transactions entered governed amended restated limited liability company agreement dated july 3 2017 bhge llc agreement bhge llc agreement ehhc newco llc ehhc wholly owned subsidiary bhge sole managing member bhge sole managing member ehhc managing member ehhc conducts directs exercises full control activities including daytoday business affairs decisionmaking without approval member ehhc responsible operational administrative decisions daytoday management business transactions treated reverse acquisition accounting purposes historical financial statements accounting acquirer ge og historical financial statements company accompanying consolidated combined financial statements company prepared accordance accounting principles generally accepted united states america us principles us gaap pursuant rules regulations sec annual financial information intercompany accounts transactions eliminated companys financial statements prepared consolidated basis effective july 3 2017 basis presentation financial statements consolidate subsidiaries entities controlling financial interest often hold majority voting interest subsequent periods also presented consolidated basis periods prior july 3 2017 companys financial statements prepared combined basis combined financial statements combine certain accounts ge subsidiaries historically managed part oil gas business contributed bhge llc part transactions additionally also includes certain assets liabilities results operations businesses ge also contributed bhge llc part transactions fully retrospective basis accordance guidance applicable transactions entities common control based carrying values reflected accounting records ge consolidated combined statements income reflect intercompany expense allocations made us ge certain corporate functions shared services provided ge possible allocations made specific identification basis cases expenses allocated ge based relative percentages net operating costs basis depending nature allocated cost see note 16 related party transactions information expenses allocated ge historical financial results consolidated combined financial statements presented may indicative results would achieved ge og operated separate standalone entity periods merger related costs includes costs associated transactions described note 3 refer note 3 business acquisition disposition details 2018 merger related costs also include costs incurred connection finalization master agreement framework costs related anticipated separation ge see note 16 related party transactions information master agreement framework bhge llc 2018 form 10k 54 baker hughes ge company llc notes consolidated combined financial statements companys financial statements notes certain amounts reclassified conform current year presentation notes consolidated combined financial statements dollar unit amounts tabulations millions dollars units respectively unless otherwise indicated certain columns rows financial statements notes thereto may add due use rounded numbers revision previously filed consolidated combined financial statements three months ended march 31 2018 company adopted accounting standard revenue recognition set forth financial accounting standards board fasb accounting standards update asu 201409 revenue contracts customers related amendments topic 606 consolidated combined financial statements present previously reported financial information bhge revised basis consistent 2018 financial statements include adoption new revenue standard addition updates related new revenue standard january 1 2018 company adopted fasb asu 201707 improving presentation net periodic pension cost net periodic postretirement benefit cost changed income statement presentation net periodic benefit cost requiring separation service cost component components company represented consolidated combined statements income loss accordance new standard consistent financial statements include adoption service cost component presented operating expense similar compensation costs arising services rendered pertinent employees period non operating components presented outside income operations company also recast consolidated combined statements financial position statements cash flows accordance fasb asu 201618 statement cash flows restricted cash company adopted three months ended march 31 2018 following notes updated subsequent filing form 10k year ended december 31 2017 reflect change due retrospective adoption new accounting standards notes 1 2 3 4 5 8 9 12 13 15 summary significant accounting policies use estimates preparation financial statements conformity us gaap requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period base estimates judgments historical experience various assumptions information believe reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained operating environment changes believe estimates assumptions used preparation consolidated combined financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts inventory valuation reserves recoverability longlived assets including revenue recognition longterm contracts valuation goodwill useful lives used depreciation amortization income taxes related valuation allowances accruals contingencies actuarial assumptions determine costs liabilities related employee benefit plans stockbased compensation expense valuation derivatives fair value assets acquired liabilities assumed acquisitions expense allocations certain corporate functions shared services provided ge bhge llc 2018 form 10k 55 baker hughes ge company llc notes consolidated combined financial statements foreign currency assets liabilities nonus operations functional currency us dollar translated us dollars quarterly exchange rates revenue expenses cash flows translated average rates respective periods resulting translation gains losses included comprehensive income loss gains losses foreign currency transactions resulting settlement receivables payables nonfunctional currency resulting remeasurements monetary items included consolidated combined statement income loss investments equity securities investments equity securities entities controlling financial interest often hold voting interest 0 20 readily determinable fair values measured fair value changes fair value recognized earnings reported non operating income net caption consolidated combined statements income loss equity securities readily determinable fair values recorded cost minus impairment plus minus changes resulting observable price changes orderly transactions identical similar equity securities issuer perform qualitative impairment assessment equity securities without readily determinable fair values qualitative assessment indicates impairment exists equity security impaired fair value associated companies entities controlling financial interest significant influence often hold voting interest 20 50 associated companies accounted equity method investments results associated companies presented oneline basis caption equity loss affiliate consolidated combined statements income loss investments advances associated companies presented oneline basis caption assets consolidated combined statement financial position revenue sale equipment performance obligations satisfied time recognize revenue agreements sales goods manufactured unique customer specifications including longterm construction projects overtime basis utilizing cost inputs measurement criteria assessing progress toward completion estimate costs incurred fulfill promise customer based history manufacturing constructing similar assets customers updated routinely reflect changes quantity pricing inputs begin recognize revenue contracts contract specific inventory becomes customized customer reflective initial transfer control incurred costs provide potential losses agreements probable incur loss billing terms overtime contracts vary generally based achieving specified milestones differences timing revenue recognized based costs incurred customer billings based contractual terms results changes contract asset contract liability positions performance obligations satisfied point time recognize revenue noncustomized equipment point time customer obtains control good earlier customer physical possession product equipment recognize revenue point time include goods manufacture standardized basis sale market use proof delivery certain large equipment complex logistics associated shipment whereas delivery equipment determined based historical data transit times regions bhge llc 2018 form 10k 56 baker hughes ge company llc notes consolidated combined financial statements occasion sell products right return use accumulated experience estimate provide returns record sale situations arrangements include customer acceptance provisions based seller customerspecified objective criteria recognize revenue concluded customer control goods acceptance likely occur billing terms point time equipment contracts vary generally based shipment goods customer revenue sale services performance obligations satisfied time revenue oilfield services recognized overtime basis performed also sell product services longterm product maintenance extended warranty agreements turbomachinery process solutions oilfield equipment segments agreements require us maintain customers assets service agreement contract terms generally range 10 20 years general contractual arrangements provide services repairs maintenance covered unit gas turbines mechanical drive power generation primarily lng applications drilling rigs services performed various times life contract thus costs performing services incurred straightline basis recognize related sales based extent progress toward completion measured actual costs incurred relation total expected costs provide loss expect incur agreements loss probable bhge utilizes historical customer data prior product performance data statistical analysis thirdparty data internal management estimates calculate contractspecific margins certain contracts total transaction price variable based customer utilization excluded contract margin period customer utilized appropriately reflect revenue activity period earned billing terms contracts generally based asset utilization ie usage per hour occurrence major maintenance event within contract differences timing revenue recognized based costs incurred customer billings based contractual terms results changes contract asset contract liability positions performance obligations satisfied point time sell certain tangible products largely spare equipment services business recognize revenues equipment point time customer obtains control good point time deliver spare part customer billing terms point time service contracts vary generally based shipment goods customer research development research development costs expensed incurred relate research development new products services costs amounted 700 million 501 million 352 million years ended december 31 2018 2017 2016 respectively research development expenses reported cost goods sold cost services sold cash equivalents restricted cash shortterm investments original maturities three months less included cash equivalents unless designated availableforsale classified investment securities december 31 2018 december 31 2017 1208 million 1190 million respectively cash held bank accounts cannot released transferred otherwise converted currency regularly transacted internationally due lack market liquidity capital controls similar monetary exchange limitations limiting flow capital jurisdiction funds available fund operations growth jurisdictions currently anticipate need transfer funds us included bhge llc 2018 form 10k 57 baker hughes ge company llc notes consolidated combined financial statements amounts 461 million 764 million december 31 2018 december 31 2017 respectively held behalf ge cash equivalents restricted cash includes total 747 million 997 million cash december 31 2018 december 31 2017 respectively held behalf ge corresponding liability reported shortterm borrowings see note 16 related party transactions details result adopting fasb asu 201618 statement cash flows restricted cash reclassified restricted cash 7 million assets cash equivalents restricted cash december 31 2017 allowance doubtful accounts establish allowance doubtful accounts based various factors including payment history financial condition debtors economic environment provisions doubtful accounts recorded based aging status debtor accounts becomes evident debtor make required payments either contractual due dates future concentration credit risk grant credit customers primarily operate oil natural gas industry although concentration affects overall exposure credit risk current receivables spread diverse group customers across many countries mitigates risk perform periodic credit evaluations customers financial conditions including monitoring customers payment history current credit worthiness manage risk generally require collateral support current receivables may require payment advance security form letter credit bank guarantee inventories stated lower cost net realizable values measured firstin firstout fifo basis average cost basis necessary record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments property plant equipment ppe property plant equipment initially stated cost depreciated estimated economic life subsequently property plant equipment measured cost less accumulated depreciation impairment losses manufacture substantial portion tools equipment cost items includes direct indirect manufacturing costs capitalized carried inventory completed intangible assets amortize cost intangible assets estimated useful lives unless lives deemed indefinite cost intangible assets generally amortized straightline basis assets estimated economic life amortizable intangible assets reviewed impairment whenever events changes circumstances indicate related carrying amounts may recoverable circumstances tested impairment based undiscounted cash flows impaired written fair value based either discounted cash flows appraised values intangible assets indefinite lives tested annually impairment written fair value required refer impairment goodwill longlived assets accounting policy bhge llc 2018 form 10k 58 baker hughes ge company llc notes consolidated combined financial statements impairment goodwill longlived assets perform annual impairment test goodwill qualitative quantitative basis reporting units july 1 frequently circumstances indicate impairment may exist reporting unit level performing annual impairment test option first performing qualitative assessment determine existence events circumstances would lead determination likely fair value reporting unit less carrying amount conclusion reached would required perform quantitative impairment assessment goodwill however assessment leads determination likely fair value reporting unit greater carrying amount assessments required quantitative assessment determination impairment made comparing carrying amount reporting unit fair value generally calculated using combination market comparable transaction discounted cash flow approaches see note 7 goodwill intangible assets information valuation methodology impairment goodwill review ppe intangible assets certain longlived assets impairment whenever events changes circumstances indicate carrying amount may recoverable least annually indefinitelived intangible assets testing impairment group longlived assets liabilities lowest level identifiable cash flows largely independent cash flows assets liabilities asset group determination recoverability made based upon estimated undiscounted future net cash flows amount impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets financial instruments financial instruments include cash equivalents current receivables investments accounts payables short longterm debt derivative financial instruments monitor exposure various business risks including commodity prices foreign currency exchange rates regularly use derivative financial instruments manage risks inception new derivative designate derivative hedge determine derivative undesignated hedging instrument document relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions assess whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item inception hedge ongoing basis program utilizes foreign currency forward contracts reduce risks associated effects certain foreign currency exposures program strategy gains losses foreign currency forward contracts mitigate foreign currency transaction translation gains losses extent practical foreign currency exposures typically arise changes value assets example current receivables liabilities example current payables denominated currencies functional currency respective entity record derivatives end reporting period consolidated combined statement financial position fair value forward contracts held undesignated hedging instruments record changes fair value forward contracts consolidated combined statements income loss along change fair value related foreign exchange movements hedged item changes fair value forward contracts designated cash flow hedging instruments recognized comprehensive income hedged item recognized earnings derivatives designated cash flow hedge determined ineffective portion derivatives change fair value recognized earnings fair value measurements financial assets liabilities measured fair value recurring basis fair value price would receive sell asset pay transfer liability orderly transaction market participant measurement date absence active markets identical assets liabilities measurements involve developing assumptions based market observable data absence data internal bhge llc 2018 form 10k 59 baker hughes ge company llc notes consolidated combined financial statements information consistent market participants would use hypothetical transaction occurs measurement date observable inputs reflect market data obtained independent sources unobservable inputs reflect market assumptions preference given observable inputs two types inputs create following fair value hierarchy • level 1 quoted prices identical instruments active markets • level 2 quoted prices similar instruments active markets quoted prices identical similar instruments markets active modelderived valuations whose inputs observable whose significant value drivers observable • level 3 significant inputs valuation model unobservable maintain policies procedures value instruments using best relevant data available addition perform reviews assess reasonableness valuations regard level 3 valuations including instruments valued third parties perform variety procedures assess reasonableness valuations reviews include evaluation instruments whose fair value change exceeds predefined thresholds andor change consider current interest rate currency credit environment well published data rating agency market reports current appraisals recurring fair value measurements derivatives level 1 derivatives traded either exchanges liquid overthecounter markets use closing prices valuation majority derivatives valued using internal models included level 2 internal models maximize use market observable inputs including interest rate curves forward spot prices currencies commodities derivative assets liabilities included level 2 primarily represent foreign currency commodity forward contracts company investments debt equity securities available use quoted market prices determine fair value investment securities included level 1 level 1 securities primarily include publicly traded equity securities investment securities market prices observable identical similar investment securities readily accessible investments individually difficult obtain pricing information individual investment security measurement date use pricing models consistent market participants would use inputs assumptions models derived market observable sources including benchmark yields reported trades brokerdealer quotes issuer spreads benchmark securities bids offers marketrelated data thus certain securities may priced using quoted prices rather determined market observable information investments included level 2 use valuations based significant unobservable inputs classify investment securities level 3 nonrecurring fair value measurements certain assets measured fair value nonrecurring basis assets measured fair value ongoing basis subject fair value adjustments certain circumstances assets include longlived assets reduced fair value held sale equity securities without readily determinable fair value equity method investments longlived assets written fair value impaired remeasurement retained investments formerly consolidated subsidiaries upon change control results deconsolidation subsidiary sell controlling interest bhge llc 2018 form 10k 60 baker hughes ge company llc notes consolidated combined financial statements retain noncontrolling stake entity assets written fair value impaired retained investments subsequently adjusted fair value unless impairment occurs investments equity securities investments equity securities valued using market observable data quoted prices available market observable data unavailable investments valued using discounted cash flow model comparative market multiples combination approaches appropriate thirdparty pricing sources longlived assets fair values longlived assets including real estate primarily derived internally based observed sales transactions similar assets instances example collateral types comparable observed sales transaction data collateral values developed internally corroborated external appraisal information adjustments thirdparty valuations may performed circumstances market comparables specific attributes specific collateral appraisal information may reflective current market conditions due passage time occurrence market events since receipt information income taxes treated partnership us federal income tax purposes except certain us corporations owned company subject us federal income tax current us tax laws members required take account us federal income tax purposes distributive share items income gain loss deduction generally include us operations baker hughes ge og bhge ge taxed distributive share income gain whether corresponding amount cash property distributed assets held indirectly us subsidiaries including foreign us taxes attributable subsidiaries reflected consolidated combined financial statements account taxes asset liability method deferred income taxes recognized temporary differences financial statement tax return bases assets liabilities well net operating losses tax credit carryforwards based enacted tax rates expected effect taxes actually paid recovered provisions tax law effect change tax laws rates deferred tax assets liabilities recognized income period change enacted future tax benefits recognized extent realization benefits likely valuation allowance established portion deferred tax asset management believes may realized due enactment us tax reform repatriations foreign earnings generally free us federal tax may incur taxes withholding state taxes indefinite reinvestment determined management’s judgment intentions concerning future operations company earnings reinvested active nonus business operations practicable determine income tax liability would payable earnings reinvested indefinitely significant judgment required determining tax expense evaluating tax positions including evaluating uncertainties operate 120 countries tax filings subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved tax authorities courts provided amounts believe ultimately result proceedings recognize uncertain tax positions “more likely not” sustained relevant tax authority audit position full knowledge relevant facts information tax positions meet threshold measure amount tax benefit based largest amount tax benefit greater 50 chance realized final settlement relevant authority classify interest penalties associated uncertain tax positions bhge llc 2018 form 10k 61 baker hughes ge company llc notes consolidated combined financial statements income tax expense effects tax adjustments settlements taxing authorities presented combined financial statements period recorded additionally part us tax reform us enacted tax base eroding payments us minimum tax foreign earnings global intangible lowtaxed income 2018 made accounting policy election account taxes period costs environmental liabilities involved numerous remediation actions clean hazardous waste required federal state laws liabilities remediation costs exclude possible insurance recoveries dates amounts costs known discounted appears range possible costs equal likelihood liabilities based low end range reasonably possible environmental remediation exposure exceed amounts accrued however due uncertainties status laws regulations technology information related individual sites amounts reasonably estimable determination required accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity necessary new accounting standards adopted january 1 2018 adopted fasb asu 201409 revenue contracts customers related amendments asc 606 elected adopt new standard using full retrospective method standard applied prior reporting period presented cumulative effect applying standard recognized january 1 2016 addition elected practical expedient contract modifications essentially means terms contract existed beginning earliest period presented assumed place since inception contract ie practical separately evaluate effects prior contract modifications standard requires us identify contractual performance obligations determine whether revenue recognized point time based control goods services transfer customer result adoption standard changed presentation financial statements including 1 timing revenue recognition 2 changes classification revenue costs standard cash impact affect economics underlying customer contracts impact adoption result adoption standard timing revenue recognition longterm product service agreements affected although continue recognize revenue time contracts changes contract modifications termination clauses purchase options accounted us particular previous standard cumulative impact contract modification revenue already recorded recognized period modification agreed new standard impact certain types modifications recognized remaining life contract change historical periods consolidated combined statements income loss related adoption standard summarized bhge llc 2018 form 10k 62 baker hughes ge company llc notes consolidated combined financial statements increase decrease historical statement financial position related adoption standard summarized cumulative impact retained earnings included net parent investment january 1 2016 reduction 432 million january 1 2018 adopted fasb asu 201616 accounting income taxes intraentity asset transfers assets inventory asu eliminated deferral tax effects intraentity asset transfers inventory result tax expense intercompany sale assets inventory associated changes deferred taxes recognized sale occurs even though pretax effects transaction recognized effect adoption standard increase retained earnings 67 million january 1 2018 impact financial statements future earnings reduced total amount effect change future transactions depend nature amount future transactions affect timing recognition tax expenses tax benefits change associated cash flows january 1 2018 adopted fasb asu 201707 improving presentation net periodic pension cost net periodic postretirement benefit cost changed income statement presentation net periodic benefit cost requiring separation service cost component components service cost component presented operating expense similar compensation costs arising services rendered pertinent employees period non operating components presented outside income operations change historical periods consolidated combined statements income loss related adoption asu 201707 summarized october 1 2018 elected early adopt asu 201802 income statement reporting comprehensive income topic 220 reclassification certain tax effects accumulated comprehensive income asu provides stranded tax effects tax cuts jobs act balance comprehensive income oci may reclassified retained earnings effect adoption standard reclassification tax effect recorded within accumulated comprehensive income bhge llc 2018 form 10k 63 baker hughes ge company llc notes consolidated combined financial statements aoci associated primarily change tax rate us tax reform retained earnings adoption impact consolidated financial statements new accounting standards adopted february 2016 fasb issued asu 201602 leases asu establishes rightofuse rou model requires lessee record rou asset lease liability balance sheet leases terms longer 12 months leases classified either finance operating classification affecting pattern expense recognition similarly lessors required classify leases salestype finance operating classification affecting pattern income recognition classification lessees lessors based assessment whether risks rewards well substantive control transferred lease contract new standard effective fiscal years beginning december 15 2018 including interim periods within fiscal years early adoption permitted july 2018 fasb issued asu added alternative transition method allows companies apply provisions new leasing standard january 1 2019 recognition cumulativeeffect adjustment retained earnings january 1 2019 ie without retrospectively adjusting comparative periods intend apply alternative transition method preparation adoption standard implemented internal controls key system functionality enable preparation financial information standard material impact consolidated statement financial position material impact consolidated income statements consolidated cash flow statements significant impact recognition rou assets lease liabilities operating leases accounting capital leases remains substantially unchanged adoption standard result recognition additional rou assets lease liabilities operating leases approximately 08 billion january 1 2019 june 2016 fasb issued asu 201613 financial instruments credit losses asu introduces new accounting model current expected credit losses model cecl requires earlier recognition credit losses additional disclosures related credit risk cecl model utilizes lifetime expected credit loss measurement objective recognition credit losses loans receivables time financial asset originated acquired expected credit losses adjusted period changes expected lifetime credit losses model replaces multiple existing impairment models current gaap generally require loss incurred recognized new standard also apply receivables arising revenue transactions contract assets accounts receivables effective fiscal years beginning december 15 2019 continue evaluate effect standard consolidated financial statements august 2017 fasb issued asu 201712 derivatives hedging topic 815 targeted improvements accounting hedging activities asu effective periods beginning december 15 2018 election adopt early asu requires certain changes presentation hedge accounting financial statements new modified disclosures asu also simplifies application hedge accounting expands strategies qualify hedge accounting asu material effect consolidated financial statements new accounting pronouncements issued yet effective currently evaluated time expected material impact financial position results operations bhge llc 2018 form 10k 64 baker hughes ge company llc notes consolidated combined financial statements note 2 revenue related contracts customers disaggregated revenue disaggregate revenue contracts customers primary geographic markets remaining performance obligations december 31 2018 december 31 2017 aggregate amount transaction price allocated unsatisfied partially unsatisfied performance obligations 210 billion year respectively december 31 2018 expect recognize revenue approximately 45 63 88 total remaining performance obligations within 2 5 15 years respectively remaining thereafter contract modifications could affect timing complete well amount received fulfill related remaining performance obligations note 3 business acquisition disposition business acquisition july 3 2017 closed transactions combine ge og baker hughes transactions executed using partnership structure pursuant ge og baker hughes contributed operating assets company fair value consideration exchanged 24798 million tables present fair value assets acquired liabilities assumed associated fair value noncontrolling interest related acquired net assets baker hughes final determination fair value assets liabilities concluded second quarter 2018 1 intangible assets provided table recorded fair value determined management based available information estimated useful lives intangible assets determined based upon remaining bhge llc 2018 form 10k 65 baker hughes ge company llc notes consolidated combined financial statements useful economic lives intangible assets expected contribute directly indirectly future cash flows consider baker hughes trade name indefinite life intangible asset amortized subject annual impairment test 2 includes approximately 83 million net deferred tax liabilities related fair value intangible assets included purchase consideration approximately 113 million net deferred tax assets including nonus loss carryforwards net valuation allowances partially offset liabilities unrecognized benefits 3 goodwill represents excess total purchase consideration fair value net assets recognized represents future economic benefits believe result combining operations ge og baker hughes including expected future synergies operating efficiencies goodwill resulting transactions primarily allocated oilfield services segment 67 million deductible tax purposes see note 7 goodwill intangible assets allocation goodwill segments six months ended june 30 2018 company made measurement period adjustments reflect facts circumstances existence acquisition date adjustments resulted increase goodwill december 31 2017 891 million primarily due reduction fair value property plant equipment 362 million equity method investments 228 million intangible assets 123 million increase liabilities 314 million primarily related uncertain tax positions warranty sundry liabilities result decrease property plant equipment intangible assets six months ended june 30 2018 recorded cumulative decrease depreciation amortization expense 33 million reclassified certain balances conform current presentation income taxes treated partnership us federal income tax purposes subject us federal income tax current us tax laws foreign subsidiaries however incurred current deferred foreign income taxes members required take account us federal income tax purposes distributive share items income gain loss deduction generally includes us operations bhge ge taxed distributive share income gain whether corresponding amount cash property distributed assets held indirectly us subsidiaries taxes attributable subsidiaries reflected consolidated combined financial statements merger related costs 2018 2017 2016 acquisition costs 153 million 373 million 33 million respectively expensed incurred reported merger related costs include professional fees advisors integration synergy costs related combination baker hughes ge og 2018 costs also include costs incurred connection finalization master agreement framework costs related anticipated separation ge see note 16 related party transactions details master agreement framework bhge llc 2018 form 10k 66 baker hughes ge company llc notes consolidated combined financial statements unaudited pro forma information following unaudited pro forma information presented transactions occurred january 1 2016 information prepared combining historical results ge og historical results baker hughes unaudited pro forma combined financial data periods presented adjusted give effect pro forma events 1 directly attributable transactions 2 factually supportable 3 expected continuing impact consolidated results operations adjustments based information available company time accordingly adjustments subject change impact changes may material unaudited pro forma results include incremental cost savings may result integration unaudited combined pro forma information informational purposes necessarily indicative combined companys results actually would acquisition completed beginning periods indicated addition unaudited pro forma information purport project future results combined company significant adjustments pro forma information include recognition nonrecurring direct incremental acquisition costs 2016 exclusion costs periods presented amortization associated estimate acquired intangible assets reduction interest expense fair value adjustments debt business disposition october 2018 company completed sale natural gas solution ngs business sales price 375 million ngs part tps segment provided commercial industrial products gas meters chemical injection pumps pipeline repair products electric actuators sale resulted gain income tax 171 million reported non operating income net caption consolidated combined statements income loss note 4 current receivables current receivables comprised following december 31 customer receivables recorded invoiced amount related parties consists primarily amounts owed us ge category consists primarily indirect taxes customer retentions tax receivables advance payments suppliers bhge llc 2018 form 10k 67 baker hughes ge company llc notes consolidated combined financial statements note 5 inventories net reserves 430 million 360 million 2018 2017 respectively comprised following december 31 2018 2017 recorded 105 million 157 million inventory impairments result certain restructuring activities initiated company charges inventory impairments reported cost goods sold caption consolidated combined statements income loss note 6 property plant equipment property plant equipment comprised following december 31 1 useful life excludes land depreciation expense relating property plant equipment 1031 million 716 million 311 million 2018 2017 2016 respectively see note 18 restructuring impairment additional information property plant equipment impairments bhge llc 2018 form 10k 68 baker hughes ge company llc notes consolidated combined financial statements note 7 goodwill intangible assets goodwill changes carrying value goodwill detailed segment 1 includes goodwill associated acquisition baker hughes final determination fair value assets liabilities related goodwill associated acquisition baker hughes concluded second quarter 2018 total goodwill 13669 million resulting acquisition baker hughes 12604 million allocated oilfield services segment remainder segments based expected benefit synergies acquisition test goodwill impairment annually third quarter year using data july 1 year would include consideration segment realignment reporting units four reportable segments impairment test consists two steps step one carrying value reporting unit compared fair value step two applied carrying value fair value amount goodwill impairment derived deducting fair value reporting units assets liabilities fair value equity comparing amount carrying amount goodwill determined fair values reporting units using combination market approach income approach assessed valuation methodologies based upon relevance available data weighted results appropriately valuations using market approach derived metrics publicly traded companies historically completed transactions comparable businesses selection comparable businesses based markets reporting units operate giving consideration risk profiles size geography diversity products services market approach limited reporting units publicly traded companies characteristics similar businesses income approach fair value determined based present value estimated future cash flows discounted appropriate riskadjusted rate used internal forecasts estimate future cash flows included estimate longterm future growth rates based recent views longterm outlook business actual results may differ assumed forecasts derived discount rates using capital asset pricing model analyzing published rates industries relevant reporting units estimate cost equity financing used discount rates commensurate risks uncertainty inherent respective businesses internally developed forecasts discount rates used reporting unit valuations ranged 10 115 estimating fair value reporting units requires use estimates significant judgments based number factors including actual operating results reasonably possible judgments estimates described could change future periods bhge llc 2018 form 10k 69 baker hughes ge company llc notes consolidated combined financial statements performed annual impairment test goodwill july 1 2018 july 1 2017 four reporting units step one impairment test performed considering macroeconomic industry conditions overall financial performance reporting unit longterm forecasts among factors require considerable judgment based results step one testing fair values four reporting units exceeded carrying values therefore second step impairment test required performed reporting units goodwill impairment recognized addition annual impairment testing also test goodwill impairment annual impairment testing dates whenever events circumstances occur judgment could likely reduce fair value one reporting units carrying amount assessing possibility reporting unit’s fair value reduced carrying amount due occurrence events circumstances annual impairment testing dates consider available evidence including limited results impairment testing prior annual impairment testing date particular magnitude excess fair value carrying value observed ii downward revisions internal forecasts magnitude thereof iii impact separation ge iv declines market capitalization bhge book value magnitude duration declines july 1 2018 december 31 2018 identified events circumstances could likely reduce fair value one reporting units carrying amount december 31 2018 believe goodwill recoverable however assurances sustained declines macroeconomic business conditions affecting industry business occur impairment testing discussed involves significant management judgment based assumptions future commodity pricing supply demand goods services market conditions difficult forecast volatile economic environments actual results materially differ estimated assumptions utilized forecasts may need record impairment charges future periods intangible assets intangible assets comprised following december 31 1 indefinitelived intangible assets principally comprise trade names trademarks acquired business combinations indefinitelived intangible assets december 31 2018 2017 comprised primarily baker hughes trade name valued 2100 million using relieffromroyalty method intangible assets generally amortized straightline basis estimated useful lives ranging one 30 years amortization expense years ended december 31 2018 2017 2016 455 million 387 million 239 million respectively bhge llc 2018 form 10k 70 baker hughes ge company llc notes consolidated combined financial statements estimated amortization expense subsequent five fiscal years expected follows note 8 contract deferred assets majority longterm product service agreements relate turbomachinery process solutions segment contract assets reflect revenue earned excess billings longterm contracts construct technically complex equipment longterm product maintenance extended warranty arrangements deferred contract related costs contract assets comprised following december 31 1 reflects revenue earned excess billings longterm contracts construct technically complex equipment certain service agreements 2 contract assets total revenue excess billings 1233 million january 1 2017 3 deferred inventory costs 276 million january 1 2017 represents cost deferral shipped goods costs criteria revenue recognition yet met revenue recognized year ended december 31 2018 2017 performance obligations satisfied partially satisfied previous years related longterm service agreements 26 million 44 million respectively includes revenue recognized revisions cost billing estimates may affect contract’s total estimated profitability resulting adjustment earnings bhge llc 2018 form 10k 71 baker hughes ge company llc notes consolidated combined financial statements note 9 progress collections deferred income contract liabilities include progress collections reflects billings excess revenue deferred income longterm contracts construct technically complex equipment longterm product maintenance extended warranty arrangements contract liabilities comprised following 1 progress collections deferred income contract liabilities 2038 million january 1 2017 revenue recognized year ended december 31 2018 2017 included contract liabilities beginning year 1392 million 1525 million respectively note 10 borrowings shortterm longterm borrowings comprised following december 31 1 weighted average effective interest rate based carrying value including stepup adjustments applicable recorded upon acquisition baker hughes december 31 2018 2017 2 represents longterm fixed rate debt obligations assumed connection acquisition baker hughes net amounts repurchased subsequent closing transactions estimated fair value total borrowings december 31 2018 december 31 2017 6629 million bhge llc 2018 form 10k 72 baker hughes ge company llc notes consolidated combined financial statements 8466 million respectively majority borrowings fair value determined using quoted periodend market prices market prices available estimate fair values based valuation methodologies using current market interest rate data adjusted nonperformance risk maturities debt five years period ended december 31 2023 aggregate thereafter listed table july 2017 entered new fiveyear 3 billion committed unsecured revolving credit facility 2017 credit agreement commercial banks maturing july 2022 2017 credit agreement contains certain customary representations warranties certain affirmative covenants negative covenants upon occurrence certain events default obligations 2017 credit agreement may accelerated events default include payment defaults lenders 2017 credit agreement customary defaults events default occurred year ended december 31 2018 borrowings 2017 credit agreement november 2017 entered commercial paper program may issue time 3 billion commercial paper maturities 397 days december 31 2018 borrowings outstanding commercial paper program maximum combined borrowing time 2017 credit agreement commercial paper program 3 billion concurrent transactions associated acquisition baker hughes july 3 2017 baker hughes coobligor inc became coobligor jointly severally us registered debt securities coobligor 100owned finance subsidiary incorporated sole purpose serving coobligor debt securities assets operations related sole purpose baker hughes coobligor inc also coobligor 3950 million senior notes issued december 11 2017 us private placement certain senior notes contain covenants restrict ability take certain actions including limited creation certain liens securing debt entry certain saleleaseback transactions engaging certain merger consolidation asset sale transactions excess specified limits january 2018 redeemed remaining aggregate principal amount 2018 senior notes 615 million also january 2018 commenced offering exchange 3950 million outstanding unregistered senior notes issued private offering december 11 2017 identical registered 2773 senior notes due 2022 3337 senior notes due 2027 4080 senior notes due 2047 exchange offer completed january 31 2018 see note 16 related party transactions additional information shortterm borrowings ge see note 14 financial instruments additional information borrowings associated swaps bhge llc 2018 form 10k 73 baker hughes ge company llc notes consolidated combined financial statements note 11 employee benefit plans ge multiemployer plans certain us employees covered various us ge employee benefit plans including ges retirement plans pension retiree health life insurance savings benefit plans addition certain united kingdom uk employees participate ge uk pension plan allocated relevant participation costs ge employee benefit plans part multiemployer plans recorded liabilities associated participation plans expenses associated participation plans 158 million 132 million 140 million years ended december 31 2018 2017 2016 respectively november 2018 company entered agreement ge whereby ge transfer assets liabilities ge uk pension plan related oil gas businesses bhge intended fully funded basis subsequent transfer bhge shall cease participate ge uk pension plan transfer expected close 2019 additionally beginning 2019 legacy ge og us employees cease participate ge us plans defined benefit plans addition ge plans certain employees also covered company sponsored pension plans primary pension plans 2018 included four us plans six nonus pension plans primarily uk germany canada pension assets obligations greater 20 million use december 31 measurement date plans defined benefit plans generally provide benefits employees based formulas recognizing length service earnings however half plans either frozen closed new entrants also provide certain postretirement health care benefits postretirement benefits unfunded plan closed group us employees retire meet certain age service requirements funded status funded status position represents difference benefit obligation plan assets projected benefit obligation pbo pension benefits represents actuarial present value benefits attributed employee services compensation includes assumption future compensation levels accumulated benefit obligation abo actuarial present value pension benefits attributed employee service date present compensation levels abo differs pbo abo include assumptions future compensation levels reconciliation beginning ending balances benefit obligations fair value plan assets funded status plans bhge llc 2018 form 10k 74 baker hughes ge company llc notes consolidated combined financial statements 1 relates acquisition baker hughes july 3 2017 amounts recognized consolidated combined statements financial position consist following december 31 bhge llc 2018 form 10k 75 baker hughes ge company llc notes consolidated combined financial statements information plans abos excess plan assets follows december 31 net periodic cost income components net periodic cost income follows years ended december 31 1 primarily associated two uk plans merging ge uk pension plan 2 result acquisition baker hughes obtained noncontributory pension plan baker hughes incorporated pension plan bhipp 2017 compensation committee board directors approved amendments bhipp close plan new participants freeze accruals future servicerelated benefits effective december 31 2017 result actions company recorded curtailment gain 45 million curtailment recorded company fourth quarter 2017 included “other nonoperating income loss net” caption consolidated combined statements income loss service cost component net periodic cost benefit included operating income loss components included non operating income net caption consolidated combined statements income loss assumptions used benefit calculations accounting requirements necessitate use assumptions reflect uncertainties length time pension obligations paid actual amount future benefit payments depend upon participants retire amount benefit retirement long live reflect obligation today’s dollars discount future payments using rate matches time frame payments made also need assume longterm rate return earned investments used fund payments weighted average assumptions used determine benefit obligations plans follows years ended december 31 bhge llc 2018 form 10k 76 baker hughes ge company llc notes consolidated combined financial statements weighted average assumptions used determine net periodic cost plans follows years ended december 31 determine discount rate using bond matching model whereby weighted average yields highquality fixedincome securities maturities consistent timing benefit payments lower discount rates increase size benefit obligations pension expense following year higher discount rates reduce size benefit obligation subsequentyear pension expense compensation assumption used active plans estimate annual rate pay plan participants grow rate growth assumed increases size pension obligations increase expected return plan assets estimated longterm rate return earned investments used fund pension obligations determine rate consider current target composition plan investments historical returns earned expectations future assumed health care cost trend rates significant effect amounts reported postretirement benefits december 31 2018 health care cost trend rate 650 declining gradually successive year reaches 468 one percentage point change assumed health care cost trend rates would immaterial 2018 accumulated comprehensive loss amount recorded beforetax accumulated comprehensive loss related employee benefit plans consists following december 31 estimated net actuarial loss prior service cost defined benefit pension plans amortized accumulated comprehensive loss included net periodic benefit cost 2019 15 million 1 million respectively estimated net actuarial gain prior service credit postretirement benefits amortized accumulated comprehensive loss included net periodic benefit cost 2019 7 million 3 million respectively plan assets investment committees meet regularly review portfolio returns determine assetmix targets based assetliability studies thirdparty investment consultants assist committees developing asset allocation strategies determine expected rates return expected risk various investment portfolios investment committees considered strategies formal establishment current assetmix targets based projected risk return levels major asset classes bhge llc 2018 form 10k 77 baker hughes ge company llc notes consolidated combined financial statements table presents fair value pension assets december 31 1 include direct investments investment funds 2 substantially represented hedge fund asset allocation fund investments plan assets valued using net asset value nav practical expedient amounted 1802 million 1684 million december 31 2018 2017 respectively percentages plan assets valued using nav investment fund type equity securities fixed income cash alternative investments 30 48 19 december 31 2018 respectively 30 28 24 december 31 2017 respectively investments measured fair value using nav practical expedient excluded fair value hierarchy practical expedient applied investments fair value 64 million 375 million december 31 2018 2017 respectively investments classified within level 3 2018 investments classified within level 3 2017 86 million remaining investments considered level 1 2 funding policy funding policy pension benefits contribute amounts sufficient meet minimum funding requirements set forth employee benefit tax laws plus additional amounts may determine appropriate 2018 contributed approximately 51 million expect contribute approximately 22 million pension plans 2019 fund postretirement benefits payasyougo basis 2018 contributed 21 million plans 2019 expect contribute approximately 19 million fund benefits following table presents expected benefit payments next 10 years us nonus pension benefit payments made respective pension trust funds bhge llc 2018 form 10k 78 baker hughes ge company llc notes consolidated combined financial statements defined contribution plans primary defined contribution plan 2018 company sponsored us 401k plan 401k plan 401k plan allows eligible employees elect contribute portions eligible compensation investment trust employee contributions matched company cash rate 100 per 100 employee contribution first 5 employees eligible compensation contributions vest immediately addition make cash contributions eligible employees 4 eligible compensation contributions fully vested employee three years employment 2018 2017 legacy baker hughes employees participated 401k plan whereas legacy ge og employees continued participate ge sponsored plan 401k plan provides several investment options employee sole investment discretion however 401k plan offer companys common stock investment option costs 401k plan several us nonus defined contribution plans amounted 137 million 71 million 2018 2017 respectively beginning 2019 certain legacy ge og employees eligible participate defined contribution plans including 401k plan two nonqualified defined contribution plans invested trusts assets corresponding liabilities 233 million 278 million december 31 2018 2017 respectively included assets liabilities pensions employee benefits captions consolidated combined statements financial position note 12 income taxes treated partnership us federal income tax purposes except certain us corporations owned company subject us federal income tax current us tax laws members required take account us federal income tax purposes distributive share items income gain loss deduction generally include us operations baker hughes ge og bhge ge taxed distributive share income gain whether corresponding amount cash property distributed assets held indirectly us subsidiaries including foreign us taxes attributable subsidiaries reflected consolidated combined financial statements december 22 2017 us enacted tax cuts jobs act us tax reform lowers statutory tax rate us earnings taxes historic foreign earnings previously deferred us taxation reduced rate tax transition tax establishes territorial tax system enacts new taxes associated global operations transition tax associated nonus operations borne members impact us tax reform initially recorded provisional basis legislation provided additional guidance issued us department treasury several provisions including computation transition tax based guidance received date finalization purchase accounting baker hughes acquisition finalization 2017 us income tax returns recorded 25 million tax expense 2018 additionally part us tax reform us enacted tax base eroding payments us minimum tax foreign earnings global intangible lowtaxed income would borne members made accounting policy election account taxes period costs bhge llc 2018 form 10k 79 baker hughes ge company llc notes consolidated combined financial statements provision benefit income taxes comprised following years ended december 31 geographic sources income loss income taxes inclusive equity loss affiliate follows years ended december 31 benefit provision income taxes differs amount computed applying us statutory income tax rate loss income taxes reasons set forth years ended december 31 deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards bhge llc 2018 form 10k 80 baker hughes ge company llc notes consolidated combined financial statements tax effects temporary differences carryforwards follows december 31 december 31 2018 approximately 141 million nonus tax credits may carried forward indefinitely applicable foreign law 32 million credits begin expire tax year 2033 us tax law additionally 1500 million net operating loss carryforwards approximately 319 million expire within five years 186 million expire six 20 years remainder carried forward indefinitely record valuation allowance likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions december 31 2018 1591 million valuation allowances recorded various deferred tax assets including foreign net operating losses nol 1253 million foreign tax credit carryforwards 141 million us nols tax credit carryforwards 44 million certain deferred tax assets 153 million 206 million deferred tax assets related foreign net operating loss carryforwards without valuation allowance expect deferred tax assets realized within carryforward period substantially undistributed earnings foreign subsidiaries indefinitely reinvested due enactment us tax reform repatriations foreign earnings generally free us federal tax may incur taxes withholding state taxes indefinite reinvestment determined management’s intentions concerning future operations company earnings reinvested active nonus business operations however result us tax reform substantially prior unrepatriated foreign earnings subject us tax accordingly expect ability repatriate earnings without incremental us federal tax cost result us tax reform changed intent regarding certain cash repatriations accrued additional 9 million foreign withholding taxes december 31 2018 cumulative amount indefinitely reinvested foreign earnings approximately 63 billion computation potential deferred tax liability associated undistributed earnings basis differences practicable december 31 2018 472 million tax liabilities total gross unrecognized tax benefits related uncertain tax positions addition uncertain tax positions 91 million 34 million related interest penalties respectively total liabilities 597 million uncertain positions prevail bhge llc 2018 form 10k 81 baker hughes ge company llc notes consolidated combined financial statements uncertain positions net effect would result income tax benefit approximately 516 million remaining 81 million compromised 21 million deferred tax assets represent tax benefits would received different taxing jurisdictions event prevail uncertain tax positions increased valuation allowances 60 million following table presents changes gross unrecognized tax benefits included consolidated combined statements financial position expected amount unrecognized tax benefits change next twelve months due expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate december 31 2018 approximately 96 million tax liabilities net 1 million tax assets related uncertain tax positions individually insignificant reasonably possible settled within next twelve months conduct business 120 countries subject income taxes taxing jurisdictions operate internal revenue service examinations completed closed year end 2015 significant us returns believe jurisdictions outcome unresolved issues claims likely material results operations financial position cash flows believe made adequate provision income tax uncertainties note 13 members equity bhge llc agreement provides initially one class common units currently held bhge ge bhge issues share class common stock including connection equity incentive similar plan bhge llc also issue corresponding common unit bhge one direct subsidiaries year ended december 31 2018 issued 1492 thousand common units bhge connection issuance class common stock bhge following table presents changes number common units outstanding thousands bhge llc 2018 form 10k 82 baker hughes ge company llc notes consolidated combined financial statements 1 november 2018 bhge completed underwritten secondary public offering ge affiliates sold 1012 million shares class common stock bhge receive proceeds shares sold ge affiliates offering included exchange common units together corresponding shares class b common stock bhge class common stock bhge ge affiliates per exchange agreement 2 november 2017 bhges board directors authorized us repurchase 3 billion common units bhge ge 3 billion repurchase authorization aggregate authorization repurchases bhges class common stock class b common stock together paired common unit december 31 2018 stock repurchase program substantially completed 3 2018 repurchased canceled 30742152 units total consideration 1 billion additionally november 2018 also repurchased 65 million common units ge affiliates aggregate 1461 million 2248 per unit per unit price net discounts commissions paid underwriters ge affiliates underwritten public offering connection repurchase corresponding shares class b common stock bhge held ge affiliates canceled result exchange bhges shares secondary offering common units repurchased november 2018 ges ownership common units reduced fourth quarter 2018 approximately 625 approximately 504 accumulated comprehensive loss aocl following table presents changes accumulated comprehensive loss net tax amounts reclassified accumulated comprehensive loss years ended december 31 2018 2017 represent realized gains losses investment securities recorded non operating income net ii gains losses reclassified cash flow hedges hedged transaction occurs iii amortization net actuarial loss prior service credit curtailments included computation net periodic pension cost see note 11 employee benefit plans additional details net periodic pension cost recorded across various cost expense line items within consolidated combined statements income loss bhge llc 2018 form 10k 83 baker hughes ge company llc notes consolidated combined financial statements note 14 financial instruments recurring fair value measurements assets liabilities measured fair value recurring basis consists derivative instruments investment securities transfers level 1 2 3 2018 following table provides reconciliation recurring level 3 fair value measurements investment securities significant unobservable input used valuation level 3 instruments discount rate discount rates determined based inputs market participants would use pricing investments including credit liquidity risk increase discount rate would result decrease fair value investment securities unrealized gains losses recognized consolidated combined statement income loss account level 3 instrument still held reporting date hold 149 million 127 million investment securities behalf ge december 31 2018 december 31 2017 respectively 1 investment securities classified available sale instruments nonus debt securities mature four years 2 net unrealized gains losses recorded earnings related securities 25 million 30 million years ended december 31 2018 2017 respectively bhge llc 2018 form 10k 84 baker hughes ge company llc notes consolidated combined financial statements fair value disclosure financial instruments financial instruments include cash equivalents current receivables investments accounts payable short longterm debt derivative financial instruments except longterm debt estimated fair value financial instruments december 31 2018 december 31 2017 approximates carrying value reflected consolidated combined financial statements information fair value debt see note 10 borrowings derivatives hedging use derivatives manage risks use derivatives speculation table summarizes fair value derivatives including hedging instruments embedded derivatives classified captions current assets current liabilities depending respective maturity date risk management strategy buy manufacture sell components products well provide services across global markets activities expose us changes foreign currency exchange rates commodity prices adversely affect revenue earned costs operating business currency sell equipment differs primary currency known functional currency exchange rate fluctuates affect revenue earn sale sales purchase transactions also create receivables payables denominated foreign currencies along monetary assets liabilities expose us foreign currency gains losses based changes exchange rates changes price raw material use manufacturing affect cost manufacturing use derivatives mitigate eliminate exposures forms hedging cash flow hedges use cash flow hedging primarily reduce eliminate effects foreign exchange rate changes purchase sale contracts accordingly vast majority derivative activity category consists currency exchange contracts also use commodity derivatives reduce eliminate price risk raw materials purchased use manufacturing hedge accounting derivative carrying amount measured fair value period resulting gain loss recorded separate component equity differences derivative hedged item may cause changes fair values offset completely referred ineffectiveness hedged transaction occurs amounts released equity order transaction reflected earnings rate locked derivative effect hedge reported financial statement line item earnings effects hedged transaction bhge llc 2018 form 10k 85 baker hughes ge company llc notes consolidated combined financial statements following table explains effect changes market rates fair value derivatives use commonly cash flow hedging arrangements currency forwardsswaps us dollar strengthens us dollar weakens pay us dollarsreceive foreign currency fair value decreases fair value increases economic hedges derivatives designated hedges accounting standpoint therefore apply hedge accounting relationship otherwise serve economic purpose hedging arrangements economic hedges used changes carrying amount hedged item already recorded earnings period derivative making hedge accounting unnecessary types economic hedges changes fair value derivative recorded earnings currently changes value forecasted foreign currency cash flows recognized earnings occur result even though derivative effective economic hedge net effect earnings period due differences timing earnings recognition derivative hedged item derivatives marked fair value earnings period effects reported selling general administrative expenses consolidated combined statement income loss general income loss effects hedged item recorded consolidated combined financial statement line derivative income loss effect economic hedges considering offsets related income loss effects hedged assets liabilities substantially offset changes fair value forecasted transactions yet affected income loss table explains effects market rate changes fair value derivatives use commonly economic hedges currency forwardsswaps us dollar strengthens us dollar weakens pay us dollarsreceive foreign currency fair value decreases fair value increases receive us dollarspay foreign currency fair value increases fair value decreases commodity derivatives price increases price decreases receive commodity pay fixed price fair value increases fair value decreases notional amount derivatives notional amount derivative number units underlying example notional principal amount debt interest rate swap substantial majority outstanding notional amount 64 billion 102 billion december 31 2018 december 31 2017 respectively related hedges anticipated sales purchases foreign currency commodity purchases contractual terms contracts considered embedded derivatives intercompany borrowings foreign currencies generally disclose derivative notional amounts gross basis indicate total counterparty risk gross purchase sale derivative contracts particular currency look execute contracts counterparty reduce exposure corresponding net notional amounts 28 billion december 31 2018 33 billion december 31 2017 table provides additional information derivatives reflected consolidated combined financial statements bhge llc 2018 form 10k 86 baker hughes ge company llc notes consolidated combined financial statements effects derivatives earnings derivatives marked fair value consolidated combined statement financial position whether designated hedging relationship accounting purposes used economic hedges discussed previous sections type hedge affects financial statements differently economic hedges hedged item hedging derivative offset earnings period economic hedges hedged item hedging derivative offset earnings different periods cash flow effective portion hedging derivative offset separate components equity ineffectiveness recognized earnings table summarizes offsets net effect pretax earnings 1 cash flow hedges effect earnings primarily related ineffectiveness economic hedges forecasted transactions effect earnings substantially offset future earnings economically hedged items changes fair value cash flow hedges recorded separate component equity referred accumulated comprehensive income aoci recorded earnings period hedged transaction occurs table summarizes activity hedging instrument expect transfer loss 3 million earnings next 12 months contemporaneously earnings effects related forecast transactions december 31 2018 2017 maximum term derivative instruments hedge forecast transactions twoyears threeyears respectively see note 13 members equity additional information reclassification accumulated comprehensive income cash flow hedges amount ineffectiveness hedging relationship amount changes fair value derivatives included measurement ineffectiveness insignificant reporting period counterparty credit risk fair values derivatives change significantly period based among factors market movements changes positions manage counterparty credit risk counterparties default make payments us according terms agreements individual counterparty basis note 15 segment information reportable segments operating segments organized based nature markets customers report operating results four operating segments consist similar products services within segment described oilfield services oilfield services provides products services onshore offshore operations across lifecycle well ranging drilling evaluation completion production intervention products services include bhge llc 2018 form 10k 87 baker hughes ge company llc notes consolidated combined financial statements diamond tricone drill bits drilling services including directional drilling technology measurement drilling logging drilling downhole completion tools systems wellbore intervention tools services wireline services drilling completions fluids oilfield industrial chemicals pressure pumping artificial lift technologies including electrical submersible pumps oilfield equipment oilfield equipment provides broad portfolio products services required facilitate safe reliable flow hydrocarbons subsea wellhead surface products services include pressure control equipment services subsea production systems services drilling equipment flexible pipeline systems oilfield equipment designs manufactures onshore offshore drilling production systems equipment floating production platforms provides full range services related onshore offshore drilling activities turbomachinery process solutions turbomachinery process solutions provides equipment related services mechanicaldrive compression powergeneration applications across oil gas industry well products services serve downstream segments industry including refining petrochemical distributed gas flow process control industrial applications turbomachinery process solutions portfolio includes drivers aeroderivative gas turbines heavyduty gas turbines synchronous induction electric motors compressors centrifugal axial direct drive high speed integrated subsea compressors turbo expanders reciprocating turnkey solutions industrial modules waste heat recovery pumps valves compressed natural gas cng smallscale liquefied natural gas lng solutions used primarily shale oil gas field development digital solutions digital solutions provides equipment services wide range industries including oil gas power generation aerospace metals transportation offerings include sensorbased measurement nondestructive testing inspection turbine generator plant controls condition monitoring well pipeline integrity solutions segment results summarized financial information shown following tables consistent accounting policies applied segments within company reporting periods current year results balances may comparable prior years current year includes results baker hughes july 3 2017 bhge llc 2018 form 10k 88 baker hughes ge company llc notes consolidated combined financial statements performance operating segments evaluated based segment operating income loss defined income loss income taxes equity loss affiliate following net interest expense net non operating income corporate expenses restructuring impairment charges inventory impairments merger related costs goodwill impairments certain gains losses allocated operating segments 1 inventory impairments related charges reported cost goods sold caption consolidated combined statements income loss 2017 includes 87 million adjustments writeup acquired inventory estimated fair value acquisition baker hughes inventory used sold six months ended december 31 2017 following table presents total assets segment december 31 1 corporate eliminations total segment assets includes adjustments intercompany investments receivables reflected within total assets four reportable segments following table presents depreciation amortization segment years ended december 31 bhge llc 2018 form 10k 89 baker hughes ge company llc notes consolidated combined financial statements following table presents net property plant equipment geographic location december 31 note 16 related party transactions significant related party transactions entered members affiliates ge affiliates provided continue provide variety services us also enter certain transactions bhge provided bhge llc agreement connection transactions july 3 2017 entered various agreements ge affiliates govern relationship ge following transactions including intercompany services agreement pursuant ge affiliates company provide certain services ge provides certain administrative services ge proprietary technology use certain ge trademarks consideration payment 55 million per year ge may also provide us certain additional administrative services intercompany services agreement included consideration 55 million per year payment fees services based actual usage services historical ge intercompany pricing addition provide ge affiliates confidential access certain proprietary technology related developments enhancements thereto related ges operations products service offerings recognized cost 55 million 28 million year ended december 31 2018 december 31 2017 respectively services provided ge affiliates subsequent close transactions terms master agreement framework entered november 13 2018 annual intercompany services fee 55 million agreed pay ge part transactions reduced 50 275 million per year beginning january 1 2019 intercompany services agreement terminate 90 days following trigger date see discussion sold products services ge affiliates 363 million 639 million 374 million years ended december 31 2018 2017 2016 respectively purchases ge affiliates 1791 million 1512 million 978 million years ended december 31 2018 2017 2016 respectively prior transactions ge affiliates provided variety services funding us cost services either recognized allocated portion ges corporate overhead b billed directly us costs 103 million 210 million year ended december 31 2017 2016 respectively recorded consolidated combined statements income loss respect services provided ge affiliates prior close transactions master agreement framework june 2018 ge announced intention pursue orderly separation bhge time november 13 2018 entered master agreement series related ancillary agreements binding term sheets ge bhge collectively master agreement framework designed solidify commercial technological collaborations us ge facilitate ability transition operating controlled company particular master agreement framework contemplates longterm agreements us bhge ge technology fulfillment key areas provide greater clarity customers employees members key elements master agreement framework include secured longterm collaboration critical rotating equipment terms master agreement framework defined parameters longterm collaboration strategic relationship ge certain critical rotating equipment products bhge llc 2018 form 10k 90 baker hughes ge company llc notes consolidated combined financial statements entered aeroderivative joint venture jv binding term sheet ge form jv relating parties’ respective aeroderivative gas turbine products services jv expected become effective subject regulatory clearances customary closing conditions date trigger date later july 3 2019 ii date ge affiliates cease 50 voting power bhge’s outstanding common stock jet engine aeroderivative products mainly used lng onshoreoffshore production pipeline industrial segments within turbomachinery process solutions segment ge power generation business ge contribute certain assets inventory service facilities jv companies jointly control operations jv supply technology development agreement ge’s aviation business ge aviation revise extend pricing arrangements compared bhge’s existing supply agreement become effective trigger date additionally entered industrial steam turbine binding term sheet ge among things sets forth terms bhge llc would granted option exercisable following completion applicable information consultation processes employee representative bodies transfer certain assets liabilities employees related bhge llc’s existing business developing designing engineering marketing supplying installing servicing certain industrial steam turbine product lines ge parallel also entered binding term sheet longterm supply related distribution arrangement ge heavyduty gas turbine technology current pricing levels become effective trigger date heavyduty gas turbine technologies important components bhge tps’ offerings longterm agreements provide greater clarity commercial approach customer fulfillment enable bhge ge jointly innovate leading technology preserved access ge digital software technology part master agreement framework bhge agreed ge digital maintain subject certain conditions bhges current status exclusive reseller ge digital offerings oil gas space bhge continue source exclusively ge digital certain ge digital offerings oil gas applications part agreement bhge ge digital revised extended certain pricing arrangements established service level obligations key agreements • ge bhge agreed maintain current operations pricing levels regards control upgrade services offer digitals solution segment division four years commencing trigger date • ge transfer bhge certain uk pension liabilities related oil gas businesses bhge certain specified former oil gas businesses ge intended fully funded basis using agreed upon actuarial assumptions liabilities associated ge’s broadbased us defined benefit pension plan transferred us • tax matters agreement ge negotiated time transactions clarified otherwise remain substantially place companies retain ability monetize certain tax benefits • terms master agreement framework annual intercompany services fee 55 million agreed pay ge part transactions reduced 50 275 million per year beginning january 1 2019 intercompany services agreement terminate 90 days following trigger date except respect certain tools access connection master agreement framework bhge agreed terminate transfer restrictions previously applicable ge stockholders agreement dated july 3 2017 bhge ge amended time stockholders agreement transfer restrictions prohibited ge transferring shares bhges common stock prior july 3 2019 except affiliates without approval conflicts committee bhge board directors provisions stockholders agreement including bhge llc 2018 form 10k 91 baker hughes ge company llc notes consolidated combined financial statements continuing restrictions certain private transfers shares bhges common stock ge approval requirements related party transactions remain effect addition stockholders agreement amended restated provide following trigger date ge affiliates less 20 voting power bhge outstanding common stock ge shall entitled designate one person nomination bhge board directors related party connection transactions july 3 2017 executed promissory note ge represents certain cash holding ges behalf due restricted nature cash restriction arises majority cash cannot released transferred otherwise converted nonrestricted market currency due lack market liquidity capital controls similar monetary exchange limitations government entity jurisdiction cash situated maturity date promissory note remain obligated repay ge therefore obligation reflected shortterm borrowings december 31 2018 896 million due ge 747 million held form cash 149 million held form investment securities december 31 2017 1124 million due ge 997 million held form cash 127 million held form investment securities corresponding liability reported shortterm borrowings consolidated combined statements financial position company 538 million 575 million accounts payable december 31 2018 2017 respectively goods services provided ge ordinary course business company 746 million 915 million current receivables december 31 2018 2017 respectively goods services provided ge ordinary course business additionally company 93 million current receivables december 31 2018 bhge prior transactions ge provided guarantees letters credit support arrangements behalf provide guarantees ge capital behalf customers entered financing arrangements ge capital trade payables accelerated payment program north american operations participate accounts payable programs ge capital invoices settled vendors per payment terms obtain cash discounts ge capital provides funding invoices eligible cash discount liability associated funded participation accounts payable programs presented accounts payable within consolidated combined statements financial position 471 million 293 million december 31 2018 december 31 2017 respectively january 16 2019 ge announced sale ge capital’s accounts payable program platform thirdparty intent start transitioning existing program accounts payable program party ge affiliate covered agreement income taxes closing transactions bhge ge bhge llc entered tax matters agreement tax matters agreement governs administration allocation parties tax liabilities benefits arising prior result subsequent transactions including certain restructuring transactions connection therewith respective rights responsibilities obligations ge bhge respect various tax matters ge responsible certain taxes related formation transaction undertaken ge baker hughes respective subsidiaries ge assumed approximately 31 million tax obligations baker hughes related formation transaction following closing transactions bhge llc respective subsidiaries may included group tax returns ge extent included group tax returns ge required pay bhge llc extent separate tax returns include net operating losses used reduce taxes payable ge respect applicable group tax return ii bhge llc required make tax sharing payments ge amount intended approximate amount entity would paid included group tax returns filed separate tax returns bhge llc 2018 form 10k 92 baker hughes ge company llc notes consolidated combined financial statements tax matters agreement also provides sharing certain tax benefits arising transactions including restructuring transactions ii resulting allocations tax items bhge llc ge entitled 100 tax benefits extent ge borne certain taxes related formation transaction currently estimated 31 million thereafter tax benefits shared ge bhge accordance economic ownership bhge llc sharing tax benefits generally expected result cash payments bhge llc members cash payments may subject adjustment based certain subsequent events including tax audits determinations availability tax benefits respect cash payments previously made note 17 commitments contingencies leases december 31 2018 longterm noncancelable operating leases covering certain facilities equipment minimum annual rental commitments net amounts due subleases five years period ending december 31 2023 186 million 154 million 108 million 77 million 55 million respectively 266 million aggregate thereafter rent expense 579 million 360 million 200 million years ended december 31 2018 2017 2016 respectively enter significant capital leases three years ended december 31 2018 litigation subject number lawsuits claims arising conduct business ability predict ultimate outcome matters involves judgments estimates inherent uncertainties record liability contingencies incurrence loss probable amount reasonably estimated including accruals selfinsured losses calculated based historical claim data specific loss development factors information range total possible losses litigation matters cannot reasonably estimated based consideration relevant facts circumstances expect ultimate outcome currently pending lawsuits claims us discussed material adverse effect financial position results operations cash flows however assurance ultimate outcome matters respect litigation matters adverse outcome individually collectively could material impact business financial condition results operations expected year litigation matters subject inherent uncertainties managements view matters may change future therefore assurance ultimate outcome matters 2014 received notification customer related possible equipment failure natural gas storage system northern germany includes certain products customer initiated arbitral proceedings us june 19 2015 rules german institute arbitration ev dis august 3 2016 customer amended claims alleged damages €202 million plus interest annual rate prime 5 hearings arbitration panel held january 16 2017 january 23 2017 march 20 2017 march 21 2017 addition september 21 2015 triuva kapitalverwaltungsgesellschaft mbh filed lawsuit united states district court southern district texas houston division company baker hughes oilfield operations inc alleging plaintiff owner gas storage caverns etzel germany company provided certain equipment connection development gas storage caverns plaintiff alleges company supplied equipment either defectively designed failed warn risks equipment posed alleged defects caused damage plaintiffs property plaintiff seeks recovery alleged compensatory punitive damages unspecified amount addition reasonable attorneys fees court costs prejudgment postjudgment interest allegations lawsuit related claims made june 19 2015 german arbitration referenced june 7 2018 dis arbitration panel issued confidential arbitration ruling addressed claims asserted customer estimated financial impact arbitration ruling reflected companys financial statements material bhge llc 2018 form 10k 93 baker hughes ge company llc notes consolidated combined financial statements impact company vigorously contesting claims made triuva houston federal court time able predict outcome claims asserted houston federal court july 31 2015 rapid completions llc filed lawsuit federal court eastern district texas baker hughes incorporated baker hughes oilfield operations inc others claiming infringement us patent nos 6907936 7134505 7543634 7861774 8657009 august 6 2015 rapid completions amended complaint allege infringement us patent 9074451 september 17 2015 rapid completions packers plus energy services inc sued baker hughes canada company canada federal court related canadian patent 2412072 april 1 2016 rapid completions removed us patent 6907936 claims lawsuit april 5 2016 rapid completions filed second lawsuit federal court eastern district texas baker hughes incorporated baker hughes oilfield operations inc others claiming infringement us patent 9303501 patents relate primarily certain specific downhole completions equipment plaintiff requested permanent injunction alleged infringement damages unspecified amount supplemental enhanced damages additional relief attorneys fees costs august september 2016 united states patent trademark office uspto agreed institute interpartes review us patent nos 7861774 7134505 7543634 6907936 8657009 9074451 august 29 2017 uspto issued final written decisions interpartes reviews us patent nos 8657009 9074451 finding claims patents unpatentable august 31 2017 uspto issued final written decision interpartes review us patent 6907936 patent dropped lawsuit plaintiffs finding claims patent patentable october 27 2017 rapid completions filed notices appeal uspto’s final written decision interpartes review us patent nos 8657009 9074451 september 26 2018 uspto issued final written decision interpartes review us patent 7134505 finding challenged claims unpatentable september 27 2018 uspto issued final written decision interpartes review us patent 7543634 finding challenged claims unpatentable trial validity asserted claims canada patent 2412072 completed march 9 2017 december 7 2017 canadian court issued judgment finding patent claims asserted canada patent 2412072 baker hughes canada company invalid january 5 2018 rapid completions filed notice appeal canadian court’s judgment invalidity time able predict outcome claims following consummation transactions two purported holders shares baker hughes common stock representing total 1875000 shares common stock baker hughes filed petitions court chancery state delaware seeking appraisal shares pursuant section 262 delaware general corporation law action captioned follows gkc strategic value master fund lp fka gkc appraisal rights master fund lp walleye trading llc v baker hughes incorporated case 20170769 july 12 2018 parties entered confidential settlement agreement release claims asserted two shareholders settlement agreement material impact companys financial statements february 17 2017 ge infrastructure sensing inc known ge infrastructure sensing llc geis subsidiary company served lawsuit filed eastern district new york company named saniteq llc claiming compensatory damages totaling 500 million plus punitive damages unspecified amount complaint captioned saniteq llc v ge infrastructure sensing inc 17cv771 edny 2017 complaint generally alleges geis breached contract negotiated parties misappropriated unspecified trade secrets september 13 2018 district court entered order granting geis’ motion summary judgment dismissing saniteq llc’s claims entirety matter law saniteq llc filed notice appeal district court’s judgment february 6 2019 parties entered confidential settlement agreement release claims settlement agreement material impact companys financial statements january 2013 ineos naphtachimie initiated expertise proceedings aixenprovence france arising fire chemical plant owned ineos lavera france resulted 15day plant shutdown destruction steam turbine part compressor train owned naphtachimie recent quantification alleged damages €250 million two companys subsidiaries 17 companies notified participate proceedings ongoing time indication companys subsidiaries involved incident although outcome claims remains uncertain bhges insurer accepted coverage defending company expertise proceeding bhge llc 2018 form 10k 94 baker hughes ge company llc notes consolidated combined financial statements late november 2017 staff boston office sec notified ge conducting investigation ge’s revenue recognition practices internal controls financial reporting related longterm service agreements scope sec’s request may include bhge contracts expected mainly tps business provided documents ge cooperating response sec time able predict outcome review july 31 2018 international engineering construction sa iec initiated arbitration proceedings new york administered international center dispute resolution icdr company subsidiaries arising series sales service contracts entered iec company’s subsidiaries sale installation lng plants related power generation equipment nigeria contracts prior filing iec arbitration company’s subsidiaries made demands payment due contracts august 15 2018 company’s subsidiaries initiated separate demand icdr arbitration iec claims additional costs amounts due contracts october 10 2018 iec filed petition compel arbitration united states district court southern district new york company seeking compel nonsignatory bhge entities participate arbitration filed iec complaint captioned international engineering construction sa et al v baker hughes ge company llc et al 18cv09241 sdny 2018 iec alleges breach contract claims company subsidiaries seeks recovery alleged compensatory damages addition reasonable attorneys fees expenses arbitration costs iec alleges total damages may exceed 500 million company intends vigorously contest claims made iec arbitration litigation proceedings time able predict outcome claims insure risks arising business extent deemed prudent management extent insurance available assurance given nature amount insurance sufficient fully indemnify us liabilities arising pending future legal proceedings claims insurance policies contain deductibles selfinsured retentions amounts deem prudent responsible payment determining amount selfinsurance policy selfinsure losses predictable measurable recurring nature claims automobile liability general liability workers compensation environmental matters estimated remediation costs accrued using currently available facts existing environmental permits technology enacted laws regulations cost estimates developed based internal evaluations discounted accruals recorded probable obligated pay environmental site evaluation remediation related activities costs reasonably estimated additional information becomes available accruals adjusted reflect current cost estimates ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party us federal state comprehensive environmental response compensation liability act superfund site accrue share estimated remediation costs site share based ratio estimated volume waste contributed site total volume waste disposed site normal course business customers vendors others entered offbalance sheet arrangements surety bonds performance letters credit bank issued guarantees totaled approximately 36 billion december 31 2018 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect financial position results operations cash flows also commitments outstanding purchase obligations five years period ending december 31 2023 1388 million 51 million 35 million 20 million 5 million respectively 8 million aggregate thereafter bhge llc 2018 form 10k 95 baker hughes ge company llc notes consolidated combined financial statements note 18 restructuring impairment recorded restructuring impairment charges 433 million 412 million 516 million years ended december 31 2018 2017 2016 respectively details charges discussed restructuring impairment charges current prior periods approved various restructuring plans globally mainly consolidate manufacturing service facilities rationalize product lines rooftops reduce headcount across various functions result recognized charge 304 million 385 million 293 million years ended december 31 2018 2017 2016 respectively restructuring initiatives expected generate charges approximately 82 million restructuring plans come completion charges included restructuring impairment caption consolidated combined statements income loss amount costs included reported segment results follows costs primarily related product line terminations facility closures related expenses property plant equipment impairments contract terminations costs assets employees relocation employeerelated termination benefits incremental costs direct result restructuring plans charges included restructuring impairment caption consolidated combined statements income loss 129 million 27 million 223 million years ended december 31 2018 2017 2016 respectively 2018 charges consist primarily accelerated amortization 80 million related trade names technology ofs segment litigation charges 25 million corporate costs 13 million exit certain operations impacted tps ofs segments 2017 2016 charges primarily include currency devaluation charges 12 million 138 million respectively largely driven significant currency devaluations angola nigeria bhge llc 2018 form 10k 96 baker hughes ge company llc notes consolidated combined financial statements note 19 supplementary information current liabilities current liabilities december 31 2018 2017 include 951 million 881 million respectively employee related liabilities product warranties provide estimated product warranty expenses sell related products warranty estimates forecasts based best available information primarily historical claims experience claims costs may differ amounts provided analysis changes liability product warranties follows 1 primarily related acquisition baker hughes allowance doubtful accounts change allowance doubtful accounts follows bhge llc 2018 form 10k 97 baker hughes ge company llc notes consolidated combined financial statements note 20 quarterly data unaudited 1 represents revenue less cost sales cost services 2 restructuring impairment costs associated asset impairments workforce reductions facility closures contract terminations recorded 2018 2017 see note 18 restructuring impairment discussion bhge llc 2018 form 10k 98 item 9item 8 financial statements supplementary data managements report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rules 13a15f internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles supervision participation management including principal executive officer principal financial officer assessed effectiveness internal control financial reporting based 2013 framework internal control integrated framework issued committee sponsoring organizations treadway commission based assessment principal executive officer principal financial officer concluded internal control financial reporting effective december 31 2019 conclusion based recognition inherent limitations systems internal control inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate kpmg llp companys independent registered public accounting firm issued attestation report effectiveness companys internal control financial reporting lorenzo simonelli lorenzo simonelli president chief executive officer brian worrell brian worrell chief financial officer kurt camilleri kurt camilleri senior vice president controller chief accounting officer houston texas february 13 2020 bhge llc 2019 form 10k 40 report independent registered public accounting firm members baker hughes ge company llc opinion consolidated combined financial statements audited accompanying consolidated statements financial position baker hughes ge company llc subsidiaries company december 31 2019 2018 related consolidated combined statements income loss comprehensive income loss changes members equity cash flows years threeyear period ended december 31 2019 related notes collectively consolidated combined financial statements opinion consolidated combined financial statements present fairly material respects financial position company december 31 2019 2018 results operations cash flows years threeyear period ended december 31 2019 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 31 2019 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission report dated february 13 2020 expressed unqualified opinion effectiveness company’s internal control financial reporting basis opinion consolidated combined financial statements responsibility company’s management responsibility express opinion consolidated combined financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether consolidated combined financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement consolidated combined financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated combined financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated combined financial statements believe audits provide reasonable basis opinion critical audit matters critical audit matters communicated matters arising current period audit consolidated combined financial statements communicated required communicated audit committee 1 relate accounts disclosures material consolidated combined financial statements 2 involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated combined financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate evaluation revenue recognition agreements sales goods manufactured unique customer specifications discussed note 1 consolidated combined financial statements company enters agreements sales goods manufactured unique customer specifications revenue types contracts recognized extent progress towards completion measured actual costs incurred relative total expected costs identified revenue recognition contracts sales goods manufactured unique customer specifications critical audit matter complex auditor judgment required evaluating companys longterm estimates expected costs incurred order complete contract bhge llc 2019 form 10k 41 primary procedures performed address critical audit matter included following tested certain internal controls company’s revenue recognition process contracts sales goods manufactured unique customer specifications controls included controls pertaining companys estimation costs expected incurred complete contract selected certain contracts sales goods manufactured unique customer specifications evaluate company’s ability accurately estimate costs expected incurred complete contract selected contracts evaluated estimated costs expected incurred complete contract questioning companys finance project managers regarding progress date based latest project reports costs expected still incurred completion observing project review meetings performed company inspecting relevant minutes meetings identify changes estimated costs expected incurred complete contract related contract margins assessing remaining estimated costs expected incurred expenditure category contracts progress comparing actual costs incurred current year selected project similar projects investigating changes contract margin compared prior years estimated contract margin assessment carrying value goodwill oilfield equipment oilfield services reporting units discussed note 7 consolidated combined financial statements company four reporting units monitored impairment basis market condition company performs goodwill impairment test annual basis july 1 whenever events changes circumstances indicate carrying value reporting unit might exceed fair value goodwill balance december 31 2019 20396 million 3319 million 12749 million related oilfield equipment oilfield services reporting units respectively oilfield equipment oilfield services reporting units fair values significantly excess carrying values projected revenue projected operating profit discount rates elements estimated future cash flows used company determining fair value reporting unit identified evaluation projected revenue projected operating profit discount rates used assessment carrying value goodwill oilfield equipment oilfield services reporting units critical audit matter specifically evaluation projected revenue projected operating profit discount rates required application subjective auditor judgement projections involve assumptions future events changes discount rate assumptions may significant effect companys assessment carrying value goodwill reporting units primary procedures performed address critical audit matter included following tested certain internal controls company’s goodwill impairment process including controls development projected financial information discount rates management’s review projections comparison historical results evaluated projected revenue projected operating profit assumptions comparing projected amounts past performance reporting unit including historical results growth rates b relevant reliable industry benchmark data related future events also considered evidence obtained areas audit evaluated company’s ability accurately prepare projections comparing projected revenues projected operating profit historical results period addition involved valuation professionals specialized skills knowledge assisted evaluating industry benchmark data used company developing projected financial information evaluating discount rates used comparing discount rate range independently developed using publicly available market data comparable entities performing sensitivity analysis related key inputs including revenue growth rates discount rates projected operating profit kpmg llp served company’s auditor since 2017 houston texas february 13 2020 bhge llc 2019 form 10k 42 report independent registered public accounting firm members baker hughes ge company llc opinion internal control financial reporting audited baker hughes ge company llc subsidiaries’ company internal control financial reporting december 31 2019 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission opinion company maintained material respects effective internal control financial reporting december 31 2019 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states pcaob consolidated statements financial position company december 31 2019 2018 related consolidated combined statements income loss comprehensive income loss changes members’ equity cash flows years threeyear period ended december 31 2019 related notes collectively consolidated combined financial statements report dated february 13 2020 expressed unqualified opinion consolidated combined financial statements basis opinion company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audit accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audit also included performing procedures considered necessary circumstances believe audit provides reasonable basis opinion definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate kpmg llp houston texas february 13 2020 bhge llc 2019 form 10k 43 baker hughes ge company llc consolidated combined statements income loss see accompanying notes consolidated combined financial statements bhge llc 2019 form 10k 44 baker hughes ge company llc consolidated combined statements comprehensive income loss see accompanying notes consolidated combined financial statements bhge llc 2019 form 10k 45 baker hughes ge company llc consolidated statements financial position 1 total assets include 273 million 896 million assets held behalf ge 162 million 747 million cash equivalents 111 million 149 million investment securities december 31 2019 2018 respectively corresponding amount liability reported shortterm borrowings see note 17 related party transactions details see accompanying notes consolidated combined financial statements bhge llc 2019 form 10k 46 baker hughes ge company llc consolidated combined statements changes members equity see accompanying notes consolidated combined financial statements bhge llc 2019 form 10k 47 baker hughes ge company llc consolidated combined statements cash flows see accompanying notes consolidated combined financial statements bhge llc 2019 form 10k 48 baker hughes ge company llc notes consolidated combined financial statements note 1 basis presentation summary significant accounting policies description business baker hughes ge company llc delaware limited liability company bhge llc us successor baker hughes incorporated delaware corporation bhi energy technology company diversified portfolio technologies services span energy industrial value chain conduct business 120 countries employ approximately 68000 employees july 3 2017 completed combination oil gas business ge og general electric company ge bhi transactions december 31 2019 ge owns approximately 367 common units baker hughes company baker hughes owns approximately 633 units basis presentation accompanying consolidated combined financial statements company prepared accordance accounting principles generally accepted united states america us principles us gaap pursuant rules regulations sec annual financial information intercompany accounts transactions eliminated connection transactions entered governed amended restated limited liability company agreement dated july 3 2017 bhge llc agreement bhge llc agreement ehhc newco llc ehhc wholly owned subsidiary baker hughes sole managing member baker hughes sole managing member ehhc managing member ehhc conducts directs exercises full control activities including daytoday business affairs decisionmaking without approval member ehhc responsible operational administrative decisions daytoday management business companys financial statements prepared consolidated basis effective july 3 2017 basis presentation financial statements consolidate subsidiaries entities controlling financial interest often hold majority voting interest periods prior july 3 2017 companys financial statements prepared combined basis combined financial statements combine certain accounts ge subsidiaries historically managed part oil gas business contributed bhge llc part transactions additionally also includes certain assets liabilities results operations businesses ge also contributed bhge llc part transactions fully retrospective basis accordance guidance applicable transactions entities common control based carrying values reflected accounting records ge consolidated combined statements income reflect intercompany expense allocations made us ge certain corporate functions shared services provided ge possible allocations made specific identification basis cases expenses allocated ge based relative percentages net operating costs basis depending nature allocated cost see note 17 related party transactions information expenses allocated ge historical financial results consolidated combined financial statements presented may indicative results would achieved ge og operated separate standalone entity periods companys financial statements notes certain amounts reclassified conform current year presentation notes consolidated combined financial statements dollar common unit amounts tabulations millions dollars units respectively unless otherwise indicated certain columns rows financial statements notes thereto may add due use rounded numbers bhge llc 2019 form 10k 49 baker hughes ge company llc notes consolidated combined financial statements summary significant accounting policies use estimates preparation financial statements conformity us gaap requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period base estimates judgments historical experience various assumptions information believe reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained operating environment changes believe estimates assumptions used preparation consolidated combined financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts inventory valuation reserves recoverability longlived assets including revenue recognition longterm contracts valuation goodwill useful lives used depreciation amortization income taxes related valuation allowances accruals contingencies actuarial assumptions determine costs liabilities related employee benefit plans stockbased compensation expense valuation derivatives fair value assets acquired liabilities assumed acquisitions expense allocations certain corporate functions shared services provided ge foreign currency assets liabilities nonus operations functional currency us dollar translated us dollars using period end exchange rates revenue expenses cash flows translated average rates respective periods resulting translation gains losses included comprehensive income loss gains losses foreign currency transactions resulting settlement receivables payables nonfunctional currency resulting remeasurements monetary items included consolidated combined statement income loss revenue sale equipment performance obligations satisfied time recognize revenue agreements sales goods manufactured unique customer specifications including longterm construction projects time basis utilizing cost inputs measurement criteria assessing progress toward completion estimate costs incurred fulfill promise customer based history manufacturing similar assets customers updated routinely reflect changes quantity pricing inputs begin recognize revenue contracts contract specific inventory becomes customized customer reflective initial transfer control incurred costs provide potential losses agreements probable incur loss billing terms time contracts vary generally based achieving specified milestones differences timing revenue recognized based costs incurred customer billings based contractual terms results changes contract asset contract liability positions performance obligations satisfied point time recognize revenue noncustomized equipment point time customer obtains control good equipment recognize revenue point time include goods manufacture standardized basis sale market use proof delivery certain large equipment complex logistics associated shipment whereas delivery equipment generally determined based historical data transit times regions bhge llc 2019 form 10k 50 baker hughes ge company llc notes consolidated combined financial statements occasion sell products right return use accumulated experience estimate provide returns record sale situations arrangements include customer acceptance provisions based seller customerspecified objective criteria recognize revenue concluded customer control goods acceptance likely occur billing terms point time equipment contracts vary generally based shipment goods customer revenue sale services performance obligations satisfied time sell product services longterm product maintenance extended warranty agreements turbomachinery process solutions oilfield equipment segments agreements require us maintain customers assets service agreement contract terms generally range 10 20 years general contractual arrangements provide services repairs maintenance covered unit gas turbines mechanical drive power generation primarily lng applications drilling rigs services performed various times life contract thus costs performing services incurred straightline basis recognize related sales based extent progress toward completion measured actual costs incurred relation total expected costs provide loss expect incur agreements loss probable company utilizes historical customer data prior product performance data statistical analysis thirdparty data internal management estimates calculate contractspecific margins certain contracts total transaction price variable based customer utilization excluded contract margin period customer utilized appropriately reflect revenue activity period earned addition revenue certain oilfield services recognized time basis performed billing terms contracts generally based asset utilization ie usage per hour occurrence major maintenance event within contract differences timing revenue recognized based costs incurred customer billings based contractual terms results changes contract asset contract liability positions performance obligations satisfied point time sell certain tangible products largely spare equipment services business recognize revenues equipment point time customer obtains control good point time deliver spare part customer billing terms point time service contracts vary generally based shipment goods customer research development research development costs expensed incurred relate research development new products services costs amounted 687 million 700 million 501 million years ended december 31 2019 2018 2017 respectively research development expenses reported cost goods sold cost services sold separation merger related separation merger related costs primarily include costs incurred connection separation ge finalization master agreement framework omnibus agreement see note 17 related party transactions information master agreement framework prior 2019 separation merger related costs primarily include costs associated combination bhi ge og costs include professional fees advisors integration synergy costs related combination bhi ge og bhge llc 2019 form 10k 51 baker hughes ge company llc notes consolidated combined financial statements cash equivalents shortterm investments original maturities three months less included cash equivalents unless designated availableforsale classified investment securities december 31 2019 2018 1102 million 1208 million respectively cash held bank accounts cannot released transferred otherwise converted currency regularly transacted internationally due lack market liquidity capital controls similar monetary exchange limitations limiting flow capital jurisdiction funds available fund operations growth jurisdictions currently anticipate need transfer funds us included amounts 142 million 461 million december 31 2019 2018 respectively held behalf ge cash equivalents includes total 162 million 747 million cash december 31 2019 2018 respectively held behalf ge corresponding liability reported shortterm borrowings see note 17 related party transactions details allowance doubtful accounts establish allowance doubtful accounts based various factors including payment history financial condition debtors economic environment provisions doubtful accounts recorded based aging status debtor accounts becomes evident debtor make required payments either contractual due dates future concentration credit risk grant credit customers primarily operate oil natural gas industry although concentration affects overall exposure credit risk current receivables spread diverse group customers across many countries mitigates risk perform periodic credit evaluations customers financial conditions including monitoring customers payment history current credit worthiness manage risk generally require collateral support current receivables may require payment advance security form letter credit bank guarantee inventories stated lower cost net realizable values measured firstin firstout fifo basis average cost basis necessary record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments property plant equipment ppe property plant equipment initially stated cost depreciated estimated economic life subsequently property plant equipment measured cost less accumulated depreciation impairment losses manufacture substantial portion tools equipment ofs segment cost items includes direct indirect manufacturing costs capitalized carried inventory completed intangible assets amortize cost intangible assets estimated useful lives unless lives deemed indefinite cost intangible assets generally amortized straightline basis assets estimated economic life amortizable intangible assets reviewed impairment whenever events changes circumstances indicate related carrying amounts may recoverable circumstances tested impairment based undiscounted cash flows impaired written fair value based either discounted cash flows appraised values intangible assets indefinite lives tested annually impairment bhge llc 2019 form 10k 52 baker hughes ge company llc notes consolidated combined financial statements written fair value required refer impairment goodwill longlived assets accounting policy impairment goodwill longlived assets perform annual impairment test goodwill qualitative quantitative basis reporting units july 1 frequently circumstances indicate impairment may exist reporting unit level performing annual impairment test option first performing qualitative assessment determine existence events circumstances would lead determination likely fair value reporting unit less carrying amount conclusion reached would required perform quantitative impairment assessment goodwill however assessment leads determination likely fair value reporting unit greater carrying amount assessments required quantitative assessment determination impairment made comparing carrying amount reporting unit fair value generally calculated using combination market comparable transaction discounted cash flow approaches see note 7 goodwill intangible assets information valuation methodology impairment goodwill review ppe intangible assets certain longlived assets impairment whenever events changes circumstances indicate carrying amount may recoverable least annually indefinitelived intangible assets testing impairment group longlived assets liabilities lowest level identifiable cash flows largely independent cash flows assets liabilities asset group determination recoverability made based upon estimated undiscounted future net cash flows amount impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets financial instruments financial instruments include cash equivalents current receivables investments accounts payables short longterm debt derivative financial instruments monitor exposure various business risks including commodity prices foreign currency exchange rates regularly use derivative financial instruments manage risks inception new derivative designate derivative hedge determine derivative undesignated hedging instrument document relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions assess whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item inception hedge ongoing basis program utilizes foreign currency forward contracts reduce risks associated effects certain foreign currency exposures program strategy gains losses foreign currency forward contracts mitigate foreign currency transaction translation gains losses extent practical foreign currency exposures typically arise changes value assets example current receivables liabilities example current payables denominated currencies functional currency respective entity record derivatives end reporting period consolidated statement financial position fair value forward contracts held undesignated hedging instruments record changes fair value forward contracts consolidated combined statements income loss along change fair value related foreign exchange movements hedged item changes fair value forward contracts designated cash flow hedging instruments recognized comprehensive income hedged item recognized earnings fair value measurements financial assets liabilities measured fair value recurring basis fair value price would receive sell asset pay transfer liability orderly transaction market participant measurement date absence active markets identical assets liabilities measurements involve developing assumptions based market observable data absence data internal bhge llc 2019 form 10k 53 baker hughes ge company llc notes consolidated combined financial statements information consistent market participants would use hypothetical transaction occurs measurement date observable inputs reflect market data obtained independent sources unobservable inputs reflect market assumptions preference given observable inputs two types inputs create following fair value hierarchy • level 1 quoted prices identical instruments active markets • level 2 quoted prices similar instruments active markets quoted prices identical similar instruments markets active modelderived valuations whose inputs observable whose significant value drivers observable • level 3 significant inputs valuation model unobservable maintain policies procedures value instruments using best relevant data available addition perform reviews assess reasonableness valuations regard level 3 valuations including instruments valued third parties perform variety procedures assess reasonableness valuations reviews include evaluation instruments whose fair value change exceeds predefined thresholds andor change consider current interest rate currency credit environment well published data rating agency market reports current appraisals recurring fair value measurements derivatives level 1 derivatives traded either exchanges liquid overthecounter markets use closing prices valuation majority derivatives valued using internal models included level 2 internal models maximize use market observable inputs including interest rate curves forward spot prices currencies commodities derivative assets liabilities included level 2 primarily represent foreign currency commodity forward contracts company investments debt equity securities available use quoted market prices determine fair value investment securities included level 1 level 1 securities primarily include publicly traded equity securities investment securities market prices observable identical similar investment securities readily accessible investments individually difficult obtain pricing information individual investment security measurement date use pricing models consistent market participants would use inputs assumptions models derived market observable sources including benchmark yields reported trades brokerdealer quotes issuer spreads benchmark securities bids offers marketrelated data thus certain securities may priced using quoted prices rather determined market observable information investments included level 2 use valuations based significant unobservable inputs classify investment securities level 3 nonrecurring fair value measurements certain assets measured fair value nonrecurring basis assets measured fair value ongoing basis subject fair value adjustments certain circumstances assets include longlived assets reduced fair value held sale equity securities without readily determinable fair value equity method investments longlived assets written fair value impaired remeasurement retained investments formerly consolidated subsidiaries upon change control results deconsolidation subsidiary sell controlling interest bhge llc 2019 form 10k 54 baker hughes ge company llc notes consolidated combined financial statements retain noncontrolling stake entity assets written fair value impaired retained investments subsequently adjusted fair value unless impairment occurs investments equity securities investments equity securities entities either controlling financial interest significant influence often hold voting interest 0 20 readily determinable fair values measured fair value changes fair value recognized earnings reported non operating income net caption consolidated combined statements income loss equity securities readily determinable fair values recorded cost minus impairment plus minus changes resulting observable price changes orderly transactions identical similar equity securities issuer associated companies entities controlling financial interest significant influence often hold voting interest 20 50 associated companies accounted equity method investments results associated companies presented consolidated combined statements income loss follows associated company integral operations results included selling general administrative ii associated company integral operations results included non operating income net iii equity method investment bj services us limited liability corporation presented equity loss affiliate investments advances associated companies presented oneline basis caption assets consolidated statement financial position income taxes treated partnership us federal income tax purposes except certain us corporations owned company subject us federal income tax current us tax laws members required take account us federal income tax purposes distributive share items income gain loss deduction generally include us operations baker hughes ge og baker hughes ge taxed distributive share income gain whether corresponding amount cash property distributed assets held indirectly us subsidiaries including foreign us taxes attributable subsidiaries reflected consolidated combined financial statements account taxes asset liability method deferred income taxes recognized temporary differences financial statement tax return bases assets liabilities well net operating losses tax credit carryforwards based enacted tax rates expected effect taxes actually paid recovered provisions tax law effect change tax laws rates deferred tax assets liabilities recognized income period change enacted future tax benefits recognized extent realization benefits likely valuation allowance established portion deferred tax asset management believes may realized due enactment us tax reform repatriations foreign earnings generally free us federal tax may incur taxes withholding state taxes indefinite reinvestment determined management’s judgment intentions concerning future operations company earnings reinvested active nonus business operations practicable determine income tax liability would payable earnings reinvested indefinitely significant judgment required determining tax expense evaluating tax positions including evaluating uncertainties operate 120 countries tax filings subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved tax authorities courts provided amounts believe ultimately result proceedings recognize uncertain tax positions “more likely not” sustained relevant tax authority audit position full knowledge relevant facts bhge llc 2019 form 10k 55 baker hughes ge company llc notes consolidated combined financial statements information tax positions meet threshold measure amount tax benefit based largest amount tax benefit greater 50 chance realized final settlement relevant authority classify interest penalties associated uncertain tax positions income tax expense effects tax adjustments settlements taxing authorities presented combined financial statements period recorded additionally part us tax reform us enacted tax base eroding payments us minimum tax foreign earnings global intangible lowtaxed income 2018 made accounting policy election account taxes period costs environmental liabilities involved numerous remediation actions clean hazardous waste required federal state laws liabilities remediation costs exclude possible insurance recoveries dates amounts costs known discounted appears range possible costs equal likelihood liabilities based low end range reasonably possible environmental remediation exposure exceed amounts accrued however due uncertainties status laws regulations technology information related individual sites amounts reasonably estimable determination required accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity necessary new accounting standards adopted leases january 1 2019 adopted accounting standards update asu 201602 leases related amendments asc 842 asu requires lessees recognize operating lease asset lease liability balance sheet exception shortterm leases adopted standard using modified retrospective approach leases existing entered january 1 2019 required recognized measured prior period amounts adjusted continue reflected accordance historical accounting company elected practical expedients upon transition allow entities reassess lease identification classification initial direct costs leases existed prior adoption significant impact standard recognition rightofuse rou assets operating lease liabilities lessees leases classified operating leases standard disclosures required meet objective enabling users financial statements assess amount timing uncertainty cash flows arising leases implemented internal controls key system functionality enable preparation financial information adoption determine arrangement lease inception rou assets included assets operating lease liabilities included current liabilities consolidated statement financial position finance lease assets included property plant equipment finance lease liabilities included shortterm debt longterm debt consolidated statement financial position rou assets represent right use underlying asset lease term lease liabilities represent obligation make lease payments arising lease rou assets operating lease liabilities recognized later lease commencement date effective date adoption asc 842 january 1 2019 based present value lease payments remaining lease term finance lease rou assets liabilities recognized commencement date leases provide implicit rate use incremental collateralized borrowing rate based information available commencement date determining present value lease payments lease terms may include options extend terminate lease reasonably certain exercise option lease expense operating lease payments recognized straightline basis lease term shortterm leases one year result rou bhge llc 2019 form 10k 56 baker hughes ge company llc notes consolidated combined financial statements asset recognized income statement straightline basis lease term company made election include within operating lease liability future payments lease nonlease components see note 10 leases additional information adoption standard resulted recording rou assets operating lease liabilities 844 million january 1 2019 consolidated statements financial position immaterial impact consolidated combined statements equity related impact consolidated combined statements income loss shortterm leases recorded consolidated statements financial position accounting finance leases remained substantially unchanged derivatives hedging january 1 2019 adopted asu 201712 derivatives hedging topic 815 targeted improvements accounting hedging activities since impact new guidance consolidated combined financial statements transition adjustments recorded asu 201712 simplifies application hedge accounting expands strategies qualify hedge accounting accordance asu effective ineffective portion cash flow hedge initially reported component accumulated comprehensive income loss reclassified earnings forecasted transaction affects earnings asu requires certain changes presentation hedge accounting financial statements new modified disclosures see note 15 financial instruments additional information new accounting standards adopted june 2016 financial accounting standards board fasb issued asu 201613 financial instruments credit losses asu introduced new accounting model current expected credit losses model cecl requires earlier recognition credit losses additional disclosures related credit risk cecl model utilizes lifetime expected credit loss measurement objective recognition credit losses loans receivables time financial asset originated acquired expected credit losses adjusted period changes expected lifetime credit losses model replaces multiple existing impairment models current us gaap generally require loss incurred recognized new standard also apply financial assets arising revenue transactions contract assets accounts receivables effective fiscal years beginning december 15 2019 upon adoption new standard material impact consolidated financial statements january 2017 fasb issued asu 201704 intangibles goodwill simplifying test goodwill impairment simplifies subsequent measurement goodwill eliminating requirement calculate fair value individual assets liabilities reporting unit measure goodwill impairment new asu entity perform goodwill impairment test comparing fair value reporting unit carrying value recognize impairment charge amount carrying value exceeds fair value reporting unit new standard effective goodwill impairment tests annual reporting periods beginning december 15 2019 applied prospective basis early adoption permitted company adopted asu january 1 2020 prospective basis new accounting pronouncements issued yet effective currently evaluated time expected material impact financial position results operations bhge llc 2019 form 10k 57 baker hughes ge company llc notes consolidated combined financial statements note 2 revenue related contracts customers disaggregated revenue disaggregate revenue contracts customers primary geographic markets remaining performance obligations december 31 2019 2018 aggregate amount transaction price allocated unsatisfied partially unsatisfied performance obligations 229 billion 210 billion respectively december 31 2019 expect recognize revenue approximately 53 65 91 total remaining performance obligations within 2 5 15 years respectively remaining thereafter contract modifications could affect timing complete well amount received fulfill related remaining performance obligations note 3 business acquisition dispositions business acquisition july 3 2017 closed transactions combine ge og bhi transactions executed using partnership structure pursuant ge og bhi contributed operating assets company fair value consideration exchanged 24798 million tables present final fair value assets acquired liabilities assumed associated fair value noncontrolling interest related acquired net assets bhi final determination fair value assets liabilities concluded second quarter 2018 1 intangible assets provided table recorded fair value determined management based available information useful lives intangible assets determined based upon remaining useful bhge llc 2019 form 10k 58 baker hughes ge company llc notes consolidated combined financial statements economic lives intangible assets expected contribute directly indirectly future cash flows consider baker hughes trade name indefinite life intangible asset amortized subject annual impairment test 2 includes approximately 83 million net deferred tax liabilities related fair value intangible assets included purchase consideration approximately 113 million net deferred tax assets including nonus loss carryforwards net valuation allowances partially offset liabilities unrecognized benefits 3 goodwill resulting transactions primarily allocated oilfield services segment 67 million deductible tax purposes unaudited pro forma information following unaudited pro forma information presented transactions occurred january 1 2016 information prepared combining historical results ge og historical results bhi unaudited pro forma combined financial data adjusted give effect pro forma events 1 directly attributable transactions 2 factually supportable 3 expected continuing impact consolidated results operations unaudited pro forma results include incremental cost savings may result integration unaudited combined pro forma information informational purposes necessarily indicative combined companys results actually would acquisition completed beginning periods indicated addition unaudited pro forma information purport project future results combined company significant adjustments pro forma information include amortization associated estimate acquired intangible assets reduction interest expense fair value adjustments debt excluded proforma information nonrecurring direct incremental acquisition costs 2017 business dispositions july 2019 company completed sale highspeed reciprocating compression recip business total consideration 77 million recip based houston texas part tps segment provided highspeed reciprocating compression equipment aftermarket parts services oil gas production gas processing gas distribution independent power industries sale resulted loss income tax 138 million reported non operating income loss net caption consolidated combined statements income loss bhge llc 2019 form 10k 59 baker hughes ge company llc notes consolidated combined financial statements october 2018 company completed sale natural gas solution ngs business sales price 375 million ngs part tps segment provided commercial industrial products gas meters chemical injection pumps pipeline repair products electric actuators sale resulted gain income tax 171 million reported non operating income loss net caption consolidated combined statements income loss note 4 current receivables current receivables comprised following december 31 customer receivables recorded invoiced amount related parties consists primarily amounts owed us ge category consists primarily indirect taxes advance payments suppliers customer retentions note 5 inventories net reserves 429 million 430 million 2019 2018 respectively comprised following december 31 see note 16 segment information additional information inventory impairments note 6 property plant equipment property plant equipment comprised following december 31 1 useful life excludes land depreciation expense relating property plant equipment 1053 million 1031 million 716 million 2019 2018 2017 respectively see note 19 restructuring impairment additional information property plant equipment impairments bhge llc 2019 form 10k 60 baker hughes ge company llc notes consolidated combined financial statements note 7 goodwill intangible assets goodwill changes carrying value goodwill detailed segment 1 includes goodwill associated acquisition bhi final determination fair value assets liabilities related goodwill associated acquisition bhi concluded second quarter 2018 total goodwill 13669 million resulting acquisition bhi 12604 million allocated oilfield services segment remainder segments based expected benefit synergies acquisition third quarter fiscal year conjunction annual strategic planning process perform quantitative goodwill impairment test reporting units reporting units four reportable segments performing quantitative assessment determine fair value reporting units using combination income approach market approach assessing valuation methodologies based upon availability relevance comparable company data determining appropriate weighting income approach fair value reporting units determined based present value estimated future cash flows discounted appropriate riskadjusted rate used internal forecasts estimate future cash flows including estimate longterm future growth rates based recent views longterm outlook reporting unit includes assumptions future commodity pricing expected demand goods services due inherent uncertainties involved making estimates assumptions actual results may differ assumed forecasts derived discount rates using capital asset pricing model analyzing published rates industries relevant reporting units estimate cost equity financing used discount rates commensurate risks uncertainties inherent respective businesses internally developed forecasts discount rates used reporting unit valuations ranged 100 115 testing date rates may change future periods based changes us treasury rate inflation factors valuations using market approach derived metrics publicly traded companies historically completed transactions comparable businesses selection comparable businesses based markets reporting units operate giving consideration risk profiles size geography diversity products services quantifying fair value carrying value reporting unit compared fair value carrying value fair value step two analysis performed step two analysis amount goodwill impairment derived deducting fair value reporting unit’s assets liabilities fair value equity comparing amount carrying amount goodwill bhge llc 2019 form 10k 61 baker hughes ge company llc notes consolidated combined financial statements completed annual impairment test goodwill july 1 2019 four reporting units step one impairment test performed included key assumptions related macroeconomic industry conditions overall financial performance reporting unit short longterm forecasts impact separation ge among factors require considerable judgment addition also considered declines market capitalization baker hughes book value including magnitude duration declines based results step one testing fair values four reporting units exceeded carrying values therefore second step impairment test required performed reporting units goodwill impairment recognized turbomachinery process solutions digital solutions reporting units fair values substantially excess carrying values oilfield services ofs oilfield equipment ofe reporting units fair values exceeded carrying values 80 100 respectively part annual impairment test goodwill performed sensitivity analyses two key assumptions discount rate longterm growth rate ofs ofe reporting units assumed hypothetical 100basispoint decrease expected longterm growth rate hypothetical 100basispoint increase discount rate scenarios independently yielded estimated fair value ofs ofe reporting units carrying value addition annual impairment testing also test goodwill impairment annual impairment testing dates whenever events circumstances occur judgment could likely reduce fair value one reporting units carrying amount assessing possibility reporting unit’s fair value reduced carrying amount due occurrence events circumstances annual impairment testing dates consider available evidence including limited results recent annual impairment testing particular magnitude excess fair value carrying value observed ii downward revisions internal forecasts magnitude thereof iii negative impact result additional secondary offerings baker hughes class common stock ge iv declines baker hughes market capitalization book value magnitude duration declines july 1 2019 december 31 2019 identified events circumstances could likely reduce fair value one reporting units carrying amount december 31 2019 ofs ofe reporting units remain atrisk future goodwill impairments reasonably possible judgments estimates certain key assumptions could change future periods may result reduction fair value significant adverse changes future periods internal forecasts external market conditions could reasonably expected negatively affect key assumptions may result future goodwill impairment charges could material baker hughes stock price historically experienced volatility result industrywide macroeconomic factors including global oil prices addition recently believe baker hughes stock price subject increased volatility resulting among things uncertainty around impact additional secondary offerings baker hughes class common stock ge believe baker hughes stock price reflects transitory circumstancesconditions described future sustained declines stock price could triggering event may require us perform quantitative test time bhge llc 2019 form 10k 62 baker hughes ge company llc notes consolidated combined financial statements intangible assets intangible assets comprised following december 31 1 indefinitelived intangible assets principally comprised baker hughes trade name intangible assets generally amortized straightline basis estimated useful lives ranging one 30 years amortization expense years ended december 31 2019 2018 2017 365 million 455 million 387 million respectively estimated amortization expense subsequent five fiscal years expected follows bhge llc 2019 form 10k 63 baker hughes ge company llc notes consolidated combined financial statements note 8 contract deferred assets majority longterm product service agreements relate turbomachinery process solutions segment contract assets reflect revenue earned excess billings longterm contracts construct technically complex equipment longterm product maintenance extended warranty arrangements deferred contract related costs contract assets comprised following december 31 1 reflects revenue earned excess billings longterm contracts construct technically complex equipment certain service agreements revenue recognized year ended december 31 2019 2018 performance obligations satisfied partially satisfied previous years related longterm service agreements 1 million 26 million respectively includes revenue recognized revisions cost billing estimates may affect contract’s total estimated profitability resulting adjustment earnings note 9 progress collections deferred income contract liabilities include progress collections reflects billings excess revenue deferred income longterm contracts construct technically complex equipment longterm product maintenance extended warranty arrangements contract liabilities comprised following december 31 revenue recognized year ended december 31 2019 2018 included contract liabilities beginning year 1690 million 1392 million respectively bhge llc 2019 form 10k 64 baker hughes ge company llc notes consolidated combined financial statements note 10 leases leasing activities primarily consist operating leases administrative offices manufacturing facilities research centers service centers sales offices certain equipment following table presents operating lease expense year ended december 31 1 leases term one year less including leases term one month less years ended december 31 2018 2017 total operating lease expense 783 million 439 million respectively cash flows used operating activities operating leases approximates expense years ended december 31 2019 2018 2017 december 31 2019 maturities operating lease liabilities follows december 31 2018 minimum annual rental commitments net amounts due subleases five years period ending december 31 2023 186 million 154 million 108 million 77 million 55 million respectively 266 million aggregate thereafter amounts recognized consolidated statement financial position december 31 2019 rightofuse assets 829 million december 31 2019 included assets consolidated statements financial position weightedaverage remaining lease term december 31 2019 approximately eight years operating leases weightedaverage discount rate used determine operating lease liability december 31 2019 41 bhge llc 2019 form 10k 65 baker hughes ge company llc notes consolidated combined financial statements note 11 borrowings shortterm longterm borrowings comprised following december 31 1 weighted average effective interest rate based carrying value including stepup adjustments applicable recorded upon acquisition bhi 2 represents longterm fixed rate debt obligations assumed connection acquisition bhi net amounts repurchased subsequent closing transactions november 2019 bhge llc issued 525 million 3138 senior notes due november 2029 senior notes presented net issuance costs 3 million consolidated statements financial position used proceeds offering repurchase outstanding 32 senior notes due august 2021 total cash consideration paid repurchase excluding interest 526 million resulting loss 7 million recorded interest expense net caption consolidated combined statements income loss estimated fair value total borrowings december 31 2019 2018 6847 million 6629 million respectively majority borrowings fair value determined using quoted periodend market prices market prices available estimate fair values based valuation methodologies using current market interest rate data adjusted nonperformance risk maturities debt five years period ending december 31 2024 aggregate thereafter listed table december 2019 bhge llc entered 3 billion committed unsecured revolving credit facility 2019 credit agreement commercial banks maturing december 2024 2019 credit agreement contains bhge llc 2019 form 10k 66 baker hughes ge company llc notes consolidated combined financial statements certain customary representations warranties certain customary affirmative covenants certain customary negative covenants upon occurrence certain events default bhge llcs obligations 2019 credit agreement may accelerated events default include payment defaults lenders 2019 credit agreement customary defaults events default occurred connection bhge llc’s entry 2019 credit agreement bhge llc terminated thenexisting fiveyear committed 3 billion revolving credit agreement dated july 3 2017 credit agreement 2019 2018 borrowings 2019 2017 credit agreement bhge llc commercial paper program may issue time 3 billion commercial paper maturities 397 days december 31 2019 2018 borrowings outstanding commercial paper program concurrent transactions associated acquisition bhi july 3 2017 baker hughes coobligor inc became coobligor jointly severally bhge llc registered debt securities coobligor 100owned finance subsidiary bhge llc incorporated sole purpose serving coobligor debt securities assets operations related sole purpose baker hughes coobligor inc also coobligor 3950 million senior notes issued december 2017 bhge llc private placement subsequently registered january 2018 certain senior notes contain covenants restrict bhge llcs ability take certain actions including limited creation certain liens securing debt entry certain saleleaseback transactions engaging certain merger consolidation asset sale transactions excess specified limits see note 17 related party transactions additional information shortterm borrowings ge see note 15 financial instruments additional information borrowings associated swaps note 12 employee benefit plans ge multiemployer plans historically allocated relevant participation costs certain employees participated ge employee benefit plans part multiemployer plans certain us employees covered various us ge employee benefit plans including ges retirement plans pension retiree health life insurance savings benefit plans january 1 2019 us employees ceased participate ge us plans addition certain united kingdom uk employees participated ge uk pension plan may 1 2019 uk employees ceased participate ge uk pension plan expenses associated participation plans 3 million 158 million 132 million years ended december 31 2019 2018 2017 respectively 2019 assets liabilities ge uk pension plan related oil gas businesses transferred us fully funded basis defined benefit plans addition ge plans certain employees also covered company sponsored pension plans primary pension plans 2019 included four us plans seven nonus pension plans primarily uk germany canada pension assets obligations greater 20 million use december 31 measurement date plans defined benefit plans generally provide benefits employees based formulas recognizing length service earnings however half plans either frozen closed new entrants also provide certain postretirement health care benefits postretirement benefits unfunded plan closed group us employees retire meet certain age service requirements funded status funded status position represents difference benefit obligation plan assets projected benefit obligation pbo pension benefits represents actuarial present value benefits attributed employee services compensation includes assumption future compensation levels accumulated benefit obligation abo actuarial present value pension benefits attributed employee bhge llc 2019 form 10k 67 baker hughes ge company llc notes consolidated combined financial statements service date present compensation levels abo differs pbo abo include assumptions future compensation levels reconciliation beginning ending balances benefit obligations fair value plan assets funded status plans amounts recognized consolidated combined statements financial position consist following december 31 bhge llc 2019 form 10k 68 baker hughes ge company llc notes consolidated combined financial statements information plans abos excess plan assets follows december 31 net periodic cost income components net periodic cost income follows years ended december 31 1 result acquisition bhi obtained noncontributory pension plan baker hughes incorporated pension plan bhipp 2017 compensation committee board directors approved amendments bhipp close plan new participants freeze accruals future servicerelated benefits effective december 31 2017 result actions company recorded curtailment gain 45 million curtailment recorded company fourth quarter 2017 included “other non operating income loss net” caption consolidated combined statements income loss service cost component net periodic cost benefit included operating income loss components included non operating income net caption consolidated combined statements income loss assumptions used benefit calculations accounting requirements necessitate use assumptions reflect uncertainties length time pension obligations paid actual amount future benefit payments depend upon participants retire amount benefit retirement long live reflect obligation today’s dollars discount future payments using rate matches time frame payments made also need assume longterm rate return earned investments used fund payments weighted average assumptions used determine benefit obligations plans follows years ended december 31 bhge llc 2019 form 10k 69 baker hughes ge company llc notes consolidated combined financial statements weighted average assumptions used determine net periodic cost plans follows years ended december 31 determine discount rate using bond matching model whereby weighted average yields highquality fixedincome securities maturities consistent timing benefit payments lower discount rates increase size benefit obligations pension expense following year higher discount rates reduce size benefit obligation subsequentyear pension expense compensation assumption used active plans estimate annual rate pay plan participants grow rate growth assumed increases size pension obligations increase expected return plan assets estimated longterm rate return earned investments used fund pension obligations determine rate consider current target composition plan investments historical returns earned expectations future assumed health care cost trend rates significant effect amounts reported postretirement benefits december 31 2019 health care cost trend rate 650 declining gradually successive year reaches 450 one percentage point change assumed health care cost trend rates would immaterial 2019 accumulated comprehensive loss amount recorded beforetax accumulated comprehensive loss related employee benefit plans consists following december 31 estimated net actuarial loss prior service cost defined benefit pension plans amortized accumulated comprehensive loss included net periodic benefit cost 2020 32 million 1 million respectively estimated net actuarial gain prior service credit postretirement benefits amortized accumulated comprehensive loss included net periodic benefit cost 2020 3 million 3 million respectively plan assets investment committees meet regularly review portfolio returns determine assetmix targets based assetliability studies thirdparty investment consultants assist committees developing asset allocation strategies determine expected rates return expected risk various investment portfolios investment committees considered strategies formal establishment current assetmix targets based projected risk return levels major asset classes bhge llc 2019 form 10k 70 baker hughes ge company llc notes consolidated combined financial statements table presents fair value pension assets december 31 1 include direct investments investment funds 2 consists primarily asset allocation fund investments plan assets valued using net asset value nav practical expedient amounted 2988 million 1802 million december 31 2019 2018 respectively percentages plan assets valued using nav investment fund type equity securities fixed income cash alternative investments 20 62 18 december 31 2019 respectively 30 48 19 december 31 2018 respectively investments measured fair value using nav practical expedient excluded fair value hierarchy practical expedient applied investments fair value 14 million 64 million december 31 2019 2018 respectively investments classified within level 3 2019 2018 remaining investments considered level 1 2 funding policy funding policy pension benefits contribute amounts sufficient meet minimum funding requirements set forth employee benefit tax laws plus additional amounts may determine appropriate 2019 contributed approximately 23 million expect contribute approximately 21 million pension plans 2020 fund postretirement benefits payasyougo basis 2019 funded 16 million 2020 expect fund approximately 11 million benefits following table presents expected benefit payments next 10 years us nonus pension benefit payments made respective pension trust funds bhge llc 2019 form 10k 71 baker hughes ge company llc notes consolidated combined financial statements defined contribution plans primary defined contribution plan 2019 company sponsored us 401k plan 401k plan 401k plan allows eligible employees elect contribute portions eligible compensation investment trust employee contributions matched company cash rate 100 per 100 employee contribution first 5 employees eligible compensation contributions vest immediately addition make cash contributions eligible employees 4 eligible compensation contributions fully vested employee three years employment 2018 legacy bhi employees participated 401k plan whereas legacy ge og employees continued participate ge sponsored plan beginning 2019 certain legacy ge og employees eligible participate defined contribution plans including 401k plan legacy bhi employees continued participate 401k plan 2019 401k plan provides several investment options employee sole investment discretion however 401k plan offer baker hughes common stock investment option costs 401k plan several us nonus defined contribution plans amounted 235 million 137 million 2019 2018 respectively two nonqualified defined contribution plans invested trusts assets corresponding liabilities 276 million 233 million december 31 2019 2018 respectively included assets liabilities pensions employee benefits captions consolidated combined statements financial position note 13 income taxes treated partnership us federal income tax purposes except certain us corporations owned company subject us federal income tax current us tax laws members required take account us federal income tax purposes distributive share items income gain loss deduction generally include us operations baker hughes ge og baker hughes ge taxed distributive share income gain whether corresponding amount cash property distributed assets held indirectly us subsidiaries including foreign us taxes attributable subsidiaries reflected consolidated combined financial statements december 22 2017 us enacted tax cuts jobs act us tax reform lowers statutory tax rate us earnings taxes historic foreign earnings previously deferred us taxation reduced rate tax transition tax establishes territorial tax system enacts new taxes associated global operations transition tax associated nonus operations borne members impact us tax reform initially recorded provisional basis legislation provided additional guidance issued us department treasury several provisions including computation transition tax based guidance received date finalization purchase accounting bhi acquisition finalization 2017 us income tax returns recorded 25 million tax expense 2018 additionally part us tax reform us enacted tax base eroding payments us minimum tax foreign earnings global intangible lowtaxed income would borne members made accounting policy election account taxes period costs bhge llc 2019 form 10k 72 baker hughes ge company llc notes consolidated combined financial statements provision benefit income taxes comprised following years ended december 31 geographic sources income loss income taxes inclusive equity loss affiliate follows years ended december 31 provision income taxes differs amount computed applying us statutory income tax rate loss income taxes reasons set forth years ended december 31 deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards bhge llc 2019 form 10k 73 baker hughes ge company llc notes consolidated combined financial statements tax effects temporary differences carryforwards follows december 31 december 31 2019 approximately 366 million nonus tax credits may carried forward indefinitely applicable foreign law 32 million credits begin expire tax year 2033 us tax law additionally 1591 million net operating loss carryforwards approximately 331 million expire within five years 326 million expire 6 years 20 years remainder carried forward indefinitely record valuation allowance likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions december 31 2019 1835 million valuation allowances recorded various deferred tax assets including foreign net operating losses nol 1257 million foreign tax credit carryforwards 366 million us nols tax credit carryforwards 46 million certain us foreign deferred tax assets 166 million 290 million deferred tax assets related foreign net operating loss carryforwards without valuation allowance expect deferred tax assets realized within carryforward period substantially undistributed earnings foreign subsidiaries indefinitely reinvested indefinite reinvestment determined management’s intentions concerning future operations company earnings reinvested active nonus business operations december 31 2019 cumulative amount indefinitely reinvested foreign earnings approximately 67 billion computation potential deferred tax liability associated undistributed earnings basis differences practicable december 31 2019 451 million tax liabilities total gross unrecognized tax benefits related uncertain tax positions addition uncertain tax positions 93 million 29 million related interest penalties respectively total liabilities 573 million uncertain positions prevail uncertain positions net effect would result income tax benefit approximately 515 million remaining 58 million comprised 21 million deferred tax assets represent tax benefits would received different taxing jurisdictions event prevail uncertain tax positions increased valuation allowances 37 million bhge llc 2019 form 10k 74 baker hughes ge company llc notes consolidated combined financial statements following table presents changes gross unrecognized tax benefits included consolidated combined statements financial position expected amount unrecognized tax benefits change next twelve months due expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate december 31 2019 approximately 67 million tax liabilities related uncertain tax positions individually insignificant reasonably possible settled within next twelve months conduct business 120 countries subject income taxes taxing jurisdictions operate internal revenue service examinations completed closed year end 2016 significant us returns believe jurisdictions outcome unresolved issues claims likely material results operations financial position cash flows believe made adequate provision income tax uncertainties note 14 members equity bhge llc agreement provides initially one class units currently held baker hughes ge baker hughes issues share class common stock including connection equity incentive similar plan bhge llc also issue corresponding common unit baker hughes one direct subsidiaries year ended december 31 2019 issued 4416 thousand units baker hughes connection issuance class common stock baker hughes following table presents changes number units outstanding thousands 1 september 2019 november 2018 baker hughes completed underwritten secondary public offerings ge affiliates sold 1323 million 1012 million shares class common stock respectively offerings included exchange ge affiliates units together corresponding shares class b common stock baker hughes class common stock baker hughes 2 september 2019 also repurchased canceled 11865211 units ge affiliates bhge llc 2019 form 10k 75 baker hughes ge company llc notes consolidated combined financial statements aggregate 250 million 2107 per unit per share price paid underwriters ge affiliates concurrent underwritten public offering 2018 repurchased canceled 30742152 units total consideration 10 billion additionally november 2018 also repurchased 65 million units ge affiliates aggregate 1461 million 2248 per unit per share price paid underwriters ge affiliates concurrent underwritten public offering result exchange shares secondary offering class b common stock baker hughes together associated units repurchased september 2019 ges ownership units reduced third quarter 2019 approximately 368 result exchange shares secondary offering class b common stock baker hughes together associated units repurchased november 2018 ges ownership units reduced fourth quarter 2018 approximately 625 approximately 504 accumulated comprehensive loss aocl following table presents changes accumulated comprehensive loss net tax amounts reclassified accumulated comprehensive loss years ended december 31 2019 2018 represent gains losses reclassified cash flow hedges hedged transaction occurs ii amortization net actuarial loss prior service credit curtailments included computation net periodic pension cost see note 12 employee benefit plans additional details net periodic pension cost recorded across various cost expense line items consolidated combined statements income loss bhge llc 2019 form 10k 76 baker hughes ge company llc notes consolidated combined financial statements note 15 financial instruments recurring fair value measurements assets liabilities measured fair value recurring basis consists derivative instruments investment securities transfers level 1 2 3 2019 following table provides reconciliation recurring level 3 fair value measurements investment securities significant unobservable input used valuation level 3 instruments discount rate discount rates determined based inputs market participants would use pricing investments including credit liquidity risk increase discount rate would result decrease fair value investment securities unrealized gains losses recognized consolidated combined statement income loss account level 3 instrument still held reporting date hold 111 million 149 million investment securities behalf ge december 31 2019 2018 respectively 1 investment securities classified available sale instruments nonus debt securities mature within three years 2 gains losses recorded earnings related securities 2 million 25 million 30 million years ended december 31 2019 2018 2017 respectively bhge llc 2019 form 10k 77 baker hughes ge company llc notes consolidated combined financial statements fair value disclosure financial instruments financial instruments include cash equivalents current receivables investments accounts payable short longterm debt derivative financial instruments except longterm debt estimated fair value financial instruments december 31 2019 2018 approximates carrying value reflected consolidated combined financial statements information fair value debt see note 11 borrowings derivatives hedging use derivatives manage risks use derivatives speculation table summarizes fair value derivatives including hedging instruments embedded derivatives classified consolidated statements financial position captions current assets current liabilities depending respective maturity date december 31 2019 2018 52 million 67 million derivative assets recorded current assets 6 million 7 million recorded assets consolidated statements financial position respectively december 31 2019 2018 24 million 79 million derivative liabilities recorded current liabilities 3 million 3 million recorded liabilities consolidated statements financial position respectively risk management strategy buy manufacture sell components products well provide services across global markets activities expose us changes foreign currency exchange rates commodity prices adversely affect revenues earned costs operating business currency sell equipment differs primary currency known functional currency exchange rate fluctuates affect revenue earn sale sales purchase transactions also create receivables payables denominated foreign currencies along monetary assets liabilities expose us foreign currency gains losses based changes exchange rates changes price raw material use manufacturing affect cost manufacturing use derivatives mitigate eliminate exposures bhge llc 2019 form 10k 78 baker hughes ge company llc notes consolidated combined financial statements forms hedging cash flow hedges use cash flow hedging primarily reduce eliminate effects foreign exchange rate changes purchase sale contracts accordingly vast majority derivative activity category consists currency exchange contracts also use commodity derivatives reduce eliminate price risk raw materials purchased use manufacturing changes fair value cash flow hedges recorded separate component equity referred accumulated comprehensive income aoci recorded earnings period hedged transaction occurs table summarizes activity hedging instrument expect transfer 10 million earnings gain next 12 months contemporaneously earnings effects related forecasted transactions december 31 2019 2018 maximum term derivative instruments hedge forecasted transactions one year two years respectively economic hedges derivatives designated hedges accounting standpoint therefore apply hedge accounting relationship otherwise serve economic purpose hedging arrangements economic hedges used changes carrying amount hedged item already recorded earnings period derivative making hedge accounting unnecessary types economic hedges changes fair value derivative recorded earnings currently changes value forecasted foreign currency cash flows recognized earnings occur result even though derivative effective economic hedge net effect earnings period due differences timing earnings recognition derivative hedged item derivatives marked fair value earnings period effects reported selling general administrative consolidated combined statement income loss general income loss effects hedged item recorded consolidated combined financial statement line derivative income loss effect economic hedges considering offsets related income loss effects hedged assets liabilities substantially offset changes fair value forecasted transactions yet affected income loss following table summarizes gains losses derivatives designated hedges consolidated combined statements income loss 1 excludes losses embedded derivatives 7 million 3 million 76 million december 31 2019 2018 2017 respectively embedded derivatives considered hedging instruments economic hedges bhge llc 2019 form 10k 79 baker hughes ge company llc notes consolidated combined financial statements 2 effect earnings derivatives designated hedges substantially offset change fair value economically hedged items current future periods notional amount derivatives notional amount derivative number units underlying example notional principal amount debt interest rate swap substantial majority outstanding notional amount 57 billion 64 billion december 31 2019 2018 respectively related hedges anticipated sales purchases foreign currency commodity purchases contractual terms contracts considered embedded derivatives intercompany borrowings foreign currencies generally disclose derivative notional amounts gross basis indicate total counterparty risk gross purchase sale derivative contracts particular currency look execute contracts counterparty reduce exposure corresponding net notional amounts 18 billion december 31 2019 28 billion december 31 2018 counterparty credit risk fair values derivatives change significantly period based among factors market movements changes positions manage counterparty credit risk counterparties default make payments us according terms agreements individual counterparty basis equity investments december 31 2019 2018 carrying amount equity securities without readily determinable fair values 637 million 542 million respectively 2019 certain equity instruments remeasured fair value date observable transaction occurred resulted company recording unrealized gain 19 million note 16 segment information reportable segments operating segments organized based nature markets customers report operating results four operating segments consist similar products services within segment described operating results reviewed regularly chief operating decision maker chief executive officer deciding allocate resources assess performance oilfield services oilfield services provides products services onshore offshore operations across lifecycle well ranging drilling evaluation completion production intervention products services include diamond tricone drill bits drilling services including directional drilling technology measurement drilling logging drilling downhole completion tools systems wellbore intervention tools services wireline services drilling completions fluids oilfield industrial chemicals pressure pumping artificial lift technologies including electrical submersible pumps oilfield equipment oilfield equipment provides broad portfolio products services required facilitate safe reliable flow hydrocarbons subsea wellhead surface products services include pressure control equipment services subsea production systems services drilling equipment flexible pipeline systems oilfield equipment designs manufactures onshore offshore drilling production systems equipment floating production platforms provides full range services related onshore offshore drilling activities bhge llc 2019 form 10k 80 baker hughes ge company llc notes consolidated combined financial statements turbomachinery process solutions turbomachinery process solutions provides equipment related services mechanicaldrive compression powergeneration applications across oil gas industry well products services serve downstream segments industry including refining petrochemical distributed gas flow process control industrial applications turbomachinery process solutions portfolio includes drivers aeroderivative gas turbines heavyduty gas turbines synchronous induction electric motors compressors centrifugal axial direct drive high speed integrated subsea compressors turbo expanders reciprocating turnkey solutions industrial modules waste heat recovery pumps valves compressed natural gas cng smallscale liquefied natural gas lng solutions used primarily shale oil gas field development digital solutions digital solutions provides equipment software services wide range industries including oil gas power generation aerospace metals transportation offerings include sensorbased process measurement nondestructive testing inspection turbine generator plant controls condition monitoring well pipeline integrity solutions segment results summarized financial information shown following tables consistent accounting policies applied segments within company reporting periods current year results balances may comparable prior years current year includes results bhi july 3 2017 performance operating segments evaluated based segment operating income loss defined income loss income taxes equity loss affiliate following net interest expense net non operating income corporate expenses restructuring impairment charges inventory impairments separation merger related costs goodwill impairments certain gains losses allocated operating segments bhge llc 2019 form 10k 81 baker hughes ge company llc notes consolidated combined financial statements 1 inventory impairments related charges reported cost goods sold caption consolidated combined statements income loss 2017 includes 87 million adjustments writeup acquired inventory estimated fair value acquisition bhi inventory used sold six months ended december 31 2017 following table presents total assets segment december 31 1 corporate eliminations total segment assets includes adjustments intercompany investments receivables reflected within total assets four reportable segments 2019 transferred 21 billion baker hughes trade name indefinitelived intangible asset oilfield services corporate due separation ge resulting rebranding baker hughes following table presents depreciation amortization segment years ended december 31 following table presents net property plant equipment geographic location december 31 note 17 related party transactions significant related party transactions entered members affiliates ge affiliates provided continue provide variety services us also enter certain transactions baker hughes provided bhge llc agreement september 16 2019 trigger date result secondary offering repurchase class b common stock baker hughes associated units ges ownership us reduced approximately 503 approximately 368 december 31 2019 ges interest us 367 baker hughes interest us 633 bhge llc 2019 form 10k 82 baker hughes ge company llc notes consolidated combined financial statements following transactions entered various agreements ge affiliates govern relationship ge including intercompany services agreement pursuant ge affiliates company provide certain services ge provided certain administrative services ge proprietary technology use certain ge trademarks annual intercompany services fee 55 million terms master agreement framework entered november 13 2018 annual intercompany services fee 55 million reduced 50 275 million per year beginning january 1 2019 intercompany services agreement terminated december 15 2019 except respect certain provisions including relating certain tools access sold products services ge affiliates 337 million 363 million 639 million years ended december 31 2019 2018 2017 respectively purchases ge affiliates 1498 million 1791 million 1512 million years ended december 31 2019 2018 2017 respectively master agreement framework june 2018 ge announced intention pursue orderly separation baker hughes time november 13 2018 entered master agreement series related ancillary agreements binding term sheets later negotiated definitive agreements ge baker hughes collectively master agreement framework designed solidify commercial technological collaborations us ge facilitate baker hughes ability transition operating controlled company particular master agreement framework contemplated longterm agreements us baker hughes ge technology fulfillment key areas provide greater clarity customers employees members key elements master agreement framework include secured longterm collaboration critical rotating equipment terms master agreement framework defined parameters longterm collaboration strategic relationship ge certain critical rotating equipment products february 28 2019 entered aeroderivative joint venture jv agreement ge form jv relating parties’ respective aeroderivative gas turbine products services jet engine aeroderivative products mainly used turbomachinery process solutions segment consequently november 1 2019 contributed 289 million certain assets inventory cash service facilities aero products services jv llc delaware limited liability company ge us jointly control operations addition contributions jv paid 60 million ge order equalize partys interests jv 50 jv supply technology development agreement ge’s aviation business among things revised extended certain pricing arrangements applicable aeroderivative products companys interest jv accounted equity method investment additionally effective may 1 2019 closed previously announced transfer assets liabilities employees related prior business developing designing engineering marketing supplying installing servicing certain industrial steam turbine product lines ist ge pursuant stock asset purchase agreement addition connection transfer ist business made cash payment 13 million addition working capital adjustments ge closing transaction parallel also entered agreement longterm supply related distribution arrangement ge heavyduty gas turbine technology current pricing levels became effective trigger date agreement appointed ges exclusive distributor limited exceptions within oil gas industry respect heavyduty gas turbine units initial term 5 years associated services including parts components initial term 20 years operating service life relevant gas turbine whichever heavyduty gas turbine technologies important components tps’ offerings longterm agreements provide greater clarity commercial approach customer fulfillment enable us ge jointly innovate leading technology bhge llc 2019 form 10k 83 baker hughes ge company llc notes consolidated combined financial statements access ge digital software technology part master agreement framework agreed ge digital maintain subject certain conditions status exclusive reseller ge digital offerings oil gas space part agreement bhge llc ge digital also revised extended certain pricing arrangements established service level obligations however commercial arrangements modified pursuant omnibus agreement described including modifying relationship us ge digital nonexclusive respect digital offerings oil gas space key agreements • agreed ge maintain current operations pricing levels regards control upgrade services offer digital solutions segment division 4 years commencing trigger date • 2019 ge transferred us certain uk pension liabilities related oil gas businesses certain specified former oil gas businesses ge assets associated liabilities also transferred fully funded basis liabilities associated ge’s broadbased us defined benefit pension plan transferred us • tax matters agreement ge negotiated time transactions remain substantially place companies retain ability monetize certain tax benefits • terms master agreement framework annual intercompany services fee 55 million agreed pay ge part transactions reduced 50 275 million per year beginning january 1 2019 intercompany services agreement terminated december 15 2019 except respect certain tools access omnibus agreement july 31 2019 entered omnibus agreement general framework agreement addresses certain outstanding matters existing longterm commercial agreements us ge omnibus agreement contains provisions regarding among things repayment certain outstanding amounts mutually owed parties ii certain employee assets transfers including allocation costs expenses associated therewith iii certain matters related three international joint ventures material terms agreed parties include provision certain transition services bhge llc ge including providing development use certain service related intellectual property end transition period management certain data information future business needs ii sale certain digital business assets bhge llc ge consideration 50 million closed september 3 2019 iii modification certain sales arrangements parties ability party directly market offerings digital business customers oil gas industry iv research development efforts purchase products services related aeroderivative turbines v supply distribution terms certain trailermounted gas turbine generatorbased engine units related parts services vi repayment us ge amounts due promissory note see related party discussion net certain costs tax adjustments bhge llc 2019 form 10k 84 baker hughes ge company llc notes consolidated combined financial statements related party connection transactions july 3 2017 executed promissory note ge amended restated july 31 2019 connection entry omnibus agreement referenced represents certain cash holding ges behalf due restricted nature cash restriction arises majority cash cannot released transferred otherwise converted nonrestricted market currency due lack market liquidity capital controls similar monetary exchange limitations government entity jurisdiction cash situated maturity date promissory note remain obligated repay ge therefore obligation reflected shortterm borrowings december 31 2019 273 million due ge 162 million held form cash 111 million held form investment securities december 31 2018 896 million due ge 747 million held form cash 149 million held form investment securities corresponding liability reported shortterm borrowings consolidated combined statements financial position company 536 million 538 million accounts payable december 31 2019 2018 respectively goods services provided ge ordinary course business excludes liability associated participation trade payables accelerated payment program see company 495 million 653 million current receivables december 31 2019 2018 respectively goods services provided ge ordinary course business additionally company 75 million 93 million current receivables december 31 2019 2018 respectively baker hughes also provide guarantees ge capital behalf customers entered financing arrangements ge capital trade payables accelerated payment program prior separation ge north american operations participated supply chain finance programs funded ge capital invoices settled suppliers per payment terms obtain cash discounts ge capital provided funding invoices eligible cash discount liability associated ge capital funded participation accounts payable programs 38 million 471 million december 31 2019 2018 respectively result separation participation program ended begun transitioning program administered third party supply chain finance programs suppliers given opportunity sell receivables us participating financial institutions sole discretion third party administers program responsibility limited making payment terms originally negotiated supplier regardless whether supplier sells receivable financial institution range payment terms negotiate suppliers consistent irrespective whether supplier participates program liabilities continue presented accounts payable consolidated statements financial position reflected cash flow operating activities settled note 18 commitments contingencies litigation subject number lawsuits claims arising conduct business ability predict ultimate outcome matters involves judgments estimates inherent uncertainties record liability contingencies incurrence loss probable amount reasonably estimated including accruals selfinsured losses calculated based historical claim data specific loss development factors information bhge llc 2019 form 10k 85 baker hughes ge company llc notes consolidated combined financial statements range total possible losses litigation matters cannot reasonably estimated based consideration relevant facts circumstances expect ultimate outcome currently pending lawsuits claims us discussed material adverse effect financial position results operations cash flows however assurance ultimate outcome matters respect litigation matters adverse outcome individually collectively could material impact business financial condition results operations expected year litigation matters subject inherent uncertainties managements view matters may change future therefore assurance ultimate outcome matters 2014 received notification customer related possible equipment failure natural gas storage system northern germany includes certain products customer initiated arbitration proceedings us june 19 2015 rules german institute arbitration ev dis august 3 2016 customer amended claims alleged damages €202 million plus interest annual rate prime 5 hearings arbitration panel held january 16 2017 january 23 2017 march 20 2017 march 21 2017 addition september 21 2015 triuva kapitalverwaltungsgesellschaft mbh filed lawsuit united states district court southern district texas houston division company baker hughes oilfield operations inc alleging plaintiff owner gas storage caverns etzel germany company provided certain equipment connection development gas storage caverns plaintiff alleges company supplied equipment either defectively designed failed warn risks equipment posed alleged defects caused damage plaintiffs property plaintiff seeks recovery alleged compensatory punitive damages unspecified amount addition reasonable attorneys fees court costs prejudgment postjudgment interest allegations lawsuit related claims made june 19 2015 german arbitration referenced june 7 2018 dis arbitration panel issued confidential arbitration ruling addressed claims asserted customer estimated financial impact arbitration ruling reflected companys financial statements material impact march 11 2019 customer initiated second arbitral proceeding us rules german institute arbitration ev dis customer alleged damages €142 million plus interest annual rate prime 5 since june 20 2015 allegations second arbitration proceeding related claims made june 19 2015 german arbitration houston federal court proceedings referenced company contesting claims made triuva houston federal court claims made customer second arbitration proceeding time able predict outcome claims asserted houston federal court second arbitration proceeding july 31 2015 rapid completions llc filed lawsuit federal court eastern district texas baker hughes incorporated baker hughes oilfield operations inc others claiming infringement us patent nos 6907936 7134505 7543634 7861774 8657009 august 6 2015 rapid completions amended complaint allege infringement us patent 9074451 april 1 2016 rapid completions removed us patent 6907936 claims lawsuit april 5 2016 rapid completions filed second lawsuit federal court eastern district texas baker hughes incorporated baker hughes oilfield operations inc others claiming infringement us patent 9303501 patents relate primarily certain specific downhole completions equipment plaintiff requested permanent injunction alleged infringement damages unspecified amount supplemental enhanced damages additional relief attorneys fees costs august september 2016 united states patent trademark office uspto agreed institute interpartes review us patent nos 7861774 7134505 7543634 6907936 8657009 9074451 august 29 2017 uspto issued final written decisions interpartes reviews us patent nos 8657009 9074451 finding claims patents unpatentable august 31 2017 uspto issued final written decision interpartes review us patent 6907936 patent dropped lawsuit plaintiffs finding claims patent patentable october 27 2017 rapid completions filed notices appeal uspto’s final written decision interpartes review us patent nos 8657009 9074451 september 26 2018 uspto issued final written decision interpartes review us patent 7134505 finding challenged claims unpatentable september 27 2018 uspto issued final written decision interpartes review us patent 7543634 finding challenged claims unpatentable november bhge llc 2019 form 10k 86 baker hughes ge company llc notes consolidated combined financial statements 19 2018 us court appeals federal circuit affirmed uspto’s unpatentability findings respect us patent nos 8657009 9074451 november 26 2018 rapid completions filed notices appeal uspto’s final written decisions inter partes reviews us patent 7134505 7543634 may 2 2019 uspto issued final written decision ipr us patent number 9303501 finding claims unpatentable rapid completions appealed decision federal circuit july 5 2019 november 13 2019 us court appeals federal circuit affirmed uspto’s unpatentability findings respect us patent 7134505 7543634 november 26 2019 uspto issued final written decision interpartes review us patent 7861774 finding challenged claims unpatentable rapid completions timely appeal decision january 21 2020 federal circuit affirmed uspto’s unpatentability finding asserted claims us patent 9303501 september 17 2015 rapid completions packers plus energy services inc sued baker hughes canada company canada federal court related canadian patent 2412072 patent relates primarily certain specific downhole completions equipment plaintiff requested permanent injunction alleged infringement damages unspecified amount supplemental enhanced damages additional relief attorneys fees costs trial validity asserted claims canada patent 2412072 completed march 9 2017 december 7 2017 canadian court issued judgment finding patent claims asserted canada patent 2412072 baker hughes canada company invalid january 5 2018 rapid completions filed notice appeal canadian court’s judgment invalidity april 24 2019 canadian court appeals ruled rapid completions dismissed rapid completion’s appeal canada june 24 2019 rapid completions filed application leave appeal court appeals decision supreme court canada december 19 2019 supreme court canada dismissed rapid completions appeal january 2013 ineos naphtachimie initiated expertise proceedings aixenprovence france arising fire chemical plant owned ineos lavera france resulted 15day plant shutdown destruction steam turbine part compressor train owned naphtachimie recent quantification alleged damages €250 million 2 companys subsidiaries 17 companies notified participate proceedings ongoing time indication companys subsidiaries involved incident although outcome claims remains uncertain insurer accepted coverage defending company expertise proceeding late november 2017 staff boston office sec notified ge conducting investigation ge’s revenue recognition practices internal controls financial reporting related longterm service agreements scope sec’s request may include baker hughes contracts expected mainly tps business provided requested documents ge time able predict outcome review july 31 2018 international engineering construction sa iec initiated arbitration proceedings new york administered international center dispute resolution icdr company subsidiaries arising series sales service contracts entered iec company’s subsidiaries sale installation lng plants related power generation equipment nigeria contracts prior filing iec arbitration company’s subsidiaries made demands payment due contracts august 15 2018 company’s subsidiaries initiated separate demand icdr arbitration iec claims additional costs amounts due contracts october 10 2018 iec filed petition compel arbitration united states district court southern district new york company seeking compel nonsignatory baker hughes entities participate arbitration filed iec complaint captioned international engineering construction sa et al v baker hughes ge company llc et al 18cv09241 sdny 2018 action dismissed court august 13 2019 arbitration iec alleges breach contract claims company subsidiaries seeks recovery alleged compensatory damages addition reasonable attorneys fees expenses arbitration costs march 15 2019 iec amended request arbitration alleged damages 591 million lost profits plus unspecified additional costs based alleged nonperformance contracts dispute arbitration hearing held december 9 2019 december 20 2019 company subsidiaries contested iec’s claims pursuing claims compensation contracts time able predict outcome claims bhge llc 2019 form 10k 87 baker hughes ge company llc notes consolidated combined financial statements march 15 2019 march 18 2019 city riviera beach pension fund richard schippnick respectively filed delaware court chancery shareholder derivative lawsuits baker hughes’s behalf ge thencurrent members board directors baker hughes baker hughes nominal defendant related decision terminate contractual prohibition barring ge selling baker hughes shares july 3 2019 ii repurchase 15 billion baker hughes’ stock ge iii permit ge sell approximately 25 billion baker hughes stock secondary offering iv enter series agreements amendments govern ongoing relationship baker hughes ge collectively “2018 transactions” complaints lawsuits allege among things ge baker hughes controlling stockholder members baker hughes board directors breached fiduciary duties entering 2018 transactions relief sought complaints includes request declaration defendants breached fiduciary duties ge unjustly enriched disgorgement profits award damages sustained company pre postjudgment interest attorneys’ fees costs march 21 2019 chancery court entered order consolidating schippnick city riviera beach complaints consolidated ca 20190201agb styled baker hughes ge company derivative litigation may 10 2019 plaintiffs voluntarily dismissed claims members baker hughes conflicts committee may 15 2019 plaintiffs voluntarily dismissed claims former baker hughes director martin craighead june 7 2019 defendants nominal defendant filed motion dismiss lawsuit ground derivative plaintiffs failed make demand baker hughes board directors pursue claims ge baker hughes board directors filed motion dismiss lawsuit ground complaint failed state claim relief granted chancery court denied motions october 8 2019 except granted ge’s motion dismiss unjust enrichment claim october 31 2019 baker hughes board directors designated special litigation committee empowered full authority investigate evaluate allegations issues raised derivative litigation special litigation committee filed motion stay derivative litigation investigation december 3 2019 chancery court granted motion stayed derivative litigation june 1 2020 special litigation committee’s investigation evaluation remains ongoing time able predict outcome special litigation committee investigation claims march 2019 baker hughes received document request united states department justice “doj” related certain company’s operations iraq dealings unaoil limited affiliates december 2019 baker hughes received similar document request securities exchange commission sec baker hughes company cooperating doj sec connection requests related matters addition baker hughes agreed toll statute limitations connection matters subject doj’s document request may 7 2019 alaska district attorney filed criminal information baker hughes incorporated baker hughes oilfield operations inc baker petrolite corporation baker hughes employee alleging individuals working baker petrolite corporation chemical transfer facility kenai alaska exposed hazardous air emissions criminal information charges six counts assault third degree three counts assault fourth degree negligent air emissions july 22 2019 six counts assault third degree dismissed alaska attorney general’s office indicating intent present charges grand jury obtain indictment around september 11 2019 grand jury issued indictment 25 counts including 10 counts assault first degree 10 counts assault second degree 5 counts assault third degree around december 3 2019 state agreed dismiss indictment baker hughes oilfield operations inc company defendants pled guilty intend defend charges time able predict outcome criminal proceeding august 13 2019 tristate joint fund filed delaware court chancery shareholder class action lawsuit behalf similarly situated public stockholders baker hughes incorporated “bhi” general electric company former members board directors bhi certain former bhi officers alleging breaches fiduciary duty aiding abetting claims connection transactions october 28 2019 city providence filed delaware court chancery shareholder class action lawsuit behalf similarly situated public shareholders bhi ge former members board directors bhi certain former bhi officers alleging substantially claims connection transactions relief sought complaints include request declaration bhge llc 2019 form 10k 88 baker hughes ge company llc notes consolidated combined financial statements defendants breached fiduciary duties award damages pre postjudgment interest attorneys’ fees costs lawsuits consolidated plaintiffs filed consolidated class action complaint december 17 2019 certain former bhi officers alleging breaches fiduciary duty ge aiding abetting breaches december 2019 complaint omitted former members board directors bhi except mr craighead also served president ceo bhi mr craighead ms ross served senior vice president chief financial officer bhi remain named december 2019 complaint along ge relief sought consolidated complaint includes declaration former bhi officers breached fiduciary duties ge aided abetted breaches award damages pre postjudgment interest attorneys’ fees costs time able predict outcome claims december 11 2019 bmc software inc “bmc” filed lawsuit federal court southern district texas baker hughes ge company llc alleging trademark infringement unfair competition unjust enrichment arising company’s use new logo affiliated branding january 1 2020 bmc amended complaint add baker hughes company relief sought complaint includes request injunctive relief award damages including punitive damages pre postjudgment interest attorneys’ fees costs time able predict outcome claims insure risks arising business extent deemed prudent management extent insurance available assurance given nature amount insurance sufficient fully indemnify us liabilities arising pending future legal proceedings claims insurance policies contain deductibles selfinsured retentions amounts deem prudent responsible payment determining amount selfinsurance policy selfinsure losses predictable measurable recurring nature claims automobile liability general liability workers compensation environmental matters estimated remediation costs accrued using currently available facts existing environmental permits technology enacted laws regulations cost estimates developed based internal evaluations discounted accruals recorded probable obligated pay environmental site evaluation remediation related activities costs reasonably estimated additional information becomes available accruals adjusted reflect current cost estimates ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party us federal state comprehensive environmental response compensation liability act superfund site accrue share estimated remediation costs site share based ratio estimated volume waste contributed site total volume waste disposed site normal course business customers vendors others entered offbalance sheet arrangements surety bonds performance letters credit bank issued guarantees totaled approximately 39 billion december 31 2019 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect financial position results operations cash flows also commitments outstanding purchase obligations five years period ending december 31 2024 1304 million 170 million 61 million 9 million 12 million respectively 15 million aggregate thereafter sometimes enter consortium similar arrangements certain projects primarily oilfield equipment segment arrangements party responsible performing certain scope work within total scope contracted work obligations expire contractual obligations completed failure inability financially otherwise parties perform obligations could impose additional costs obligations us factors could result unanticipated costs complete project liquidated damages contract disputes bhge llc 2019 form 10k 89 baker hughes ge company llc notes consolidated combined financial statements note 19 restructuring impairment recorded restructuring impairment charges 342 million 433 million 412 million years ended december 31 2019 2018 2017 respectively details charges discussed restructuring impairment charges current prior periods approved various restructuring plans globally mainly consolidate manufacturing service facilities rationalize product lines rooftops reduce headcount across various functions result recognized charge 314 million 304 million 385 million years ended december 31 2019 2018 2017 respectively restructuring initiatives expected generate charges approximately 11 million future periods restructuring plans come completion charges included restructuring impairment caption consolidated combined statements income loss amount costs included reported segment results follows costs primarily related employee termination benefits product line terminations plant closures related expenses property plant equipment impairments contract terminations incremental costs direct result restructuring plans charges included restructuring impairment caption consolidated combined statements income loss 28 million 129 million 27 million years ended december 31 2019 2018 2017 respectively 2019 items primarily relate currency devaluations ofs segment 2018 charges consist primarily accelerated amortization 80 million related trade names technology ofs segment litigation charges 25 million corporate costs 13 million exit certain operations impacted tps ofs segments 2017 charges primarily relate currency devaluations 12 million bhge llc 2019 form 10k 90 baker hughes ge company llc notes consolidated combined financial statements note 20 supplementary information current liabilities current liabilities december 31 2019 2018 include 1115 million 951 million respectively employee related liabilities product warranties provide estimated product warranty expenses sell related products warranty estimates forecasts based best available information primarily historical claims experience claims costs may differ amounts provided analysis changes liability product warranties follows 1 2018 amounts primarily related acquisition bhi allowance doubtful accounts change allowance doubtful accounts follows bhge llc 2019 form 10k 91 baker hughes ge company llc notes consolidated combined financial statements note 21 quarterly data unaudited 1 represents revenue less cost sales cost services 2 restructuring impairment costs associated asset impairments workforce reductions facility closures contract terminations recorded 2019 2018 see note 19 restructuring impairment discussion bhge llc 2019 form 10k 92 item 9item 8 financial statements supplementary data managements report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rules 13a15f internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles supervision participation management including principal executive officer principal financial officer assessed effectiveness internal control financial reporting based 2013 framework internal control integrated framework issued committee sponsoring organizations treadway commission based assessment principal executive officer principal financial officer concluded internal control financial reporting effective december 31 2020 conclusion based recognition inherent limitations systems internal control inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate kpmg llp companys independent registered public accounting firm issued attestation report effectiveness companys internal control financial reporting lorenzo simonelli lorenzo simonelli president chief executive officer brian worrell brian worrell chief financial officer kurt camilleri kurt camilleri senior vice president controller chief accounting officer houston texas february 25 2021 baker hughes holdings llc 2020 form 10k 42 report independent registered public accounting firm members baker hughes holdings llc opinion consolidated financial statements audited accompanying consolidated statements financial position baker hughes holdings llc subsidiaries company december 31 2020 2019 related consolidated statements income loss comprehensive income loss changes members equity cash flows years threeyear period ended december 31 2020 related notes collectively consolidated financial statements opinion consolidated financial statements present fairly material respects financial position company december 31 2020 2019 results operations cash flows years threeyear period ended december 31 2020 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 31 2020 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission report dated february 25 2021 expressed unqualified opinion effectiveness company’s internal control financial reporting basis opinion consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements believe audits provide reasonable basis opinion critical audit matters critical audit matters communicated matters arising current period audit consolidated financial statements communicated required communicated audit committee 1 relate accounts disclosures material consolidated financial statements 2 involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate revenue recognition certain agreements sales new products manufactured unique customer specifications discussed note 1 consolidated financial statements company enters agreements sales goods manufactured unique customer specifications time basis revenue types contracts recognized extent progress towards completion measured actual costs incurred relative total expected costs company provides potential losses types contracts probable loss incurred identified revenue recognition certain agreements sales new products critical audit matter complex auditor judgment required evaluating companys longterm estimates expected direct material costs incurred order complete agreements baker hughes holdings llc 2020 form 10k 43 following primary procedures performed address critical audit matter evaluated design tested operating effectiveness certain internal controls related company’s revenue recognition process sales new products included controls pertaining companys estimation direct material costs expected incurred complete agreements sales new products evaluated companys ability accurately estimate direct material costs expected incurred complete agreements sales new products evaluated estimated direct material costs expected incurred complete new products agreements questioning companys finance project managers regarding progress date based latest project reports costs expected still incurred completion observing project review meetings performed company inspecting relevant minutes meetings identify changes estimated costs expected incurred complete contract related contract margins investigating changes contract margin compared prior years estimated contract margin evaluating estimated direct material costs incurred obtaining supplier cost estimates considering changes estimates year goodwill impairment oilfield services reporting unit discussed notes 1 6 consolidated financial statements company four reporting units monitored impairment basis market conditions company performs impairment test goodwill annual basis reporting units july 1 frequently circumstances indicate impairment indicator exists reporting unit level potential impairment indicators include results recent annual impairment testing downward revisions internal forecasts declines market capitalization book value magnitude duration declines company identified impairment indicators therefore performed interim quantitative impairment test comparing fair value reporting units carrying value march 31 2020 based results quantitative impairment test march 31 2020 company concluded carrying value oilfield services reporting unit exceeded estimated fair value recorded goodwill impairment charge amount 11428 million associated oilfield services reporting unit goodwill balance december 31 2020 5739 million 1301 million related oilfield services reporting unit projected revenue projected operating profit discount rate elements estimated future cash flows used company determining fair value reporting units identified evaluation goodwill impairment analysis oilfield services reporting unit critical audit matter specifically evaluation projected revenue projected operating profit required application subjective auditor judgment projections involve assumptions future events addition changes discount rate assumptions may significant effect company’s assessment carrying value goodwill reporting unit following primary procedures performed address critical audit matter evaluated design tested operating effectiveness certain internal controls related goodwill impairment process included controls relating management’s goodwill impairment test development projected financial information discount rate management’s review projections evaluated projected revenue projected operating profit assumptions comparing projected amounts 1 past performance reporting unit including historical actual results 2 relevant industry benchmark data related future events also considered evidence obtained areas audit evaluated company’s ability accurately prepare projections comparing projected revenues projected operating profit actual results period addition involved valuation professionals specialized skills knowledge assisted evaluating discount rate used comparing discount rate range independently developed using publicly available market data comparable entities kpmg llp served company’s auditor since 2017 houston texas february 25 2021 baker hughes holdings llc 2020 form 10k 44 report independent registered public accounting firm members baker hughes holdings llc opinion internal control financial reporting audited baker hughes holdings llc subsidiaries’ company internal control financial reporting december 31 2020 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission opinion company maintained material respects effective internal control financial reporting december 31 2020 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states pcaob consolidated statements financial position company december 31 2020 2019 related consolidated statements income loss comprehensive income loss changes members equity cash flows years threeyear period ended december 31 2020 related notes collectively consolidated financial statements report dated february 25 2021 expressed unqualified opinion consolidated financial statements basis opinion company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audit accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audit also included performing procedures considered necessary circumstances believe audit provides reasonable basis opinion definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate kpmg llp houston texas february 25 2021 baker hughes holdings llc 2020 form 10k 45 baker hughes holdings llc consolidated statements income loss see accompanying notes consolidated financial statements baker hughes holdings llc 2020 form 10k 46 baker hughes holdings llc consolidated statements comprehensive income loss see accompanying notes consolidated financial statements baker hughes holdings llc 2020 form 10k 47 baker hughes holdings llc consolidated statements financial position 1total assets include 45 million 273 million assets held behalf ge 44 million 162 million cash equivalents 1 million 111 million investment securities december 31 2020 2019 respectively corresponding amount liability reported shortterm borrowings see note 16 related party transactions details see accompanying notes consolidated financial statements baker hughes holdings llc 2020 form 10k 48 baker hughes holdings llc consolidated statements changes members equity see accompanying notes consolidated financial statements baker hughes holdings llc 2020 form 10k 49 baker hughes holdings llc consolidated statements cash flows see note 20 supplementary information additional cash flow disclosures see accompanying notes consolidated financial statements baker hughes holdings llc 2020 form 10k 50 baker hughes holdings llc notes consolidated financial statements note 1 basis presentation summary significant accounting policies description business baker hughes holdings llc delaware limited liability company bhh llc us successor baker hughes incorporated delaware corporation bhi energy technology company diversified portfolio technologies services span entire energy value chain partnership formed result combination bhi oil gas business ge og general electric company ge april 15 2020 company changed name baker hughes ge company llc baker hughes holdings llc december 31 2020 ge owns approximately 301 common units baker hughes company baker hughes owns approximately 699 common units basis presentation accompanying consolidated financial statements company prepared accordance accounting principles generally accepted united states america us principles us gaap pursuant rules regulations sec annual financial information intercompany accounts transactions eliminated connection transactions entered governed amended restated limited liability company agreement dated july 3 2017 amended restated april 15 2020 bhh llc agreement bhh llc agreement ehhc newco llc ehhc wholly owned subsidiary baker hughes sole managing member baker hughes sole managing member ehhc managing member ehhc conducts directs exercises full control activities including daytoday business affairs decisionmaking without approval member ehhc responsible operational administrative decisions daytoday management business companys consolidated financial statements notes certain amounts reclassified conform current year presentation notes consolidated financial statements dollar common unit amounts tabulations millions dollars units respectively unless otherwise indicated certain columns rows financial statements notes thereto may add due use rounded numbers summary significant accounting policies use estimates preparation financial statements conformity us gaap requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period base estimates judgments historical experience various assumptions information believe reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained operating environment changes believe estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance credit losses inventory valuation reserves recoverability longlived assets including revenue recognition longterm contracts valuation goodwill useful lives used depreciation amortization income taxes related valuation allowances accruals contingencies actuarial assumptions determine costs liabilities related employee benefit plans stockbased compensation expense valuation derivatives fair value assets acquired liabilities assumed acquisitions expense allocations certain corporate functions shared services provided ge baker hughes holdings llc 2020 form 10k 51 baker hughes holdings llc notes consolidated financial statements foreign currency assets liabilities nonus operations functional currency us dollar translated us dollars using period end exchange rates revenue expenses cash flows translated average rates respective periods resulting translation gains losses included comprehensive income loss gains losses foreign currency transactions resulting settlement receivables payables nonfunctional currency resulting remeasurements monetary items included consolidated statements income loss revenue sale equipment performance obligations satisfied time recognize revenue agreements sales goods manufactured unique customer specifications including longterm construction projects time basis utilizing cost inputs measurement criteria assessing progress toward completion estimate costs incurred fulfill promise customer based history manufacturing similar assets customers updated routinely reflect changes quantity pricing inputs begin recognize revenue contracts contract specific inventory becomes customized customer reflective initial transfer control incurred costs provide potential losses agreements probable incur loss billing terms time contracts vary generally based achieving specified milestones differences timing revenue recognized based costs incurred customer billings based contractual terms results changes contract asset contract liability positions performance obligations satisfied point time recognize revenue noncustomized equipment point time customer obtains control good equipment recognize revenue point time include goods manufacture standardized basis sale market use proof delivery certain large equipment complex logistics associated shipment whereas delivery equipment generally determined based historical data transit times regions occasion sell products right return use accumulated experience estimate provide returns record sale situations arrangements include customer acceptance provisions based seller customerspecified objective criteria recognize revenue concluded customer control goods acceptance likely occur billing terms point time equipment contracts vary generally based shipment goods customer revenue sale services performance obligations satisfied time sell product services longterm product maintenance extended warranty agreements turbomachinery process solutions oilfield equipment segments agreements require us maintain customers assets service agreement contract terms generally range 10 20 years general contractual arrangements provide services repairs maintenance covered unit gas turbines mechanical drive power generation primarily lng applications drilling rigs services performed various times life contract thus costs performing services incurred straightline basis recognize related sales based extent progress toward completion measured actual costs incurred relation total expected costs provide loss expect incur agreements loss probable company utilizes historical customer data prior baker hughes holdings llc 2020 form 10k 52 baker hughes holdings llc notes consolidated financial statements product performance data statistical analysis thirdparty data internal management estimates calculate contractspecific margins certain contracts total transaction price variable based customer utilization excluded contract margin period customer utilized appropriately reflect revenue activity period earned addition revenue certain oilfield services recognized time basis performed billing terms contracts generally based asset utilization ie usage per hour occurrence major maintenance event within contract differences timing revenue recognized based costs incurred customer billings based contractual terms results changes contract asset contract liability positions performance obligations satisfied point time sell certain tangible products largely spare equipment services business recognize revenue equipment point time customer obtains control good point time deliver spare part customer billing terms point time service contracts vary generally based shipment goods customer research development research development costs expensed incurred relate research development new products services costs amounted 595 million 687 million 700 million years ended december 31 2020 2019 2018 respectively research development expenses reported cost goods sold cost services sold separation merger related 2020 2019 separation merger related costs primarily include costs incurred connection separation ge finalization master agreement framework omnibus agreement prior 2019 separation merger related costs primarily include costs associated combination bhi ge og cash equivalents shortterm investments original maturities three months less included cash equivalents unless designated availableforsale classified investment securities december 31 2020 2019 687 million 1102 million respectively cash held bank accounts cannot released transferred otherwise converted currency regularly transacted internationally due lack market liquidity capital controls similar monetary exchange limitations limiting flow capital jurisdiction funds available fund operations growth jurisdictions currently anticipate need transfer funds us included amounts 42 million 142 million december 31 2020 2019 respectively held behalf ge cash equivalents includes total 44 million 162 million cash december 31 2020 2019 respectively held behalf ge corresponding liability reported shortterm borrowings see note 16 related party transactions details allowance credit losses monitor customers payment history current credit worthiness determine collectability related financial assets reasonably assured also consider overall business climate customers operate accounts receivable loss allowance matrix utilized measure lifetime expected credit losses matrix contemplates historical credit losses age receivables adjusted forwardlooking information management expectations baker hughes holdings llc 2020 form 10k 53 baker hughes holdings llc notes consolidated financial statements concentration credit risk grant credit customers primarily operate oil natural gas industry although concentration affects overall exposure credit risk current receivables spread diverse group customers across many countries mitigates risk perform periodic credit evaluations customers financial conditions including monitoring customers payment history current credit worthiness manage risk generally require collateral support current receivables may require payment advance security form letter credit bank guarantee inventories stated lower cost net realizable values measured firstin firstout fifo basis average cost basis necessary record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments property plant equipment ppe property plant equipment initially stated cost depreciated estimated economic life subsequently property plant equipment measured cost less accumulated depreciation generally provided using straightline method estimated economic lives individual assets impairment losses manufacture substantial portion tools equipment ofs segment cost items includes direct indirect manufacturing costs capitalized inventory subsequently moved ppe intangible assets amortize cost intangible assets estimated useful lives unless lives deemed indefinite cost intangible assets generally amortized straightline basis assets estimated economic life amortizable intangible assets reviewed impairment whenever events changes circumstances indicate related carrying amounts may recoverable circumstances tested impairment based undiscounted cash flows impaired written fair value based either discounted cash flows appraised values intangible assets indefinite lives tested annually impairment written fair value required refer impairment goodwill longlived assets accounting policy impairment goodwill longlived assets perform annual impairment test goodwill qualitative quantitative basis reporting units july 1 frequently circumstances indicate impairment may exist reporting unit level performing annual impairment test option first performing qualitative assessment determine existence events circumstances would lead determination likely fair value reporting unit less carrying amount conclusion reached would required perform quantitative impairment assessment goodwill however assessment leads determination likely fair value reporting unit greater carrying amount assessments required quantitative assessment determination impairment made comparing carrying amount reporting unit fair value generally calculated using combination market comparable transaction discounted cash flow approaches see note 6 goodwill intangible assets information valuation methodology impairment goodwill review ppe intangible assets certain longlived assets impairment whenever events changes circumstances indicate carrying amount may recoverable least annually indefinitelived intangible assets testing impairment group longlived assets liabilities lowest level identifiable cash flows largely independent cash flows assets liabilities asset group determination recoverability made based upon estimated baker hughes holdings llc 2020 form 10k 54 baker hughes holdings llc notes consolidated financial statements undiscounted future net cash flows amount impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets financial instruments financial instruments include cash equivalents current receivables investments accounts payables short longterm debt derivative financial instruments monitor exposure various business risks including commodity prices foreign currency exchange rates regularly use derivative financial instruments manage risks inception new derivative designate derivative hedge determine derivative undesignated hedging instrument document relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions assess whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item inception hedge ongoing basis program utilizes foreign currency forward contracts reduce risks associated effects certain foreign currency exposures program strategy gains losses foreign currency forward contracts mitigate foreign currency transaction translation gains losses extent practical foreign currency exposures typically arise changes value assets example current receivables liabilities example current payables denominated currencies functional currency respective entity record derivatives end reporting period consolidated statement financial position fair value forward contracts held undesignated hedging instruments record changes fair value forward contracts consolidated statements income loss along change fair value related foreign exchange movements hedged item changes fair value forward contracts designated cash flow hedging instruments recognized comprehensive income hedged item recognized earnings fair value measurements financial assets liabilities measured fair value recurring basis fair value price would receive sell asset pay transfer liability orderly transaction market participant measurement date absence active markets identical assets liabilities measurements involve developing assumptions based market observable data absence data internal information consistent market participants would use hypothetical transaction occurs measurement date observable inputs reflect market data obtained independent sources unobservable inputs reflect market assumptions preference given observable inputs two types inputs create following fair value hierarchy •level 1 quoted prices identical instruments active markets •level 2 quoted prices similar instruments active markets quoted prices identical similar instruments markets active modelderived valuations whose inputs observable whose significant value drivers observable •level 3 significant inputs valuation model unobservable maintain policies procedures value instruments using best relevant data available addition perform reviews assess reasonableness valuations regard level 3 valuations including instruments valued third parties perform variety procedures assess reasonableness valuations reviews include evaluation instruments whose fair value change exceeds predefined thresholds andor change consider current interest rate currency credit environment well published data rating agency market reports current appraisals baker hughes holdings llc 2020 form 10k 55 baker hughes holdings llc notes consolidated financial statements recurring fair value measurements derivatives level 1 derivatives traded either exchanges liquid overthecounter markets use closing prices valuation majority derivatives valued using internal models included level 2 internal models maximize use market observable inputs including interest rate curves forward spot prices currencies commodities derivative assets liabilities included level 2 primarily represent foreign currency commodity forward contracts company investments debt equity securities available use quoted market prices determine fair value investment securities included level 1 level 1 securities primarily include publicly traded equity securities investment securities market prices observable identical similar investment securities readily accessible investments individually difficult obtain pricing information individual investment security measurement date use pricing models consistent market participants would use inputs assumptions models derived market observable sources including benchmark yields reported trades brokerdealer quotes issuer spreads benchmark securities bids offers marketrelated data thus certain securities may priced using quoted prices rather determined market observable information investments included level 2 use valuations based significant unobservable inputs classify investment securities level 3 nonrecurring fair value measurements certain assets measured fair value nonrecurring basis assets measured fair value ongoing basis subject fair value adjustments certain circumstances assets include longlived assets reduced fair value held sale equity securities without readily determinable fair value equity method investments longlived assets written fair value impaired remeasurement retained investments formerly consolidated subsidiaries upon change control results deconsolidation subsidiary sell controlling interest retain noncontrolling stake entity assets written fair value impaired retained investments subsequently adjusted fair value unless impairment occurs investments equity securities investments equity securities entities either controlling financial interest significant influence often hold voting interest 0 20 readily determinable fair values measured fair value changes fair value recognized earnings reported non operating income loss net consolidated statements income loss equity securities readily determinable fair values recorded cost minus impairment plus minus changes resulting observable price changes orderly transactions identical similar equity securities issuer changes recorded nonoperating income loss net consolidated statements income loss associated companies entities controlling financial interest significant influence often hold voting interest 20 50 associated companies accounted equity method investments results associated companies presented consolidated statements income loss follows associated company integral operations results included selling general administrative ii associated company integral operations results included nonoperating income loss net iii equity method investment bj services delaware limited liability company presented equity loss affiliate investments advances associated companies presented oneline basis caption assets consolidated statement financial position baker hughes holdings llc 2020 form 10k 56 baker hughes holdings llc notes consolidated financial statements income taxes treated partnership us federal income tax purposes except certain us corporations owned company subject us federal income tax current us tax laws members required take account us federal income tax purposes distributive share items income gain loss deduction generally include us operations baker hughes ge og baker hughes ge taxed distributive share income gain whether corresponding amount cash property distributed assets held indirectly us subsidiaries including foreign us taxes attributable subsidiaries reflected consolidated financial statements account taxes asset liability method deferred income taxes recognized temporary differences financial statement tax return bases assets liabilities well net operating losses tax credit carryforwards based enacted tax rates expected effect taxes actually paid recovered provisions tax law effect change tax laws rates deferred tax assets liabilities recognized income period change enacted future tax benefits recognized extent realization benefits likely valuation allowance established portion deferred tax asset management believes may likely realized indefinite reinvestment determined management’s judgment intentions concerning future operations company cases repatriation would otherwise incur significant withholding income taxes foreign earnings indefinitely reinvested company’s active nonus business operations computation potential deferred tax liability associated undistributed earnings basis difference practicable significant judgment required determining tax expense evaluating tax positions including evaluating uncertainties operate 120 countries tax filings subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved tax authorities courts provided amounts believe ultimately result proceedings recognize uncertain tax positions “more likely not” sustained relevant tax authority audit position full knowledge relevant facts information tax positions meet threshold measure amount tax benefit based largest amount tax benefit greater 50 chance realized final settlement relevant authority classify interest penalties associated uncertain tax positions income tax expense effects tax adjustments settlements taxing authorities presented financial statements period recorded additionally part us tax reform us enacted tax base eroding payments us minimum tax foreign earnings global intangible lowtaxed income 2018 made accounting policy election account taxes period costs environmental liabilities involved numerous remediation actions clean hazardous waste required federal state laws liabilities remediation costs exclude possible insurance recoveries dates amounts costs known discounted appears range possible costs equal likelihood liabilities based low end range reasonably possible environmental remediation exposure exceed amounts accrued however due uncertainties status laws regulations technology information related individual sites amounts reasonably estimable determination required accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity necessary baker hughes holdings llc 2020 form 10k 57 baker hughes holdings llc notes consolidated financial statements new accounting standards adopted financial instruments credit losses january 1 2020 adopted financial accounting standards board fasb accounting standards update asu 201613 financial instruments credit losses asu introduces new accounting model current expected credit losses model cecl requires earlier recognition credit losses additional disclosures related credit risk cecl model utilizes lifetime expected credit loss measurement objective recognition credit losses loans receivables time financial asset originated acquired expected credit losses adjusted period changes expected lifetime credit losses model replaces multiple existing impairment models previously used us gaap generally require loss incurred recognized new standard also applies financial assets arising revenue transactions contract assets accounts receivables adoption material impact consolidated financial statements intangibles goodwill january 1 2020 adopted fasb asu 201704 intangibles goodwill simplifying test goodwill impairment simplifies subsequent measurement goodwill eliminating requirement calculate fair value individual assets liabilities reporting unit measure goodwill impairment new asu required test goodwill recoverability entity perform goodwill impairment test comparing fair value reporting unit carrying value recognize impairment charge amount carrying value exceeds fair value reporting unit applied asu prospective basis see note 6 goodwill intangible assets details new accounting standards adopted new accounting pronouncements issued yet effective currently evaluated time expected material impact financial position results operations note 2 revenue related contracts customers disaggregated revenue disaggregate revenue contracts customers primary geographic markets remaining performance obligations december 31 2020 2019 aggregate amount transaction price allocated unsatisfied partially unsatisfied performance obligations 234 billion 229 billion respectively december 31 2020 expect recognize revenue approximately 51 67 90 total remaining performance obligations within 2 5 15 years respectively remaining thereafter contract modifications could affect timing complete well amount received fulfill related remaining performance obligations baker hughes holdings llc 2020 form 10k 58 baker hughes holdings llc notes consolidated financial statements note 3 current receivables current receivables comprised following december 31 customer receivables recorded invoiced amount related parties consists primarily amounts owed us ge category consists primarily indirect taxes advance payments suppliers tax receivables customer retentions note 4 inventories net reserves 421 million 429 million 2020 2019 respectively comprised following december 31 recorded inventory impairments 246 million nil 105 million years ended december 31 2020 2019 2018 respectively inventory impairments 2020 2018 predominantly oilfield services segment oilfield equipment segment respectively result certain restructuring activities initiated company charges inventory impairments reported cost goods sold caption consolidated statements income loss note 5 property plant equipment property plant equipment comprised following december 31 1useful life excludes land depreciation expense relating property plant equipment 1009 million 1053 million 1031 million years ended december 31 2020 2019 2018 respectively see note 18 restructuring impairment additional information property plant equipment impairments baker hughes holdings llc 2020 form 10k 59 baker hughes holdings llc notes consolidated financial statements note 6 goodwill intangible assets goodwill changes carrying value goodwill detailed segment perform annual goodwill impairment test reporting units july 1 fiscal year conjunction annual strategic planning process reporting units four reportable segments addition annual impairment test also test goodwill impairment annual impairment dates whenever events circumstances occur judgment could likely reduce fair value one reporting units carrying value potential impairment indicators include limited results recent annual interim impairment testing particular magnitude excess fair value carrying value observed ii downward revisions internal forecasts magnitude thereof iii declines baker hughes market capitalization book value magnitude duration declines first quarter 2020 baker hughes market capitalization declined significantly compared fourth quarter 2019 baker hughes closing stock price fell historic low 933 march 23 2020 period equity value peer group companies overall us stock market also declined significantly amid market volatility addition oilfield services index osx indicator investors’ view earnings prospects cost capital oil gas services industry traded prices lowest history declines driven uncertainty surrounding outbreak coronavirus covid19 macroeconomic events geopolitical tensions opec russia also resulted significant drop oil prices based factors concluded triggering event occurred accordingly interim quantitative impairment test performed march 31 2020 “testing date” performing interim quantitative impairment test march 31 2020 consistent prior practice determined fair value reporting units using combination income approach market approach assessing valuation methodologies based upon availability relevance comparable company data determining appropriate weighting income approach fair value reporting units determined based present value estimated future cash flows discounted appropriate riskadjusted rate used internal forecasts updated recent events estimate future cash flows cash flows beyond specific operating plans estimated using terminal value calculation incorporates historical forecasted trends including estimate longterm future growth rates based recent views longterm outlook reporting unit internal forecasts include assumptions future commodity pricing expected demand goods services due inherent uncertainties involved making estimates assumptions actual results may differ assumed forecasts baker hughes holdings llc 2020 form 10k 60 baker hughes holdings llc notes consolidated financial statements derived discount rates using capital asset pricing model analyzing published rates industries relevant reporting units estimate cost equity financing used discount rates commensurate risks uncertainties inherent respective businesses internally developed forecasts updated recent events valuations using market approach derived metrics publicly traded companies historically completed transactions comparable businesses selection comparable businesses based markets reporting units operate giving consideration risk profiles size geography diversity products services based upon results interim quantitative impairment test performed march 31 2020 concluded carrying value oilfield services ofs oilfield equipment ofe reporting units exceeded estimated fair value testing date resulted goodwill impairment charges 11428 million 3289 million respectively goodwill impairment calculated amount carrying value reporting unit including goodwill exceeded fair value third quarter 2020 completed annual impairment test reporting unit determined likely fair value reporting units exceeded carrying amounts annual test date july 1 2020 december 31 2020 identify indicators would lead determination likely fair value reporting units less carrying value assurances future sustained declines macroeconomic business conditions affecting industry occur could result goodwill impairment charges future periods intangible assets intangible assets comprised following december 31 1for year ended december 31 2020 recorded intangible asset impairments customer relationships 481 million technology 8 million trade names trademarks 237 million capitalized software 3 million see note 18 restructuring impairment discussion intangible assets generally amortized straightline basis estimated useful lives ranging one 30 years amortization expense 308 million 365 million 455 million years ended december 31 2020 2019 2018 respectively baker hughes holdings llc 2020 form 10k 61 baker hughes holdings llc notes consolidated financial statements estimated amortization expense subsequent five fiscal years expected follows note 7 contract deferred assets majority longterm product service agreements relate turbomachinery process solutions segment contract assets reflect revenue earned excess billings longterm contracts construct technically complex equipment longterm product maintenance extended warranty arrangements deferred contract related costs contract assets comprised following december 31 1reflects revenue earned excess billings longterm contracts construct technically complex equipment certain service agreements revenue recognized year ended december 31 2020 2019 performance obligations satisfied partially satisfied previous years related longterm service agreements 17 million 1 million respectively includes revenue recognized revisions cost billing estimates may affect contract’s total estimated profitability resulting adjustment earnings note 8 progress collections deferred income contract liabilities include progress collections reflects billings excess revenue deferred income longterm contracts construct technically complex equipment longterm product maintenance extended warranty arrangements contract liabilities comprised following december 31 revenue recognized year ended december 31 2020 2019 included contract liabilities beginning year 1962 million 1239 million respectively baker hughes holdings llc 2020 form 10k 62 baker hughes holdings llc notes consolidated financial statements note 9 leases leasing activities primarily consist operating leases administrative offices manufacturing facilities research centers service centers sales offices certain equipment following table presents operating lease expense 1leases term one year less including leases term one month less year ended december 31 2018 total operating lease expense 783 million cash flows used operating activities operating leases approximates expense years ended december 31 2020 2019 2018 december 31 2020 maturities operating lease liabilities follows amounts recognized consolidated statement financial position operating leases follows rightofuse assets 802 million 829 million december 31 2020 2019 respectively included assets consolidated statements financial position weightedaverage remaining lease term operating leases approximately 8 years ended december 31 2020 2019 weightedaverage discount rate used determine operating lease liability december 31 2020 2019 37 41 respectively baker hughes holdings llc 2020 form 10k 63 baker hughes holdings llc notes consolidated financial statements note 10 borrowings shortterm longterm borrowings comprised following december 31 1weighted average effective interest rate based carrying value including stepup adjustments applicable recorded upon acquisition bhi see note 1 summary significant accounting policies discussion 2represents longterm fixed rate debt obligations assumed connection acquisition bhi net amounts repurchased subsequent closing transactions may 2020 bhh llc issued 500 million aggregate principal amount 4486 senior notes due may 2030 november 2019 bhh llc issued 525 million aggregate principal amount 3138 senior notes due november 2029 used proceeds november 2019 offering repurchase outstanding 32 senior notes due august 2021 total cash consideration paid repurchase excluding interest 526 million resulting loss 7 million recorded interest expense net caption consolidated statements income loss senior notes presented net issuance costs consolidated statements financial position estimated fair value total borrowings december 31 2020 2019 8502 million 6847 million respectively majority borrowings fair value determined using quoted periodend market prices market prices available estimate fair values based valuation methodologies using current market interest rate data adjusted nonperformance risk maturities debt five years period ending december 31 2025 aggregate thereafter listed table baker hughes holdings llc 2020 form 10k 64 baker hughes holdings llc notes consolidated financial statements december 2019 bhh llc entered 3 billion committed unsecured revolving credit facility 2019 credit agreement commercial banks maturing december 2024 2019 credit agreement contains certain customary representations warranties certain customary affirmative covenants certain customary negative covenants upon occurrence certain events default bhh llcs obligations 2019 credit agreement may accelerated events default include payment defaults lenders 2019 credit agreement customary defaults events default occurred connection bhh llc’s entry 2019 credit agreement bhh llc terminated thenexisting fiveyear committed 3 billion revolving credit agreement dated july 3 2017 credit agreement 2020 2019 borrowings 2019 credit agreement 2017 credit agreement commercial paper program may issue time commercial paper maturities 397 days second quarter 2020 increased commercial paper program 3 billion approximately 38 billion baker hughes coobligor inc coobligor jointly severally bhh llc longterm debt securities coobligor 100owned finance subsidiary bhh llc incorporated sole purpose serving corporate coobligor longterm debt securities assets operations related sole purpose 2020 baker hughes coobligor inc coobligor longterm debt securities totaling 6650 million certain senior notes contain covenants restrict bhh llcs ability take certain actions including limited creation certain liens securing debt entry certain saleleaseback transactions engaging certain merger consolidation asset sale transactions excess specified limits december 31 2020 compliance debt covenants see note 16 related party transactions additional information shortterm borrowings ge note 11 employee benefit plans defined benefit plans certain employees covered company sponsored pension plans primary pension plans 2020 included four us plans seven nonus pension plans primarily uk germany canada pension assets obligations greater 20 million use december 31 measurement date plans defined benefit plans generally provide benefits employees based formulas recognizing length service earnings however half plans either frozen closed new entrants also provide certain postretirement health care benefits postretirement benefits unfunded plan closed group us employees retire meet certain age service requirements funded status funded status position represents difference benefit obligation plan assets projected benefit obligation pbo pension benefits represents actuarial present value benefits attributed employee services compensation includes assumption future compensation levels accumulated benefit obligation abo actuarial present value pension benefits attributed employee service date present compensation levels abo differs pbo abo include assumptions future compensation levels baker hughes holdings llc 2020 form 10k 65 baker hughes holdings llc notes consolidated financial statements reconciliation beginning ending balances benefit obligations fair value plan assets funded status plans 1the actuarial loss gain primarily related change discount rate used measure benefit obligation plans 2020 2019 amounts recognized consolidated statements financial position consist following december 31 baker hughes holdings llc 2020 form 10k 66 baker hughes holdings llc notes consolidated financial statements information plans abos pbos excess plan assets follows december 31 net periodic cost income components net periodic cost income follows service cost component net periodic cost benefit included operating income loss components included nonoperating income net caption consolidated statements income loss assumptions used benefit calculations accounting requirements necessitate use assumptions reflect uncertainties length time pension obligations paid actual amount future benefit payments depend upon participants retire amount benefit retirement long live reflect obligation today’s dollars discount future payments using rate matches time frame payments made also need assume longterm rate return earned investments used fund payments another assumption used interest crediting rate us qualified cash balance plan provisions pension plan hypothetical cash balance account established participant accounts receive quarterly interest credits based prescribed formula weighted average assumptions used determine benefit obligations plans follows baker hughes holdings llc 2020 form 10k 67 baker hughes holdings llc notes consolidated financial statements weighted average assumptions used determine net periodic cost plans follows determine discount rate using bond matching model whereby weighted average yields highquality fixedincome securities maturities consistent timing benefit payments lower discount rates increase size benefit obligations pension expense following year higher discount rates reduce size benefit obligation subsequentyear pension expense compensation assumption used active plans estimate annual rate pay plan participants grow rate growth assumed increases size pension obligations increase expected return plan assets estimated longterm rate return earned investments used fund pension obligations determine rate consider current target composition plan investments historical returns earned expectations future assumed health care cost trend rates significant effect amounts reported postretirement benefits december 31 2020 health care cost trend rate 65 declining gradually successive year reaches 45 accumulated comprehensive loss amount recorded beforetax accumulated comprehensive loss related employee benefit plans consists following december 31 plan assets investment committees meet regularly review portfolio returns determine assetmix targets based assetliability studies thirdparty investment consultants assist committees developing asset allocation strategies determine expected rates return expected risk various investment portfolios investment committees considered strategies formal establishment current assetmix targets based projected risk return levels major asset classes baker hughes holdings llc 2020 form 10k 68 baker hughes holdings llc notes consolidated financial statements table presents fair value pension assets december 31 1include direct investments investment funds 2consists primarily asset allocation fund investments plan assets valued using net asset value nav practical expedient amounted 3072 million 2988 million december 31 2020 2019 respectively percentages plan assets valued using nav investment fund type equity securities fixed income cash alternative investments 21 59 20 december 31 2020 respectively 20 62 18 december 31 2019 respectively investments measured fair value using nav practical expedient excluded fair value hierarchy practical expedient applied investments fair value 130 million 16 million december 31 2020 2019 respectively investments classified within level 3 120 million december 31 2020 non us insurance contracts consisted purchases 124 million reduced 4 million unrealized losses investments classified within level 3 2019 remaining investments considered level 2 funding policy funding policy pension benefits contribute amounts sufficient meet minimum funding requirements set forth employee benefit tax laws plus additional amounts may determine appropriate 2020 contributed approximately 20 million anticipate contribute approximately 20 million 35 million pension plans 2021 fund postretirement benefits payasyougo basis 2020 funded 19 million 2021 expect fund approximately 10 million benefits following table presents expected benefit payments next 10 years us nonus pension benefit payments made respective pension trust funds baker hughes holdings llc 2020 form 10k 69 baker hughes holdings llc notes consolidated financial statements ge multiemployer plans historically allocated relevant participation costs certain employees participated ge employee benefit plans part multiemployer plans certain us employees covered various us ge employee benefit plans including ges retirement plans pension retiree health life insurance savings benefit plans january 1 2019 us employees ceased participate ge us plans addition certain united kingdom uk employees participated ge uk pension plan may 1 2019 uk employees ceased participate ge uk pension plan may 2019 assets liabilities ge uk pension plan related oil gas businesses transferred us fully funded basis expenses associated participation plans 3 million 158 million years ended december 31 2019 2018 respectively incurred expenses associated ge multiemployer plans 2020 defined contribution plans primary defined contribution plan 2020 companysponsored us 401k plan 401k plan 401k plan allows eligible employees contribute portions eligible compensation investment trust company matches employee contributions rate 100 per 100 employee contribution first 5 employees eligible compensation contributions vest immediately addition make cash contributions eligible employees 4 eligible compensation contributions fully vested three years employment 401k plan provides several investment options employee sole investment discretion however 401k plan offer baker hughes common stock investment option costs 401k plan several us nonus defined contribution plans amounted 236 million 235 million 2020 2019 respectively two nonqualified defined contribution plans invested trusts assets corresponding liabilities 314 million 276 million december 31 2020 2019 respectively included assets liabilities pensions employee benefits captions consolidated statements financial position note 12 income taxes response covid19 pandemic many governments enacted contemplating measures provide aid economic stimulus measures may include deferring due dates tax payments changes income nonincomebased tax laws coronavirus aid relief economic security act cares act enacted march 27 2020 us includes measures assist companies year ended december 31 2020 material tax impacts consolidated financial statements relates covid19 measures provision benefit income taxes comprised following baker hughes holdings llc 2020 form 10k 70 baker hughes holdings llc notes consolidated financial statements geographic sources income loss income taxes inclusive equity loss affiliate follows provision income taxes differs amount computed applying us statutory income tax rate loss income taxes reasons set forth years ended december 31 deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards tax effects temporary differences carryforwards follows december 31 december 31 2020 approximately 402 million nonus tax credits may carried forward indefinitely applicable foreign law 35 million credits majority expire tax year 2027 us tax law additionally 2006 million net operating loss carryforwards baker hughes holdings llc 2020 form 10k 71 baker hughes holdings llc notes consolidated financial statements approximately 347 million expire within five years 960 million expire 6 years 20 years remainder carried forward indefinitely record valuation allowance likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions december 31 2020 2342 million valuation allowances recorded various deferred tax assets including foreign net operating losses nol 1657 million us federal foreign tax credit carryforwards 402 million us nols tax credit carryforwards 55 million certain us foreign deferred tax assets 228 million 319 million deferred tax assets related foreign net operating loss carryforwards without valuation allowance expect deferred tax assets realized within carryforward period indefinite reinvestment determined management’s intentions concerning future operations company cases repatriation would otherwise incur significant withholding income taxes earnings indefinitely reinvested companys active nonus business operations december 31 2020 cumulative amount undistributed foreign earnings approximately 6 billion computation potential deferred tax liability associated undistributed earnings basis differences practicable december 31 2020 454 million tax liabilities total gross unrecognized tax benefits related uncertain tax positions addition uncertain tax positions 95 million 23 million related interest penalties respectively total liabilities 572 million uncertain positions prevail uncertain positions net effect would result income tax benefit approximately 523 million remaining 48 million comprised 24 million deferred tax assets represent tax benefits would received different taxing jurisdictions different character event prevail uncertain tax positions increased valuation allowances 24 million following table presents changes gross unrecognized tax benefits included consolidated statements financial position expected amount unrecognized tax benefits change next twelve months due expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate december 31 2020 approximately 57 million tax liabilities related uncertain tax positions individually insignificant reasonably possible settled within next twelve months conduct business 120 countries subject income taxes taxing jurisdictions operate may multiple open years subject examination internal revenue service examinations completed closed 2016 significant us returns believe made adequate provision income tax uncertainties baker hughes holdings llc 2020 form 10k 72 baker hughes holdings llc notes consolidated financial statements note 13 members equity bhh llc agreement provides initially one class common units currently held directly indirectly baker hughes ge collectively members baker hughes issues share class common stock including connection equity incentive similar plan also issue corresponding unit baker hughes one direct subsidiaries year ended december 31 2020 2019 issued 7939 thousand 4416 thousand units respectively baker hughes one direct subsidiaries connection issuance class common stock members entitled units receive distributions equal amount dividend paid baker hughes class shareholders 2019 ge’s interest us reduced approximately 504 approximately 367 primarily result exchange 132 million shares class b common stock corresponding units secondary offering repurchase cancellation 12 million shares class b common stock 2020 ge’s interest us reduced approximately 301 primarily result exchange 66 million shares class b common stock corresponding units following table presents changes number units outstanding thousands 1 share amounts reflected net shares withheld satisfy employees tax withholding obligation 2 2020 ge exchanged 66 million shares class b common stock paired units class common stock 2019 completed underwritten secondary public offerings ge affiliates sold 132 million shares class common stock receive proceeds shares sold ge affiliates offerings included exchange ge affiliates units together corresponding shares class b common stock class common stock shares class b common stock together associated units exchanged shares class common stock pursuant exchange agreement shares class b common stock canceled 3 2019 repurchased canceled 12 million units class b common stock together equal number associated units ge affiliates aggregate 250 million 2107 per unit per unit price paid underwriters ge affiliates concurrent underwritten secondary public offering baker hughes holdings llc 2020 form 10k 73 baker hughes holdings llc notes consolidated financial statements accumulated comprehensive loss aocl following table presents changes accumulated comprehensive loss net tax amounts reclassified accumulated comprehensive loss years ended december 31 2020 2019 represent gains losses reclassified cash flow hedges hedged transaction occurs ii amortization net actuarial loss prior service credit curtailments included computation net periodic pension cost see note 11 employee benefit plans additional details net periodic pension cost recorded across various cost expense line items consolidated statements income loss note 14 financial instruments recurring fair value measurements assets liabilities measured fair value recurring basis consists derivative instruments investment securities transfers level 1 2 3 2020 baker hughes holdings llc 2020 form 10k 74 baker hughes holdings llc notes consolidated financial statements following table provides reconciliation recurring level 3 fair value measurements investment securities significant unobservable input used valuation level 3 instruments discount rate discount rates determined based inputs market participants would use pricing investments including credit liquidity risk increase discount rate would result decrease fair value investment securities unrealized gains losses recognized consolidated statement income loss account level 3 instrument still held reporting date held 1 million 111 million investment securities behalf ge december 31 2020 2019 respectively 1all investment securities classified available sale instruments nonus debt securities mature within two years 2gains losses recorded earnings related securities 14 billion 2 million 25 million years ended december 31 2020 2019 2018 respectively december 31 2020 equity securities consist primarily investment c3ai june 2019 entered stock purchase agreement certain related agreements c3ai company suite artificial intelligence ai software resulted us acquiring economic interest c3ai approximately 15 investment c3ai recurring readily determinable fair value december 9 2020 c3ai stock began trading publicly december 31 2020 owned 10813095 shares c3ai class common stock economic interest approximately 11 fair value 1500 million year ended december 31 2020 recorded marktomarket unrealized gain 1417 million investment c3ai reported “nonoperating income loss” caption consolidated statement income loss see “note 16 related party transactions” details agreements c3ai december 31 2020 1514 million total investment securities recorded current assets consolidated statements financial position remaining 18 million assets december 31 2019 254 million equity securities recorded current assets consolidated statements financial position remaining 29 million assets fair value disclosure financial instruments financial instruments include cash equivalents current receivables investments accounts payable short longterm debt derivative financial instruments except longterm debt estimated fair value financial instruments december 31 2020 2019 approximates carrying value reflected baker hughes holdings llc 2020 form 10k 75 baker hughes holdings llc notes consolidated financial statements consolidated financial statements information fair value debt see note 10 borrowings derivatives hedging use derivatives manage risks use derivatives speculation table summarizes fair value derivatives including hedging instruments embedded derivatives classified consolidated statements financial position depending respective maturity date december 31 2020 2019 115 million 52 million derivative assets recorded current assets 3 million 6 million recorded assets consolidated statements financial position respectively december 31 2020 2019 48 million 24 million derivative liabilities recorded current liabilities 4 million 3 million recorded liabilities consolidated statements financial position respectively forms hedging cash flow hedges use cash flow hedging primarily reduce eliminate effects foreign exchange rate changes purchase sale contracts accordingly vast majority derivative activity category consists currency exchange contracts also use commodity derivatives reduce eliminate price risk raw materials purchased use manufacturing changes fair value cash flow hedges recorded separate component equity referred accumulated comprehensive income aoci recorded earnings period hedged transaction occurs table summarizes hedging instrument activity currency exchange contracts expect transfer 5 million earnings gain next 12 months contemporaneously earnings effects related forecasted transactions maximum term derivative instruments hedge forecasted transactions one year december 31 2020 2019 economic hedges derivatives designated hedges accounting standpoint therefore apply hedge accounting relationship otherwise serve economic purpose hedging arrangements derivatives marked fair value earnings period baker hughes holdings llc 2020 form 10k 76 baker hughes holdings llc notes consolidated financial statements following table summarizes gains losses derivatives designated hedges consolidated statements income loss 1excludes losses embedded derivatives 14 million 7 million 3 million years ended december 31 2020 2019 2018 respectively embedded derivatives considered hedging instruments economic hedges 2the effect earnings changes fair value derivatives designated hedges substantially offset earnings effect economically hedged items income statement caption current future periods notional amount derivatives notional amount derivative number units underlying substantial majority outstanding notional amount 70 billion 57 billion december 31 2020 2019 respectively related hedges anticipated sales purchases foreign currency commodity purchases contractual terms contracts considered embedded derivatives intercompany borrowings foreign currencies generally disclose derivative notional amounts gross basis indicate total counterparty risk gross purchase sale derivative contracts particular currency look execute contracts counterparty reduce exposure notional amount derivative instruments generally represent cash amounts exchanged us counterparties rather nominal amount upon changes value derivatives measured counterparty credit risk fair values derivatives change significantly period based among factors market movements changes positions manage counterparty credit risk counterparties default make payments us according terms agreements individual counterparty basis equity investments december 31 2020 2019 carrying amount equity securities without readily determinable fair values 554 million 637 million respectively 2019 certain equity securities remeasured fair value date observable transaction occurred resulted company recording unrealized gain 19 million 2018 discontinued applying equity method investment bj services required us gaap previous losses reduced investment zero requirements advance additional funds baker hughes holdings llc 2020 form 10k 77 baker hughes holdings llc notes consolidated financial statements note 15 segment information reportable segments operating segments organized based nature markets customers report operating results four operating segments consist similar products services within segment described operating results reviewed regularly chief operating decision maker chief executive officer deciding allocate resources assess performance oilfield services oilfield services provides products services onshore offshore operations across lifecycle well ranging drilling evaluation completion production intervention products services include diamond tricone drill bits drilling services including directional drilling technology measurement drilling logging drilling downhole completion tools systems wellbore intervention tools services wireline services drilling completions fluids oilfield industrial chemicals pressure pumping artificial lift technologies including electrical submersible pumps oilfield equipment oilfield equipment provides broad portfolio products services required facilitate safe reliable flow hydrocarbons wellhead production facilities oilfield equipment portfolio solutions subsea offshore surface onshore operating environments products services include subsea surface pressure control production systems services capital drilling equipment services flexible pipe systems offshore onshore applications lifeoffield solutions including well intervention covering entire life cycle field turbomachinery process solutions turbomachinery process solutions provides equipment related services mechanicaldrive compression powergeneration applications across oil gas industry well products services serve downstream segments industry including refining petrochemical distributed gas flow process control industrial applications turbomachinery process solutions portfolio includes drivers aeroderivative gas turbines heavyduty gas turbines synchronous induction electric motors compressors centrifugal axial direct drive high speed integrated subsea compressors turbo expanders reciprocating turnkey solutions industrial modules waste heat recovery pumps valves compressed natural gas cng smallscale liquefied natural gas lng solutions used primarily shale oil gas field development digital solutions digital solutions provides equipment software services wide range industries including oil gas power generation aerospace metals transportation offerings include sensorbased process measurement nondestructive testing inspection turbine generator plant controls condition monitoring well pipeline integrity solutions segment results summarized financial information shown following tables consistent accounting policies applied segments within company reporting periods baker hughes holdings llc 2020 form 10k 78 baker hughes holdings llc notes consolidated financial statements performance operating segments evaluated based segment operating income loss defined income loss income taxes equity loss affiliate following net interest expense net nonoperating income loss corporate expenses restructuring impairment charges inventory impairments separation merger related costs goodwill impairment certain gains losses allocated operating segments 1inventory impairments related charges reported cost goods sold consolidated statements income loss following table presents total assets segment december 31 1the assets corporate eliminations consist primarily cash baker hughes trade name investment c3ai certain facilities certain noncurrent assets also includes adjustments eliminate intercompany investments receivables reflected within total assets reportable segments following table presents depreciation amortization segment baker hughes holdings llc 2020 form 10k 79 baker hughes holdings llc notes consolidated financial statements following table presents net property plant equipment geographic location december 31 note 16 related party transactions related party transactions ge significant related party transactions entered members affiliates continuing involvement ge primarily remaining interest us ongoing purchases sales products services transition services provide well aeroderivative joint venture aero jv formed ge fourth quarter 2019 also enter certain transactions baker hughes provided bhh llc agreement september 16 2019 ges ownership us reduced approximately 503 approximately 368 trigger date following trigger date ge affiliates less 20 voting power outstanding common stock ge entitled designate one person nomination board directors december 31 2020 ges ownership interest 301 aero jv jointly controlled ge us therefore consolidate jv 2020 purchases ge affiliates including aero jv 1446 million 1498 million 1791 million years ended december 31 2020 2019 2018 respectively addition sold products services ge affiliates 216 million 337 million 363 million years ended december 31 2020 2019 2018 respectively company 356 million 536 million accounts payable december 31 2020 2019 respectively goods services provided ge ordinary course business company 429 million 495 million current receivables december 31 2020 2019 respectively goods services provided ge ordinary course business additionally company 78 million 75 million current receivables december 31 2020 2019 respectively baker hughes july 3 2017 executed promissory note ge represents certain cash holding ges behalf due restricted nature cash restriction arises majority cash cannot released transferred otherwise converted nonrestricted market currency due lack market liquidity capital controls similar monetary exchange limitations government entity jurisdiction cash situated maturity date promissory note remain obligated repay ge therefore obligation reflected shortterm debt december 31 2020 45 million due ge 44 million held form cash 1 million held form investment securities december 31 2019 273 million due ge 162 million held form cash 111 million held form investment securities corresponding liability reported shortterm debt consolidated statements financial position also provide guarantees ge capital behalf customers entered financing arrangements ge capital related party transactions c3ai june 2019 entered stock purchase agreement certain related agreements c3ai company suite artificial intelligence ai software resulted us acquiring approximately 15 economic interest c3ai april june 2019 also entered agreements c3ai among things received threeyear subscription refer direct subscription fees use certain c3ai offerings internal use development applications c3ai ai suite well right resell c3ai offerings worldwide exclusive basis oil gas market c3ais prior consent non baker hughes holdings llc 2020 form 10k 80 baker hughes holdings llc notes consolidated financial statements exclusively markets case subject certain exceptions conditions arrangement subsequently revised september 2019 june 2020 term extended total five years expiration date fiscal year ending april 30 2024 annual contractual amounts minimum revenue commitment modified 53 million 75 million 125 million 150 million per year amounts inclusive revised direct subscription fees approximately 28 million per year fiscal years ending april 30 2021 2022 2023 2024 respectively extent unable meet annual minimum revenue commitment arrangement obligated pay c3ai shortfall exceed annual minimum revenue commitment c3ai pay us sales commission fiscal year ended april 30 2020 fulfilled annual minimum revenue commitment lorenzo simonelli chief executive officer baker hughes serves member board directors c3ai december 31 2020 hold economic interest c3ai approximately 11 see “note 14 financial instruments” discussion investment c3ai note 17 commitments contingencies litigation subject legal proceedings arising ordinary course business legal proceedings inherently uncertain unable predict ultimate outcome matters record liability contingencies incurrence loss probable amount reasonably estimated based opinion management expect ultimate outcome currently pending legal proceedings material adverse effect results operations financial position cash flows however assurance ultimate outcome matters 2014 received notification customer related possible equipment failure natural gas storage system northern germany includes certain products customer initiated arbitration proceedings us june 19 2015 rules german institute arbitration ev dis august 3 2016 customer amended claims alleged damages €202 million plus interest annual rate prime 5 hearings arbitration panel held january 16 2017 january 23 2017 march 20 2017 march 21 2017 addition september 21 2015 triuva kapitalverwaltungsgesellschaft mbh triuva filed lawsuit united states district court southern district texas houston division company baker hughes oilfield operations inc alleging plaintiff owner gas storage caverns etzel germany company provided certain equipment connection development gas storage caverns plaintiff alleges company supplied equipment either defectively designed failed warn risks equipment posed alleged defects caused damage plaintiffs property plaintiff seeks recovery alleged compensatory punitive damages unspecified amount addition reasonable attorneys fees court costs prejudgment postjudgment interest allegations lawsuit related claims made june 19 2015 german arbitration referenced june 7 2018 dis arbitration panel issued confidential arbitration ruling addressed claims asserted customer estimated financial impact arbitration ruling reflected companys financial statements material impact march 11 2019 customer initiated second arbitral proceeding us rules german institute arbitration ev dis customer alleged damages €142 million plus interest annual rate prime 5 since june 20 2015 allegations second arbitration proceeding related claims made june 19 2015 german arbitration houston federal court proceedings referenced company contesting claims made triuva houston federal court claims made customer second arbitration proceeding october 2020 dis notified company partial award second arbitration addressed certain claims asserted customer time able predict outcome claims asserted houston federal court claims remain pending second arbitration january 2013 ineos naphtachimie initiated expertise proceedings aixenprovence france arising fire chemical plant owned ineos lavera france resulted 15day plant shutdown destruction steam turbine part compressor train owned naphtachimie recent quantification alleged damages €250 million two companys subsidiaries 17 companies notified participate proceedings ongoing time indication baker hughes holdings llc 2020 form 10k 81 baker hughes holdings llc notes consolidated financial statements companys subsidiaries involved incident although outcome claims remains uncertain insurer accepted coverage defending company expertise proceeding july 31 2018 international engineering construction sa iec initiated arbitration proceedings new york administered international center dispute resolution icdr company subsidiaries arising series sales service contracts entered iec company’s subsidiaries sale installation lng plants related power generation equipment nigeria contracts prior filing iec arbitration company’s subsidiaries made demands payment due contracts august 15 2018 company’s subsidiaries initiated separate demand icdr arbitration iec claims additional costs amounts due contracts october 10 2018 iec filed petition compel arbitration united states district court southern district new york company seeking compel nonsignatory baker hughes entities participate arbitration filed iec complaint captioned international engineering construction sa et al v baker hughes ge company llc et al 18cv09241 sdny 2018 action dismissed court august 13 2019 arbitration iec alleges breach contract claims company subsidiaries seeks recovery alleged compensatory damages addition reasonable attorneys fees expenses arbitration costs march 15 2019 iec amended request arbitration alleged damages 591 million lost profits plus unspecified additional costs based alleged nonperformance contracts dispute arbitration hearing held december 9 2019 december 20 2019 march 3 2020 iec amended damages claim 700 million alleged loss cash flow alternative 2449 million lost profits various costs based alleged nonperformance contracts dispute addition 48 million liquidated damages 586 million takeorpay costs feed gas unspecified additional costs rectification takeorpay future obligations plus unspecified interest attorneys fees may 3 2020 arbitration panel dismissed iecs request takeorpay damages may 29 2020 iec quantified claim legal fees 142 million reduced alternative claim 2449 million approximately 235 million company subsidiaries contested iec’s claims pursuing claims compensation contracts october 31 2020 icdr notified arbitration panel’s final award dismissed majority iec’s claims awarded portion company’s claims january 27 2021 iec filed petition vacate arbitral award supreme court new york county new york time able predict outcome proceedings march 15 2019 march 18 2019 city riviera beach pension fund richard schippnick respectively filed delaware court chancery shareholder derivative lawsuits baker hughes’ behalf ge thencurrent members board directors baker hughes baker hughes nominal defendant related decision terminate contractual prohibition barring ge selling baker hughes’ shares july 3 2019 ii repurchase 15 billion baker hughes’ stock ge iii permit ge sell approximately 25 billion baker hughes’ stock secondary offering iv enter series agreements amendments govern ongoing relationship baker hughes ge collectively “2018 transactions” complaints lawsuits allege among things ge baker hughes’ controlling stockholder members baker hughes’ board directors breached fiduciary duties entering 2018 transactions relief sought complaints includes request declaration defendants breached fiduciary duties ge unjustly enriched disgorgement profits award damages sustained company pre postjudgment interest attorneys’ fees costs march 21 2019 chancery court entered order consolidating schippnick city riviera beach complaints consolidated ca 20190201agb styled baker hughes ge company derivative litigation may 10 2019 plaintiffs voluntarily dismissed claims members baker hughes conflicts committee may 15 2019 plaintiffs voluntarily dismissed claims former baker hughes director martin craighead june 7 2019 defendants nominal defendant filed motion dismiss lawsuit ground derivative plaintiffs failed make demand baker hughes’ board directors pursue claims ge baker hughes’ board directors filed motion dismiss lawsuit ground complaint failed state claim relief granted chancery court denied motions october 8 2019 except granted ge’s motion dismiss unjust enrichment claim october 31 2019 baker hughes’ board directors designated special litigation committee empowered full authority investigate evaluate allegations issues raised derivative litigation special litigation committee filed motion stay derivative litigation investigation december 3 2019 chancery court granted motion stayed derivative litigation june 1 2020 baker hughes holdings llc 2020 form 10k 82 baker hughes holdings llc notes consolidated financial statements may 20 2020 chancery court granted extension stay october 1 2020 september 29 2020 court granted extension stay october 15 2020 october 13 2020 special litigation committee filed report court time able predict outcome claims march 2019 baker hughes received document request united states department justice “doj” related certain companys operations iraq dealings unaoil limited affiliates december 2019 baker hughes received similar document request securities exchange commission sec baker hughes company cooperating doj sec connection requests related matters addition baker hughes agreed toll statute limitations connection matters subject doj’s document request august 13 2019 tristate joint fund filed delaware court chancery shareholder class action lawsuit behalf similarly situated public stockholders baker hughes incorporated “bhi” general electric company ge former members board directors bhi certain former bhi officers alleging breaches fiduciary duty aiding abetting claims connection combination bhi oil gas business ge og ge transactions october 28 2019 city providence filed delaware court chancery shareholder class action lawsuit behalf similarly situated public shareholders bhi ge former members board directors bhi certain former bhi officers alleging substantially claims connection transactions relief sought complaints include request declaration defendants breached fiduciary duties award damages pre postjudgment interest attorneys’ fees costs lawsuits consolidated plaintiffs filed consolidated class action complaint december 17 2019 certain former bhi officers alleging breaches fiduciary duty ge aiding abetting breaches december 2019 complaint omitted former members board directors bhi except mr craighead also served president ceo bhi mr craighead ms ross served senior vice president chief financial officer bhi remain named december 2019 complaint along ge relief sought consolidated complaint includes declaration former bhi officers breached fiduciary duties ge aided abetted breaches award damages pre postjudgment interest attorneys’ fees costs around february 12 2020 defendants filed motions dismiss lawsuit grounds complaint failed state claim relief could granted around october 27 2020 chancery court granted ge’s motion dismiss granted part motion dismiss filed mr craighead ms ross thereby dismissing claims ge ms ross one claims mr craighead time able predict outcome remaining claim december 11 2019 bmc software inc “bmc” filed lawsuit federal court southern district texas baker hughes ge company llc alleging trademark infringement unfair competition unjust enrichment arising company’s use new logo affiliated branding january 1 2020 bmc amended complaint add baker hughes company relief sought complaint includes request injunctive relief award damages including punitive damages pre postjudgment interest attorneys’ fees costs time able predict outcome claims december 2020 company received notice sec conducting formal investigation company understands related books records internal controls regarding sales products services projects impacted us sanctions company cooperating sec providing requested information company also initiated internal review assistance external legal counsel regarding internal controls compliance related us sanctions requirements secs investigation companys internal review ongoing company cannot anticipate timing outcome possible impact investigation review financial otherwise insure risks arising business extent deemed prudent management extent insurance available assurance given nature amount insurance sufficient fully indemnify us liabilities arising pending future legal proceedings claims insurance policies contain deductibles selfinsured retentions amounts deem prudent responsible payment determining amount selfinsurance policy selfinsure baker hughes holdings llc 2020 form 10k 83 baker hughes holdings llc notes consolidated financial statements losses predictable measurable recurring nature claims automobile liability general liability workers compensation environmental matters item 103 sec regulation sk requires disclosure certain environmental matters governmental authority party proceedings involve potential monetary sanctions company reasonably believes exceed specified threshold pursuant recent sec amendments item company using threshold 1 million proceedings applying threshold environmental matters disclose period estimated remediation costs accrued using currently available facts existing environmental permits technology enacted laws regulations cost estimates developed based internal evaluations discounted accruals recorded probable obligated pay environmental site evaluation remediation related activities costs reasonably estimated additional information becomes available accruals adjusted reflect current cost estimates ongoing environmental compliance costs obtaining renewing environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party us federal state comprehensive environmental response compensation liability act superfund site accrue share known estimated remediation costs site share based ratio estimated volume waste contributed site total volume waste disposed site normal course business customers vendors others entered offbalance sheet arrangements surety bonds performance letters credit bank issued guarantees totaled approximately 41 billion december 31 2020 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect financial position results operations cash flows also commitments outstanding purchase obligations five years period ending december 31 2025 838 million 86 million 37 million 8 million 5 million respectively 18 million aggregate thereafter sometimes enter consortium similar arrangements certain projects primarily oilfield equipment segment arrangements party responsible performing certain scope work within total scope contracted work obligations expire contractual obligations completed failure inability financially otherwise parties perform obligations could impose additional costs obligations us factors could result unanticipated costs complete project liquidated damages contract disputes note 18 restructuring impairment first quarter 2020 response impact business covid19 pandemic significant decline oil gas prices approved plan 18 billion 2020 plan primarily associated rationalizing certain product lines restructuring business designed among things rightsize operations anticipated activity levels market conditions remainder year incurred additional charges originally contemplated 2020 plan primarily ofs segment address challenging market conditions upstream oil gas market recorded restructuring impairment charges totaling 1866 million inventory impairments 246 million 2020 see note 4 inventories discussion substantially activities charges associated original 2020 plan completed december 31 2020 years ended december 31 2019 2018 recorded restructuring impairment charges 342 million 433 million respectively charges included restructuring impairment caption consolidated statements income loss details charges discussed baker hughes holdings llc 2020 form 10k 84 baker hughes holdings llc notes consolidated financial statements restructuring impairment charges current prior periods approved various restructuring plans globally mainly consolidate manufacturing service facilities rationalize product lines rooftops reduce headcount across various functions result recognized charge 903 million 314 million 304 million years ended december 31 2020 2019 2018 respectively following table presents restructuring impairment charges impacted segment however charges included reported segment results restructuring impairment charges primarily related employee termination expenses reducing headcount certain geographical locations product line rationalization including plant closures related expenses property plant equipment impairments incremental costs direct result restructuring plans charges included restructuring impairment caption consolidated statements income loss 963 million 28 million 129 million years ended december 31 2020 2019 2018 respectively 2020 charges consisted primarily intangible asset impairments 605 million driven decision exit certain businesses primarily ofs segment longlived asset impairments 216 million 124 million intangible assets 77 million property plant equipment 15 million assets ofe segment charges 73 million driven certain litigation matters impairment equity method investment charges 61 million related corporate facility rationalization 2019 charges primarily relate currency devaluations ofs segment 2018 charges consist primarily accelerated amortization 80 million related trade names technology ofs segment litigation charges 25 million corporate costs 13 million exit certain operations impacted tps ofs segments note 19 business dispositions completed several product line dispositions past three years described gain loss business disposition reported nonoperating income loss net caption consolidated statements income loss baker hughes holdings llc 2020 form 10k 85 baker hughes holdings llc notes consolidated financial statements •in october 2020 completed sale surface pressure control flow business nonstrategic product line ofe segment provided surface wellhead surface tree systems onshore market sale resulted loss income taxes 137 million •in june 2020 completed sale rod lift systems rls business rls part ofs segment provided rod lift products technologies services solutions oil gas industry sale resulted loss income taxes 216 million •in july 2019 completed sale highspeed reciprocating compression recip business recip part tps segment provided highspeed reciprocating compression equipment aftermarket parts services oil gas production gas processing gas distribution independent power industries sale resulted loss income taxes 138 million •in october 2018 completed sale natural gas solution ngs business ngs part tps segment provided commercial industrial products gas meters chemical injection pumps pipeline repair products electric actuators sale resulted gain income taxes 171 million note 20 supplementary information current liabilities current liabilities december 31 2020 2019 include 907 million 1115 million respectively employee related liabilities product warranties provide estimated product warranty expenses sell related products warranty estimates forecasts based best available information primarily historical claims experience claims costs may differ amounts provided analysis changes liability product warranties follows allowance credit losses change allowance credit losses follows cash flow disclosures supplemental cash flow disclosures follows years ended december 31 baker hughes holdings llc 2020 form 10k 86 item 9item 8 financial statements supplementary data management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rules 13a15f internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles control environment foundation system internal control embodied business code conduct sets tone company includes core values integrity teamwork performance learning included system internal control written policies organizational structure providing division responsibilities selection training qualified personnel program financial operations reviews professional staff corporate auditors internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect underlying transactions including acquisition disposition assets ii provide reasonable assurance assets safeguarded transactions executed accordance management’s directors’ authorization recorded necessary permit preparation financial statements accordance generally accepted accounting principles iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition assets could material effect financial statements supervision participation management including principal executive officer principal financial officer conducted evaluation effectiveness internal control financial reporting evaluation based framework internal control integrated framework issued committee sponsoring organizations treadway commission based evaluation framework internal control integrated framework principal executive officer principal financial officer concluded internal control financial reporting effective december 31 2004 conclusion principal executive officer principal financial officer based recognition inherent limitations systems internal control inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management’s assessment effectiveness internal control financial reporting december 31 2004 audited deloitte touche llp independent registered public accounting firm stated report included herein chad c deaton g stephen finley alan j keifer chad c deaton g stephen finley alan j keifer chairman senior vice president vice president chief executive officer finance administration controller chief financial officer houston texas february 24 2005 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited management’s assessment included accompanying management’s report internal control financial reporting baker hughes incorporated subsidiaries “company” maintained effective internal control financial reporting december 31 2004 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment opinion effectiveness company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion management’s assessment company maintained effective internal control financial reporting december 31 2004 fairly stated material respects based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission also opinion company maintained material respects effective internal control financial reporting december 31 2004 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states consolidated financial statements company december 31 2004 year ended financial statement schedule ii report dated february 24 2005 expressed unqualified opinion consolidated financial statements financial statement schedule deloitte touche llp houston texas february 24 2005 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited accompanying consolidated balance sheets baker hughes incorporated subsidiaries “company” december 31 2004 2003 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2004 audits also included financial statement schedule ii valuation qualifying accounts financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position baker hughes incorporated subsidiaries december 31 2004 2003 results operations cash flows three years period ended december 31 2004 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein described note 1 consolidated financial statements effective january 1 2003 company adopted statement financial accounting standards 143 established new accounting reporting standards asset retirement obligations effective january 1 2002 company adopted statement financial accounting standards 142 established new accounting reporting standards recording amortization impairment goodwill intangibles also audited accordance standards public company accounting oversight board united states effectiveness company’s internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 24 2005 expressed unqualified opinion management’s assessment effectiveness company’s internal control financial reporting unqualified opinion effectiveness company’s internal control financial reporting deloitte touche llp houston texas february 24 2005 baker hughes incorporated consolidated statements operations millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated balance sheets millions except par value see notes consolidated financial statements baker hughes incorporated consolidated statements stockholders’ equity millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated statements cash flows millions see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements note 1 summary significant accounting policies nature operations baker hughes incorporated “baker hughes” engaged oilfield services industry baker hughes major supplier wellborerelated products technology services systems worldwide oil natural gas industry provides products services drilling formation evaluation completion production oil natural gas wells basis presentation consolidated financial statements include accounts baker hughes majority owned subsidiaries “we” “our” “us” investments ability exercise significant influence operating financial policies hold controlling interest accounted using equity method accounting significant intercompany accounts transactions eliminated consolidation notes consolidated financial statements dollar share amounts tabulations millions dollars shares respectively unless otherwise indicated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period base estimates judgments historical experience various assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained operating environment changes believe estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts inventory valuation reserves recoverability longlived assets useful lives used depreciation amortization income taxes related valuation allowances insurance environmental legal pensions postretirement benefit obligations revenue recognition products services generally sold based upon purchase orders contracts customer include fixed determinable prices include right return similar provisions significant postdelivery obligations products produced standard manufacturing operation even produced customer’s specifications sold ordinary course business regular marketing channels recognize revenue products upon delivery title passes collectibility reasonably assured provisions estimated warranty returns similar types items made time related revenue recognized revenue services recognized services rendered collectibility reasonably assured rates services typically priced per day per meter per man hour similar basis cash equivalents consider highly liquid investments original maturity three months less time purchase cash equivalents inventories stated lower cost market cost determined using firstin firstout “fifo” method average cost method approximates fifo includes cost materials labor manufacturing overhead property depreciation property stated cost less accumulated depreciation generally provided using straightline method estimated useful lives individual assets manufacture substantial portion rental tools equipment cost items includes direct indirect manufacturing costs capitalized carried inventory tool completed tool completed cost tool reflected capital expenditures tool classified rental tools equipment property significant improvements betterments capitalized extend useful life asset baker hughes incorporated notes consolidated financial statements continued interest oil producing property west africa sold effective january 2003 classified discontinued operation used fullcost method accounting property method capitalized acquisition exploration development costs incurred purpose finding oil reserves accordance full cost accounting rules performed ceiling tests carrying value oil properties 2002 ceiling test charge recorded depreciation depletion amortization oil properties computed using unitofproduction method based upon production estimates proved reserves totaled 166 million 2002 costs excluded full cost amortization pool december 31 2002 cost center related properties west africa goodwill intangible assets amortization goodwill including goodwill associated equity method investments intangible assets indefinite lives amortized intangible assets finite useful lives amortized either straightline basis asset’s estimated useful life basis reflects pattern economic benefits intangible assets realized impairment longlived assets review property intangible assets certain assets impairment whenever events changes circumstances indicate carrying amount may recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense amount impairment loss determined comparing fair value determined discounted cash flows analysis carrying value related assets perform annual impairment test goodwill october 1 frequently circumstances indicate impairment may exist investments affiliates also reviewed impairment whenever events changes circumstances indicate impairment may exist determination impairment made comparing carrying amount fair value calculated using combination market capitalization discounted cash flows approach income taxes use liability method determining income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered future tax benefits recognized extent realization benefits likely deferred income taxes provided estimated income tax effect temporary differences financial tax bases assets liabilities deferred tax assets also provided certain tax credit carryforwards valuation allowance reduce deferred tax assets established likely portion deferred tax assets realized intend indefinitely reinvest certain earnings foreign subsidiaries operations outside us accordingly provided us income taxes earnings provide us additional nonus taxes earnings anticipated repatriated nonus subsidiaries operate 90 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenues rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability taxing jurisdiction could impact upon amount income taxes provide given year tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law received tax assessments various taxing authorities currently varying stages appeals andor litigation regarding matters baker hughes incorporated notes consolidated financial statements continued provided amounts believe ultimately result proceedings believe substantial defenses questions raised pursue legal remedies unfavorable outcome result however resolution matters involves uncertainties assurances outcomes favorable product warranties sell certain products product warranty provides customers return defective product specified warranty period following purchase exchange replacement product repair cost customer issuance credit customer accrue amounts estimated warranty claims based upon current historical product sales data warranty costs incurred related information known us environmental matters remediation costs accrued based estimates probable environmental exposure using currently available facts existing environmental permits technology presently enacted laws regulations sites primarily responsible remediation cost estimates developed based internal evaluations discounted accruals recorded probable obligated pay amounts environmental site evaluation remediation related activities amounts reasonably estimated obligation estimated within range accrue minimum amount range accruals recorded even significant uncertainties exist ultimate cost remediation additional accurate information becomes available adjust accruals reflect current cost estimates ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party united states federal state “superfund” site accrue share estimated remediation costs site share based ratio estimated volume waste contributed site total volume waste disposed site foreign currency majority significant foreign subsidiaries designated local currency functional currency gains losses resulting balance sheet translation foreign operations included separate component accumulated comprehensive loss within stockholders’ equity gains losses foreign currency transactions resulting settlement foreign receivables payables included selling general administrative “sga” expense consolidated statements operations incurred foreign subsidiaries designated us dollar functional currency gains losses resulting balance sheet translation foreign operations also included sga expense consolidated statements operations incurred recorded net foreign currency transaction translation gains losses 40 million 15 million 168 million 2004 2003 2002 respectively derivative financial instruments monitor exposure various business risks including commodity price foreign currency exchange rate interest rate risks occasionally use derivative financial instruments manage impact certain risks policies permit use derivative financial instruments speculative purposes use foreign currency forward contracts hedge certain firm commitments transactions denominated foreign currencies use interest rate swaps manage interest rate risk inception new derivative designate derivative cash flow hedge fair value hedge document relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions assess whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item inception hedge ongoing basis stockbased compensation allowed statement financial accounting standards “sfas” 123 accounting stockbased compensation elected account stockbased compensation using intrinsic value method accounting accordance accounting principles board opinion 25 “apb 25” accounting stock issued employees method compensation expense recognized difference quoted market price stock measurement date less amount employee required pay stock reported net income include compensation expense associated stock option awards exercise prices stock option awards equal market prices underlying stock granted reported net income include compensation expense associated restricted stock awards baker hughes incorporated notes consolidated financial statements continued recognized compensation expense fair value based method applied awards provided sfas 123 pro forma net income earnings per share “eps” stockbased compensation cost would follows years ended december 31 pro forma calculations may indicative future amounts since additional awards future years anticipated sfas 123 fair value stockbased awards calculated use option pricing models require subjective assumptions including future stock price volatility expected time exercise greatly affect calculated values calculations made using blackscholes option pricing model following weighted average assumptions years ended december 31 weighted average fair values options granted 2004 2003 2002 1116 1025 1024 per share respectively new accounting standards january 2003 financial accounting standards board “fasb” issued fasb interpretation 46 “fin 46” consolidation variable interest entities entity subject consolidation rules fin 46 referred variable interest entity “vie” entity’s equity investors lack characteristics controlling financial interest sufficient equity risk entity finance operations without additional financial support december 2003 fasb issued modifications fin 46 “fin 46r” resulting multiple effective dates based nature well creation date vie adoption fin 46 fin 46r 2004 impact consolidated financial statements may 2004 fasb issued fasb staff position 1062 “fsp 1062” accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 provides guidance accounting effects medicare prescription drug improvement modernization act 2003 employers sponsor postretirement health care plans provide prescription drug benefits adopted provisions fsp 1062 third quarter 2004 resulting reduction accumulated postretirement benefit obligation 188 million recognized reduction net periodic postretirement benefit costs 20 million 2004 result adoption fsp 1062 november 2004 fasb issued sfas 151 inventory costs amendment arb 43 chapter 4 amends guidance arb 43 clarify accounting abnormal amounts idle facility expense freight handling costs wasted material sfas 151 requires items recognized current period charges addition sfas 151 requires baker hughes incorporated notes consolidated financial statements continued allocation fixed production overheads inventory based normal capacity production facilities sfas 151 effective inventory costs incurred fiscal years beginning june 15 2005 currently evaluating provisions sfas 151 adopt sfas 151 january 1 2006 december 2004 fasb issued sfas 153 exchanges nonmonetary assets amendment apb opinion 29 address measurement exchanges nonmonetary assets sfas 153 eliminates exception fair value measurement nonmonetary exchanges similar productive assets replaces general exception exchanges nonmonetary assets commercial substance nonmonetary exchange commercial substance future cash flows entity expected change significantly result exchange sfas 153 effective nonmonetary exchanges occurring june 30 2005 adopt sfas 153 july 1 2005 december 2004 fasb revised sfas 123 sharebased payment “sfas 123r” sfas 123r revision sfas 123 supersedes apb 25 sfas 123r requires public entity measure cost employee services received exchange award equity instruments based grantdate fair value award cost recognized period employee required provide service exchange award sfas 123r also requires public entity initially measure cost employee services rendered exchange award liability instruments current fair value fair value award remeasured subsequently reporting date settlement date changes fair value required service period recognized compensation cost period currently process evaluating different option pricing models impact sfas 123r consolidated financial statements adopt sfas 123r july 1 2005 december 2004 fasb issued fasb staff position 1091 “fsp 1091” application fasb statement 109 “accounting income taxes” “sfas 109” tax deduction qualified production activities provided american jobs creation act 2004 provides guidance recently enacted american jobs creation act 2004 “act” act provides tax deduction income qualified domestic production activities fsp 1091 provides treatment deduction special deduction described sfas 109 deduction effect existing deferred tax assets liabilities impact deduction reported period deduction claimed us tax return expect deduction material impact effective tax rate future years fsp 1091 effective prospectively january 1 2005 december 2004 fasb issued fasb staff position 1092 “fsp 1092” accounting disclosure guidance foreign repatriation provision within american jobs creation act 2004 provides guidance sfas 109 respect recording potential impact repatriation provisions act company’s income tax expense deferred tax liability fsp 1092 states company allowed time beyond financial reporting period enactment evaluate effect act plan reinvestment repatriation foreign earnings purposes applying sfas 109 yet decided whether extent might elect repatriate foreign earnings provisions act repatriation act must occur december 31 2005 accordingly consolidated financial statements reflect provision taxes related election maximum amount could elect repatriate 500 million prescribed act evaluation effect election made expected completed end second quarter 2005 reclassifications certain reclassifications including reclassifications deferred income taxes tax liabilities made prior years’ consolidated financial statements conform current year presentation note 2 discontinued operations september 2004 completed sale baker hughes mining tools “bhmt” product line group within oilfield segment manufactured rotary drill bits used mining industry 315 million recorded gain sale 02 million net tax 36 million consisted gain disposal 68 million offset loss 66 million related recognition cumulative foreign currency translation adjustments earnings october 2003 signed definitive agreement sale bird machine “bird” remaining division former process segment recorded charges totaling 374 million net tax 109 million consisted loss 135 million writedown bird fair value 62 million severance warranty accruals loss 177 million related baker hughes incorporated notes consolidated financial statements continued recognition cumulative foreign currency translation adjustments earnings january 2004 completed sale bird recorded additional loss sale 05 million tax benefit received 56 million proceeds subject postclosing adjustments purchase price retained certain accounts receivable inventories assets second quarter 2004 made net payment 68 million buyer settlement final purchase price adjustments result changes value assets sold liabilities assumed buyer date initial sales price negotiated closing sale december 2002 entered exclusive negotiations sale interest oil producing operations west africa 320 million proceeds transaction effective january 1 2003 resulted gain sale 41 million net tax benefit 02 million received 100 million deposit 2002 remaining 220 million april 2003 november 2002 sold eimco process equipment “eimco” division former process segment recorded loss disposal 223 million net tax 12 million consisted loss 23 million writedown fair value loss 200 million related recognition cumulative foreign currency translation adjustments earnings received total proceeds 489 million 49 million held escrow pending completion final adjustments purchase price 2003 purchase price adjustments completed resulting release escrow balance received 20 million 29 million returned buyer 2003 also recorded additional loss sale due purchase price adjustments 25 million net tax 13 million reclassified consolidated financial statements prior periods presented reflect operations discontinued summarized financial information discontinued operations follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued assets liabilities discontinued operations follows year ended december 31 note 3 acquisitions 2002 entered venture luna energy llc “luna” 40 interest accounted using equity method accounting december 2004 acquired remaining 60 interest luna 10 million cash required consolidate luna’s accounts discontinued using equity method accounting luna result acquisition recorded approximately 190 million goodwill 55 million intangible assets also assigned 18 million inprocess research development written date acquisition writeoff included research development expenses included cost revenues consolidated statement operations purchase price allocated based fair value assets acquired liabilities assumed luna fair values determined using discounted cash flows approach assisted valuation luna third party pro forma results operations presented effect acquisition material consolidated financial statements 2003 made two acquisitions aggregate purchase price 169 million 95 million paid cash result acquisitions recorded approximately 39 million goodwill 96 million intangible assets purchase price allocated based fair value assets acquired liabilities assumed acquisitions pro forma results operations presented effects acquisitions material consolidated financial statements either individual aggregate basis 2002 made three acquisitions aggregate cash purchase price 397 million net cash acquired result acquisitions recorded approximately 284 million goodwill purchase prices allocated based fair values assets acquired liabilities assumed pro forma results operations presented effects acquisitions material consolidated financial statements either individual aggregate basis note 4 reversal restructuring charge 2000 board directors approved plan substantially exit oil natural gas exploration business recorded restructuring charge 295 million included restructuring charge 11 million contractual obligation related oil natural gas property angola property sold 2003 reversed liability related contractual obligation baker hughes incorporated notes consolidated financial statements continued note 5 income taxes provision income taxes income continuing operations comprised following years ended december 31 geographic sources income continuing operations income taxes follows years ended december 31 tax benefits 125 million 15 million 14 million associated exercise employee stock options allocated equity recorded capital excess par value years ended december 31 2004 2003 2002 respectively provision income taxes differs amount computed applying us statutory income tax rate income continuing operations income taxes reasons set forth years ended december 31 2004 recognized incremental effect 18 million additional taxes attributable portion operations westerngeco primarily result increased income us 2003 recognized incremental effect 363 million additional taxes related investment westerngeco amount 159 million related reduction carrying value equity investment westerngeco tax benefit remaining 204 million arose operations venture due venture taxed certain foreign jurisdictions based deemed profit basis percentage revenues rather profits ii unbenefitted foreign losses venture operating losses impairment restructuring charges certain foreign jurisdictions current tax benefit deferred tax asset recorded due uncertainty realization 2002 amount additional taxes resulting operations venture 402 million 2003 recognized 33 million benefit result refund claims filed us 2002 144 million benefit recognized result settlement internal revenue service examination related september 30 1996 september 30 1998 tax years received tax assessments various taxing authorities currently varying stages appeals litigation regarding matters provided amounts believe ultimately result proceedings believe substantial defenses questions raised pursue legal remedies unfavorable outcome result baker hughes incorporated notes consolidated financial statements continued provided taxes believe ultimately payable result assessments aggregate assessments approximately 340 million excess taxes provided consolidated financial statements addition aforementioned assessments received various taxing authorities provide taxes certain situations assessments received situations consider probable taxes ultimately payable exceed amounts reflected filed tax returns accordingly taxes provided situations guidance sfas 5 accounting contingencies included income taxes current liabilities deferred income taxes tax liabilities consolidated balance sheets deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards tax effects temporary differences carryforwards follows december 31 record valuation allowance likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions provided valuation allowance operating loss carryforwards certain nonus jurisdictions operations decreased currently ceased withdrawn entirely provision made us additional foreign taxes anticipated repatriation certain earnings foreign subsidiaries consider undistributed earnings foreign subsidiaries amount already provided indefinitely reinvested intention repatriate earnings additional foreign earnings could become subject additional tax remitted deemed remitted dividend however practicable estimate additional amount taxes payable december 31 2004 approximately 222 million foreign tax credits 351 million general business credits available offset future payments federal income taxes expiring varying amounts 2010 2025 196 million alternative minimum tax credits may carried forward indefinitely current us law operating loss carryforwards without valuation allowance expire varying amounts next twenty years baker hughes incorporated notes consolidated financial statements continued note 6 earnings per share reconciliation number shares used basic diluted eps computations follows years ended december 31 note 7 inventories comprised following december 31 note 8 investments affiliates investments affiliates accounted using equity method accounting significant affiliates westerngeco seismic venture 30 schlumberger limited “schlumberger” owns 70 conjunction formation westerngeco november 2000 entered agreement schlumberger whereby cash trueup payment made either parties based formula comparing ratio net present value sales revenue party’s contributed multiclient seismic data libraries fouryear period ending november 30 2004 ratio net book value libraries november 30 2000 maximum payment either party required make result adjustment 1000 million currently estimate schlumberger make payment us range 90 million 115 million pending final determination adjustment received payment recorded reduction carrying value investment westerngeco payment taxable paid tax effect recorded current income tax expense november 2000 also entered agreement westerngeco whereby westerngeco subleased facility us period ten years current market rates 2004 2003 2002 received payments 55 million 50 million 55 million respectively westerngeco related lease december 1 2005 either party westerngeco master formation agreement may offer sell entire interest venture party cash purchase price per percentage interest specified offer notice offer sell accepted offering party obligated purchase entire interest party price per percentage interest price specified offer notice included caption “equity income loss affiliates” consolidated statement operations 2003 1357 million share 4520 million certain impairment restructuring charges taken westerngeco 2003 charges related impairment westerngeco’s multiclient seismic library rationalization westerngeco’s marine seismic fleet addition result continued weakness seismic industry evaluated value investment westerngeco recorded impairment loss 453 million 2003 writedown investment fair value fair value determined using combination market capitalization discounted cash flows approach assisted determination fair value third party included caption “equity income loss affiliates” 2002 902 million share 3007 million restructuring charge related westerngeco’s impairment assets reductions workforce closing certain operations reducing marine seismic fleet february 2004 completed sale minority interest petreco international venture entered 2001 358 million 74 million held escrow pending outcome potential indemnification obligations pursuant baker hughes incorporated notes consolidated financial statements continued sales agreement portion escrow released may 2005 remainder released february 2006 recognized gain sale 13 million net tax 15 million 2003 invested 301 million 50 interest quantx wellbore instrumentation venture “quantx” expro international “expro” venture engaged permanent inwell monitoring market formed combining expro’s permanent monitoring business one product lines account ownership quantx using equity method accounting summarized unaudited combined financial information affiliates account interests using equity method accounting follows december 31 december 31 2004 2003 net accounts payable receivable unconsolidated affiliates totaled 11 million 07 million respectively december 31 2004 2003 excess investment equity affiliates 2689 million 2982 million respectively note 9 property comprised following december 31 note 10 goodwill intangible assets january 1 2002 adopted sfas 142 goodwill intangible assets sfas 142 required us cease amortizing goodwill perform transitional impairment test goodwill reporting units january 1 2002 reporting units based organizational reporting structure corporate assets liabilities allocated reporting units extent related operations reporting units assisted determination fair value reporting units third party used combination market capitalization discounted cash flows approach estimate fair values reporting units determined goodwill eimco bird operating divisions former process segment impaired accordingly recorded transitional impairment losses 425 million net taxes 204 million first quarter 2002 cumulative effect accounting change consolidated statement operations baker hughes incorporated notes consolidated financial statements continued sfas 142 also requires us perform annual impairment test goodwill perform test october 1 impairments 2004 2003 reporting units related annual impairment test adoption sfas 142 also required us reevaluate remaining useful lives intangible assets determine whether remaining useful lives appropriate also reevaluated amortization methods intangible assets determine whether amortization reflects pattern economic benefits intangible assets consumed performing evaluations reduced remaining life one marketing related intangibles changed method amortization one technology based intangibles changes carrying amount goodwill oilfield segment follows intangible assets comprised following december 31 intangible assets amortized either straightline basis estimated useful lives ranging 1 20 years basis reflects pattern economic benefits intangible assets consumed range 15 30 years 2003 joint venture accounting using equity method accounting dissolved mutual agreement venture partner us included carrying value investment joint venture 212 million goodwill resulting prior purchase accounting reclassified equity method goodwill contract based technology based marketing related intangibles received rights market certain products previously held joint venture upon dissolution joint venture amortization expense included net income years ended december 31 2004 2003 2002 149 million 135 million 109 million respectively estimated amortization expense subsequent five fiscal years expected within range 125 million 162 million baker hughes incorporated notes consolidated financial statements continued note 11 indebtedness total debt consisted following december 31 december 31 2004 8974 million credit facilities commercial banks 5000 million committed revolving credit facility “facility” expires july 2006 facility contains certain covenants among things require maintenance funded indebtedness total capitalization ratio defined formula per facility less equal 050 limit amount subsidiary indebtedness restrict sale significant assets defined 10 total consolidated assets december 31 2004 compliance facility covenants direct borrowings facility year ended december 31 2004 however ability borrow facility reduced extent outstanding commercial paper december 31 2004 outstanding commercial paper money market borrowings realized gains result terminating various interest rate swap agreements prior scheduled maturities gains deferred amortized reduction interest expense remaining life underlying debt securities unamortized deferred gains included certain debt securities reported longterm debt consolidated balance sheets follows december 31 maturities debt december 31 2004 follows 2005 760 million 2006 01 million 2007 00 million 2008 00 million 2009 5475 million 5387 million thereafter baker hughes incorporated notes consolidated financial statements continued note 12 financial instruments fair value financial instruments financial instruments include cash shortterm investments receivables payables debt foreign currency forward contracts except described estimated fair value financial instruments december 31 2004 2003 approximate carrying value reflected consolidated balance sheets fair value debt foreign currency forward contracts estimated based yearend quoted market prices estimated fair value debt december 31 2004 2003 13150 million 16098 million respectively differs carrying amounts 11623 million 14844 million respectively included consolidated balance sheets interest rate swap agreements april 2004 entered interest rate swap agreement notional amount 3250 million associated 625 notes due january 2009 agreement receive interest fixed rate 625 pay interest floating rate sixmonth libor plus spread 2741 interest rate swap agreement designated qualifies fair value hedging instrument interest rate swap agreement fully effective resulting gain loss recorded consolidated statement operations recorded fair value interest rate swap agreement 23 million liability december 31 2004 based quoted market prices contracts similar terms maturity dates different times 2003 entered three separate interest rate swap agreements notional amount 3250 million associated 625 notes due january 2009 agreements designated qualified fair value hedging instruments due outlook interest rates terminated three agreements received payments totaling 269 million three agreements terminated prior entering new agreement deferred gains amortized reduction interest expense remaining life underlying debt security matures january 2009 2002 terminated two interest rate swap agreements entered prior years agreements designated qualified fair value hedging instruments upon termination received proceeds 48 million 110 million deferred gain 48 million amortized reduction interest expense remaining life underlying debt security matured june 2004 deferred gain 110 million amortized reduction interest expense remaining life underlying debt security matures january 2009 foreign currency forward contracts december 31 2004 entered several foreign currency forward contracts notional amounts aggregating 780 million hedge exposure currency fluctuations various foreign currencies including british pound sterling norwegian krone euro brazilian real contracts designated qualify fair value hedging instruments based quoted market prices december 31 2004 contracts similar terms maturity dates recorded loss 04 million adjust foreign currency forward contracts fair market value loss offsets designated foreign exchange gains resulting underlying exposures included selling general administrative expense consolidated statement operations december 31 2004 also entered several foreign currency forward contracts notional amounts aggregating 1224 million hedge exposure currency fluctuations various foreign currencies including british pound sterling canadian dollar exposures arise local currency operating expenses balance local currency revenue collections funding imbalances supported shortterm intercompany borrowing commitments definitive amounts funding dates commitments scheduled take place december 31 2005 foreign currency forward contracts designated cash flow hedging instruments fully effective based quoted market prices december 31 2004 contracts similar terms maturity dates recorded loss 01 million adjust foreign currency forward contracts fair market value loss included comprehensive income consolidated balance sheet additionally 2004 2003 entered settled foreign currency forward contracts hedge exposure currency fluctuations specific transactions balances impact consolidated statements operations significant contracts either individually aggregate baker hughes incorporated notes consolidated financial statements continued counterparties foreign currency forward contracts major financial institutions credit ratings concentration risk financial institutions monitored continuing basis unlikely event counterparties fail meet terms foreign currency contract exposure limited foreign currency exchange rate differential concentration credit risk sell products services numerous companies oil natural gas industry although concentration could affect overall exposure credit risk believe exposed minimal risk since majority business conducted major companies within industry perform periodic credit evaluations customers’ financial condition generally require collateral accounts receivable cases require payment advance security form letter credit bank guarantee maintain cash deposits major banks may exceed federally insured limits periodically assess financial condition institutions believe risk loss minimal note 13 segment related information operate seven divisions baker atlas baker hughes drilling fluids baker oil tools baker petrolite centrilift hughes christensen inteq aggregated oilfield segment similar economic characteristics longterm financial performance divisions affected similar economic conditions consolidated results evaluated regularly chief operating decision maker deciding allocate resources assessing performance operating divisions manufacture sell products provide services used oil natural gas exploration industry including drilling formation evaluation completion production oil natural gas wells operate markets includes major oil natural gas producing regions world north america south america europe africa middle east far east also substantially customers includes major multinational independent stateowned oil companies oilfield segment also includes 30 interest westerngeco investments affiliates accounting policies oilfield segment described note 1 notes consolidated financial statements evaluate performance oilfield segment based segment profit loss defined income continuing operations income taxes accounting changes restructuring charge reversals impairment assets interest income expense baker hughes incorporated notes consolidated financial statements continued summarized financial information shown following table “corporate other” column includes corporaterelated items results insignificant operations relates segment profit loss income expense allocated oilfield segment including restructuring charge reversals impairment assets “corporate other” column december 31 2003 2002 also includes assets discontinued operations years ended december 31 2004 2003 2002 revenues attributable one customer accounted 10 total revenues following table presents details “corporate other” segment loss years ended december 31 following table presents details “corporate other” total assets december 31 baker hughes incorporated notes consolidated financial statements continued following table presents consolidated revenues country based location use products services years ended december 31 following table presents net property country based location asset december 31 note 14 employee stock plans stock option plans provide issuance incentive nonqualified stock options directors officers key employees exercise price equal greater fair market value stock date grant stock options generally vest three years vested options exercisable part full time prior expiration date ten years date grant december 31 2004 126 million shares available future option grants following table summarizes activity stock option plans baker hughes incorporated notes consolidated financial statements continued following table summarizes information stock options outstanding december 31 2004 also employee stock purchase plan whereby eligible employees may purchase shares common stock price equal 85 lower closing price common stock first last trading day calendar year total 41 million shares remaining issuance plan employees purchased 08 million shares three years ending december 31 2004 awarded restricted stock directors certain executive officers fair value restricted stock date grant amortized ratably vesting period following table summarizes restricted stock awarded years ended december 31 baker hughes incorporated notes consolidated financial statements continued note 15 employee benefit plans defined benefit pension plans noncontributory defined benefit pension plans “pension benefits” covering employees primarily us uk germany 2004 converted plan norway defined benefit plan defined contribution plan resulting settlement curtailment benefits conversion generally make annual contributions plans amounts necessary meet minimum governmental funding requirements however fourth quarter 2004 contributed 686 million pension plans order improve funded status certain pension plans provide us increased flexibility future funding pension plans measurements plan assets obligations october 1 year presented reconciliation beginning ending balances projected benefit obligations “pbo” fair value plan assets funded status plans follows years ended december 31 report prepaid benefit cost assets accrued benefit minimum liabilities pensions postretirement benefit obligations consolidated balance sheet amounts recognized consolidated balance sheet follows december 31 baker hughes incorporated notes consolidated financial statements continued weighted average assumptions used determine benefit obligations plans follows years ended december 31 accumulated benefit obligation “abo” actuarial present value pension benefits attributed employee service date present compensation levels abo differs pbo abo include assumptions future compensation levels abo us plans 2018 million 1746 million december 31 2004 2003 respectively abo nonus plans 2525 million 2450 million december 31 2004 2003 respectively information plans abos excess plan assets follows december 31 components net periodic benefit cost follows years ended december 31 weighted average assumptions used determine net costs plans follows years ended december 31 selecting expected rate return plan assets consider average rate earnings expected funds invested provide benefits plans includes considering trusts’ asset allocation expected returns likely earned life plans weightedaverage asset allocations asset category plans follows december 31 baker hughes incorporated notes consolidated financial statements continued investment committee meets quarterly review portfolio returns determine assetmix targets based assetliability studies nationally recognized thirdparty investment consultant assisted us developing asset allocation strategy determine expected rate return expected risk various investment portfolios investment committee considered studies formal establishment current assetmix targets based projected risk return levels asset class 2005 expect contribute 20 million 50 million us pension plans 100 million 140 million nonus pension plans expected benefit payments related us pension plans five years period ending december 31 2009 114 million 123 million 133 million 147 million 172 million respectively 1264 million aggregate five years thereafter expected benefit payments related nonus pension plans five years period ending december 31 2009 79 million 79 million 120 million 62 million 42 million respectively 260 million aggregate five years thereafter payments reflect benefits attributable estimated future employee service primarily funded plan assets postretirement welfare benefits provide certain postretirement health care life insurance benefits “postretirement welfare benefits” substantially us employees retire met certain age service requirements plan unfunded measurement plan obligations october 1 year presented reconciliation beginning ending balances benefit obligations funded status plan follows years ended december 31 weighted average discount rates 600 625 used determine postretirement welfare benefit obligations plan years ended december 31 2004 2003 respectively components net periodic benefit cost follows years ended december 31 weighted average discount rates 625 675 700 used determine net postretirement welfare benefit costs plan years ended december 31 2004 2003 2002 respectively baker hughes incorporated notes consolidated financial statements continued december 2003 medicare prescription drug improvement modernization act 2003 “the medicare act” signed law medicare act expanded medicare include first time coverage prescription drugs may 2004 fasb issued fsp 1062 provided guidance accounting effects medicare act employers sponsor postretirement health care plans provide prescription drug benefits adopted provisions fsp 1062 third quarter 2004 resulting reduction accumulated postretirement benefit obligation 188 million reflected actuarial gain loss caption funded status reconciliation recognized reduction net periodic postretirement benefit costs 20 million result adoption fsp 1062 assumed health care cost trend rates significant effect amounts reported postretirement welfare benefits plan assumed health care cost trend rate used measuring accumulated benefit obligation postretirement welfare benefits increased 2003 december 31 2004 health care cost trend rate 90 employees age 65 70 participants age 65 declining gradually successive year reaches 50 employees age 65 age 65 2008 one percentage point change assumed health care cost trend rates would following effects 2004 expected benefit payments related postretirement welfare benefits follows years ending december 31 defined contribution plans periods reported generally us employees eligible participate sponsored thrift plan 401k plan internal revenue code 1986 amended thrift plan allows eligible employees elect contribute 1 50 salaries investment trust employee contributions matched cash us rate 100 per 100 employee contribution first 3 050 per 100 employee contribution next 2 employee’s salary contributions vest immediately addition make cash contributions eligible employees 2 5 salary depending employee’s age contributions become fully vested employee five years employment thrift plan provides ten different investment options employee sole discretion determining employer employee contributions invested contributions thrift plan several nonus defined contribution plans amounted 755 million 677 million 628 million 2004 2003 2002 respectively certain nonus employees eligible participate thrift plan provide nonqualified defined contribution plan provides basically benefits thrift plan addition provide nonqualified supplemental retirement plan “srp” certain officers employees whose benefits thrift plan pension plan limited federal tax law srp also allows eligible employees defer portion eligible compensation provides employer matching base contributions pursuant limitations nonqualified plans fully funded invested trusts assets corresponding liabilities included consolidated balance sheet contributions nonqualified plans 61 million 55 million 60 million 2004 2003 2002 respectively postemployment benefits provide certain postemployment disability income medical benefits substantially qualifying former inactive us employees income benefits longterm disability provided fullyinsured plan continuation medical benefits disability “continuation benefits” provided qualified selfinsured plan accrued postemployment liability continuation benefits december 31 2004 2003 202 million 272 million respectively included liabilities consolidated balance sheet baker hughes incorporated notes consolidated financial statements continued note 16 commitments contingencies leases december 31 2004 longterm noncancelable operating leases covering certain facilities equipment minimum annual rental commitments net amounts due subleases five years period ending december 31 2009 740 million 504 million 348 million 250 million 172 million respectively 1263 million aggregate thereafter entered significant capital leases litigation involved litigation proceedings arisen ordinary business activities insure risks extent deemed prudent management extent insurance available assurance given nature amount insurance sufficient fully indemnify us liabilities arising pending future legal proceedings many insurance policies contain deductibles selfinsured retentions amounts deem prudent responsible payment determining amount selfinsurance policy selfinsure losses predictable measurable recurring nature claims automobile liability general liability workers compensation record accruals uninsured portion losses related types claims accruals losses calculated estimating losses claims using historical claim data specific loss development factors information necessary march 29 2002 announced advised securities exchange commission “sec” department justice “doj” conducting investigations allegations violations law relating nigeria related matters sec issued formal order investigation possible violations provisions foreign corrupt practices act “fcpa” regarding antibribery books records internal controls august 6 2003 sec issued subpoena seeking information operations angola kazakhstan part ongoing investigation providing documents cooperating fully sec doj sec issued subpoenas otherwise asked interviews current former employees connection investigations regarding nigeria angola kazakhstan addition conducted internal investigations matters internal investigations identified issues regarding propriety certain payments apparent deficiencies books records internal controls respect certain operations nigeria angola kazakhstan well potential liabilities governmental authorities nigeria investigation nigeria substantially completed first quarter 2003 based upon current information expect potential liabilities material adverse effect consolidated financial statements internal investigations angola kazakhstan substantially completed third quarter 2004 evidence obtained course investigations provided sec doj department commerce department navy doj “us agencies” investigating compliance certain export licenses issued western geophysical 1994 2000 export seismic equipment leased people’s republic china acquired western geophysical august 1998 subsequently transferred related assets westerngeco december 2000 westerngeco formation agreement owe indemnity westerngeco certain matters cooperating fully us agencies received subpoena grand jury southern district new york regarding goods services delivered iraq 1995 2003 united nations oilforfood program “un program” also received request sec provide written statement certain information regarding participation un program responding subpoena request companies energy industry believed received similar subpoenas requests us agencies sec authorities broad range civil criminal sanctions may seek impose corporations individuals appropriate circumstances including limited injunctive relief disgorgement fines penalties modifications business practices compliance programs 2004 agencies authorities entered agreements obtained range sanctions several public corporations individuals arising allegations improper payments deficiencies books records internal controls whereby civil criminal penalties imposed including cases multimillion dollar fines sanctions possible accurately predict time investigations related company completed based current information cannot predict outcome investigations actions may taken us agencies sec authorities effect may consolidated financial statements baker hughes incorporated notes consolidated financial statements continued may 10 2004 district court andrews county texas entered judgment favor lotus llc inteq amount 148 million lost profits resulting breach contract drilling well create salt cavern disposing naturally occurring radioactive waste filed appeal taken actions believe liability may incur result litigation would material adverse financial effect consolidated financial statements environmental matters past present operations include activities subject extensive domestic including us federal state local international environmental regulations regard air water quality environmental matters environmental procedures policies practices designed ensure compliance existing laws regulations minimize possibility significant environmental damage involved voluntary remediation projects present former manufacturing facilities majority relate properties obtained acquisitions sites longer actively used operations rare occasions remediation activities conducted specified government agencyissued consent decree agreed order remediation costs accrued based estimates probable exposure using currently available facts existing environmental permits technology presently enacted laws regulations remediation cost estimates include direct costs related environmental investigation external consulting activities governmental oversight fees treatment equipment costs associated longterm operation maintenance monitoring remediation project also identified potentially responsible party “prp” remedial activities related various superfund sites participate process set joint participation defense agreement negotiate government agencies identify prps determine prp’s allocation estimate remediation costs accrued believe prorata share total estimated cost remediation associated management superfund sites share based upon ratio estimated volume waste contributed site bears total estimated volume waste disposed site applicable united states federal law imposes joint several liability prp cleanup sites leaving us uncertainty may responsible remediation cost attributable prps unable pay share accrual made joint several liability concept superfund sites participation minor since believe probability pay material costs volumetric share remote believe prps greater involvement volumetric calculation basis substantial assets may reasonably expected pay share cost remediation superfund sites major prp remediation costs estimated include recalcitrant parties cases insurance coverage contractual indemnities third parties cover ultimate liability total accrual environmental remediation 136 million 156 million includes accruals 36 million 43 million various superfund sites december 31 2004 2003 respectively determination required accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity utilized believe likelihood material losses excess recorded accruals remote normal course business customers vendors others entered offbalance sheet arrangements letters credit bank issued guarantees totaled approximately 3123 million december 31 2004 also commitments outstanding purchase obligations related capital expenditures inventory purchase orders contracts approximately 1147 million december 31 2004 addition december 31 2004 guaranteed debt obligations third parties maximum exposure 74 million practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements baker hughes incorporated notes consolidated financial statements continued note 17 supplemental information supplemental consolidated statement operations information follows years ended december 31 changes aggregate product warranty liability follows january 1 2003 adopted sfas 143 accounting asset retirement obligations sfas 143 requires fair value liability associated asset retirement obligation “aro” recognized period incurred reasonable estimate made liability aro revised subsequent period due passage time changes estimates associated retirement costs capitalized part carrying amount longlived asset subsequently depreciated estimated useful life asset adoption sfas 143 2003 resulted charge 56 million net tax 28 million recorded cumulative effect accounting change consolidated statement operations conjunction adoption recorded aro liabilities 114 million primarily anticipated costs obligations associated future disposal power source units certain divisions refurbishment costs associated certain leased facilities europe fleet leased railcars tanks changes asset retirement obligation liability follows accumulated comprehensive loss net tax comprised following december 31 baker hughes incorporated notes consolidated financial statements continued note 18 quarterly data unaudited 1 represents revenues less cost revenues 2 see note 4 reversal restructuring charge note 8 impairment investment affiliate item 9item 8 financial statements supplementary data management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rules 13a15f internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles control environment foundation system internal control embodied business code conduct sets tone company includes core values integrity teamwork performance learning included system internal control written policies organizational structure providing division responsibilities selection training qualified personnel program financial operations reviews professional staff internal auditors internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition assets could material effect financial statements supervision participation management including principal executive officer principal financial officer conducted evaluation effectiveness internal control financial reporting evaluation based framework internal control integrated framework issued committee sponsoring organizations treadway commission based evaluation framework internal control integrated framework principal executive officer principal financial officer concluded internal control financial reporting effective december 31 2006 conclusion principal executive officer principal financial officer based recognition inherent limitations systems internal control inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management’s assessment effectiveness internal control financial reporting december 31 2006 audited deloitte touche llp independent registered public accounting firm stated report included herein chad c deaton peter ragauss alan j keifer chad c deaton chairman chief executive officer peter ragauss senior vice president chief financial officer alan j keifer vice president controller houston texas february 21 2007 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited management’s assessment included accompanying management’s report internal control financial reporting baker hughes incorporated subsidiaries “company” maintained effective internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment opinion effectiveness company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion management’s assessment company maintained effective internal control financial reporting december 31 2006 fairly stated material respects based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission also opinion company maintained material respects effective internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states consolidated financial statements financial statement schedule ii year ended december 31 2006 company report dated february 21 2007 expressed unqualified opinion financial statements financial statement schedule included explanatory paragraph regarding company’s adoption new accounting standards deloitte touche llp houston texas february 21 2007 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited accompanying consolidated balance sheets baker hughes incorporated subsidiaries “company” december 31 2006 2005 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2006 audits also included financial statement schedule ii valuation qualifying accounts listed index item 15 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position baker hughes incorporated subsidiaries december 31 2006 2005 results operations cash flows three years period ended december 31 2006 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein described note 4 note 14 consolidated financial statements effective january 1 2006 company adopted statement financial accounting standards “sfas” 123r established new accounting reporting standards stockbased compensation effective december 31 2006 company adopted sfas 158 established new accounting reporting standards defined benefit pension post retirement plans also audited accordance standards public company accounting oversight board united states effectiveness company’s internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 21 2007 expressed unqualified opinion management’s assessment effectiveness company’s internal control financial reporting unqualified opinion effectiveness company’s internal control financial reporting deloitte touche llp houston texas february 21 2007 baker hughes incorporated consolidated statements operations millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated balance sheets millions except par value see notes consolidated financial statements baker hughes incorporated consolidated statements stockholders’ equity millions except per share amounts see notes consolidated financial statements baker hughes incorporated consolidated statements cash flows millions see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements note 1 summary significant accounting policies nature operations baker hughes incorporated “baker hughes” engaged oilfield services industry baker hughes major supplier products technology services systems worldwide oil natural gas industry provides products services drilling formation evaluation completion production oil natural gas wells basis presentation consolidated financial statements include accounts baker hughes majority owned subsidiaries “company” “we” “our” “us” investments ability exercise significant influence operating financial policies hold controlling interest accounted using equity method accounting significant intercompany accounts transactions eliminated consolidation notes consolidated financial statements dollar share amounts tabulations millions dollars shares respectively unless otherwise indicated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period base estimates judgments historical experience various assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained operating environment changes believe estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts inventory valuation reserves recoverability longlived assets useful lives used depreciation amortization income taxes related valuation allowances insurance environmental legal pensions postretirement benefit obligations revenue recognition products services generally sold based upon purchase orders contracts customer include fixed determinable prices include right return similar provisions significant postdelivery obligations products produced standard manufacturing operation even produced customer’s specifications sold ordinary course business regular marketing channels recognize revenue products upon delivery title passes collectibility reasonably assured significant obligations future performance provisions estimated warranty returns similar types items made time related revenue recognized revenue services rentals recognized services rendered collectibility reasonably assured rates services typically priced per day per meter per man hour similar basis cash equivalents consider highly liquid investments original maturity three months less time purchase cash equivalents shortterm investments invest auction rate securities highly liquid variablerate debt securities underlying security longterm maturity interest rate reset dutch auctions typically held every 7 28 35 days creating shortterm liquidity securities trade par callable par interest payment date option issuer interest paid end auction period limit investments auction rate securities carry aaa equivalent rating recognized rating agency investments classified availableforsale recorded cost approximates market value baker hughes incorporated notes consolidated financial statements continued inventories stated lower cost market cost determined using firstin firstout “fifo” method average cost method approximates fifo includes cost materials labor manufacturing overhead property depreciation property stated cost less accumulated depreciation generally provided using straightline method estimated useful lives individual assets significant improvements betterments capitalized extend useful life asset manufacture substantial portion rental tools equipment cost items includes direct indirect manufacturing costs capitalized carried inventory tool completed tool completed cost tool reflected capital expenditures tool classified rental tools equipment property capitalized costs computer software developed purchased internal use included property goodwill intangible assets amortization goodwill including goodwill associated equity method investments intangible assets indefinite lives amortized intangible assets finite useful lives amortized either straightline basis asset’s estimated useful life basis reflects pattern economic benefits intangible assets realized impairment longlived assets review property intangible assets certain assets impairment whenever events changes circumstances indicate carrying amount may recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense amount impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets perform annual impairment test goodwill reporting units october 1 frequently circumstances indicate impairment may exist reporting units based organizational reporting structure corporate assets liabilities allocated reporting units extent relate operations reporting units determining carrying amount investments affiliates also reviewed impairment whenever events changes circumstances indicate impairment may exist determination impairment made comparing carrying amount fair value calculated using combination market capitalization discounted cash flow approach income taxes use liability method determining income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered future tax benefits recognized extent realization benefits likely deferred income taxes provided estimated income tax effect temporary differences financial tax bases assets liabilities deferred tax assets also provided certain tax credit carryforwards valuation allowance reduce deferred tax assets established likely portion deferred tax assets realized intend indefinitely reinvest certain earnings foreign subsidiaries operations outside us accordingly provided us income taxes earnings provide us additional nonus taxes earnings anticipated repatriated nonus subsidiaries operate 90 countries many legal forms result subject jurisdiction numerous domestic foreign tax authorities well tax agreements treaties among governments operations different jurisdictions taxed various bases actual income taxes deemed profits generally determined using percentage revenues rather profits withholding taxes based revenue determination taxable income jurisdiction requires interpretation related tax laws regulations use estimates assumptions regarding significant future events amount timing character deductions permissible revenue recognition methods tax law sources character income tax credits changes tax laws regulations agreements treaties foreign currency exchange restrictions level operations profitability tax jurisdiction could impact upon baker hughes incorporated notes consolidated financial statements continued amount income taxes provide given year tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts believe assessments may occasionally based erroneous even arbitrary interpretations local tax law received tax assessments various tax authorities currently varying stages appeals andor litigation regarding matters provided amounts believe ultimately result proceedings believe substantial defenses questions raised pursue legal remedies unfavorable outcome result however resolution matters involves uncertainties assurances outcomes favorable product warranties sell certain products product warranty provides customers return defective product specified warranty period following purchase exchange replacement product repair cost customer issuance credit customer accrue amounts estimated warranty claims based upon current historical product sales data warranty costs incurred related information known us environmental matters remediation costs accrued based estimates known environmental remediation exposure using currently available facts existing environmental permits technology presently enacted laws regulations sites primarily responsible remediation cost estimates developed based internal evaluations discounted accruals recorded probable obligated pay environmental site evaluation remediation related activities costs reasonably estimated obligation estimated within range accrue minimum amount range accruals recorded even significant uncertainties exist ultimate cost remediation additional accurate information becomes available accruals adjusted reflect current cost estimates ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party united states federal state “superfund” site accrue share estimated remediation costs site share based ratio estimated volume waste contributed site total volume waste disposed site foreign currency number significant foreign subsidiaries designated local currency functional currency gains losses resulting balance sheet translation foreign operations included separate component accumulated comprehensive loss within stockholders’ equity gains losses foreign currency transactions resulting settlement receivables payables nonfunctional currency included selling general administrative “sga” expense consolidated statements operations incurred foreign subsidiaries designated us dollar functional currency gains losses resulting balance sheet translation foreign operations also included sga expense consolidated statements operations incurred recorded net foreign currency transaction translation gains sga consolidated statement operations 17 million 68 million 40 million 2006 2005 2004 respectively derivative financial instruments monitor exposure various business risks including commodity prices foreign currency exchange rates interest rates occasionally use derivative financial instruments manage impact certain risks policies permit use derivative financial instruments speculative purposes use foreign currency forward contracts hedge certain firm commitments transactions denominated foreign currencies used may use interest rate swaps manage interest rate risk inception new derivative designate derivative cash flow fair value hedge determine derivative undesignated hedging instrument facts dictate document relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions assess whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item inception hedge ongoing basis baker hughes incorporated notes consolidated financial statements continued new accounting standards february 2006 financial accounting standards board “fasb” issued statement financial accounting standards “sfas” 155 accounting certain hybrid financial instruments amendment fasb statements 133 140 “sfas 155” sfas 155 amends sfas 133 required derivative embedded host contract meet definition derivative accounted separately certain conditions sfas 155 effective financial instruments acquired issued subject remeasurement event following start entity’s first fiscal year beginning september 15 2006 adopted sfas 155 january 1 2007 impact consolidated financial statements july 2006 fasb issued fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” fin 48 clarifies accounting uncertainty income taxes recognized entity’s financial statements accordance sfas 109 accounting income taxes prescribes recognition threshold measurement attribute financial statement disclosure tax positions taken expected taken tax return fin 48 effective fiscal years beginning december 15 2006 adopted fin 48 january 1 2007 currently estimate cumulative effect adopting fin 48 reduction consolidated retained earnings january 1 2007 range 450 million 600 million september 2006 fasb issued sfas 157 fair value measurements “sfas 157” intended increase consistency comparability fair value measurements defining fair value establishing framework measuring fair value expanding disclosures fair value measurements sfas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years adopt sfas 157 january 1 2008 yet determined impact consolidated financial statements september 2006 fasb issued sfas 158 employers’ accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r “sfas 158” sfas 158 requires employer recognize overfunded underfunded status defined benefit postretirement plan asset liability statement financial position recognize changes funded status year changes occur comprehensive income additionally requires employer measure funded status plan date year end statement financial position limited exceptions sfas 158 effective end fiscal year ending december 15 2006 however requirement measure plan assets benefit obligations date employer’s fiscal year end statement financial position effective fiscal years ending december 15 2008 adopted requirements sfas 158 december 31 2006 except funded status measurement date requirement adopted december 31 2008 allowed sfas 158 see note 14 incremental effect applying sfas 158 consolidated balance sheet december 31 2006 september 2006 securities exchange commission issued staff accounting bulletin 108 considering effects prior year misstatements quantifying misstatements current year financial statements “sab 108” sab 108 requires public companies utilize “dualapproach” assessing quantitative effects financial misstatements dual approach includes income statement focused assessment balance sheet focused assessment sab 108 effective fiscal years ending november 15 2006 adopted sab 108 december 31 2006 impact consolidated financial statements september 2006 fasb issued fasb staff position aug air1 “fsp aug air1” addresses accounting planned major maintenance activities fsp aug air1 prohibits use accrueinadvance method accounting planned major maintenance activities annual interim financial reporting periods adopted fsp aug air1 january 1 2007 applying retrospective application financial statements presented currently expect material impact consolidated financial statements result adoption february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities including amendment fasb statement 115 “sfas 159” sfas 159 permits entities measure eligible assets liabilities fair value unrealized gains losses items fair value option elected reported earnings sfas 159 effective fiscal years beginning november 15 2007 adopt sfas 159 january 1 2008 yet determined impact consolidated financial statements baker hughes incorporated notes consolidated financial statements continued note 2 discontinued operations fourth quarter 2005 management initiated board directors approved plan sell baker supply products division “baker spd” product line group within completion production segment distributes basic supplies products small tools drilling industry march 2006 completed sale baker spd received cash proceeds 425 million recorded gain sale 192 million net tax 110 million consisted aftertax gain disposal 169 million 23 million related recognition cumulative foreign currency translation adjustments earnings september 2004 completed sale baker hughes mining tools “bhmt” product line group within drilling evaluation segment manufactured rotary drill bits used mining industry 315 million recorded gain sale 02 million net tax 36 million consisted aftertax gain disposal 68 million offset loss 66 million related recognition cumulative foreign currency translation adjustments earnings january 2004 completed sale bird machine “bird” recorded loss sale 05 million tax benefit received 56 million proceeds subject postclosing adjustments purchase price retained certain accounts receivable inventories assets second quarter 2004 made net payment 68 million buyer settlement final purchase price adjustments result changes value assets sold liabilities assumed buyer date initial sales price negotiated closing sale reclassified consolidated financial statements prior periods presented reflect operations discontinued summarized financial information discontinued operations follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued assets liabilities discontinued operations follows years ended december 31 note 3 acquisitions january 2006 acquired nova technology corporation “nova” 554 million net cash acquired 30 million plus assumed debt nova supplier permanent monitoring chemical injection systems multiline services deepwater subsea oil gas well applications result acquisition recorded 297 million goodwill 243 million intangible assets assigned 26 million inprocess research development terms purchase agreement former owners nova entitled additional purchase price consideration 30 million based certain postclosing events extent events occur later january 31 2016 december 2005 purchased zeroth technology limited “zertech” developer expandable metal sealing element 203 million cash result acquisition recorded 94 million goodwill 103 million intangible assets terms purchase agreement former owners zertech entitled additional purchase price consideration approximately 140 million based performance business 2006 2007 2008 owned 50 interest quantx wellbore instrumentation venture “quantx” october 2005 purchased remaining 50 interest quantx 272 million subject final purchase price adjustments recorded 284 million goodwill 196 million intangibles assigned 51 million inprocess research development 2002 entered venture luna energy llc “luna” 40 interest december 2004 acquired remaining 60 interest luna 10 million cash result acquisition recorded 190 million goodwill 55 million intangible assets assigned 18 million inprocess research development acquisitions included completion production segment acquisitions purchase price allocated based fair value assets acquired liabilities assumed using discounted cash flow approach amounts related inprocess research development written date acquisition included research engineering expenses pro forma results operations presented individually aggregate acquisitions effects acquisitions material consolidated financial statements note 4 stockbased compensation january 1 2006 adopted sfas 123r establishes accounting equity instruments exchanged employee services sfas 123r revision sfas 123 supersedes apb 25 provisions sfas 123r stockbased compensation cost measured date grant based calculated fair value award recognized expense employee’s service period generally vesting period equity grant prior january 1 2006 accounted stockbased compensation employees intrinsic value method accordance apb 25 permitted sfas 123 method compensation cost recognized difference quoted market price date grant less amount employee required pay common stock accordingly recognize compensation cost stock option awards employee stock purchase plan issue options exercise prices equal market value stock date grant employee stock purchase plan noncompensatory record compensation cost restricted stock awards restricted stock units baker hughes incorporated notes consolidated financial statements continued sfas 123r also clarified accounting sfas 123 related estimating service period employees become retirement eligible vesting period requiring recognition compensation expense employees accelerated impacts timing expense recognition total expense recognized vesting period first quarter 2005 adopted new methodology prospective basis cumulative effect clarification 118 million net tax related stock option awards included amount pro forma disclosure stockbased compensation costs year ended december 31 2005 adopted sfas 123r using modified prospective application method accordingly prior periods restated method compensation cost recognized year ended december 31 2006 includes compensation cost stockbased awards granted prior yet vested january 1 2006 based grantdate fair value estimated accordance original provisions sfas 123 b compensation cost stockbased awards granted january 1 2006 based grantdate fair value estimated accordance sfas 123r additionally compensation cost recognized based awards ultimately expected vest therefore reduced cost estimated forfeitures based historical forfeiture rates sfas 123r requires forfeitures estimated time grant revised necessary subsequent periods reflect actual forfeitures result adoption sfas 123r balance unearned compensation recorded stockholders’ equity january 1 2006 124 million net tax reclassified reduced balance capital excess par value fasb staff position fas 123 r3 “transition election related accounting tax effects sharebased payment awards” “fsp 123r3” provides alternative method calculating excess tax benefits “apic pool” method defined sfas 123r onetime election adopt transition method fsp 123r3 available entities adopting sfas 123r company calculated apic pool using alternative method outlined fsp 123r3 following table summarizes stockbased compensation costs recognized sfas 123r year ended december 31 2006 apb 25 years ended december 31 2005 2004 stockbased compensation costs capitalized amounts material application sfas 123r following effect reported amounts year ended december 31 2006 compared amounts would reported using intrinsic value method pursuant previous accounting method baker hughes incorporated notes consolidated financial statements continued following table illustrates pro forma effect net income earnings per share years ended december 31 2005 2004 recognized compensation expense applying fair value based method awards provided sfas 123 stock options restricted stock awards units currently 325 million shares authorized issuance december 31 2006 approximately 102 million shares available future grants policy issue new shares exercises stock options vesting restricted stock awards units issuances employee stock purchase plan stock options stock option plans provide issuance incentive nonqualified stock options directors officers key employees exercise price equal fair market value stock date grant although subject terms stock option agreement substantially stock options become exercisable three equal annual installments beginning year date grant generally expire ten years date grant stock option plans provide acceleration vesting upon employee’s retirement therefore reduced service period employees become retirement eligible vesting period accordingly recognition compensation expense employees accelerated compensation cost related stock options recognized straightline basis vesting service period net forfeitures fair value stock option granted estimated date grant using blackscholes option pricing model following table presents weighted average assumptions used option pricing model options granted expected life options represents period time options expected outstanding years 2005 2004 expected life based historical trends year ended december 31 2006 expected life based historical exercise trends postvest termination data incorporated forward looking stock price model years 2005 2004 expected volatility based historical volatility stock period approximating expected life year ended december 31 2006 allowed securities exchange commission’s staff accounting bulletin 107 “sab 107” expected volatility based implied volatility forecast implied prices actively traded options purchase stock observed market riskfree interest rate based observed us treasury yield curve effect time options granted dividend yield based history dividend payouts baker hughes incorporated notes consolidated financial statements continued summary stock option activity related information presented thousands except per option prices total intrinsic value stock options defined amount market price underlying stock date exercise exceeds exercise price option exercised 2006 2005 2004 736 million 846 million 536 million respectively income tax benefit realized stock options exercised 169 million year ended december 31 2006 total fair value options vested 2006 2005 2004 202 million 204 million 315 million respectively december 31 2006 121 million total unrecognized compensation cost related nonvested stock options expected recognized weighted average period 19 years following table summarizes information stock options outstanding december 31 2006 thousands except per option prices remaining life aggregate intrinsic value stock options outstanding december 31 2006 1216 million 822 million relates awards vested exercisable 395 million relates awards expected vest intrinsic value stock options outstanding calculated amount quoted price 7466 common stock december 31 2006 exceeds exercise price options restricted stock awards units addition stock options officers directors key employees may granted restricted stock awards “rsa” award common stock exercise price restricted stock units “rsu” unit represents right receive end stipulated period one unrestricted share stock exercise price rsas rsus subject cliff graded vesting generally ranging three five year period determine fair value restricted stock awards restricted stock units based market price common stock date grant compensation cost rsas rsus primarily recognized straightline basis vesting service period net forfeitures baker hughes incorporated notes consolidated financial statements continued summary rsa rsu activity related information presented thousands except per shareunit prices weighted average grant date fair value per share rsas 2005 2004 4428 4222 respectively weighted average grant date fair value per share rsus 2005 4260 rsus granted 2004 total grant date fair value rsas rsus vested 2006 2004 106 million 23 million respectively rsas rsus vested 2005 december 31 2006 259 million 48 million total unrecognized compensation cost related nonvested rsas rsus respectively expected recognized weighted average period 21 years employee stock purchase plan employee stock purchase plan “espp” allows eligible employees purchase shares stock 85 market value first last business day whichever lower calendar year purchases limited 10 employee’s base salary currently 145 million shares authorized issuance espp december 31 2006 29 million shares reserved future issuance espp compensation expense determined sfas 123r year ended december 31 2006 calculated using blackscholes option pricing model following assumptions calculated estimated volatility using historical daily prices based expected life stock purchase plan riskfree interest rate based observed us treasury yield curve effect time espp shares granted dividend yield based history dividend payouts note 5 sale interest investments affiliates investments affiliates accounted using equity method accounting significant affiliates 30 interest westerngeco seismic venture jointly owned schlumberger limited “schlumberger” april 28 2006 sold 30 interest westerngeco schlumberger 24 billion cash recorded pretax gain 17435 million 10352 million net tax prior sale 2006 2005 received distributions 596 million 300 million respectively westerngeco recorded reductions carrying value investment 2005 received 133 million schlumberger related trueup payment associated revenues earned westerngeco four year period ending november 2004 party’s contributed multiclient seismic data libraries recorded 130 million reduction carrying value investment westerngeco 03 million interest income tax effect 33 million related payment included provision income taxes year ended december 31 2005 baker hughes incorporated notes consolidated financial statements continued november 2000 entered agreement westerngeco whereby westerngeco subleases facility us period ten years current market rates 2006 entered extension sublease five additional years rent determined based market rates 2010 2006 2005 2004 received payments 56 million 65 million 55 million respectively westerngeco related lease february 2004 completed sale minority interest petreco international venture entered 2001 358 million 74 million placed escrow pending outcome potential indemnification obligations pursuant sales agreement escrow received full following table includes summarized unaudited combined financial information affiliates account interests using equity method accounting included table operating financial position results westerngeco march 31 2006 recent date information available information affiliates december 31 december 31 2006 2005 excess investments recorded balance sheet prorata share shareholders’ equity reported affiliates 84 million 2394 million respectively note 6 income taxes provision income taxes income continuing operations comprised following years ended december 31 baker hughes incorporated notes consolidated financial statements continued geographic sources income continuing operations income taxes follows years ended december 31 tax benefits 194 million 198 million 125 million associated exercise employee stock options allocated equity recorded capital excess par value years ended december 31 2006 2005 2004 respectively provision income taxes differs amount computed applying us statutory income tax rate income continuing operations income taxes reasons set forth years ended december 31 2006 provided 7083 million taxes related sale interest westerngeco approximately 981 million tax provision excess us statutory income tax rate due taxes provided expected repatriation nonus proceeds received transaction larger us tax gain due lower tax basis compared book basis 2005 recognized 106 million deferred tax asset attributable cumulative temporary difference carrying values supplemental retirement plan “srp” financial reporting income tax purposes effect reducing tax expense received tax assessments various tax authorities currently varying stages appeals litigation regarding matters provided amounts believe ultimately result proceedings believe substantial defenses questions raised pursue legal remedies unfavorable outcome result provided taxes believe ultimately payable result assessments aggregate assessments approximately 362 million excess taxes provided consolidated financial statements addition aforementioned assessments received various tax authorities provide taxes certain situations assessments received situations consider probable taxes ultimately payable exceed amounts reflected filed tax returns accordingly taxes provided situations guidance sfas 5 accounting contingencies included income taxes current liabilities deferred income taxes tax liabilities consolidated balance sheets december 31 2006 2005 deferred income taxes tax liabilities reflected consolidated balance sheets 3002 million 2281 million respectively include 1083 million 306 million deferred tax liabilities 1919 million 1975 million longterm tax liabilities july 2006 fasb issued fin 48 clarifies accounting uncertainty income taxes recognized entity’s financial statements accordance sfas 109 accounting income taxes prescribes recognition threshold measurement attribute financial statement disclosure tax positions taken expected taken tax return fin 48 effective fiscal years beginning december 15 2006 adopted fin 48 january 1 2007 currently estimate cumulative effect adopting fin 48 reduction consolidated retained earnings january 1 2007 range 450 million 600 million baker hughes incorporated notes consolidated financial statements continued deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards tax effects temporary differences carryforwards follows december 31 record valuation allowance likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions provided valuation allowance operating loss carryforwards certain nonus jurisdictions operations decreased currently ceased withdrawn entirely provided us additional foreign taxes anticipated repatriation certain earnings foreign subsidiaries consider undistributed earnings foreign subsidiaries amount already provided indefinitely reinvested intention repatriate earnings additional foreign earnings could become subject additional tax remitted deemed remitted dividend however practicable estimate additional amount taxes payable december 31 2006 approximately 140 million foreign tax credits may carried forward indefinitely applicable foreign law 67 million state tax credits expiring varying amounts 2016 2021 operating loss carryforwards without valuation allowance expire varying amounts next twenty years note 7 earnings per share reconciliation number shares used basic diluted eps computations follows years ended december 31 baker hughes incorporated notes consolidated financial statements continued note 8 inventories comprised following december 31 note 9 property comprised following december 31 note 10 goodwill intangible assets changes carrying amount goodwill detailed segment baker hughes incorporated notes consolidated financial statements continued perform annual impairment test goodwill october 1 every year impairments goodwill 2006 2005 2004 related annual impairment test intangible assets comprised following december 31 intangible assets amortized either straightline basis estimated useful lives ranging 1 20 years basis reflects pattern economic benefits intangible assets expected realized range 15 30 years amortization expense included net income years ended december 31 2006 2005 2004 200 million 152 million 149 million respectively estimated amortization expense subsequent five fiscal years expected within range 134 million 204 million note 11 indebtedness total debt consisted following december 31 december 31 2006 10578 million credit facilities commercial banks 5000 million committed revolving credit facility “facility” expires july 2011 facility provides two oneyear extensions subject approval acceptance lenders among conditions addition facility contains provision allow baker hughes incorporated notes consolidated financial statements continued increase facility amount additional 5000 million subject approval acceptance lenders among conditions facility contains certain covenants among things require maintenance funded indebtedness total capitalization ratio defined formula per facility less equal 060 restrict certain merger transactions sale substantially assets company significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations facility may accelerated events default include payment defaults lenders facility covenant defaults customary defaults december 31 2006 compliance facility covenants direct borrowings facility year ended december 31 2006 however extent outstanding commercial paper ability borrow facility reduced december 31 2006 outstanding commercial paper prior years terminated various interest rate swap agreements prior scheduled maturities resulting net gains net gains deferred amortized net reduction interest expense remaining life underlying debt securities unamortized net deferred gains 105 million 155 million included 625 notes due january 2009 reported longterm debt consolidated balance sheets december 31 2006 2005 respectively maturities debt december 31 2006 follows 2007 13 million 2008 00 million 2009 5345 million 2010 00 million 2011 00 million 5393 million thereafter note 12 financial instruments fair value financial instruments financial instruments include cash shortterm investments receivables payables debt foreign currency forward contracts except described estimated fair value financial instruments december 31 2006 2005 approximates carrying value reflected consolidated balance sheets fair value debt foreign currency forward contracts estimated based quoted year end market prices estimated fair value total debt december 31 2006 2005 11710 million 12336 million respectively differs carrying amounts 10751 million 10879 million respectively included consolidated balance sheets foreign currency forward contracts december 31 2006 entered several foreign currency forward contracts notional amounts aggregating 1050 million hedge exposure currency fluctuations various foreign currency payables receivables including british pound sterling norwegian krone euro indonesian rupiah brazilian real contracts designated qualify fair value hedging instruments based quoted market prices december 31 2006 contracts similar terms maturity dates recorded loss 02 million adjust foreign currency forward contracts fair market value loss offsets designated foreign currency exchange gains resulting underlying exposures included selling general administrative expense consolidated statement operations december 31 2005 entered several foreign currency forward contracts notional amounts aggregating 650 million hedge exposure currency fluctuations various foreign currency payables receivables including british pound sterling norwegian krone euro brazilian real contracts designated qualified fair value hedging instruments based quoted market prices december 31 2005 contracts similar terms maturity dates recorded gain 01 million adjust foreign currency forward contracts fair market value gain offsets designated foreign currency exchange losses resulting underlying exposures included selling general administrative expense consolidated statement operations counterparties foreign currency forward contracts major financial institutions credit ratings concentration risk financial institutions monitored continuing basis unlikely event counterparties fail meet terms foreign currency contract exposure limited foreign currency exchange rate differential baker hughes incorporated notes consolidated financial statements continued concentration credit risk sell products services numerous companies oil natural gas industry although concentration could affect overall exposure credit risk believe exposed minimal risk since majority business conducted major companies within industry perform periodic credit evaluations customers’ financial condition generally require collateral accounts receivable cases require payment advance security form letter credit bank guarantee maintain cash deposits major banks may exceed federally insured limits periodically assess financial condition institutions believe risk loss minimal note 13 segment related information provider drilling formation evaluation completion production products services worldwide oil natural gas industry historically reported results three segments drilling evaluation completion production westerngeco segment consisted 30 interest westerngeco sold april 2006 report results productline focused divisions two segments drilling evaluation segment completion production segment aggregated divisions within segment similar economic characteristics longterm financial performance divisions affected similar economic conditions also operate markets include major oil natural gas producing regions world results segment evaluated regularly chief operating decision maker deciding allocate resources assessing performance accounting policies segments described note 1 notes consolidated financial statements • drilling evaluation segment consists baker hughes drilling fluids drilling fluids hughes christensen oilfield drill bits inteq drilling measurementwhiledrilling loggingwhiledrilling baker atlas wireline formation evaluation wireline completion services divisions drilling evaluation segment provides products services used drill evaluate oil natural gas wells • completion production segment consists baker oil tools workover fishing completion equipment baker petrolite oilfield specialty chemicals centrilift electrical submersible pumps progressing cavity pumps divisions productionquest business unit completion production segment provides equipment services used completion phase productive life oil natural gas wells performance segments evaluated based segment profit loss defined income continuing operations income taxes interest expense interest dividend income accounting changes “corporate other” column includes corporaterelated items pretax gain sale interest westerngeco 17435 million financial charge 461 million recorded connection settlement negotiations sec doj results insignificant operations relates segment profit loss income expense allocated segments “corporate other” column also includes assets discontinued operations december 31 2005 2004 summarized financial information shown following table baker hughes incorporated notes consolidated financial statements continued years ended december 31 2006 2005 2004 revenues attributable one customer accounted 10 total revenues following table presents details “corporate other” segment profit loss years ended december 31 baker hughes incorporated notes consolidated financial statements continued following table presents details “corporate other” total assets december 31 following table presents consolidated revenues country based location use products services years ended december 31 following table presents net property country based location asset december 31 baker hughes incorporated notes consolidated financial statements continued note 14 employee benefit plans defined benefit plans noncontributory defined benefit pension plans “pension benefits” covering employees primarily us uk germany us merged two pension plans effective january 1 2007 resulting one taxqualified us pension plan baker hughes incorporated pension plan “bhipp” provisions bhipp hypothetical cash balance account established participant accounts receive pay credits quarterly basis quarterly pay credit based percentage according employee’s age last day quarter applied quarterly eligible compensation addition quarterly pay credits cash balance account receives interest credits based balance account last day quarter bhipp also includes frozen accrued benefits participants legacy defined benefit plans majority participants uk pension plans accrue benefits plans frozen however limited number members still accrue future benefits defined benefit basis germany pension plan unfunded plan benefits based creditable years service creditable pay accrual rates also provide certain postretirement health care life insurance benefits “other postretirement benefits” unfunded plan substantially us employees retire met certain age service requirements adoption sfas 158 september 2006 fasb issued sfas 158 requires employer recognize overfunded underfunded status defined benefit postretirement plan asset liability statement financial position recognize changes funded status year changes occur comprehensive income additionally requires employer measure funded status plan date year end statement financial position limited exceptions sfas 158 effective end fiscal year ending december 15 2006 however requirement measure plan assets benefit obligations date employer’s fiscal year end statement financial position effective fiscal years ending december 15 2008 adopted requirements sfas 158 december 31 2006 except funded status measurement date requirement adopted december 31 2008 allowed sfas 158 incremental effect applying sfas 158 individual line items balance sheet december 31 2006 provided table incremental effect assets consists decrease 1208 million related prepaid pension assets offset increase 216 million related deferred tax assets incremental effect accumulated comprehensive loss “aocl” net tax impact 216 million baker hughes incorporated notes consolidated financial statements continued funded status reconciliation beginning ending balances benefit obligations fair value plan assets funded status plans pension plans benefit obligation projected benefit obligation “pbo” postretirement benefit plans benefit obligation accumulated postretirement benefit obligation “apbo” measurement date plan assets obligations october 1 year presented amounts recognized consolidated balance sheet consist following december 31 weighted average asset allocations asset category plans follows december 31 baker hughes incorporated notes consolidated financial statements continued investment committee meets quarterly review portfolio returns determine assetmix targets based assetliability studies thirdparty investment consultant assisted us developing asset allocation strategy determine expected rate return expected risk various investment portfolios investment committee considered studies formal establishment current assetmix targets based projected risk return levels asset class accumulated benefit obligation “abo” actuarial present value pension benefits attributed employee service date present compensation levels abo differs pbo abo include assumptions future compensation levels abo us plans 2609 million 2329 million december 31 2006 2005 respectively abo nonus plans 3533 million 2792 million december 31 2006 2005 respectively information plans abos excess plan assets follows december 31 weighted average assumptions used determine benefit obligations plans follows years ended december 31 development discount rate us plans based bond matching model whereby hypothetical bond portfolio highquality fixedincome securities selected match cash flows underlying projected benefit obligation discount rate assumption nonus plans reflects market rate highquality fixedincome securities accumulated comprehensive loss amounts recognized accumulated comprehensive loss “aocl” consist following december 31 2006 estimated net loss prior service cost defined benefit pension plans amortized accumulated comprehensive loss net periodic benefit cost next fiscal year 33 million 07 million respectively estimated prior service cost postretirement benefits amortized accumulated comprehensive loss net periodic benefit cost next fiscal year 10 million baker hughes incorporated notes consolidated financial statements continued net periodic benefit costs components net periodic benefit cost follows years ended december 31 weighted average assumptions used determine net periodic benefit costs plans follows years ended december 31 selecting expected rate return plan assets consider average rate earnings expected funds invested provide benefits plans includes considering trusts’ asset allocation expected returns likely earned life plans expected cash flows pension plans make annual contributions plans amounts equal greater amounts necessary meet minimum governmental funding requirements result merger us plans bhipp overfunded therefore required intend make pension contributions bhipp 2007 currently estimate required make contributions bhipp five eight years thereafter 2007 expect contribute 20 million 30 million nonqualified us pension plans 130 million 150 million nonus pension plans following table presents expected benefit payments next ten years us nonus pension benefit payments made respective pension trust funds postretirement benefits net expected medicare subsidies approximately 20 million per year payments expected made us baker hughes incorporated notes consolidated financial statements continued health care cost trend rates assumed health care cost trend rates significant effect amounts reported postretirement welfare benefits plan december 31 2006 health care cost trend rate 90 employees age 65 66 participants age 65 declining gradually successive year reaches 50 employees age 65 age 65 2011 one percentage point change assumed health care cost trend rates would following effects 2006 defined contribution plans periods reported generally us employees eligible participate sponsored thrift plan 401k plan internal revenue code 1986 amended “the code” thrift plan allows eligible employees elect contribute 1 50 salaries investment trust employee contributions matched cash us rate 100 per 100 employee contribution first 3 050 per 100 employee contribution next 2 employee’s salary beginning january 1 2007 match employee contributions cash rate 100 per 100 employee contribution first 5 employee’s salary contributions vest immediately addition make cash contributions eligible employees 2 5 salary depending employee’s age prior january 1 2007 contributions become fully vested employee five years employment beginning january 1 2007 contributions fully vested employee three years employment thrift plan provides ten different investment options employee sole discretion determining employer employee contributions invested contributions thrift plan several nonus defined contribution plans amounted 1022 million 865 million 755 million 2006 2005 2004 respectively certain nonus employees eligible participate thrift plan provide nonqualified defined contribution plan provides basically benefits thrift plan addition provide nonqualified supplemental retirement plan “srp” certain officers employees whose benefits thrift plan andor us defined benefit pension plan limited federal tax law srp also allows eligible employees defer portion eligible compensation provides employer matching base contributions pursuant limitations nonqualified plans invested trusts assets corresponding liabilities included consolidated balance sheet contributions nonqualified plans 83 million 72 million 61 million 2006 2005 2004 respectively postemployment benefits provide certain postemployment disability income medical benefits substantially qualifying former inactive us employees income benefits longterm disability provided fullyinsured plan continuation medical benefits disability “continuation benefits” provided qualified selfinsured plan accrued postemployment liability continuation benefits december 31 2006 2005 176 million 175 million respectively included liabilities consolidated balance sheet note 15 commitments contingencies leases december 31 2006 longterm noncancelable operating leases covering certain facilities equipment minimum annual rental commitments net amounts due subleases five years period ending december 31 2011 820 million 574 million 408 million 285 million 216 million respectively 1379 million aggregate thereafter entered significant capital leases baker hughes incorporated notes consolidated financial statements continued litigation involved litigation proceedings arisen ordinary business activities insure risks extent deemed prudent management extent insurance available assurance given nature amount insurance sufficient fully indemnify us liabilities arising pending future legal proceedings many insurance policies contain deductibles selfinsured retentions amounts deem prudent responsible payment determining amount selfinsurance policy selfinsure losses predictable measurable recurring nature claims automobile liability general liability workers compensation record accruals uninsured portion losses related types claims accruals losses calculated estimating losses claims using historical claim data specific loss development factors information necessary march 29 2002 announced advised securities exchange commission “sec” department justice “doj” conducting investigations allegations violations law relating nigeria related matters sec issued formal order investigation possible violations provisions foreign corrupt practices act “fcpa” regarding antibribery books records internal controls sec issued subpoenas seeking information operations angola subpoena dated august 6 2003 kazakhstan subpoenas dated august 6 2003 april 22 2005 part ongoing investigation providing documents cooperating fully sec doj sec issued subpoenas otherwise asked interviews current former employees connection investigations regarding nigeria angola kazakhstan addition conducted internal investigations matters internal investigations identified issues regarding propriety certain payments apparent deficiencies books records internal controls respect certain operations nigeria angola kazakhstan well potential liabilities governmental authorities nigeria investigation nigeria substantially completed first quarter 2003 based upon current information expect potential liabilities material adverse effect consolidated financial statements internal investigations angola kazakhstan substantially completed third quarter 2004 evidence obtained course investigations provided sec doj 2004 received subpoena grand jury southern district new york regarding goods services delivered iraq 1995 2003 united nations oilforfood program 2004 also received request sec provide written statement certain information regarding participation program responded subpoena request may provide additional materials doj sec agencies authorities broad range civil criminal sanctions may seek impose corporations individuals appropriate circumstances including limited injunctive relief disgorgement fines penalties modifications business practices compliance programs agencies authorities entered agreements obtained range sanctions several public corporations individuals arising allegations improper payments deficiencies books records internal controls whereby civil criminal penalties imposed including cases multimillion dollar fines sanctions company engaged settlement discussions doj sec concerning issues nigeria angola kazakhstan assurance discussions result resolution issues however determined settlement discussions likely result resolution include civil criminal sanctions well significant fines penalties best estimate associated financial charge 461 million recorded fourth quarter 2006 included selling general administrative expenses resolution concluded believe probable doj sec seek civil criminal sanctions us well fines penalties ultimately imposed agreed settlement fines penalties may exceed current amount estimated reserved possible accurately predict time investigations finally resolved environmental matters past present operations include activities subject extensive domestic including us federal state local international environmental regulations regard air water quality environmental matters environmental procedures policies practices designed ensure compliance existing laws regulations minimize possibility significant environmental damage baker hughes incorporated notes consolidated financial statements continued involved voluntary remediation projects present former manufacturing locations facilities majority relate properties obtained acquisitions sites longer actively used operations rare occasions remediation activities conducted specified government agencyissued consent decree agreed order remediation costs accrued based estimates probable exposure using currently available facts existing environmental permits technology presently enacted laws regulations remediation cost estimates include direct costs related environmental investigation external consulting activities governmental oversight fees treatment equipment costs associated longterm operation maintenance monitoring remediation project also identified potentially responsible party “prp” remedial activities related various superfund sites participate process set joint participation defense agreement negotiate government agencies identify prps determine prp’s allocation estimate remediation costs accrued believe prorata share total estimated cost remediation associated management superfund sites share based upon ratio estimated volume waste contributed site bears total estimated volume waste disposed site applicable united states federal law imposes joint several liability prp cleanup sites leaving us uncertainty may responsible remediation cost attributable prps unable pay share accrual made joint several liability concept superfund sites participation de minimis since believe probability pay material costs volumetric share remote believe prps greater involvement volumetric calculation basis substantial assets may reasonably expected pay share cost remediation superfund sites significant prp remediation costs estimated include recalcitrant parties cases insurance coverage contractual indemnities third parties cover portion ultimate liability total accrual environmental remediation 173 million 174 million includes accruals 59 million 49 million various superfund sites december 31 2006 2005 respectively determination required accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity utilized believe likelihood material losses excess amounts accrued remote normal course business customers vendors others entered offbalance sheet arrangements letters credit bank issued guarantees totaled approximately 3769 million december 31 2006 also commitments outstanding purchase obligations related capital expenditures inventory purchase orders contracts approximately 2537 million december 31 2006 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements note 16 supplemental information product warranty liability changes aggregate product warranty liability follows baker hughes incorporated notes consolidated financial statements continued asset retirement obligations december 31 2005 adopted fasb interpretation 47 conditional asset retirement obligations “fin 47” fin 47 clarifies term “conditional asset retirement obligation” used sfas 143 accounting asset retirement obligations refers legal obligation perform asset retirement activity timing andor method settlement conditional future event may within control entity obligation perform asset retirement activity unconditional even though uncertainty exists timing andor method settlement fin 47 also clarifies entity would sufficient information reasonably estimate fair value asset retirement obligation adoption fin 47 resulted charge 09 million net tax 05 million recorded cumulative effect accounting change consolidated statement operations conjunction adoption recorded conditional asset retirement obligations 16 million fair value costs associated special handling asbestos related materials certain facilities certain facilities contain asbestos related materials liability recognized unable determine time frame obligations may settled normal practice conduct asbestos abatement procedures required contractual requirements related asset disposals facility asbestos subject significant renovation demolished plans expectations sell abandon demolish facilities anticipate need major renovations resulting technological operations changes factors expect facilities operational current state foreseeable future therefore time frame obligations settled cannot determined result sufficient information exist enable us reasonably estimate fair value asset retirement obligation changes asset retirement obligation liability follows accumulated comprehensive loss accumulated comprehensive loss net tax comprised following december 31 baker hughes incorporated notes consolidated financial statements continued supplemental consolidated statement operations information follows years ended december 31 note 17 quarterly data unaudited 1 represents revenues less cost sales cost services rentals research engineering item 9item 8 financial statements supplementary data managements report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rules 13a15f internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles supervision participation management including principal executive officer principal financial officer assessed effectiveness internal control financial reporting based 2013 framework internal control integrated framework issued committee sponsoring organizations treadway commission based assessment principal executive officer principal financial officer concluded internal control financial reporting effective december 31 2016 conclusion based recognition inherent limitations systems internal control inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate deloitte touche llp companys independent registered public accounting firm issued attestation report effectiveness companys internal control financial reporting martin craighead martin craighead chairman chief executive officer kimberly ross kimberly ross senior vice president chief financial officer kelly c janzen kelly c janzen vice president controller chief accounting officer houston texas february 7 2017 report independent registered public accounting firm board directors stockholders baker hughes incorporated houston texas audited accompanying consolidated balance sheets baker hughes incorporated subsidiaries company december 31 2016 2015 related consolidated statements income loss comprehensive income loss changes equity cash flows three years period ended december 31 2016 audits also included financial statement schedule ii valuation qualifying accounts listed index item 15 also audited companys internal control financial reporting december 31 2016 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission companys management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion financial statements financial statement schedule opinion companys internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions companys internal control financial reporting process designed supervision companys principal executive principal financial officers persons performing similar functions effected companys board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position baker hughes incorporated subsidiaries december 31 2016 2015 results operations cash flows three years period ended december 31 2016 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also opinion company maintained material respects effective internal control financial reporting december 31 2016 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission deloitte touche llp houston texas february 7 2017 baker hughes incorporated consolidated statements income loss see notes consolidated financial statements baker hughes incorporated consolidated statements comprehensive income loss see notes consolidated financial statements baker hughes incorporated consolidated balance sheets see notes consolidated financial statements baker hughes incorporated consolidated statements changes equity see notes consolidated financial statements baker hughes incorporated consolidated statements cash flows see notes consolidated financial statements baker hughes incorporated notes consolidated financial statements note 1 summary significant accounting policies nature operations baker hughes incorporated baker hughes company us leading supplier oilfield services products technology systems used worldwide oil natural gas industry also provide products services businesses including downstream chemicals process pipeline services basis presentation consolidated financial statements prepared conformity united states generally accepted accounting principles gaap consolidated financial statements include accounts baker hughes subsidiaries exercise control investments subsidiaries whollyowned exercise control equity held minority owners portions net income loss reflected noncontrolling interests investments ability exercise significant influence operating financial policies hold controlling interest accounted using equity method accounting intercompany accounts transactions eliminated consolidation notes consolidated financial statements dollar share amounts tabulations millions dollars shares respectively unless otherwise indicated beginning 2016 merger related costs presented separate line item consolidated statements income loss prior year merger related costs reclassified conform current year presentation see note 2 halliburton merger agreement note 3 general electric transaction agreement information use estimates preparation financial statements conformity gaap requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period base estimates judgments historical experience various assumptions information believed reasonable circumstances estimates assumptions future events effects cannot perceived certainty accordingly estimates may change new events occur experience acquired additional information obtained operating environment changes believe estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts inventory valuation reserves recoverability longlived assets useful lives used depreciation amortization income taxes related valuation allowances accruals contingencies actuarial assumptions determine costs liabilities related employee benefit plans stockbased compensation expense fair value assets acquired liabilities assumed acquisitions revenue recognition products services sold based upon purchase orders contracts agreements customer include fixed determinable prices include right return similar provisions significant postdelivery obligations recognize revenue products sold title risk loss passes collectability reasonably assured significant obligations future performance provisions estimated warranty returns similar arrangements made time related revenue recognized revenue services recognized services rendered collectability reasonably assured rates services typically priced per day per distance drilled per man hour similar basis certain situations revenue generated transactions may include multiple products services one contract agreement may delivered customer extended period time revenue arrangements recognized accordance criteria item service delivered based relative fair value baker hughes incorporated notes consolidated financial statements research engineering research engineering expenses expensed incurred include costs associated research development new products services costs associated sustaining engineering existing products services costs research development new products services 271 million 330 million 430 million years ended december 31 2016 2015 2014 respectively cash equivalents cash equivalents include investments original maturity three months less maintain cash deposits major financial institutions times amounts may exceed federally insured limits monitor credit ratings concentration risk financial institutions continuing basis safeguard cash deposits allowance doubtful accounts establish allowance doubtful accounts based various factors including payment history financial condition customers economic environment provisions doubtful accounts recorded based aging status customer accounts becomes evident customer make required payments either contractual due dates future provision doubtful accounts recorded cost sales 188 million 193 million 102 million years ended december 31 2016 2015 2014 respectively concentration credit risk grant credit customers primarily operate oil natural gas industry although concentration affects overall exposure credit risk trade receivables spread diverse group customers across many countries mitigates risk perform periodic credit evaluations customers financial condition including monitoring customers payment history current credit worthiness manage risk generally require collateral support trade receivables may require payment advance security form letter credit bank guarantee 2016 2015 2014 individual customer accounted 10 consolidated revenue inventories january 1 2016 inventories stated lower cost net realizable value result adoption accounting standard update 201511 described prior adoption standard inventories stated lower cost market cost determined using average cost method includes cost materials labor manufacturing overhead net realizable value estimated selling price ordinary course business less reasonably predictable costs completion disposal transportation necessary record provisions maintain reserves excess slow moving obsolete inventory determine reserve amounts regularly review inventory quantities hand compare estimates future product demand market conditions production requirements technological developments property plant equipment accumulated depreciation property plant equipment ppe stated cost less accumulated depreciation generally provided using straightline method estimated useful lives individual assets significant improvements betterments capitalized extend useful life asset manufacture substantial portion tools equipment cost items includes direct indirect manufacturing costs capitalized carried inventory completed complete cost reflected capital expenditures classified machinery equipment ppe maintenance repairs charged expense incurred upon sale disposition applicable amounts asset cost accumulated depreciation removed balance sheet net amount less proceeds disposal charged credited income capitalized costs computer software developed purchased internal use classified machinery equipment baker hughes incorporated notes consolidated financial statements goodwill intangible assets amortization goodwill excess consideration transferred fair value tangible identifiable intangible assets liabilities recognized acquisitions goodwill intangible assets indefinite lives amortized intangible assets finite useful lives amortized basis reflects pattern economic benefits intangible assets realized generally straightline basis assets estimated useful life impairment goodwill ppe intangibles longlived assets perform annual impairment test goodwill reporting units october 1 frequently event occurs circumstances change indicate likely impairment may exist reporting units based organizational reporting structure five reportable segments corporate assets liabilities allocated reporting units extent relate operations reporting units determining carrying amount performing annual impairment test option first performing qualitative assessment determine existence events circumstances would lead determination likely fair value reporting unit less carrying amount conclusion reached would required perform quantitative impairment assessment goodwill however assessment leads determination likely fair value reporting unit greater carrying amount assessments required quantitative assessment determination impairment made comparing carrying amount reporting unit fair value generally calculated using combination market comparable transaction discounted cash flow approaches see note 12 goodwill intangible assets information goodwill impairment recorded 2016 review ppe intangible assets certain longlived assets impairment whenever events changes circumstances indicate carrying amount may recoverable least annually certain intangible assets determination recoverability made based upon estimated undiscounted future net cash flows amount impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets 2015 2014 performed qualitative assessment annual goodwill impairment test determined likely fair value reporting units exceeded carrying amount time impairments goodwill recorded years ended december 31 2015 2014 income taxes use liability method determining provision liabilities income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates deferred tax liabilities assets computed estimated income tax effect temporary differences financial tax bases assets liabilities determined using tax rate expected effect taxes actually paid recovered valuation allowance reduce deferred tax assets established likely portion deferred tax assets realized currently intend indefinitely reinvest certain earnings foreign subsidiaries operations outside us accordingly provided us income taxes earnings provide us additional nonus taxes earnings anticipated repatriated nonus subsidiaries tax filings various periods subject audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities courts provided amounts believe ultimately result proceedings addition assessments received various tax authorities also provide taxes uncertain tax positions formal assessments received classify interest penalties related uncertain tax positions income taxes financial statements baker hughes incorporated notes consolidated financial statements environmental matters estimated remediation costs accrued using currently available facts existing environmental permits technology enacted laws regulations cost estimates developed based internal evaluations discounted accruals recorded probable obligated pay environmental site evaluation remediation related activities costs reasonably estimated additional information becomes available accruals adjusted reflect current cost estimates ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party us federal state comprehensive environmental response compensation liability act superfund site accrue share estimated remediation costs site share based ratio estimated volume waste contributed site total volume waste disposed site foreign currency number significant foreign subsidiaries designated local currency functional currency gains losses resulting balance sheet translation foreign operations included separate component accumulated comprehensive loss within stockholders equity gains losses foreign currency transactions resulting settlement receivables payables nonfunctional currency included marketing general administrative mga expenses consolidated statements income loss incurred foreign subsidiaries designated us dollar usd functional currency monetary assets liabilities remeasured periodend exchange rates nonmonetary items remeasured historical exchange rates gains losses resulting balance sheet remeasurement also included mga expenses incurred fair value measurement define fair value price would received selling asset paid transfer liability orderly transaction market participants measurement date apply following fair value hierarchy prioritizes inputs used measure fair value three levels bases categorization within hierarchy upon lowest level input available significant fair value measurement • level one use quoted prices active markets identical financial instruments • level two use quoted prices similar instruments active markets quoted prices identical similar instruments markets active inputs observable market corroborated observable market data • level three use significantly unobservable inputs typically require use managements estimates assumptions market participants would use pricing financial instruments financial instruments include cash equivalents accounts receivable investments accounts payable short longterm debt derivative financial instruments except longterm debt estimated fair value financial instruments december 31 2016 2015 approximates carrying value reflected consolidated balance sheets information fair value debt see note 13 indebtedness monitor exposure various business risks including commodity prices foreign currency exchange rates interest rates regularly use derivative financial instruments manage risks policies permit use derivative financial instruments speculative purposes inception new derivative designate derivative hedge determine derivative undesignated hedging instrument document relationships hedging instruments hedged items well risk management objectives strategy undertaking various hedge transactions program utilizes foreign currency forward contracts reduce risks associated effects certain foreign currency exposures program strategy gains losses baker hughes incorporated notes consolidated financial statements foreign currency forward contracts mitigate foreign currency transaction translation gains losses extent practical foreign currency exposures typically arise changes value assets liabilities denominated currencies functional currency foreign currency forward contracts generally settle less 180 days record derivatives end reporting period consolidated balance sheet fair value record changes fair value forward contracts consolidated statements income loss along change fair value hedged item recognized gains losses derivatives entered manage foreign currency exchange risk included mga expenses consolidated statements income loss outstanding foreign currency forward contracts notional amounts aggregating 271 million 499 million hedge exposure currency fluctuations various foreign currencies december 31 2016 2015 respectively based quoted market prices december 31 2016 2015 forward contracts similar terms maturity dates recorded gain 1 million loss 1 million respectively adjust forward contracts fair market value new accounting standards adopted july 2015 financial accounting standards board fasb issued accounting standards update asu 201511 simplifying measurement inventory requires inventory measured using average cost methods utilize subsequently measured lower cost net realizable value net realizable value estimated selling price ordinary course business less reasonably predictable costs completion disposal transportation elected early adopt guidance january 1 2016 believe approach reduces complexity subsequent measurement inventory previously inventory required subsequently measured lower cost market defined replacement cost net realizable value net realizable value less normal profit margin impact adopting standard immaterial financial statements guidance stipulates amendments asu no201511 shall adopted prospective basis therefore adoption impact prior reporting periods new accounting standards adopted may 2014 fasb issued asu 201409 revenue contracts customers asu supersede existing revenue recognition requirements us gaap require entities recognize revenue amount reflects consideration company expects entitled exchange transferring goods services customer new standard also requires significantly expanded disclosures regarding qualitative quantitative information entitys nature amount timing uncertainty revenue cash flows arising contracts customers pronouncement effective annual reporting periods beginning december 15 2017 including interim periods within reporting period applied using retrospective modified retrospective approach early adoption permitted currently evaluating provisions asu 201409 assessing impact may financial position results operations part assessment work todate formed implementation work team completed training new asus revenue recognition model begun contract review documentation november 2015 fasb issued asu 201517 balance sheet classification deferred taxes amends existing guidance income taxes require classification deferred tax assets liabilities noncurrent balance sheet pronouncement effective annual reporting periods beginning december 15 2016 adopted prospectively completed evaluation pronouncement determined reclassification deferred taxes material consolidated financial statements related disclosures february 2016 fasb issued asu 201602 leases new standard accounting leases asu introduces lessee model brings leases balance sheet new standard also aligns many underlying principles new lessor model current accounting guidance well fasbs new revenue recognition standard however asu eliminates use brightline tests determining lease classification required current guidance asu also requires additional qualitative disclosures along specific quantitative disclosures better enable users financial statements assess amount baker hughes incorporated notes consolidated financial statements timing uncertainty cash flows arising leases pronouncement effective annual reporting periods beginning december 15 2018 including interim periods within reporting period using modified retrospective approach early adoption permitted currently evaluating provisions asu 201602 assessing impact consolidated financial statements related disclosures part assessment work todate formed implementation work team completed training new asus lease model implementation team begun review documentation march 2016 fasb issued asu 201609 improvements employee sharebased payment accounting standard provides new requirement record tax effects related sharebased payments settlement expiration income statement pronouncement effective annual reporting periods beginning december 15 2016 completed evaluation pronouncement determined impact upon adoption material consolidated financial statements related disclosures june 2016 fasb issued asu 201613 financial instrumentscredit losses measurement credit losses financial instruments new standard amends impairment model trade receivables net investments leases debt securities loans certain instruments utilize expected loss methodology place currently used incurred loss methodology pronouncement effective annual periods beginning december 15 2019 including interim periods within annual periods early adoption permitted annual periods beginning december 15 2018 currently evaluating provisions pronouncement assessing impact financial statements related disclosures august 2016 fasb issued asu 201615 classification certain cash receipts cash payments standard addresses classification presentation eight specific cash flow issues currently result diverse practices pronouncement effective annual reporting periods beginning december 15 2017 amendments asu applied using retrospective approach completed evaluation impact pronouncement consolidated financial statements related disclosures impact expected material october 2016 fasb issued asu 201616 accounting income taxes intraentity asset transfers assets inventory standard removes prohibition asc 740 immediate recognition current deferred income tax effects intraentity transfers assets inventory pronouncement effective annual reporting periods beginning december 15 2017 amendments asu applied using retrospective approach completed evaluation impact pronouncement consolidated financial statements related disclosures impact expected material note 2 halliburton terminated merger agreement november 16 2014 baker hughes halliburton company halliburton wholly owned subsidiary halliburton merger sub entered agreement plan merger agreement halliburton would acquire outstanding shares baker hughes merger baker hughes merger sub merger accordance provisions section 91 merger agreement baker hughes halliburton agreed terminate merger agreement april 30 2016 result failure merger occur april 30 2016 due inability obtain certain specified antitrust related approvals halliburton paid 35 billion baker hughes may 4 2016 representing termination fee required paid pursuant merger agreement baker hughes incurred costs related merger 180 million 295 million 2016 2015 respectively including costs retention program obligations minimum incentive compensation costs based meeting eligibility criteria treated merger related costs baker hughes incorporated notes consolidated financial statements note 3 general electric transaction agreement october 30 2016 baker hughes general electric company ge bear newco inc newco delaware corporation direct wholly owned subsidiary baker hughes bear mergersub inc merger sub delaware corporation direct wholly owned subsidiary newco entered transaction agreement plan merger transaction agreement pursuant among things merger sub merge baker hughes baker hughes surviving corporation surviving entity direct wholly owned subsidiary newco ii outstanding share baker hughes common stock converted right receive one share class common stock par value 00001 per share newco class common stock iii newco cause surviving entity converted delaware limited liability company newco llc newco become sole managing member newco llc iv ge receive approximate 625 membership interest newco llc exchange contributing 74 billion less class b purchase price defined cash ges oil gas business ge og newco llc b receive class b common stock par value 00001 per share newco class b common stock representing approximately 625 voting power outstanding shares common stock newco exchange contributing par value thereof class b purchase price newco v newco distribute special dividend amount equal 1750 per share holders record newco class common stock former baker hughes stockholders collectively ge transaction newco operate public company immediately following closing ge transaction closing ge hold 100 newco class b common stock represent approximately 625 voting power outstanding shares common stock newco b baker hughes stockholders immediately prior closing hold 100 newco class common stock represent approximately 375 voting power outstanding shares common stock newco ii ge hold approximate 625 membership interest newco llc b newco hold approximate 375 membership interest newco llc iii membership interests newco llc together newco class b common stock exchangeable 11 basis newco class common stock subject certain adjustments rights including voting rights newco class common stock newco class b common stock identical provided newco class b common stock economic rights effective following closing newco subsidiaries operate name baker hughes ge company baker hughes ge made customary representations warranties covenants transaction agreement including among others covenants baker hughes ge subject certain exceptions conduct business case baker hughes ge og case ge ordinary course interim period execution transaction agreement closing particular among restrictions subject certain exceptions baker hughes agreed generally refrain acquiring new businesses incurring new indebtedness repurchasing shares issuing new common stock equity awards equity awards granted employees officers directors materially consistent historical longterm incentive awards granted entering new material contracts commitments outside normal course business without consent ge period execution transaction agreement consummation ge transaction respect equity awards granted transaction agreement officers employees awards vest solely result ge transaction converted equivalent newco equity award however vest entirely officer employee terminated within one year following closing ge transaction baker hughes permitted pay regular quarterly cash dividends stockholders signing closing ge og permitted pay dividends ge signing closing provided ge og required minimum level working capital closing obligation parties consummate ge transaction subject customary closing conditions including among others approval holders majority outstanding shares baker hughes common stock ii expiration termination applicable waiting period hartscottrodino antitrust improvements act 1976 amended b european commission issuing decision council regulation ec 1392004 january 20 2004 control concentrations undertakings published official journal european union january 29 2004 l 241 declaring ge baker hughes incorporated notes consolidated financial statements transaction compatible common market european commission adopted decision article 9 regulations refer ge transaction part member state european economic area european commission issuing decision declaring part ge transaction referred member state compatible common market every member state part transaction referred article 9 issuing decision clearing ge transaction c expiration termination applicable waiting time periods certain regulatory competition laws iii absence legal restraints prohibitions iv effectiveness registration statement form s4 filed newco securities exchange commission approval listing new york stock exchange newco class common stock issued ge transaction v completion material respects certain restructuring transactions connection transaction obligation party consummate ge transaction also conditioned upon partys representations warranties true correct subject certain materiality exceptions party performed material respects obligations transaction agreement addition baker hughes obligation consummate transaction subject financial statementrelated condition described promptly reasonably practicable following december 31 2016 event later april 15 2017 april 30 2017 case september 30 2016 audited financial statements ge required deliver baker hughes certain audited financial statements ge og including required included newcos registration statement form s4 audited financial statements differ unaudited financial statements ge og provided baker hughes manner material intrinsic value ge og adverse manner baker hughes may terminate transaction agreement event termination ge would required reimburse baker hughes certain expenses 40 million ge required take actions necessary obtain regulatory approvals including agreeing divestitures certain specified businesses business forms substantial part specified businesses unless assets businesses product lines subject actions would account 200 million revenue 2015 divestiture specified businesses taken account purposes calculating 200 million divestiture limit subject certain exceptions proceeds divestitures would remain ge og transferred newco llc following closing transaction additionally transaction agreement provides certain termination rights baker hughes ge including ges right terminate transaction agreement baker hughes board directors changes recommendation baker hughes stockholders approve transaction agreement ii baker hughes right terminate transaction agreement prior obtaining approval stockholders enter definitive agreement providing superior proposal iii right party terminate transaction agreement ge transaction consummated termination date january 30 2018 subject partys right extend termination date april 30 2018 closing conditions receipt certain regulatory approvals satisfied january 30 2018 transaction agreement provides payment baker hughes ge termination fee 750 million certain events described transaction agreement occur including baker hughes board directors changes recommendation baker hughes stockholders approve transaction agreement baker hughes also required reimburse ge certain expenses 40 million transaction agreement terminated baker hughes stockholders approved transaction agreement upon vote taken thereon prior baker hughes stockholder meeting proposal alternative transaction publicly announced withdrawn within twelve months termination baker hughes enters agreement providing consummates alternative transaction third party thereby triggering 750 million termination fee described termination fee reduced amount expenses previously reimbursed event transaction agreement terminated either party result failure ge transaction occur termination date may extended due failure achieve certain antitrustrelated approvals closing conditions receipt antitrust specified regulatory approvals conditions nature cannot satisfied closing subject conditions capable satisfied closing date termination satisfied ii either party baker hughes incorporated notes consolidated financial statements result antitrustrelated final nonappealable order injunction prohibiting closing iii baker hughes result ges material breach obligations obtain regulatory approvals antitrustrelated condition closing incapable satisfied case ge would required pay baker hughes termination fee 13 billion baker hughes ge expect ge transaction close mid2017 however baker hughes cannot predict certainty ge transaction completed completion ge transaction subject conditions beyond control baker hughes baker hughes incurred costs 19 million related ge transaction recorded merger related costs fourth quarter 2016 note 4 impairment restructuring charges impairment charges conduct impairment tests longlived assets whenever events changes circumstances indicate carrying value may recoverable based estimated future cash flows although oil prices risen since lows reached february 2016 rig counts begun stabilize customer spending activity remained low levels throughout 2016 resulting lower demand products services considered customers constrained capital spending budgets 2016 impairment indicators accordingly evaluated longlived assets impairment result testing 2016 certain machinery equipment written estimated fair value resulting impairment charges 453 million additionally 2016 certain intangible assets comprised technology customer relationships trade names written estimated fair values resulting impairment charges 114 million total impairment charges 567 million 2016 described segment table estimated fair values assets determined using discounted future cash flows significant level 3 unobservable inputs used determination fair value assets estimated future cash flows weighted average cost capital wacc waccs used discount future cash flows impairments recognized 2016 included table 1 waccs used region 2016 follows europe 105 africa 195 russiacaspian 150 middle east 140 asia pacific 135 result testing 2015 certain machinery equipment total carrying value 164 billion written estimated fair value resulting impairment charges 105 billion additionally certain intangible assets comprised primarily customer relationships trade names total carrying value 178 million written estimated fair values resulting impairment charges 116 million total impairment charges 2015 116 billion majority related pressure pumping business north america wacc used discount future cash flows impairments recognized north america 98 baker hughes incorporated notes consolidated financial statements restructuring charges recognize restructuring charges costs associated workforce reductions contract terminations facility closures impairments related permanent removal service disposal excess machinery equipment result downturn industry 2015 impact business outlook took actions restructure adjust operations cost structure reflect current expected activity levels extent allowable merger agreement halliburton following termination merger agreement second quarter 2016 address ongoing industry challenges took additional actions reduce costs simplify organization refine rationalize operating strategy adjust capacity meet expected levels future demand actions necessitated workforce reductions contract terminations facility closures permanent removal service disposal excess machinery equipment result restructuring activities recorded restructuring charges 117 billion 830 million 2016 2015 respectively depending future market conditions activity levels actions may necessary adjust operations may result additional charges restructuring charges summarized december 31 workforce reduction costs 2016 2015 initiated workforce reductions resulting combined elimination approximately 26200 positions worldwide result workforce reductions recorded charge severance expense 272 million 436 million 2016 2015 respectively net related employee benefit plan gains 9 million 10 million respectively amount accrued unpaid severance based written severance policy ongoing benefit arrangements country mandated scheme positions eliminated 2016 2015 made payments totaling 289 million 365 million respectively relating workforce reductions expect substantially accrued severance remaining paid middle 2017 contract termination costs 2016 2015 incurred costs 192 million 121 million respectively terminate restructure various contracts primarily north america includes accrual costs settle leases closed facilities certain equipment estimated exit costs net expected sublease income also includes costs terminate restructure certain takeorpay supply contracts related purchase materials used pressure pumping operations north america including writeoff 14 million prepayments made 2014 2016 2015 made payments totaling 130 million 81 million respectively relating contract termination costs expect substantially accrued contract termination costs remaining paid end 2017 impairment buildings improvements 2016 2015 consolidated closed certain facilities owned leased recorded related impairment charges 214 million 82 million respectively 2016 total impairment buildings improvements reduced segment assets follows north america 145 million latin america 18 million europeafricarussia caspian 41 million middle eastasia pacific 9 million industrial services 1 million 2015 impairment charges related facilities primarily north america latin america facilities taken service disposed impairment machinery equipment following termination merger agreement halliburton second quarter 2016 evaluated capacity made adjustments align capacity expected future operational levels strategy actions impacted product lines result recognized impairment loss 490 million 2016 relating cost impair excess machinery equipment net realizable value total machinery equipment impairments reduced segment assets follows north america 203 million latin america 80 million europeafricarussia caspian 88 million baker hughes incorporated notes consolidated financial statements middle eastasia pacific 85 million industrial services 34 million 2015 exited substantially downsized presence select markets primarily pressure pumping product line north america latin america result recognized 191 million impairment losses adjust carrying value certain machinery equipment fair value net costs dispose disposing excess machinery equipment substantially complete end 2016 inventory charges 2016 connection evaluation current inventory levels expected future demand align future strategy recorded charges 617 million including 34 million disposal costs 204 million reported cost sales 413 million reported cost services write carrying value inventory deemed excess actions impacted product lines amount inventory writeoff recorded segment follows north america 230 million latin america 84 million europeafricarussia caspian 143 million middle eastasia pacific 117 million industrial services 43 million disposing excess inventory substantially complete end 2016 2015 also recorded charges 194 million 37 million reported cost sales 157 million reported cost services write carrying value certain inventory writedown primarily due lower cost market adjustments triggered significant decline activity related prices products coupled declines replacement costs product lines impacted primarily pressure pumping drilling completion fluids north america note 5 acquisitions dispositions aquisitions september 2014 completed acquisition pipeline specialty services business weatherford international ltd pss total cash consideration 248 million pss provides expanded range precommissioning deepwater inline inspection services worldwide included industrial services segment transaction accounted using acquisition method accounting accordingly assets acquired liabilities assumed recorded fair values acquisition date result acquisition recorded approximately 73 million goodwill approximately 37 million intangible assets pro forma results operations acquisition presented effect acquisition material consolidated financial statements dispositions december 2016 closed transaction contemplated contribution agreement among baker hughes csl capital management csl west street energy partners wsep fund managed merchant banking division goldman sachs create north american onshore pressure pumping company called bj services llc bj services terms agreement contributed whollyowned north american onshore cementing hydraulic fracturing business comprised us canada operations also includes personnel technology infrastructure net book value assets contributed totaled approximately 516 million comprised fixed assets inventory certain patents technology also allocated goodwill contributed business 139 million received consideration 142 million cash net 8 million direct transaction fees 467 interest bj services recorded equity method investment valued 416 million included assets consolidated balance sheet resulted loss deconsolidation business 97 million provide customary support services transition period bj services access certain baker hughes pressure pumping technology licensing agreement utilizing strategic collaboration access bj services product service portfolio continue provide solutions customers north american onshore market revenue operations totaled 231 million 127 billion 430 billion 2016 2015 2014 respectively operating loss tax allocations indirect costs expenses totaled 251 million 2016 559 million 2015 operating profit tax allocations indirect baker hughes incorporated notes consolidated financial statements costs expenses 2014 totaled 279 million see note 6 segment information description operating profit loss tax note 6 segment information supplier oilfield services products technology systems worldwide oil natural gas business referred oilfield operations managed operating segments aligned geographic regions also provide services products downstream chemicals process pipeline services referred industrial services performance operating segments evaluated based operating profit loss tax defined income loss income taxes following net interest expense corporate expenses impairment restructuring charges goodwill impairment charges merger termination fee loss sale business interest loss early extinguishment debt certain gains losses allocated operating segments beginning 2016 excluded merger related costs terminated halliburton proposed ge transactions operating segments costs presented separate line item consolidated statement income loss prior year merger related costs reclassified conform current year presentation following table presents revenue operating profit loss tax segment years ended december 31 baker hughes incorporated notes consolidated financial statements following table presents total assets segment december 31 shared assets consist primarily assets carried enterprise level include assets related supply chain product line technology information technology organizations assets used support operating segments consist primarily manufacturing inventory property plant equipment used manufacturing information technology intangible assets related technology certain deferred tax assets costs expenses organizations including depreciation amortization allocated operating segments enterprise organizations support global operations corporate assets include cash certain facilities equity method investment bj services certain noncurrent assets related certain employee retirement plans following table presents capital expenditures depreciation amortization segment years ended december 31 baker hughes incorporated notes consolidated financial statements following tables present geographic consolidated revenue based location product shipped services performed years ended december 31 net property plant equipment geographic location december 31 amounts industrial services included applicable geographic locations following table presents consolidated revenue category similar products services years ended december 31 note 7 stockbased compensation stockbased compensation cost measured date grant based calculated fair value award generally recognized straightline basis vesting period equity grant compensation cost determined based awards ultimately expected vest therefore reduced cost estimated forfeitures based historical forfeiture rates forfeitures estimated time grant revised necessary subsequent periods reflect actual forfeitures stockbased compensation costs capitalized amounts material baker hughes incorporated notes consolidated financial statements stockbased compensation costs follows years ended december 31 stock options restricted stock awards units currently 607 million shares authorized issuance december 31 2016 approximately 169 million shares available future grants policy issue new shares exercises stock options restricted stock awards granted vesting restricted stock units issuances employee stock purchase plan stock options stock option plans provide issuance stock options directors officers key employees exercise price equal fair market value stock date grant although subject terms stock option agreement substantially stock options become exercisable three equal annual installments beginning year date grant generally expire ten years date grant stock option plans provide acceleration vesting upon employees retirement therefore service period reduced employees become retirement eligible vesting period accordingly recognition compensation expense employees accelerated stock options granted 2016 2015 fair value stock option granted estimated using blackscholes option pricing model following table presents weighted average assumptions used option pricing model options granted expected life options represents period time options expected outstanding expected life based historical exercise trends postvest termination data incorporated forwardlooking stock price model expected volatility based implied volatility forecast implied prices actively traded options purchase stock observed market riskfree interest rate based observed us treasury yield curve effect time options granted dividend yield based history dividend payouts baker hughes incorporated notes consolidated financial statements following table presents changes stock options outstanding related information thousands except per option prices weighted average remaining contractual term options outstanding options exercisable december 31 2016 377 years 366 years respectively total intrinsic value stock options defined amount market price common stock date exercise exceeds exercise price option exercised 2016 2015 2014 11 million 15 million 70 million respectively income tax benefit realized stock options exercised 1 million 38 million 196 million 2016 2015 2014 respectively total fair value options vested 2016 2015 2014 13 million 24 million 29 million respectively december 31 2016 1 million total unrecognized compensation cost related unvested stock options expected recognized weighted average period six months total intrinsic value stock options outstanding december 31 2016 97 million 96 million relates options vested exercisable intrinsic value stock options outstanding calculated amount quoted price 6497 common stock end 2016 exceeds exercise price options restricted stock awards units addition stock options officers directors key employees may granted restricted stock awards rsa award common stock exercise price restricted stock units rsu unit represents right receive end stipulated period one unrestricted share stock exercise price rsas rsus subject cliff graded vesting generally ranging three year period one year period nonemployee directors determine fair value restricted stock awards restricted stock units based market price common stock date grant following table presents combined changes rsas rsus related information thousands except per awardunit prices baker hughes incorporated notes consolidated financial statements weighted average grant date fair value per share rsas rsus granted 2016 2015 2014 4056 5737 6967 respectively total fair value rsas rsus vested 2016 2015 2014 100 million 72 million 60 million respectively december 31 2016 110 million total unrecognized compensation cost related unvested rsas rsus expected recognized weighted average period two years employee stock purchase plan employee stock purchase plan espp provides eligible employees purchase shares aftertax basis amount 1 10 annual pay june 30 year 15 discount fair market value common stock january 1 june 30 whichever lower ii december 31 year 15 discount fair market value common stock july 1 december 31 whichever lower employee may contribute 5000 either sixmonth measurement periods described 10000 annually currently 305 million shares authorized issuance december 31 2016 27 million shares reserved future issuance compensation cost years ended december 31 calculated using blackscholes option pricing model following assumptions calculated estimated volatility using historical daily prices based expected life stock purchase plan riskfree interest rate based observed us treasury yield curve effect time espp shares granted dividend yield based history dividend payouts note 8 income taxes provision benefit income taxes comprised following years ended december 31 baker hughes incorporated notes consolidated financial statements geographic sources loss income taxes follows years ended december 31 benefit provision income taxes differs amount computed applying us statutory income tax rate loss income taxes reasons set forth years ended december 31 deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes well operating loss tax credit carryforwards tax effects temporary differences carryforwards follows december 31 baker hughes incorporated notes consolidated financial statements december 31 2016 approximately 127 million foreign tax credits may carried forward indefinitely applicable foreign law 59 million foreign tax credits 28 million credits expire 2017 2036 us tax law decrease tax credit carryforwards approximately 244 million primarily due utilization foreign tax credits us tax law primarily due 35 billion termination fee received halliburton see note 2 halliburton terminated merger agreement generated sufficient taxable income 2016 resulting utilization foreign tax credit carryforwards existed december 31 2015 additionally 111 billion net operating loss carryforwards approximately 435 million expire within five years 142 million expire twenty years remainder carried forward indefinitely record valuation allowance likely portion deferred tax assets realized ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future appropriate taxing jurisdictions december 31 2016 201 billion valuation allowances recorded various deferred tax assets including foreign net operating losses nol 101 billion us federal foreign tax credit carryforwards 186 million us nols tax credit carryforwards 55 million certain us foreign deferred tax assets 761 million increase valuation allowances due valuation allowances recorded us deferred tax assets well increased foreign deferred tax assets require valuation allowance due significant downturn us market year uncertainty whether us generate sufficient future taxable income utilize us deferred tax assets concluded valuation allowances required 76 million deferred tax assets related foreign net operating loss carryforwards without valuation allowance expect deferred tax assets realized within carryforward period provided relevant us foreign taxes anticipated repatriation certain earnings foreign subsidiaries consider undistributed earnings foreign subsidiaries amount taxes already provided indefinitely reinvested current intention repatriate earnings december 31 2016 cumulative amount foreign earnings upon us income taxes provided approximately 45 billion additional foreign earnings could become subject additional tax remitted deemed remitted dividend computation potential deferred tax liability associated undistributed earnings basis differences practicable 2016 property goodwill impaired written estimated fair value majority currently deductible tax purposes result impairments book basis decreased change tax basis resulting significant change deferred balances comparing 2016 2015 balances december 31 2016 351 million tax liabilities total gross unrecognized tax benefits related uncertain tax positions includes liabilities interest penalties 48 million 26 million respectively prevail uncertain tax positions net effect would result income tax benefit approximately 341 million remaining approximately 10 million offset deferred tax assets represent tax benefits would received different taxing jurisdictions event prevail uncertain tax positions baker hughes incorporated notes consolidated financial statements following table presents changes gross unrecognized tax benefits associated interest penalties included consolidated balance sheets expected amount unrecognized tax benefits change next twelve months due expiring statutes audit activity tax payments competent authority proceedings related transfer pricing final decisions matters subject litigation various taxing jurisdictions operate december 31 2016 approximately 214 million tax liabilities net 2 million tax assets related uncertain tax positions individually insignificant reasonably possible settled within next twelve months december 31 2016 approximately 135 million tax liabilities total gross unrecognized tax benefits included noncurrent portion income tax liabilities settlement period cannot determined however expected within next twelve months conduct business 80 countries subject income taxes taxing jurisdictions operate following table summarizes earliest tax years remain subject examination major taxing jurisdictions operate addition us include foreign jurisdictions historically generated highest tax liability baker hughes incorporated notes consolidated financial statements note 9 earnings per share reconciliation number shares used basic diluted loss earnings per share eps computations follows years ended december 31 1 calculation diluted net loss per share 2016 2015 excludes shares potentially issuable stockbased incentive compensation plans employee stock purchase plan effect included would antidilutive 2 options exercise price exceeds average market price excluded calculation diluted net loss earnings per share effect would antidilutive note 10 inventories net reserves 188 million 278 million 2016 2015 respectively comprised following december 31 2016 wrote carrying value certain excess inventory resulting charges 583 million net existing reserves 272 million addition 2016 accrued 34 million related disposal costs 2015 recorded charges 194 million primarily related lower cost market adjustments due significant decline activity related prices products coupled declines replacement costs see note 4 impairment restructuring charges discussion substantially excess inventory disposed december 31 2016 baker hughes incorporated notes consolidated financial statements note 11 property plant equipment property plant equipment comprised following december 31 depreciation expense relating property plant equipment 109 billion 164 billion 171 billion 2016 2015 2014 respectively 2016 2015 recorded impairment charges relating property plant equipment totaling 116 billion 132 billion respectively see note 4 impairment restructuring charges discussion note 12 goodwill intangible assets changes carrying amount goodwill detailed segment perform annual impairment test goodwill qualitative quantitative basis reporting units october 1 year frequently circumstances indicate impairment may exist reporting unit level second quarter 2016 result termination merger agreement halliburton concluded necessary conduct quantitative goodwill impairment review reporting units five reportable segments goodwill tested impairment using twostep approach first step fair value reporting unit determined compared reporting units carrying value including goodwill fair value reporting unit less carrying value second step goodwill impairment test performed measure amount impairment second step fair value reporting unit allocated assets liabilities reporting unit acquired business combination purchase price equivalent fair value reporting unit excess fair value reporting unit amounts assigned assets liabilities referred implied fair value goodwill implied fair value reporting units goodwill compared actual carrying value goodwill implied fair value goodwill less carrying value goodwill impairment loss recognized difference determined fair value reporting units using combination techniques including discounted cash flows derived longterm plans market approach provides value indications comparison guideline public companies inputs used determine fair values classified level 3 fair value hierarchy based results impairment test second quarter 2016 determined goodwill two reporting units impaired performed second step goodwill impairment test substantially completed actions necessary determination implied fair value goodwill baker hughes incorporated notes consolidated financial statements second quarter 2016 however estimated fair values allocations subject adjustment valuations computations completed third quarter 2016 finalized valuations computations total impairment reflected table addition quantitative assessment performed second quarter 2016 consistent policy also performed annual goodwill impairment test reporting units october 1 2016 assessment performed qualitative basis included consideration changes industry market conditions since performance quantitative analysis second quarter 2016 based increasing oil prices projections increased drilling exploration activity near long term would drive higher customer spending determined likely fair value reporting units exceeded carrying amount time thus additional impairment goodwill necessary fourth quarter 2016 2015 2014 performed qualitative assessment annual goodwill impairment test determined likely fair value reporting units exceeded carrying amount time impairments goodwill recorded years ended december 31 2015 2014 volatility currently exists oil natural gas industry declines future commodity prices customer spending could negatively impact forecasted profitability operating cash flows necessitating future goodwill impairment review depending changes business outlook assumptions underlying fair value measurements reporting units may required recognize additional goodwill impairments intangible assets comprised following december 31 1 2016 2015 recorded impairments relating technology customer relationships trade names intangible assets totaling 114 million 116 million respectively see note 4 impairment restructuring charges discussion intangible assets generally amortized straightline basis estimated useful lives ranging 3 30 years amortization expense years ended december 31 2016 2015 2014 76 million 104 million 107 million respectively estimated amortization expense subsequent five fiscal years expected follows baker hughes incorporated notes consolidated financial statements note 13 indebtedness total debt consisted following december 31 net unamortized discount debt issuance cost estimated fair value total debt december 31 2016 2015 336 billion 432 billion respectively differs carrying amounts 302 billion 404 billion respectively included consolidated balance sheets fair value determined using quoted period end market prices june 2016 purchased 10 billion aggregate outstanding principal amount associated longterm outstanding notes debentures included portions tranche notes debentures pursuant cash tender offer purchases resulted payment earlytender premium including various fees 135 million pretax loss early extinguishment debt 142 million includes premium writeoff portion remaining original debt issue costs debt discounts premiums july 13 2016 entered new fiveyear 25 billion committed revolving credit facility 2016 credit agreement commercial banks maturing july 2021 replaced existing credit facility 25 billion maintained existing commercial paper program previous credit facility maturity date september 2016 maximum combined borrowing time 2016 credit agreement commercial paper program 25 billion 2016 credit agreement contains certain covenants among things require maintenance total debttototal capitalization ratio restrict certain merger transactions sale substantially assets significant subsidiary limit amount subsidiary indebtedness upon occurrence certain events default obligations 2016 credit agreement may accelerated events default include payment defaults lenders 2016 credit agreement covenant defaults customary defaults extent outstanding commercial paper aggregate ability borrow 2016 credit agreement reduced december 31 2016 compliance credit facilitys covenants direct borrowings credit facility 2016 commercial paper program may issue time 25 billion commercial paper maturities 270 days amount available borrow credit facility reduced amount commercial paper outstanding december 31 2016 borrowings outstanding commercial paper program maturities debt five years period ending december 31 2021 aggregate thereafter listed table weighted average interest rate shortterm borrowings outstanding december 31 2016 2015 123 122 respectively baker hughes incorporated notes consolidated financial statements note 14 employee benefit plans defined benefit plans funded unfunded noncontributory defined benefit pension plans pension benefits covering certain employees primarily us uk germany canada provisions us qualified pension plan us pension plan hypothetical cash balance account established participant accounts receive quarterly credits based percentage according employees age last day quarter applied quarterly eligible compensation interest credits based balance account last day quarter uk canada plans frozen majority participants therefore accrue benefits participants germany pension plan unfunded plan benefits based creditable years service creditable pay accrual rates also provide certain postretirement health care benefits postretirement benefits unfunded plan closed group us employees retire met certain age service requirements 2016 2015 result workforce reductions stemming restructuring activities remeasured certain pension postretirement benefit obligations resulted reductions projected benefit obligations 18 million 28 million respectively curtailment gains 9 million 18 million respectively funded status reconciliation beginning ending balances benefit obligations fair value plan assets funded status plans baker hughes incorporated notes consolidated financial statements amounts recognized consolidated balance sheets consist following december 31 funded status position represents difference benefit obligation plan assets projected benefit obligation pbo pension benefits represents actuarial present value benefits attributed employee services compensation includes assumption future compensation levels accumulated benefit obligation abo actuarial present value pension benefits attributed employee service date present compensation levels abo differs pbo abo include assumptions future compensation levels information plans abos excess plan assets follows december 31 weighted average assumptions used determine benefit obligations plans follows years ended december 31 development discount rate us plans substantially nonus plans based bond matching model whereby hypothetical bond portfolio highquality fixedincome securities selected match cash flows underlying projected benefit obligation baker hughes incorporated notes consolidated financial statements accumulated comprehensive loss amount recorded beforetax accumulated comprehensive loss related employee benefit plans consists following december 31 estimated net actuarial loss prior service cost defined benefit pension plans amortized accumulated comprehensive loss included net periodic benefit cost 2017 16 million 08 million respectively estimated prior service credit postretirement benefits amortized accumulated comprehensive loss included net periodic benefit cost 2017 8 million amortization net actuarial loss postretirement benefits accumulated comprehensive loss expected 2017 net periodic cost components net periodic cost follows years ended december 31 weighted average assumptions used determine net periodic cost plans follows years ended december 31 selecting expected rate return plan assets consider average rate earnings expected funds invested provide benefits plans includes considering trusts asset allocation expected returns likely earned life plans baker hughes incorporated notes consolidated financial statements health care cost trend rates assumed health care cost trend rates significant effect amounts reported postretirement benefits december 31 2016 health care cost trend rate 69 employees age 65 declining gradually successive year reaches 45 one percentage point change assumed health care cost trend rates would following effects 2016 plan assets investment committees meet regularly review portfolio returns determine assetmix targets based assetliability studies thirdparty investment consultants assist committees developing asset allocation strategies determine expected rates return expected risk various investment portfolios investment committees considered strategies formal establishment current assetmix targets based projected risk return levels major asset classes majority investments held form units funds hold underlying securities redeemable measurement date investments equities fixedincome funds generally measured fair value based daily closing prices provided active exchanges basis observable marketbased inputs investments hedge funds generally measured fair value basis net asset values provided investment sponsor thirdparty administrator fair values private equity investments real estate funds based appraised values developed using comparable market transactions discounted cash flows us pension plan investment policy us pension plan developed examining historical relationships risk return among asset classes relationship expected behavior us plans assets liabilities investment policy us plan designed provide greatest probability meeting exceeding us plans objectives lowest possible risk evaluating risk investment committee us pension plan us committee reviews longterm characteristics various asset classes focusing balancing risk expected return accordingly us committee selected following six asset classes allowable investments assets us pension plan us equities nonus equities global fixedincome securities real estate hedge funds private equity baker hughes incorporated notes consolidated financial statements table presents fair value assets us pension plan asset category valuation technique december 31 1 multimanager strategy investing fixed income securities funds current allocation includes 39 unconstrained bond funds 25 government bonds 12 corporate bonds 10 government mortgagebacked securities 6 passive index bond 1 commercial mortgagebacked securities 1 shortterm bills notes 1 assetbacked securities 5 cash securities 2 multimanager strategy investing common stocks nonus listed companies using value growth approaches 3 multimanager strategy investing common stocks us listed companies using value growth approaches 4 strategies taking long short positions equities fixed income securities currencies derivative contracts 5 strategy investing global private real estate secondary market using valuebased investment approach 6 partnership making opportunistic investments global basis across asset classes capital structures geographies nonus pension plans investment policies pension plans plan assets primarily canada uk nonus plans cover asset allocations governing boards believe appropriate nonus plans longterm taking account nature liabilities expect incur suitability asset allocations investment policies reviewed periodically ensure alignment plan liabilities baker hughes incorporated notes consolidated financial statements table presents fair value assets nonus plans asset category valuation technique december 31 1 invests mixes global common stocks bonds achieve broad diversification 2 invests canadian dollardenominated high quality corporate bonds 3 invests canadian dollardenominated government issued bonds intended match duration plan liabilities 4 invests passively british pound sterlingdenominated investment grade corporate bonds 5 invests passively british pound sterlingdenominated government issued bonds 6 invests globally high quality corporate bonds 7 invests broad equity funds based securities offered various regions countries equity funds allocated region follows 47 global 32 uk 7 emerging markets 5 north america 5 asia pacific 4 europe 8 invests diversified range property throughout uk principally retail office industrialwarehouse sectors 9 invests range pooled funds include positions swap contracts uk sovereign bonds pooled funds categorized maturities underlying positions pooled funds employ leverage order match uk plans duration inflation baker hughes incorporated notes consolidated financial statements following table presents changes fair value assets determined using level 3 unobservable inputs expected cash flows pension plans make annual contributions plans amounts equal greater amounts necessary meet minimum governmental funding requirements 2017 expect contribute 55 million 60 million funded pension plans following table presents expected benefit payments next ten years us nonus pension benefit payments made respective pension trust funds baker hughes incorporated notes consolidated financial statements defined contribution plans periods reported generally us employees eligible participate sponsored 401k plan thrift plan thrift plan allows eligible employees elect contribute portions salaries investment trust employee contributions matched company cash rate 100 per 100 employee contribution first 5 employees salary contributions vest immediately addition make cash contributions eligible employees 2 5 salary depending employees age contributions fully vested employee three years employment effective april 2016 employer contributions certain plans suspended remainder 2016 employer contributions recommence january 1 2017 thrift plan provides several investment options employee sole investment discretion thrift plan offer companys common stock investment option contributions thrift plan several nonus defined contribution plans amounted 75 million 202 million 263 million 2016 2015 2014 respectively certain nonus employees eligible participate thrift plan provide nonqualified defined contribution international retirement plan provides basically benefits provided thrift plan addition provide nonqualified supplemental retirement plan srp certain officers employees whose benefits thrift plans andor us qualified pension plan limited federal tax law srp also allows eligible employees defer portion eligible compensation provides employer matching base contributions pursuant limitations nonqualified plans invested trusts assets corresponding liabilities included consolidated balance sheets contributions nonqualified plans amounted 9 million 15 million 17 million 2016 2015 2014 respectively 2017 estimate contribute 135 million 145 million defined contribution plans postemployment benefits provide certain postemployment disability income medical benefits substantially qualifying former inactive us employees income benefits longterm disability provided fullyinsured plan continuation medical benefits disability continuation benefits provided qualified selfinsured plan accrued postemployment liability continuation benefits december 31 2016 2015 32 million 34 million respectively included liabilities consolidated balance sheets note 15 commitments contingencies leases december 31 2016 longterm noncancelable operating leases covering certain facilities equipment minimum annual rental commitments net amounts due subleases five years period ending december 31 2021 118 million 62 million 44 million 29 million 19 million respectively 72 million aggregate thereafter rent expense 355 million 514 million 747 million years ended december 31 2016 2015 2014 respectively enter significant capital leases three years ended december 31 2016 litigation subject number lawsuits claims arising conduct business ability predict ultimate outcome matters involves judgments estimates inherent uncertainties record liability contingencies incurrence loss probable amount reasonably estimated including accruals selfinsured losses calculated based historical claim data specific loss development factors information range total possible losses litigation matters cannot reasonably estimated based consideration relevant facts circumstances expect ultimate outcome currently pending lawsuits claims us material adverse effect financial position results operations cash flows however assurance ultimate outcome matters baker hughes incorporated notes consolidated financial statements insure risks arising business extent deemed prudent management extent insurance available assurance given nature amount insurance sufficient fully indemnify us liabilities arising pending future legal proceedings claims insurance policies contain deductibles selfinsured retentions amounts deem prudent responsible payment determining amount selfinsurance policy selfinsure losses predictable measurable recurring nature claims automobile liability general liability workers compensation following lawsuits filed delaware connection merger halliburton subsequent filing lawsuits april 30 2016 merger agreement halliburton terminated described note 2 halliburton terminated merger agreement • november 24 2014 gary molenda purported shareholder company filed class action lawsuit court chancery state delaware chancery court baker hughes companys board directors halliburton red tiger llc wholly owned subsidiary halliburton red tiger together defendants styled gary r molenda v baker hughes inc et al case 10390cb • november 26 2014 second purported shareholder company booth family trust filed substantially similar class action lawsuit delaware chancery court • december 1 2014 new jersey building laborers annuity fund james rice two additional purported shareholders company filed substantially similar class action lawsuits delaware chancery court • december 10 2014 fifth purported shareholder company iron workers midsouth pension fund filed another substantially similar class action lawsuit delaware chancery court • december 24 2014 sixth purported shareholder company annette shipp filed another substantially similar class action lawsuit delaware chancery court lawsuits make substantially similar claims plaintiffs generally allege members companys board directors breached fiduciary duties shareholders connection merger negotiations entering merger agreement approving merger company halliburton red tiger aided abetted purported breaches fiduciary duties specifically lawsuits allege merger agreement provides inadequate consideration shareholders process resulting merger agreement flawed companys directors engaged selfdealing certain provisions merger agreement improperly favor halliburton red tiger precluding impeding third parties submitting potentially superior proposals among things lawsuit filed annette shipp also alleges board directors failed disclose material information concerning proposed merger preliminary registration statement form s4 january 7 2015 james rice amended complaint adding similar allegations regarding disclosures preliminary registration statement form s4 lawsuits seek unspecified damages injunctive relief enjoining merger rescission merger agreement among relief january 23 2015 delaware lawsuits consolidated caption baker hughes inc stockholders litigation consolidated ca 10390cb consolidated case pursuant courts consolidation order plaintiffs filed consolidated complaint february 4 2015 alleges substantially similar claims seeks substantially similar relief raised six individual complaints except baker hughes named defendant claims asserted company march 18 2015 parties reached agreement principle settle consolidated case exchange company making certain additional disclosures contained form 8k filed sec march 18 2015 settlement made subject certain conditions including consummation merger final documentation court approval termination merger agreement halliburton march 18 2015 settlement agreement rendered null void may 31 2016 consolidated case claims asserted therein dismissed save except plaintiffs counsels fee expense application delaware chancery court october 13 2016 delaware chancery court ruled plaintiffs counsels fee expense application amount awarded material impact financial position results operations cash flows baker hughes incorporated notes consolidated financial statements october 9 2014 one subsidiaries filed request arbitration customer london court international arbitration pursuing claims nonpayment invoices goods services provided amount provisionally quantified exceed 679 million request arbitration also noted invoices amount exceeding 57 million issued customer would added claim event became overdue november 6 2014 customer filed response counterclaim denying liability counterclaiming damages breach contract approximately 182 million march 31 2016 parties agreed settlement principally involving purchase customer certain inventory held subsidiary claims counterclaims released discharged party arbitral proceedings discontinued april 18 2016 claims counterclaims filed london court international arbitration released discontinued settlement material impact financial position results operations cash flows 2014 received customer notifications related possible equipment failure natural gas storage system northern germany includes certain products currently investigating cause possible failure necessary possible repair replacement options products similar products utilized natural gas storage systems customers customer initiated arbitral proceedings us june 19 2015 rules german institute arbitration ev dis august 3 2016 customer amended claims alleges damages approximately 224 million plus interest annual rate prime 5 hearing arbitration panel held january 16 2017 january 23 2017 additional hearing scheduled march 20 2017 march 21 2017 addition september 21 2015 triuva kapitalverwaltungsgesellschaft mbh filed lawsuit united states district court southern district texas houston division company baker hughes oilfield operations inc alleging plaintiff owner gas storage caverns etzel germany company provided certain equipment connection development gas storage caverns plaintiff alleges company supplied equipment either defectively designed failed warn risks equipment posed alleged defects caused damage plaintiffs property plaintiff seeks recovery alleged compensatory punitive damages unspecified amount addition reasonable attorneys fees court costs prejudgment postjudgment interest allegations lawsuit related claims made june 19 2015 german arbitration referenced time able predict outcome claims whether either material impact financial position results operations cash flows august 31 2015 customer one companys subsidiaries issued letter claim pursuant construction engineering contract customer claimed 369 million plus loss production resulting breach contract related five electric submersible pumps installed subsidiary europe january 29 2016 customer served statement claim case cl201500584 commercial court queens bench division high court justice september 20 2016 parties entered settlement agreement claims released discharged party october 6 2016 commercial court entered consent order dismissing claims litigation settlement material impact financial position results operations cash flows october 30 2015 chieftain sand proppant barron llc initiated arbitration subsidiary baker hughes oilfield operations inc american arbitration association claimant alleged company failed purchase required sand tonnage contract year 20142015 alleged company repudiated yearly purchase obligations remaining contract term claimant alleged damages approximately 110 million plus interest attorneys fees costs june 2 2016 parties agreed settlement claims counterclaims asserted arbitration settlement material impact financial position results operations cash flows april 30 2015 class collective action lawsuit alleging failed pay nationwide class workers overtime compliance fair labor standards act north dakota law filed titled williams et al v baker hughes oilfield operations inc us district court district north dakota february 8 2016 court conditionally certified certain subclasses employees collective action treatment evaluating background facts time cannot predict outcome lawsuit able reasonably estimate potential impact outcome would financial position results operations cash flows baker hughes incorporated notes consolidated financial statements july 31 2015 rapid completions llc filed lawsuit federal court eastern district texas baker hughes incorporated baker hughes oilfield operations inc others claiming infringement us patent nos 6907936 7134505 7543634 7861774 8657009 august 6 2015 rapid completions amended complaint allege infringement us patent 9074451 september 17 2015 rapid completions packers plus energy services inc sued baker hughes canada company canada federal court related canadian patent 2412072 april 1 2016 rapid completions removed us patent 6907936 claims lawsuit april 5 2016 rapid completions filed second lawsuit federal court eastern district texas baker hughes incorporated baker hughes oilfield operations inc others claiming infringement us patent 9303501 patents relate primarily certain specific downhole completions equipment plaintiff requested permanent injunction alleged infringement damages unspecified amount supplemental enhanced damages additional relief attorneys fees costs august september 2016 united states patent trademark office agreed institute interpartes review us patent nos 7861774 7134505 7534634 6907936 8657009 9074451 time able predict outcome claims whether material impact financial position results operations cash flows april 6 2016 civil complaint baker hughes incorporated halliburton company filed united states america seeking permanent injunction restraining baker hughes halliburton carrying planned acquisition baker hughes halliburton transaction would combine two companies lawsuit styled united states america v halliburton co baker hughes inc us district court district delaware case 116cv00233una complaint alleges proposed transaction halliburton baker hughes would violate section 7 clayton act subsequent filing complaint april 30 2016 merger agreement halliburton terminated described note 2 halliburton terminated merger agreement may 4 2016 united states filed notice voluntary dismissal complaint may 30 2013 received civil investigative demand cid us department justice doj pursuant antitrust civil process act cid sought documents information us period may 29 2011 date cid connection doj investigation related pressure pumping services us may 18 2016 received notice doj closed investigation action requested company environmental matters past present operations include activities subject extensive domestic including us federal state local international environmental regulations regard air land water quality environmental matters environmental procedures policies practices designed ensure compliance existing laws regulations minimize possibility significant environmental damage involved voluntary remediation projects certain facilities rare occasions remediation activities conducted specified government agencyissued consent decree agreed order remediation costs accrued based estimates probable exposure using currently available facts existing environmental permits technology presently enacted laws regulations remediation cost estimates include direct costs related environmental investigation external consulting activities governmental oversight fees treatment equipment costs associated longterm operation maintenance monitoring remediation project also identified potentially responsible party prp remedial activities related various superfund sites instances participate process set joint participation defense agreement negotiate government agencies identify prps determine prps allocation estimate remediation costs accrued believe prorata share total estimated cost remediation associated management superfund sites share based upon ratio estimated volume waste contributed site total estimated volume waste disposed site applicable us federal law imposes joint several liability prp cleanup sites leaving us uncertainty may responsible remediation cost attributable prps unable pay share accrual made joint several liability concept superfund sites participation de minimis since believe probability pay material costs baker hughes incorporated notes consolidated financial statements volumetric share remote believe prps greater involvement volumetric calculation basis substantial assets may reasonably expected pay share cost remediation superfund sites significant prp remediation costs estimated include recalcitrant parties cases insurance coverage contractual indemnities third parties cover portion ultimate liability total accrual environmental remediation 31 million 35 million december 31 2016 2015 respectively includes accruals 2 million year various superfund sites determination required accruals remediation costs subject uncertainty including evolving nature environmental regulations difficulty estimating extent type remediation activity necessary normal course business customers vendors others entered offbalance sheet arrangements surety bonds performance letters credit bank issued guarantees totaled approximately 10 billion december 31 2016 practicable estimate fair value financial instruments none offbalance sheet arrangements either likely material effect consolidated financial statements also commitments outstanding purchase obligations related capital expenditures inventory services contracts five years period ending december 31 2021 102 million 43 million 38 million 36 million 30 million respectively 37 million aggregate thereafter baker hughes incorporated notes consolidated financial statements note 16 accumulated comprehensive loss following table presents changes accumulated comprehensive loss net tax amounts reclassified accumulated comprehensive loss twelve months ended december 31 2016 2015 represent amortization net actuarial loss prior service credit curtailments included computation net periodic pension cost see note 14 employee benefit plans additional details net periodic pension cost recorded across various cost expense line items within consolidated statement income loss baker hughes incorporated notes consolidated financial statements note 17 quarterly data unaudited 1 represents revenue less cost sales cost services research engineering 2 impairment restructuring charges associated asset impairments workforce reductions facility closures contract terminations recorded 2015 2016 see note 4 impairment restructuring charges discussion 3 goodwill impairment recognized second third quarters 2016 see note 12 goodwill intangible assets discussion 4 merger termination fee received halliburton see note 2 halliburton terminated merger agreement discussion item 9 nannannannannannannannanitem 15 exhibits financial statement schedules reports form 8k list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules schedule ii valuation qualifying accounts 3 exhibits exhibit identified filed part report exhibits designated filed exhibit annual report form 10k exhibits designated identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference 31 restated certificate incorporation filed exhibit 31 annual report baker hughes incorporated form 10k year ended december 31 1998 certificate amendment restated certificate incorporation filed exhibit 42 baker hughes incorporated registration statement form s3 dated september 27 1999 32 bylaws baker hughes incorporated restated january 30 2002 filed exhibit 32 annual report baker hughes incorporated form 10k year ended december 31 2001 41 rights holders companys longterm debt company longterm debt instrument regard securities authorized thereunder equal exceed 10 total assets company subsidiaries consolidated basis company agrees furnish copy longterm debt instruments sec upon request 42 restated certificate incorporation filed exhibit 31 annual report baker hughes incorporated form 10k year ended december 31 1998 certificate amendment restated certificate incorporation filed exhibit 42 baker hughes incorporated registration statement form s3 dated september 27 1999 43 bylaws baker hughes incorporated restated january 30 2002 filed exhibit 32 annual report baker hughes incorporated form 10k year ended december 31 2001 45 indenture dated may 15 1994 western atlas inc bank new york trustee providing issuance securities series filed exhibit 46 annual report baker hughes incorporated form 10k year ended december 31 1999 101 employment agreement baker hughes incorporated michael e wiley dated july 17 2000 filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended june 30 2000 102 severance agreement baker hughes incorporated michael e wiley dated july 17 2000 filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended june 30 2000 103 severance agreement baker hughes incorporated g stephen finley dated july 23 1997 104 severance agreement baker hughes incorporated andrew j szescila dated july 23 1997 105 form amendment 1 severance agreement baker hughes incorporated g stephen finley andrew j szescila effective november 11 1998 filed exhibit 107 annual report baker hughes incorporated form 10k year ended december 31 1998 106 severance agreement baker hughes incorporated alan r crain jr dated october 25 2000 filed exhibit 106 annual report baker hughes incorporated form 10k year ended december 31 2000 107 severance agreement baker hughes incorporated greg nakanishi dated november 1 2000 filed exhibit 107 annual report baker hughes incorporated form 10k year ended december 31 2000 108 agreement regarding restricted stock award issued michael e wiley august 15 2000 amount 150000 shares company common stock filed exhibit 108 annual report baker hughes incorporated form 10k year ended december 31 2000 109 agreement regarding supplemental restricted stock award issued michael e wiley august 15 2000 amount 83000 shares company common stock filed exhibit 109 annual report baker hughes incorporated form 10k year ended december 31 2000 1010 amended restated 1991 employee stock bonus plan baker hughes incorporated amended amendment 19971 amended restated 1991 employee stock bonus plan amended amendment 19991 amended restated 1991 employee stock bonus plan 1011 restated 1987 stock option plan baker hughes incorporated amended october 24 1990 1012 baker hughes incorporated supplemental retirement plan amended restated effective january 1 2003 1013 baker hughes incorporated executive severance plan 1014 1993 stock option plan amended amendment 19971 1993 stock option plan amended amendment 19991 1993 stock option plan 1015 1993 employee stock bonus plan amended amendment 19971 1993 employee stock bonus plan amended amendment 19991 1993 employee stock bonus plan 1016 baker hughes incorporated director compensation deferral plan amended restated effective july 24 2002 1017 1995 employee annual incentive compensation plan amended amendment 19971 1995 employee annual incentive compensation plan amended amendment 19991 1995 employee annual incentive compensation plan 1018 long term incentive plan amended amendment 19991 long term incentive plan 1019 1998 employee stock option plan filed exhibit 1033 annual report baker hughes incorporated form 10k year ended december 31 1998 amended amendment 19991 1998 employee stock option plan filed exhibit 1034 annual report baker hughes incorporated form 10k year ended december 31 1998 1020 form credit agreement dated october 1 1998 among baker hughes incorporated fourteen banks 750000000 aggregate banks filed exhibit 1035 annual report baker hughes incorporated form 10k year ended december 31 1998 1021 form credit agreement dated october 1 1998 among baker hughes incorporated fourteen banks 250000000 aggregate banks filed exhibit 1036 annual report baker hughes incorporated form 10k year ended december 31 1998 amended form first amendment credit agreement dated september 29 1999 among baker hughes incorporated fourteen banks 250000000 aggregate banks filed exhibit 1029 annual report baker hughes incorporated form 10k year ended december 31 1999 amended form second amendment credit agreement dated september 25 2000 among baker hughes incorporated fourteen banks 250000000 aggregate banks filed exhibit 1035 annual report baker hughes incorporated form 10k year ended december 31 2000 amended form amendment credit agreement dated september 27 2002 filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended september 30 2002 1022 form stock option agreement executives effective january 26 2000 filed exhibit 1036 annual report baker hughes incorporated form 10k year ended december 31 2000 1023 form stock option agreement executive officers effective october 1 1998 filed exhibit 1037 annual report baker hughes incorporated form 10k year ended december 31 2000 1024 form nonqualified stock option agreement employees effective october 1 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 1998 1025 form nonqualified stock option agreement directors effective october 25 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 2000 1026 form nonqualified stock option agreement directors effective october 25 1995 filed exhibit 1026 annual report baker hughes incorporated form 10k year ended december 31 2001 1027 form nonqualified stock option agreement employees effective october 25 1995 filed exhibit 1027 annual report baker hughes incorporated form 10k year ended december 31 2001 1028 form incentive stock option agreement employees effective october 25 1995 filed exhibit 1028 annual report baker hughes incorporated form 10k year ended december 31 2001 1029 agreement regarding restricted stock award issued alan r crain jr october 25 2000 amount 7500 shares company common stock filed exhibit 1043 annual report baker hughes incorporated form 10k year ended december 31 2000 1030 agreement regarding restricted stock award issued greg nakanishi november 1 2000 amount 5000 shares company common stock filed exhibit 1044 annual report baker hughes incorporated form 10k year ended december 31 2000 1031 agreement regarding restricted stock award issued andrew j szescila january 24 2001 amount 25000 shares company common stock filed exhibit 1045 annual report baker hughes incorporated form 10k year ended december 31 2000 1032 agreement plan merger among baker hughes incorporated baker hughes delaware inc western atlas inc dated may 10 1998 filed exhibit 21 form 8k dated may 20 1998 1033 tax sharing agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1019 western atlas incs form 10q quarter ended september 30 1997 1034 employee benefits agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1021 western atlas incs form 10q quarter ended september 30 1997 1035 master formation agreement among company schlumberger limited certain wholly owned subsidiaries schlumberger limited dated september 6 2000 filed exhibit 21 form 8k dated september 7 2000 1036 shareholders agreement among schlumberger limited baker hughes incorporated parties listed signature pages thereto dated november 30 2000 filed exhibit 101 form 8k dated november 30 2000 1037 corporate executive loan program filed exhibit 1050 annual report baker hughes incorporated form 10k year ended december 31 1998 1038 amendment 1 employment agreement effective april 25 2001 baker hughes incorporated michael e wiley amendment 2 employment agreement effective december 5 2001 baker hughes incorporated michael e wiley amendment 3 employment agreement effective december 5 2001 baker hughes incorporated michael e wiley filed exhibit 1038 annual report baker hughes incorporated form 10k year ended december 31 2001 1039 severance agreement dated july 23 1997 baker hughes incorporated edwin c howell amended amendment 1 severance agreement effective november 11 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 2001 1040 severance agreement dated december 3 1997 baker hughes incorporated douglas j wall amended amendment 1 severance agreement effective november 11 1998 filed exhibit 1040 annual report baker hughes incorporated form 10k year ended december 31 2001 1041 form baker hughes incorporated nonqualified stock option agreement executive officers dated january 24 2001 filed exhibit 1041 annual report baker hughes incorporated form 10k year ended december 31 2001 1042 form severance agreement dated march 1 2001 baker hughes incorporated certain executives executed james r clark dated march 1 2001 william p faubel dated may 29 2001 filed exhibit 1042 annual report baker hughes incorporated form 10k year ended december 31 2001 1043 form baker hughes incorporated nonqualified stock option agreement employees dated january 30 2002 filed exhibit 1043 annual report baker hughes incorporated form 10k year ended december 31 2001 1044 form baker hughes incorporated incentive stock option agreement employees dated january 30 2002 filed exhibit 1044 annual report baker hughes incorporated form 10k year ended december 31 2001 1045 form stock matching agreement executed march 1 2001 baker hughes incorporated james roderick clark amended amendment 1 stock matching agreement amendment effective march 6 2002 filed exhibit 1045 annual report baker hughes incorporated form 10k year ended december 31 2001 1046 form baker hughes incorporated stock option award agreements dated july 24 2002 terms conditions employees directors officers 1047 form baker hughes incorporated stock option award agreements dated january 29 2003 terms conditions employees directors officers 1048 form baker hughes incorporated performance award agreements dated january 29 2003 executive officers 1049 amendment 1 stock matching agreement baker hughes incorporated james roderick clark effective march 6 2002 1050 form amendment credit agreement dated september 27 2002 credit agreement filed exhibit 1035 annual report baker hughes incorporated form 10k year ended december 31 1998 among baker hughes incorporated several institutions 1051 baker hughes incorporated pension plan effective january 1 2002 amended first amendment effective january 1 2002 211 subsidiaries registrant 231 consent deloitte touche llp 991 administrative proceeding file 310572 dated september 12 2001 issued securities exchange commission filed exhibit 991 current report form 8k filed september 12 2001 992 statement michael e wiley chief executive officer g stephen finley chief financial officer dated march 7 2003 pursuant section 906 sarbanesoxley act 2002 b reports form 8k current report form 8k filed commission december 13 2002 reporting company expects record charges totaling approximately 910 million tax fourth quarter 2002 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized 6th day march 2003 baker hughes incorporated smichael e wiley michael e wiley chairman board president chief executive officer pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated certifications michael e wiley certify 1 reviewed annual report form 10k baker hughes incorporated 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 6 2003 michael e wiley michael e wiley chairman board president chief executive officer g stephen finley certify 1 reviewed annual report form 10k baker hughes incorporated 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 6 2003 g stephen finley g stephen finley sr vice president finance administration chief financial officer baker hughes incorporated schedule ii valuation qualifying accounts represents reversals prior accruals receivables collected b represents elimination accounts receivable inventory deemed uncollectible worthless c represents reclasses currency translation adjustments divestitures index exhibits exhibit identified filed part report exhibits designated filed exhibit annual report form 10k exhibits designated identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference 31 restated certificate incorporation filed exhibit 31 annual report baker hughes incorporated form 10k year ended december 31 1998 certificate amendment restated certificate incorporation filed exhibit 42 baker hughes incorporated registration statement form s3 dated september 27 1999 32 bylaws baker hughes incorporated restated january 30 2002 filed exhibit 32 annual report baker hughes incorporated form 10k year ended december 31 2001 41 rights holders companys longterm debt company longterm debt instrument regard securities authorized thereunder equal exceed 10 total assets company subsidiaries consolidated basis company agrees furnish copy longterm debt instruments sec upon request 42 restated certificate incorporation filed exhibit 31 annual report baker hughes incorporated form 10k year ended december 31 1998 certificate amendment restated certificate incorporation filed exhibit 42 baker hughes incorporated registration statement form s3 dated september 27 1999 43 bylaws baker hughes incorporated restated january 30 2002 filed exhibit 32 annual report baker hughes incorporated form 10k year ended december 31 2001 45 indenture dated may 15 1994 western atlas inc bank new york trustee providing issuance securities series filed exhibit 46 annual report baker hughes incorporated form 10k year ended december 31 1999 101 employment agreement baker hughes incorporated michael e wiley dated july 17 2000 filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended june 30 2000 102 severance agreement baker hughes incorporated michael e wiley dated july 17 2000 filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended june 30 2000 103 severance agreement baker hughes incorporated g stephen finley dated july 23 1997 104 severance agreement baker hughes incorporated andrew j szescila dated july 23 1997 105 form amendment 1 severance agreement baker hughes incorporated g stephen finley andrew j szescila effective november 11 1998 filed exhibit 107 annual report baker hughes incorporated form 10k year ended december 31 1998 106 severance agreement baker hughes incorporated alan r crain jr dated october 25 2000 filed exhibit 106 annual report baker hughes incorporated form 10k year ended december 31 2000 107 severance agreement baker hughes incorporated greg nakanishi dated november 1 2000 filed exhibit 107 annual report baker hughes incorporated form 10k year ended december 31 2000 108 agreement regarding restricted stock award issued michael e wiley august 15 2000 amount 150000 shares company common stock filed exhibit 108 annual report baker hughes incorporated form 10k year ended december 31 2000 109 agreement regarding supplemental restricted stock award issued michael e wiley august 15 2000 amount 83000 shares company common stock filed exhibit 109 annual report baker hughes incorporated form 10k year ended december 31 2000 1010 amended restated 1991 employee stock bonus plan baker hughes incorporated amended amendment 19971 amended restated 1991 employee stock bonus plan amended amendment 19991 amended restated 1991 employee stock bonus plan 1011 restated 1987 stock option plan baker hughes incorporated amended october 24 1990 1012 baker hughes incorporated supplemental retirement plan amended restated effective january 1 2003 1013 baker hughes incorporated executive severance plan effective november 1 2002 1014 1993 stock option plan amended amendment 19971 1993 stock option plan amended amendment 19991 1993 stock option plan 1015 1993 employee stock bonus plan amended amendment 19971 1993 employee stock bonus plan amended amendment 19991 1993 employee stock bonus plan 1016 baker hughes incorporated director compensation deferral plan amended restated effective july 24 2002 1017 1995 employee annual incentive compensation plan amended amendment 19971 1995 employee annual incentive compensation plan amended amendment 19991 1995 employee annual incentive compensation plan 1018 long term incentive plan amended amendment 19991 long term incentive plan 1019 1998 employee stock option plan filed exhibit 1033 annual report baker hughes incorporated form 10k year ended december 31 1998 amended amendment 19991 1998 employee stock option plan filed exhibit 1034 annual report baker hughes incorporated form 10k year ended december 31 1998 1020 form credit agreement dated october 1 1998 among baker hughes incorporated fourteen banks 750000000 aggregate banks filed exhibit 1035 annual report baker hughes incorporated form 10k year ended december 31 1998 1021 form credit agreement dated october 1 1998 among baker hughes incorporated fourteen banks 250000000 aggregate banks filed exhibit 1036 annual report baker hughes incorporated form 10k year ended december 31 1998 amended form first amendment credit agreement dated september 29 1999 among baker hughes incorporated fourteen banks 250000000 aggregate banks filed exhibit 1029 annual report baker hughes incorporated form 10k year ended december 31 1999 amended form second amendment credit agreement dated september 25 2000 among baker hughes incorporated fourteen banks 250000000 aggregate banks filed exhibit 1035 annual report baker hughes incorporated form 10k year ended december 31 2000 amended form amendment credit agreement dated september 27 2002 filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended september 30 2002 1022 form stock option agreement executives effective january 26 2000 filed exhibit 1036 annual report baker hughes incorporated form 10k year ended december 31 2000 1023 form stock option agreement executive officers effective october 1 1998 filed exhibit 1037 annual report baker hughes incorporated form 10k year ended december 31 2000 1024 form nonqualified stock option agreement employees effective october 1 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 1998 1025 form nonqualified stock option agreement directors effective october 25 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 2000 1026 form nonqualified stock option agreement directors effective october 25 1995 filed exhibit 1026 annual report baker hughes incorporated form 10k year ended december 31 2001 1027 form nonqualified stock option agreement employees effective october 25 1995 filed exhibit 1027 annual report baker hughes incorporated form 10k year ended december 31 2001 1028 form incentive stock option agreement employees effective october 25 1995 filed exhibit 1028 annual report baker hughes incorporated form 10k year ended december 31 2001 1029 agreement regarding restricted stock award issued alan r crain jr october 25 2000 amount 7500 shares company common stock filed exhibit 1043 annual report baker hughes incorporated form 10k year ended december 31 2000 1030 agreement regarding restricted stock award issued greg nakanishi november 1 2000 amount 5000 shares company common stock filed exhibit 1044 annual report baker hughes incorporated form 10k year ended december 31 2000 1031 agreement regarding restricted stock award issued andrew j szescila january 24 2001 amount 25000 shares company common stock filed exhibit 1045 annual report baker hughes incorporated form 10k year ended december 31 2000 1032 agreement plan merger among baker hughes incorporated baker hughes delaware inc western atlas inc dated may 10 1998 filed exhibit 21 form 8k dated may 20 1998 1033 tax sharing agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1019 western atlas incs form 10q quarter ended september 30 1997 1034 employee benefits agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1021 western atlas incs form 10q quarter ended september 30 1997 1035 master formation agreement among company schlumberger limited certain wholly owned subsidiaries schlumberger limited dated september 6 2000 filed exhibit 21 form 8k dated september 7 2000 1036 shareholders agreement among schlumberger limited baker hughes incorporated parties listed signature pages thereto dated november 30 2000 filed exhibit 101 form 8k dated november 30 2000 1037 corporate executive loan program filed exhibit 1050 annual report baker hughes incorporated form 10k year ended december 31 1998 1038 amendment 1 employment agreement effective april 25 2001 baker hughes incorporated michael e wiley amendment 2 employment agreement effective december 5 2001 baker hughes incorporated michael e wiley amendment 3 employment agreement effective december 5 2001 baker hughes incorporated michael e wiley filed exhibit 1038 annual report baker hughes incorporated form 10k year ended december 31 2001 1039 severance agreement dated july 23 1997 baker hughes incorporated edwin c howell amended amendment 1 severance agreement effective november 11 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 2001 1040 severance agreement dated december 3 1997 baker hughes incorporated douglas j wall amended amendment 1 severance agreement effective november 11 1998 filed exhibit 1040 annual report baker hughes incorporated form 10k year ended december 31 2001 1041 form baker hughes incorporated nonqualified stock option agreement executive officers dated january 24 2001 filed exhibit 1041 annual report baker hughes incorporated form 10k year ended december 31 2001 1042 form severance agreement dated march 1 2001 baker hughes incorporated certain executives executed james r clark dated march 1 2001 william p faubel dated may 29 2001 filed exhibit 1042 annual report baker hughes incorporated form 10k year ended december 31 2001 1043 form baker hughes incorporated nonqualified stock option agreement employees dated january 30 2002 filed exhibit 1043 annual report baker hughes incorporated form 10k year ended december 31 2001 1044 form baker hughes incorporated incentive stock option agreement employees dated january 30 2002 filed exhibit 1044 annual report baker hughes incorporated form 10k year ended december 31 2001 1045 form stock matching agreement executed march 1 2001 baker hughes incorporated james roderick clark amended amendment 1 stock matching agreement amendment effective march 6 2002 filed exhibit 1045 annual report baker hughes incorporated form 10k year ended december 31 2001 1046 form baker hughes incorporated stock option award agreements dated july 24 2002 terms conditions employees directors officers 1047 form baker hughes incorporated stock option award agreements dated january 29 2003 terms conditions employees directors officers 1048 form baker hughes incorporated performance award agreements dated january 29 2003 executive officers 1049 amendment 1 stock matching agreement baker hughes incorporated james roderick clark effective march 6 2002 1050 form amendment credit agreement dated september 27 2002 credit agreement filed exhibit 1035 annual report baker hughes incorporated form 10k year ended december 31 1998 among baker hughes incorporated several institutions 1051 baker hughes incorporated pension plan effective january 1 2002 amended first amendment effective january 1 2002 211 subsidiaries registrant 231 consent deloitte touche llp 991 administrative proceeding file 310572 dated september 12 2001 issued securities exchange commission filed exhibit 991 current report form 8k filed september 12 2001 992 statement michael e wiley chief executive officer g stephen finley chief financial officer dated march 7 2003 pursuant section 906 sarbanesoxley act 2002item 15 exhibits financial statement schedules reports form 8k list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules • schedule ii valuation qualifying accounts • audited combined financial statements supplemental combining information westerngeco unconsolidated significant subsidiary reported equity method set forth exhibit 992 annual report 3 exhibits exhibit identified filed part report exhibits designated “” filed exhibit annual report form 10k exhibits designated “” identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference 31 restated certificate incorporation filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended june 30 2002 32 bylaws baker hughes incorporated restated october 22 2003 filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended september 30 2003 41 rights holders company’s longterm debt company longterm debt instrument regard securities authorized thereunder equal exceed 10 total assets company subsidiaries consolidated basis company agrees furnish copy longterm debt instruments sec upon request 42 restated certificate incorporation filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended june 30 2002 43 bylaws baker hughes incorporated restated october 31 2003 filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended september 30 2003 45 indenture dated may 15 1994 western atlas inc bank new york trustee providing issuance securities series filed exhibit 46 annual report baker hughes incorporated form 10k year ended december 31 1999 101 employment agreement baker hughes incorporated michael e wiley dated july 17 2000 filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended june 30 2000 102 severance agreement baker hughes incorporated michael e wiley dated july 17 2000 filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended june 30 2000 103 severance agreement baker hughes incorporated g stephen finley dated july 23 1997 filed exhibit 103 annual report baker hughes incorporated form 10k year ended december 31 2002 104 form indemnification agreement dated december 3 2003 baker hughes incorporated directors certain executive officers 105 form amendment 1 severance agreement baker hughes incorporated g stephen finley effective november 11 1998 filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended june 30 2003 106 severance agreement baker hughes incorporated alan r crain jr dated october 25 2000 filed exhibit 106 annual report baker hughes incorporated form 10k year ended december 31 2000 107 severance agreement baker hughes incorporated greg nakanishi dated november 1 2000 filed exhibit 107 annual report baker hughes incorporated form 10k year ended december 31 2000 108 form change control severance plan 109 form baker hughes incorporated 2002 director officer longterm incentive plan filed exhibit 102 quarterly report form 10q quarter ended september 30 2003 1010 baker hughes incorporated director retirement policy certain members board directors 1011 baker hughes incorporated supplemental retirement plan amended restated effective january 1 2003 filed exhibit 1012 annual report baker hughes incorporated form 10k year ended december 31 2002 1012 baker hughes incorporated executive severance plan effective november 1 2002 filed exhibit 1013 annual report baker hughes incorporated form 10k year ended december 31 2002 1013 1993 stock option plan amended amendment 19971 1993 stock option plan amended amendment 19991 1993 stock option plan filed exhibit 1014 annual report baker hughes incorporated form 10k year ended december 31 2002 1014 1993 employee stock bonus plan amended amendment 19971 1993 employee stock bonus plan amended amendment 19991 1993 employee stock bonus plan filed exhibit 1015 annual report baker hughes incorporated form 10k year ended december 31 2002 1015 baker hughes incorporated director compensation deferral plan amended restated effective july 24 2002 filed exhibit 1016 annual report baker hughes incorporated form 10k year ended december 31 2002 1016 1995 employee annual incentive compensation plan amended amendment 19971 1995 employee annual incentive compensation plan amended amendment 19991 1995 employee annual incentive compensation plan filed exhibit 1017 annual report baker hughes incorporated form 10k year ended december 31 2002 1017 long term incentive plan amended amendment 19991 long term incentive plan filed exhibit 1018 annual report baker hughes incorporated form 10k year ended december 31 2002 1018 baker hughes incorporated 1998 employee stock option plan amended amendment 19991 1998 employee stock option plan filed exhibit 103 quarterly report baker hughes incorporated form 10q quarter ended june 30 2003 1019 form credit agreement dated july 7 2003 among baker hughes incorporated thirteen banks 500000000 aggregate banks filed exhibit 105 quarterly report baker hughes incorporated form 10q quarter ended september 30 2003 1020 form stock option agreement executives effective january 26 2000 filed exhibit 1036 annual report baker hughes incorporated form 10k year ended december 31 2000 1021 form stock option agreement executive officers effective october 1 1998 filed exhibit 1037 annual report baker hughes incorporated form 10k year ended december 31 2000 1022 form nonqualified stock option agreement employees effective october 1 1998 filed exhibit 104 quarterly report baker hughes incorporated form 10q quarter ended june 30 2003 1023 form nonqualified stock option agreement directors effective october 25 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 2000 1024 form nonqualified stock option agreement directors effective october 25 1995 filed exhibit 1026 annual report baker hughes incorporated form 10k year ended december 31 2001 1025 form nonqualified stock option agreement employees effective october 25 1995 filed exhibit 1027 annual report baker hughes incorporated form 10k year ended december 31 2001 1026 form incentive stock option agreement employees effective october 25 1995 filed exhibit 1028 annual report baker hughes incorporated form 10k year ended december 31 2001 1027 interest rate swap confirmation dated april 8 2003 schedule master agreement multicurrencycross border dated march 6 2000 filed exhibit 102 quarterly report form 10q quarter ended march 31 2003 1028 interest rate swap confirmation dated july 30 2003 schedule master agreement multicurrencycross border dated july 30 2003 filed exhibit 106 quarterly report form 10q quarter ended june 30 2003 1029 interest rate swap confirmation dated october 16 2003 filed exhibit 103 quarterly report form 10q quarter ended september 30 2003 1030 agreement plan merger among baker hughes incorporated baker hughes delaware inc western atlas inc dated may 10 1998 1031 tax sharing agreement dated october 31 1997 western atlas inc unova inc 1032 employee benefits agreement dated october 31 1997 western atlas inc unova inc 1033 master formation agreement among company schlumberger limited certain wholly owned subsidiaries schlumberger limited dated september 6 2000 filed exhibit 21 form 8k dated september 7 2000 1034 shareholders’ agreement among schlumberger limited baker hughes incorporated parties listed signature pages thereto dated november 30 2000 filed exhibit 101 form 8k dated november 30 2000 1035 baker hughes incorporated employee stock purchase plan amended restated effective march 3 2003 filed exhibit 101 quarterly report form 10q quarter ended march 31 2003 1036 amendment 1 employment agreement effective april 25 2001 baker hughes incorporated michael e wiley amendment 2 employment agreement effective december 5 2001 baker hughes incorporated michael e wiley amendment 3 employment agreement effective december 5 2001 baker hughes incorporated michael e wiley filed exhibit 1038 annual report baker hughes incorporated form 10k year ended december 31 2001 1037 severance agreement dated july 23 1997 baker hughes incorporated edwin c howell amended amendment 1 severance agreement effective november 11 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 2001 1038 severance agreement dated december 3 1997 baker hughes incorporated douglas j wall amended amendment 1 severance agreement effective november 11 1998 filed exhibit 1040 annual report baker hughes incorporated form 10k year ended december 31 2001 1039 form baker hughes incorporated nonqualified stock option agreement executive officers dated january 24 2001 filed exhibit 1041 annual report baker hughes incorporated form 10k year ended december 31 2001 1040 form severance agreement dated march 1 2001 baker hughes incorporated certain executives executed james r clark dated march 1 2001 william p faubel dated may 29 2001 filed exhibit 1042 annual report baker hughes incorporated form 10k year ended december 31 2001 1041 form baker hughes incorporated nonqualified stock option agreement employees dated january 30 2002 filed exhibit 1043 annual report baker hughes incorporated form 10k year ended december 31 2001 1042 form baker hughes incorporated incentive stock option agreement employees dated january 30 2002 filed exhibit 1044 annual report baker hughes incorporated form 10k year ended december 31 2001 1043 amended restated stock matching agreement dated december 3 2003 baker hughes incorporated james r clark 1044 form baker hughes incorporated stock option award agreements dated july 24 2002 terms conditions employees directors officers filed exhibit 1046 annual report baker hughes incorporated form 10k year ended december 31 2002 1045 form baker hughes incorporated stock option award agreements dated january 29 2003 terms conditions employees directors officers filed exhibit 1047 annual report baker hughes incorporated form 10k year ended december 31 2002 1046 form baker hughes incorporated performance award agreements dated january 29 2003 executive officers filed exhibit 1048 annual report baker hughes incorporated form 10k year ended december 31 2002 1047 baker hughes incorporated pension plan effective january 1 2002 amended first amendment effective january 1 2002 filed exhibit 1051 annual report baker hughes incorporated form 10k year ended december 31 2002 1048 first amendment baker hughes incorporated supplemental retirement plan effective july 23 2003 filed exhibit 101 quarterly report form 10q filed quarter ended september 30 2003 1049 form baker hughes incorporated stock option award agreement dated july 22 2003 employees directors officers filed exhibit 101 quarterly report form 10q quarter ended june 30 2003 1050 form baker hughes incorporated stock option award agreements dated january 28 2004 terms conditions employees directors officers 1051 baker hughes incorporated 2002 employee longterm incentive plan filed exhibit 44 registration statement 33387372 form s8 filed may 1 2002 211 subsidiaries registrant 231 consent deloitte touche llp 232 consent pricewaterhousecoopers llp 311 certification michael e wiley chief executive officer dated march 3 2004 pursuant rule 13a14a securities exchange act 1934 amended 312 certification g stephen finley chief financial officer dated march 3 2004 pursuant rule 13a14a securities exchange act 1934 amended 32 statement michael e wiley chief executive officer g stephen finley chief financial officer dated march 3 2004 furnished pursuant rule 13a14b securities exchange act 1934 amended 991 administrative proceeding file 310572 dated september 12 2001 issued securities exchange commission filed exhibit 991 current report form 8k filed september 19 2001 992 audited combined financial statements supplemental combining information westerngeco three years period ended december 31 2003 b reports form 8k current report form 8k filed sec october 20 2003 report “item 5 events regulation fd disclosure” issuance press release whereby company announced reached proposed settlement agreement former employee made allegations improper activities relating operations nigeria b furnish “item 12 results operations financial condition” company’s issuance press release whereby company announced signed definitive agreement sale bird machine current report form 8k filed sec october 23 2003 furnish “item 12 results operations financial condition” company’s announcement financial results third quarter 2003 current report form 8k filed sec october 30 2003 report “item 5 events regulation fd disclosure” issuance press release whereby company announced retirement chief operating officer current report form 8k filed sec january 14 2004 furnish “item 12 results operations financial condition” company’s issuance press release whereby company announced completed sale bird machine current report form 8k filed sec january 30 2004 furnish “item 9 regulation fd disclosure” company’s issuance press release whereby company announced letter intent signed sell petreco international company minority interest current report form 8k filed sec february 5 2004 report “item 5 events regulation fd disclosure” company’s issuance press release whereby company announced appointment new president chief operating officer current report form 8k filed sec february 12 2004 furnish “item 12 results operations financial condition” company’s announcement financial results fourth quarter year end 2003 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized 3rd day march 2004 baker hughes incorporated smichael e wiley michael e wiley chairman board chief executive officer known persons presents person whose signature appears constitutes appoints michael e wiley g stephen finley may act without joinder true lawful attorneysinfact agents full power substitution resubstitution person name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated baker hughes incorporated schedule ii valuation qualifying accounts represents reversals prior accruals receivables collected b represents elimination accounts receivable inventory deemed uncollectible worthless c represents reclasses currency translation adjustments divestitures index exhibits exhibit identified filed part report exhibits designated “” filed exhibit annual report form 10k exhibits designated “” identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference 31 restated certificate incorporation filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended june 30 2002 32 bylaws baker hughes incorporated restated october 22 2003 filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended september 30 2003 41 rights holders company’s longterm debt company longterm debt instrument regard securities authorized thereunder equal exceed 10 total assets company subsidiaries consolidated basis company agrees furnish copy longterm debt instruments sec upon request 42 restated certificate incorporation filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended june 30 2002 43 bylaws baker hughes incorporated restated october 31 2003 filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended september 30 2003 45 indenture dated may 15 1994 western atlas inc bank new york trustee providing issuance securities series filed exhibit 46 annual report baker hughes incorporated form 10k year ended december 31 1999 101 employment agreement baker hughes incorporated michael e wiley dated july 17 2000 filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended june 30 2000 102 severance agreement baker hughes incorporated michael e wiley dated july 17 2000 filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended june 30 2000 103 severance agreement baker hughes incorporated g stephen finley dated july 23 1997 filed exhibit 103 annual report baker hughes incorporated form 10k year ended december 31 2002 104 form indemnification agreement dated december 3 2003 baker hughes incorporated directors certain executive officers 105 form amendment 1 severance agreement baker hughes incorporated g stephen finley effective november 11 1998 filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended june 30 2003 106 severance agreement baker hughes incorporated alan r crain jr dated october 25 2000 filed exhibit 106 annual report baker hughes incorporated form 10k year ended december 31 2000 107 severance agreement baker hughes incorporated greg nakanishi dated november 1 2000 filed exhibit 107 annual report baker hughes incorporated form 10k year ended december 31 2000 108 form change control severance plan 109 form baker hughes incorporated 2002 director officer longterm incentive plan filed exhibit 102 quarterly report form 10q quarter ended september 30 2003 1010 baker hughes incorporated director retirement policy certain members board directors 1011 baker hughes incorporated supplemental retirement plan amended restated effective january 1 2003 filed exhibit 1012 annual report baker hughes incorporated form 10k year ended december 31 2002 1012 baker hughes incorporated executive severance plan effective november 1 2002 filed exhibit 1013 annual report baker hughes incorporated form 10k year ended december 31 2002 1013 1993 stock option plan amended amendment 19971 1993 stock option plan amended amendment 19991 1993 stock option plan filed exhibit 1014 annual report baker hughes incorporated form 10k year ended december 31 2002 1014 1993 employee stock bonus plan amended amendment 19971 1993 employee stock bonus plan amended amendment 19991 1993 employee stock bonus plan filed exhibit 1015 annual report baker hughes incorporated form 10k year ended december 31 2002 1015 baker hughes incorporated director compensation deferral plan amended restated effective july 24 2002 filed exhibit 1016 annual report baker hughes incorporated form 10k year ended december 31 2002 1016 1995 employee annual incentive compensation plan amended amendment 19971 1995 employee annual incentive compensation plan amended amendment 19991 1995 employee annual incentive compensation plan filed exhibit 1017 annual report baker hughes incorporated form 10k year ended december 31 2002 1017 long term incentive plan amended amendment 19991 long term incentive plan filed exhibit 1018 annual report baker hughes incorporated form 10k year ended december 31 2002 1018 baker hughes incorporated 1998 employee stock option plan amended amendment 19991 1998 employee stock option plan filed exhibit 103 quarterly report baker hughes incorporated form 10q quarter ended june 30 2003 1019 form credit agreement dated july 7 2003 among baker hughes incorporated thirteen banks 500000000 aggregate banks filed exhibit 105 quarterly report baker hughes incorporated form 10q quarter ended september 30 2003 1020 form stock option agreement executives effective january 26 2000 filed exhibit 1036 annual report baker hughes incorporated form 10k year ended december 31 2000 1021 form stock option agreement executive officers effective october 1 1998 filed exhibit 1037 annual report baker hughes incorporated form 10k year ended december 31 2000 1022 form nonqualified stock option agreement employees effective october 1 1998 filed exhibit 104 quarterly report baker hughes incorporated form 10q quarter ended june 30 2003 1023 form nonqualified stock option agreement directors effective october 25 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 2000 1024 form nonqualified stock option agreement directors effective october 25 1995 filed exhibit 1026 annual report baker hughes incorporated form 10k year ended december 31 2001 1025 form nonqualified stock option agreement employees effective october 25 1995 filed exhibit 1027 annual report baker hughes incorporated form 10k year ended december 31 2001 1026 form incentive stock option agreement employees effective october 25 1995 filed exhibit 1028 annual report baker hughes incorporated form 10k year ended december 31 2001 1027 interest rate swap confirmation dated april 8 2003 schedule master agreement multicurrencycross border dated march 6 2000 filed exhibit 102 quarterly report form 10q quarter ended march 31 2003 1028 interest rate swap confirmation dated july 30 2003 schedule master agreement multicurrencycross border dated july 30 2003 filed exhibit 106 quarterly report form 10q quarter ended june 30 2003 1029 interest rate swap confirmation dated october 16 2003 filed exhibit 103 quarterly report form 10q quarter ended september 30 2003 1030 agreement plan merger among baker hughes incorporated baker hughes delaware inc western atlas inc dated may 10 1998 1031 tax sharing agreement dated october 31 1997 western atlas inc unova inc 1032 employee benefits agreement dated october 31 1997 western atlas inc unova inc 1033 master formation agreement among company schlumberger limited certain wholly owned subsidiaries schlumberger limited dated september 6 2000 filed exhibit 21 form 8k dated september 7 2000 1034 shareholders’ agreement among schlumberger limited baker hughes incorporated parties listed signature pages thereto dated november 30 2000 filed exhibit 101 form 8k dated november 30 2000 1035 baker hughes incorporated employee stock purchase plan amended restated effective march 3 2003 filed exhibit 101 quarterly report form 10q quarter ended march 31 2003 1036 amendment 1 employment agreement effective april 25 2001 baker hughes incorporated michael e wiley amendment 2 employment agreement effective december 5 2001 baker hughes incorporated michael e wiley amendment 3 employment agreement effective december 5 2001 baker hughes incorporated michael e wiley filed exhibit 1038 annual report baker hughes incorporated form 10k year ended december 31 2001 1037 severance agreement dated july 23 1997 baker hughes incorporated edwin c howell amended amendment 1 severance agreement effective november 11 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 2001 1038 severance agreement dated december 3 1997 baker hughes incorporated douglas j wall amended amendment 1 severance agreement effective november 11 1998 filed exhibit 1040 annual report baker hughes incorporated form 10k year ended december 31 2001 1039 form baker hughes incorporated nonqualified stock option agreement executive officers dated january 24 2001 filed exhibit 1041 annual report baker hughes incorporated form 10k year ended december 31 2001 1040 form severance agreement dated march 1 2001 baker hughes incorporated certain executives executed james r clark dated march 1 2001 william p faubel dated may 29 2001 filed exhibit 1042 annual report baker hughes incorporated form 10k year ended december 31 2001 1041 form baker hughes incorporated nonqualified stock option agreement employees dated january 30 2002 filed exhibit 1043 annual report baker hughes incorporated form 10k year ended december 31 2001 1042 form baker hughes incorporated incentive stock option agreement employees dated january 30 2002 filed exhibit 1044 annual report baker hughes incorporated form 10k year ended december 31 2001 1043 amended restated stock matching agreement dated december 3 2003 baker hughes incorporated james r clark 1044 form baker hughes incorporated stock option award agreements dated july 24 2002 terms conditions employees directors officers filed exhibit 1046 annual report baker hughes incorporated form 10k year ended december 31 2002 1045 form baker hughes incorporated stock option award agreements dated january 29 2003 terms conditions employees directors officers filed exhibit 1047 annual report baker hughes incorporated form 10k year ended december 31 2002 1046 form baker hughes incorporated performance award agreements dated january 29 2003 executive officers filed exhibit 1048 annual report baker hughes incorporated form 10k year ended december 31 2002 1047 baker hughes incorporated pension plan effective january 1 2002 amended first amendment effective january 1 2002 filed exhibit 1051 annual report baker hughes incorporated form 10k year ended december 31 2002 1048 first amendment baker hughes incorporated supplemental retirement plan effective july 23 2003 filed exhibit 101 quarterly report form 10q filed quarter ended september 30 2003 1049 form baker hughes incorporated stock option award agreement dated july 22 2003 employees directors officers filed exhibit 101 quarterly report form 10q quarter ended june 30 2003 1050 form baker hughes incorporated stock option award agreements dated january 28 2004 terms conditions employees directors officers 1051 baker hughes incorporated 2002 employee longterm incentive plan filed exhibit 44 registration statement 33387372 form s8 filed may 1 2002 211 subsidiaries registrant 231 consent deloitte touche llp 232 consent pricewaterhousecoopers llp 311 certification michael e wiley chief executive officer dated march 3 2004 pursuant rule 13a14a securities exchange act 1934 amended 312 certification g stephen finley chief financial officer dated march 3 2004 pursuant rule 13a14a securities exchange act 1934 amended 32 statement michael e wiley chief executive officer g stephen finley chief financial officer dated march 3 2004 furnished pursuant rule 13a14b securities exchange act 1934 amended 991 administrative proceeding file 310572 dated september 12 2001 issued securities exchange commission filed exhibit 991 current report form 8k filed september 19 2001 992 audited combined financial statements supplemental combining information westerngeco three years period ended december 31 2003item 15 exhibits financial statement schedules list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules schedule ii valuation qualifying accounts 3 exhibits exhibit identified filed part report exhibits designated “” filed exhibit annual report form 10k exhibits designated “” identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized known persons presents person whose signature appears constitutes appoints chad c deaton g stephen finley may act without joinder true lawful attorneysinfact agents full power substitution resubstitution person name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated baker hughes incorporated schedule ii valuation qualifying accounts 1 represents reversals prior accruals receivables collected 2 represents elimination accounts receivable inventory deemed uncollectible worthless 3 represents reclasses currency translation adjustments divestitures index exhibitsitem 15 exhibits financial statement schedules list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules schedule ii valuation qualifying accounts 3 exhibits exhibit identified filed part report exhibits designated “” filed exhibit annual report form 10k exhibits designated “” identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized known persons presents person whose signature appears constitutes appoints chad c deaton peter ragauss may act without joinder true lawful attorneysinfact agents full power substitution resubstitution person name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated baker hughes incorporated schedule ii valuation qualifying accounts 1 represents reversals prior accruals receivables collected 2 represents elimination accounts receivable inventory deemed uncollectible worthless 3 represents reclasses currency translation adjustments divestitures exhibit index exhibit identified filed part report exhibits designated “” filed exhibit annual report form 10k exhibits designated “” identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference 31 restated certificate incorporation filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended june 30 2007 32 bylaws baker hughes incorporated restated april 26 2007 filed exhibit 32 quarterly report baker hughes incorporated form 10q quarter ended march 31 2007 41 rights holders company’s longterm debt company longterm debt instrument regard securities authorized equal exceed 10 total assets company subsidiaries consolidated basis company agrees furnish copy longterm debt instruments sec upon request 42 restated certificate incorporation filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended june 30 2007 43 bylaws baker hughes incorporated restated april 26 2007 filed exhibit 32 quarterly report baker hughes incorporated form 10q quarter ended march 31 2007 44 indenture dated may 15 1994 western atlas inc bank new york trustee providing issuance securities series filed exhibit 44 annual report baker hughes incorporated form 10k year ended december 31 2004 101 employment agreement baker hughes incorporated chad c deaton dated october 25 2004 filed exhibit 103 current report baker hughes incorporated form 8k filed october 7 2004 102 change control agreement baker hughes incorporated chad c deaton dated october 25 2004 filed exhibit 102 current report baker hughes incorporated form 8k filed october 7 2004 103 indemnification agreement dated october 25 2004 baker hughes incorporated chad c deaton filed exhibit 101 current report baker hughes incorporated form 8k filed october 7 2004 104 stock option agreement issued chad c deaton october 25 2004 amount 75000 shares company common stock filed exhibit 104 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 105 agreement regarding restricted stock award issued chad c deaton october 25 2004 amount 80000 shares company common stock filed exhibit 105 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 106 agreement regarding restricted stock award issued james r clark october 27 2004 amount 40000 shares baker hughes incorporated common stock filed exhibit 107 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 107 second amended restated stock matching agreement baker hughes incorporated james r clark dated october 25 2004 filed exhibit 106 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 108 letter dated october 26 2005 james r clark clarifying mr clark’s employment terms filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended september 30 2005 109 letter agreement baker hughes incorporated james r clark dated august 30 2007 filed exhibit 101 current report baker hughes incorporated form 8k filed august 31 2007 1010 letter agreement peter ragauss baker hughes incorporated dated march 27 2006 filed exhibit 101 current report baker hughes incorporated form 8k filed march 31 2006 1011 letter agreement baker hughes incorporated david h barr dated october 25 2007 filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended september 30 2007 1012 form change control severance plan filed exhibit 108 annual report baker hughes incorporated form 10k year ended december 31 2003 1013 form change control severance agreement baker hughes incorporated david h barr john o’donnell effective july 28 2004 james r clark alan r crain jr effective january 1 2006 chris p beaver paul butero martin craighead effective february 28 2005 richard l williams effective may 2 2005 peter ragauss effective april 26 2006 gary g rich effective september 15 2006 didier charreton effective march 2 2007 stephen k ellison effective may 1 2007 nelson ney effective december 13 2007 filed exhibit 108 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 1014 form indemnification agreement baker hughes incorporated directors executive officers filed exhibit 104 annual report baker hughes incorporated form 10k year ended december 31 2003 1015 baker hughes incorporated director retirement policy certain members board directors filed exhibit 1010 annual report baker hughes incorporated form 10k year ended december 31 2003 1016 baker hughes incorporated director compensation deferral plan amended restated effective july 24 2002 filed exhibit 1016 annual report baker hughes incorporated form 10k year ended december 31 2002 1017 baker hughes incorporated executive severance plan amended restated february 7 2008 1018 baker hughes incorporated annual incentive compensation plan amended restated february 20 2008 1019 baker hughes incorporated supplemental retirement plan amended restated effective january 1 2005 filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended september 30 2005 1020 first amendment baker hughes incorporated supplemental retirement plan amended restated effective january 1 2005 dated february 9 2007 effective january 1 2007 filed exhibit 1019 annual report baker hughes incorporated form 10k year ended december 31 2006 1021 longterm incentive plan amended amendment 19991 longterm incentive plan filed exhibit 1018 annual report baker hughes incorporated form 10k year ended december 31 2002 1022 baker hughes incorporated 1998 employee stock option plan amended amendment 19991 1998 employee stock option plan filed exhibit 103 quarterly report baker hughes incorporated form 10q quarter ended june 30 2003 1023 baker hughes incorporated 2002 employee longterm incentive plan filed exhibit 44 registration statement 33387372 baker hughes incorporated form s8 filed may 1 2002 1024 baker hughes incorporated 2002 director officer longterm incentive plan filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended september 30 2003 1025 amendment 2002 director officer longterm incentive plan effective october 27 2005 filed exhibit 103 baker hughes incorporated quarterly report form 10q quarter ended september 30 2005 1026 baker hughes incorporated employee stock purchase plan amended restated effective march 3 2003 filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended march 31 2003 1027 form stock option agreement executive officers effective october 1 1998 filed exhibit 1037 annual report baker hughes incorporated form 10k year ended december 31 2000 1028 form nonqualified stock option agreement directors effective october 25 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 2000 1029 form baker hughes incorporated nonqualified stock option agreement executive officers dated january 24 2001 filed exhibit 1041 annual report baker hughes incorporated form 10k year ended december 31 2001 1030 form baker hughes incorporated nonqualified stock option agreement employees dated january 30 2002 filed exhibit 1043 annual report baker hughes incorporated form 10k year ended december 31 2001 1031 form baker hughes incorporated incentive stock option agreement employees dated january 30 2002 filed exhibit 1044 annual report baker hughes incorporated form 10k year ended december 31 2001 1032 form baker hughes incorporated stock option award agreements terms conditions filed exhibit 1046 annual report baker hughes incorporated form 10k year ended december 31 2002 1033 form baker hughes incorporated performance award agreement including terms conditions certain executive officers filed exhibit 104 quarterly report baker hughes incorporated form 10q quarter ended march 31 2004 1034 form restricted stock award resolution including terms conditions filed exhibit 103 quarterly report baker hughes incorporated form 10q quarter ended march 31 2004 1035 form baker hughes incorporated restricted stock award agreement filed exhibit 1054 annual report form 10k year ended december 31 2004 1036 form baker hughes incorporated restricted stock award terms conditions filed exhibit 1054 baker hughes incorporated annual report form 10k year ended december 31 2004 1037 form baker hughes incorporated restricted stock unit agreement including terms conditions 1038 form baker hughes incorporated restricted stock unit agreement filed exhibit 1054 baker hughes incorporated annual report form 10k year ended december 31 2004 1039 form baker hughes incorporated restricted stock unit terms conditions filed exhibit 1054 baker hughes incorporated annual report form 10k year ended december 31 2004 1040 form baker hughes incorporated restricted stock award including terms conditions directors filed exhibit 1040 baker hughes incorporated annual report form 10k year ended december 31 2005 1041 form baker hughes incorporated stock option award agreement including terms conditions directors filed exhibit 1041 baker hughes incorporated annual report form 10k year ended december 31 2005 1042 form baker hughes incorporated performance unit award agreement including terms conditions 1043 form baker hughes incorporated performance unit award agreement including terms conditions filed exhibit 1042 baker hughes incorporated annual report form 10k year ended december 31 2005 1044 performance goals performance unit award granted 2006 filed exhibit 1043 baker hughes incorporated annual report form 10k year ended december 31 2005 1045 form performance goals performance unit awards filed exhibit 1044 baker hughes incorporated annual report form 10k year ended december 31 2006 1046 compensation table named executive officers directors 1047 form credit agreement dated july 7 2005 among baker hughes incorporated jpmorgan chase bank na administrative agent fourteen lenders 500 million aggregate banks filed exhibit 101 current report baker hughes incorporated form 8k filed july 11 2005 1048 first amendment credit agreement dated june 7 2006 among baker hughes incorporated fifteen banks 500 million aggregate banks filed exhibit 101 current report baker hughes incorporated form 8k filed june 12 2006 1049 second amendment credit agreement dated june 7 2006 among baker hughes incorporated fifteen banks 500 million aggregate banks filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended june 30 2007 1050 agreement resignation appointment acceptance among baker hughes incorporated citibank na bank new york trust company na dated april 26 2007 effective may 1 2007 filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended march 31 2007 1051 agreement plan merger among baker hughes incorporated baker hughes delaware inc western atlas inc dated may 10 1998 filed exhibit 1030 annual report baker hughes incorporated form 10k year ended december 31 2003 1052 tax sharing agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1031 annual report baker hughes incorporated form 10k year ended december 31 2003 1053 employee benefits agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1032 annual report baker hughes incorporated form 10k year ended december 31 2003 1054 deferred prosecution agreement baker hughes incorporated united states department justice filed april 26 2007 united states district court texas houston division filed exhibit 104 quarterly report baker hughes incorporated form 10q quarter ended march 31 2007 1055 plea agreement baker hughes services international inc united states department justice filed april 26 2007 united states district court texas houston division filed exhibit 105 quarterly report baker hughes incorporated form 10q quarter ended march 31 2007 211 subsidiaries registrant 231 consent deloitte touche llp 311 certification chad c deaton chief executive officer dated february 21 2008 pursuant rule 13a14a securities exchange act 1934 amended 312 certification peter ragauss chief financial officer dated february 21 2008 pursuant rule 13a14a securities exchange act 1934 amended 32 statement chad c deaton chief executive officer peter ragauss chief financial officer dated february 21 2008 furnished pursuant rule 13a14b securities exchange act 1934 amended 991 administrative proceeding file 310572 dated september 12 2001 issued securities exchange commission filed exhibit 991 current report baker hughes incorporated form 8k filed september 19 2001 992 baker hughes incorporated information document filed april 26 2007 united states attorney’s office southern district texas united states department justice filed exhibit 991 quarterly report baker hughes incorporated form 10q quarter ended march 31 2007 993 baker hughes services international inc information document filed april 26 2007 untied states attorney’s office southern district texas united states department justice filed exhibit 992 quarterly report baker hughes incorporated form 10q quarter ended march 31 2007 994 sentencing memorandum motion waiver presentence investigation baker hughes services international inc filed exhibit 993 quarterly report baker hughes incorporated form 10q quarter ended march 31 2007 995 baker hughes services international inc sentencing letter united states department justice dated april 24 2007 filed exhibit 994 quarterly report baker hughes incorporated form 10q quarter ended march 31 2007 996 complaint securities exchange commission vs baker hughes incorporated filed april 26 2007 united states district court texas houston division filed exhibit 995 quarterly report baker hughes incorporated form 10q quarter ended march 31 2007 997 final judgment securities exchange commission defendant baker hughes incorporated dated filed may 1 2007 united states district court texas houston division filed exhibit 991 quarterly report baker hughes incorporated form 10q quarter ended june 30 2007item 15 exhibits financial statement schedules list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules schedule ii valuation qualifying accounts 3 exhibits exhibit identified filed part report exhibits designated “” filed exhibit annual report form 10k exhibits designated “” identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized baker hughes incorporated date february 26 2009 chad c deaton chad c deaton chairman board president chief executive officer known persons presents person whose signature appears constitutes appoints chad c deaton peter ragauss may act without joinder true lawful attorneysinfact agents full power substitution resubstitution person name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated baker hughes incorporated schedule ii valuation qualifying accounts 1 represents reversals prior accruals receivables collected 2 represents elimination accounts receivable inventory deemed uncollectible worthless 3 represents reclasses currency translation adjustments divestituresitem 15 exhibits financial statement schedules list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules schedule ii valuation qualifying accounts 3 exhibits exhibit identified filed part report exhibits designated “” filed exhibit annual report form 10k exhibits designated “” identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference 101ins xbrl instance document 101sch xbrl schema document 101cal xbrl calculation linkbase document 101lab xbrl label linkbase document 101pre xbrl presentation linkbase document 101def xbrl definition linkbase document signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized baker hughes incorporated date february 25 2010 chad c deaton chad c deaton chairman board president chief executive officer known persons presents person whose signature appears constitutes appoints chad c deaton peter ragauss may act without joinder true lawful attorneysinfact agents full power substitution resubstitution person name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated schedule valuation qualifying accounts disclosure baker hughes incorporated schedule ii valuation qualifying accounts 1 represents elimination accounts receivable inventory deemed uncollectible worthless 2 represents reclassifications currency translation adjustments divestituresitem 15 exhibits financial statement schedules list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules schedule ii valuation qualifying accounts 3 exhibits exhibit identified filed part report exhibits designated “” filed exhibit annual report form 10k exhibits designated “” identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference 31 certificate amendment dated april 22 2010 restated certificate incorporation filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended march 31 2010 32 restated bylaws baker hughes incorporated effective april 28 2010 filed exhibit 32 current report baker hughes incorporated form 8k filed april 29 2010 33 restated bylaws baker hughes incorporated effective april 28 2011 41 rights holders company’s longterm debt company longterm debt instrument regard securities authorized equal exceed 10 total assets company subsidiaries consolidated basis company agrees furnish copy longterm debt instruments sec upon request 42 certificate amendment dated april 22 2010 restated certificate incorporation filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended march 31 2010 43 restated bylaws baker hughes incorporated effective april 28 2010 filed exhibit 32 current report baker hughes incorporated form 8k filed april 29 2010 44 restated bylaws baker hughes incorporated effective april 28 2011 filed exhibit 33 annual report form 10k 45 indenture dated may 15 1994 western atlas inc bank new york trustee providing issuance securities series filed exhibit 44 annual report baker hughes incorporated form 10k year ended december 31 2004 46 indenture dated october 28 2008 baker hughes incorporated bank new york mellon trust company na trustee filed exhibit 41 current report baker hughes incorporated form 8k filed october 29 2008 47 officers’ certificate baker hughes incorporated dated october 28 2008 establishing 650 senior notes due 2013 750 senior notes due 2018 filed exhibit 42 current report baker hughes incorporated form 8k filed october 29 2008 48 form 650 senior notes due 2013 filed exhibit 43 current report baker hughes incorporated form 8k filed october 29 2008 49 form 750 senior notes due 2018 filed exhibit 44 current report baker hughes incorporated form 8k filed october 29 2008 410 officers’ certificate baker hughes incorporated dated august 24 2010 establishing 5125 senior notes due 2040 filed exhibit 42 current report baker hughes incorporated form 8k filed august 24 2010 411 form 5125 senior notes due 2040 filed exhibit 43 current report baker hughes incorporated form 8 k filed august 24 2010 412 indenture dated june 8 2006 bj services company issuer wells fargo bank na trustee incorporated reference exhibit 41 current report bj services company form 8k filed june 12 2006 413 first supplemental indenture dated june 8 2006 bj services company issuer wells fargo bank na trustee respect 575 senior notes due 2011 incorporated reference exhibit 42 current report bj services company form 8k filed june 12 2006 414 third supplemental indenture dated may 19 2008 bj services company issuer wells fargo bank na trustee respect 6 senior notes due 2018 incorporated reference exhibit 42 current report bj services company form 8k filed may 23 2008 415 fourth supplemental indenture dated april 28 2010 bj services company issuer bsa acquisition llc baker hughes incorporated wells fargo bank na trustee respect 575 senior notes due 2011 6 senior notes due 2018 incorporated reference exhibit 44 current report baker hughes incorporated form 8k filed april 29 2010 416 form incentive stock option assumption agreement bj services incentive plans incorporated reference exhibit 45 current report baker hughes incorporated form 8k filed april 29 2010 417 form nonqualified stock option assumption agreement bj services incentive plans incorporated reference exhibit 46 current report baker hughes incorporated form 8k filed april 29 2010 101 amendment restatement employment agreement chad c deaton baker hughes incorporated dated january 1 2009 filed exhibit 101 current report baker hughes incorporated form 8k filed december 19 2008 102 form amended restated change control agreement baker hughes incorporated executive officers effective january 1 2009 filed exhibit 102 annual report baker hughes incorporated form 10k year ended december 31 2008 103 letter agreement peter ragauss baker hughes incorporated dated march 27 2006 filed exhibit 101 current report baker hughes incorporated form 8k filed march 31 2006 104 amendment restatement baker hughes incorporated change control severance plan effective january 1 2009 filed exhibit 103 current report baker hughes incorporated form 8k filed december 19 2008 105 form indemnification agreement baker hughes incorporated directors executive officers filed exhibit 104 annual report baker hughes incorporated form 10k year ended december 31 2003 106 form amendment indemnification agreement baker hughes incorporated directors executive officers effective january 1 2009 filed exhibit 104 current report baker hughes incorporated form 8k filed december 19 2008 107 baker hughes incorporated director retirement policy certain members board directors filed exhibit 1010 annual report baker hughes incorporated form 10k year ended december 31 2003 108 baker hughes incorporated director compensation deferral plan amended restated effective january 1 2009 filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended june 30 2008 109 amendment baker hughes incorporated director compensation deferral plan effective january 1 2009 filed exhibit 105 current report baker hughes incorporated form 8k filed december 19 2008 1010 baker hughes incorporated executive severance plan amended restated february 7 2008 filed exhibit 1017 annual report baker hughes incorporated form 10k year ended december 31 2007 1011 amendment exhibit baker hughes incorporated executive severance plan july 20 2009 filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended june 30 2009 1012 baker hughes incorporated annual incentive compensation plan amended restated february 20 2008 filed exhibit 1018 annual report baker hughes incorporated form 10k year ended december 31 2007 1013 amendment baker hughes annual incentive compensation plan effective january 1 2009 filed exhibit 107 current report baker hughes incorporated form 8k filed december 19 2008 1014 baker hughes incorporated supplemental retirement plan amended restated effective january 1 2011 filed exhibit 102 current report baker hughes incorporated form 8k filed june 26 2010 1015 amendment baker hughes incorporated supplemental retirement plan effective january 1 2009 filed exhibit 106 current report baker hughes incorporated form 8k filed december 19 2008 1016 longterm incentive plan amended amendment 19991 longterm incentive plan filed exhibit 1018 annual report baker hughes incorporated form 10k year ended december 31 2002 1017 baker hughes incorporated 1998 employee stock option plan amended amendment 19991 1998 employee stock option plan filed exhibit 103 quarterly report baker hughes incorporated form 10q quarter ended june 30 2003 1018 baker hughes incorporated 2002 employee longterm incentive plan filed exhibit 44 registration statement 33387372 baker hughes incorporated form s8 filed may 1 2002 1019 amendment baker hughes incorporated 2002 employee longterm incentive plan effective july 24 2008 filed exhibit 104 quarterly report baker hughes incorporated form 10q quarter ended june 30 2008 1020 baker hughes incorporated 2002 director officer longterm incentive plan filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended september 30 2003 1021 amendment 2002 director officer longterm incentive plan effective october 27 2005 filed exhibit 103 baker hughes incorporated quarterly report form 10q quarter ended september 30 2005 1022 amendment baker hughes incorporated 2002 director officer longterm incentive plan effective july 24 2008 filed exhibit 103 quarterly report baker hughes incorporated form 10q quarter ended june 30 2008 1023 baker hughes incorporated employee stock purchase plan amended restated effective january 1 2010 filed exhibit 1025 annual report baker hughes incorporated form 10k year ended december 31 2009 1024 form stock option agreement executive officers effective october 1 1998 filed exhibit 1037 annual report baker hughes incorporated form 10k year ended december 31 2000 1025 form nonqualified stock option agreement directors effective october 25 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 2000 1026 form baker hughes incorporated nonqualified stock option agreement executive officers dated january 24 2001 filed exhibit 1041 annual report baker hughes incorporated form 10k year ended december 31 2001 1027 form baker hughes incorporated nonqualified stock option agreement employees dated january 30 2002 filed exhibit 1043 annual report baker hughes incorporated form 10k year ended december 31 2001 1028 form baker hughes incorporated nonqualified stock option agreement terms conditions officers filed exhibit 1030 annual report baker hughes incorporated form 10k year ended december 31 2009 1029 form baker hughes incorporated incentive stock option agreement employees dated january 30 2002 filed exhibit 1044 annual report baker hughes incorporated form 10k year ended december 31 2001 1030 form baker hughes incorporated stock option award agreements terms conditions filed exhibit 1046 annual report baker hughes incorporated form 10k year ended december 31 2002 1031 form baker hughes incorporated incentive stock option agreement terms conditions officers filed exhibit 1033 annual report baker hughes incorporated form 10k year ended december 31 2009 1032 form restricted stock award resolution including terms conditions filed exhibit 103 quarterly report baker hughes incorporated form 10q quarter ended march 31 2004 1033 form baker hughes incorporated restricted stock award agreement filed exhibit 1054 annual report form 10k year ended december 31 2004 1034 form baker hughes incorporated restricted stock award terms conditions filed exhibit 1054 baker hughes incorporated annual report form 10k year ended december 31 2004 1035 form baker hughes incorporated restricted stock award terms conditions officers filed exhibit 1037 annual report baker hughes incorporated form 10k year ended december 31 2009 1036 form baker hughes incorporated restricted stock unit agreement including terms conditions filed exhibit 1018 annual report baker hughes incorporated form 10k year ended december 31 2007 1053 bj services company 1995 incentive plan filed exhibit 45 bj services company’s registration statement form s8 reg 3358637 incorporated herein reference 1054 amendments effective january 25 1996 december 12 1996 bj services company 1995 incentive plan filed exhibit 109 bj services company’s annual report form 10k year ended september 30 1996 file 110570 incorporated herein reference 1055 amendment effective july 22 1999 bj services company 1995 incentive plan filed exhibit 1025 bj services company’s annual report form 10k year ended september 30 1999 file 110570 incorporated herein reference 1056 amendment effective january 27 2000 bj services company 1995 incentive plan filed appendix b bj services company’s proxy statement dated december 20 1999 file 110570 incorporated herein reference 1057 amendment effective may 10 2001 bj services company 1995 incentive plan filed appendix b bj services company’s proxy statement dated april 10 2001 file 110570 incorporated herein reference 1058 eighth amendment effective october 15 2001 bj services company 1995 incentive plan filed exhibit 1012 bj services company’s annual report form 10k year ended september 30 2001 file 110570 incorporated herein reference 1059 tenth amendment effective december 5 2008 bj services company 1995 incentive plan filed exhibit 101 bj services company’s quarterly report form 10q quarterly period ended december 31 2008 file 110570 incorporated herein reference 1060 bj services company 1997 incentive plan filed appendix b bj services company’s proxy statement dated december 22 1997 file 110570 incorporated herein reference 1061 amendment effective july 22 1999 bj services company 1997 incentive plan filed exhibit 1026 bj services company’s annual report form 10k year ended september 30 1999 file 110570 incorporated herein reference 1062 amendment effective january 27 2000 bj services company 1997 incentive plan filed appendix c bj services company’s proxy statement dated december 20 1999 file 110570 incorporated herein reference 1063 amendment effective may 10 2001 bj services company 1997 incentive plan filed appendix c bj services company’s proxy statement dated april 10 2001 file 110570 incorporated herein reference 1064 fifth amendment effective october 15 2001 bj services company 1997 incentive plan filed exhibit 1017 bj services company’s annual report form 10k year ended september 30 2001 file 110570 incorporated herein reference 1065 eighth amendment effective november 15 2006 bj services company 1997 incentive plan filed exhibit 103 bj services company’s current report form 8k filed december 13 2006 incorporated herein reference 1066 ninth amendment effective october 13 2008 bj services company 1997 incentive plan filed exhibit 1016 bj services company’s annual report form 10k year ended september 30 2008 file 110570 incorporated herein reference 1067 tenth amendment effective december 5 2008 bj services company 1997 incentive plan filed exhibit 102 bj services company’s quarterly report quarterly period ended december 31 2008 file 110570 incorporated herein reference 1068 bj services company 2000 incentive plan filed appendix b bj services company’s proxy statement dated december 20 2000 file 110570 incorporated herein reference 1069 first amendment effective march 22 2001 bj services company 2000 incentive plan filed exhibit 102 bj services company’s registration statement form s8 reg 33373348 incorporated herein reference 1070 second amendment effective may 10 2001 bj services company 2000 incentive plan filed appendix bj services company’s proxy statement dated april 10 2001 file 110570 incorporated herein reference 1071 third amendment effective october 15 2001 bj services company 2000 incentive plan filed exhibit 1024 bj services company’s annual report form 10k year ended september 30 2001 file 110570 incorporated herein reference 1072 fifth amendment effective november 15 2006 bj services company 2000 incentive plan filed exhibit 104 bj services company’s current report form 8k filed december 13 2006 file 110570 incorporated herein reference 1073 sixth amendment effective october 13 2008 bj services company 2000 incentive plan filed exhibit 1022 bj services company’s annual report form 10k year ended september 30 2008 file 110570 incorporated herein reference 1074 seventh amendment effective december 5 2008 bj services company 2000 incentive plan filed exhibit 103 bj services company’s quarterly report quarterly period ended december 31 2008 file 110570 incorporated herein reference 1075 amended restated bj services company 2003 incentive plan filed appendix bj services company’s proxy statement dated december 15 2008 file 110570 incorporated herein reference 1076 first amendment amended restated bj services company 2003 incentive plan filed exhibit 101 bj services company’s quarterly report quarterly period ended march 31 2008 file 110570 incorporated herein reference 1077 compensation table named executive officers directors 1078 form credit agreement dated july 7 2005 among baker hughes incorporated jpmorgan chase bank na administrative agent fourteen lenders 500 million aggregate banks filed exhibit 101 current report baker hughes incorporated form 8k filed july 11 2005 1079 first amendment credit agreement dated june 7 2006 among baker hughes incorporated fifteen banks 500 million aggregate banks filed exhibit 101 current report baker hughes incorporated form 8k filed june 12 2006 1080 second amendment credit agreement dated may 31 2007 among baker hughes incorporated fifteen banks 500 million aggregate banks filed exhibit 101 current report baker hughes incorporated form 8k filed june 4 2007 1081 third amendment credit agreement dated april 1 2008 among baker hughes incorporated jp morgan chase bank na administrative agent fifteen lenders 500 million aggregate banks filed exhibit 102 current report baker hughes incorporated form 8k filed april 2 2008 1082 credit agreement dated march 30 2009 among baker hughes incorporated jp morgan chase bank na administrative agent thirteen lenders 500 million aggregate banks filed exhibit 101 current report baker hughes incorporated form 8k filed march 31 2009 1083 agreement resignation appointment acceptance among baker hughes incorporated citibank na bank new york trust company na dated april 26 2007 effective may 1 2007 filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended march 31 2007 1084 agreement plan merger among baker hughes incorporated baker hughes delaware inc western atlas inc dated may 10 1998 filed exhibit 1030 annual report baker hughes incorporated form 10k year ended december 31 2003 1085 employee benefits agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1032 annual report baker hughes incorporated form 10k year ended december 31 2003 1086 deferred prosecution agreement baker hughes incorporated united states department justice filed april 26 2007 united states district court texas houston division filed exhibit 104 quarterly report baker hughes incorporated form 10q quarter ended march 31 2007 1087 plea agreement baker hughes services international inc united states department justice filed april 26 2007 united states district court texas houston division filed exhibit 105 quarterly report baker hughes incorporated form 10q quarter ended march 31 2007 1088 agreement plan merger dated august 30 2009 among baker hughes incorporated bsa acquisition llc bj services company filed exhibit 21 current report baker hughes incorporated form 8k filed august 31 2009 211 subsidiaries registrant 231 consent deloitte touche llp 311 certification chad c deaton chief executive officer dated february 24 2011 pursuant rule 13a14a securities exchange act 1934 amended 312 certification peter ragauss chief financial officer dated february 24 2011 pursuant rule 13a14a securities exchange act 1934 amended 32 statement chad c deaton chief executive officer peter ragauss chief financial officer dated february 24 2011 furnished pursuant rule 13a14b securities exchange act 1934 amended 991 baker hughes incorporated information document filed april 26 2007 united states attorney’s office southern district texas united states department justice filed exhibit 991 quarterly report baker hughes incorporated form 10q quarter ended march 31 2007 992 baker hughes services international inc information document filed april 26 2007 united states attorney’s office southern district texas united states department justice filed exhibit 992 quarterly report baker hughes incorporated form 10q quarter ended march 31 2007 993 sentencing memorandum motion waiver presentence investigation baker hughes services international inc filed exhibit 993 quarterly report baker hughes incorporated form 10q quarter ended march 31 2007 994 baker hughes services international inc sentencing letter united states department justice dated april 24 2007 filed exhibit 994 quarterly report baker hughes incorporated form 10q quarter ended march 31 2007 995 complaint securities exchange commission vs baker hughes incorporated filed april 26 2007 united states district court texas houston division filed exhibit 995 quarterly report baker hughes incorporated form 10q quarter ended march 31 2007 996 final judgment securities exchange commission defendant baker hughes incorporated dated filed may 1 2007 united states district court texas houston division filed exhibit 991 quarterly report baker hughes incorporated form 10q quarter ended june 30 2007 101ins xbrl instance document 101sch xbrl schema document 101cal xbrl calculation linkbase document 101lab xbrl label linkbase document 101pre xbrl presentation linkbase document 101def xbrl definition linkbase document signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized known persons presents person whose signature appears constitutes appoints chad c deaton peter ragauss may act without joinder true lawful attorneysinfact agents full power substitution resubstitution person name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated schedule ii valuation qualifying accounts baker hughes incorporated schedule ii valuation qualifying accounts 1 represents elimination accounts receivable inventory deemed uncollectible worthless 2 represents transfers currency translation adjustments divestituresitem 15 exhibits financial statement schedules list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules schedule iivaluation qualifying accounts 3 exhibits exhibit identified filed part report exhibits designated “” filed exhibit annual report form 10k exhibits designated “” identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized known persons presents person whose signature appears constitutes appoints martin craighead peter ragauss may act without joinder true lawful attorneysinfact agents full power substitution resubstitution person name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated schedule valuation qualifying accounts baker hughes incorporated schedule ii valuation qualifying accounts 1 represents elimination accounts receivable inventory deemed uncollectible worthless 2 represents transfers currency translation adjustments divestituresitem 15 exhibits financial statement schedules list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules schedule iivaluation qualifying accounts 3 exhibits exhibit identified filed part report exhibits designated “” filed exhibit annual report form 10k exhibits designated “” identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized known persons presents person whose signature appears constitutes appoints martin craighead peter ragauss may act without joinder true lawful attorneysinfact agents full power substitution resubstitution person name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities indicated 13th day february 2013 signature title martin craighead president chief executive officer director martin craighead principal executive officer chad c deaton executive chairman board chad c deaton peter ragauss senior vice president chief financial officer peter ragauss principal financial officer alan j keifer vice president controller alan j keifer principal accounting officer signature title larry brady director larry brady clarence p cazalot jr director clarence p cazalot jr lynn l elsenhans director lynn l elsenhans anthony g fernandes director anthony g fernandes claire w gargalli director claire w gargalli pierre h jungels director pierre h jungels james lash director james lash j larry nichols director j larry nichols h john riley jr director h john riley jr james w stewart director james w stewart charles l watson director charles l watson baker hughes incorporated schedule ii valuation qualifying accounts 1 represents elimination accounts receivable inventory deemed uncollectible worthless 2 represents transfers currency translation adjustments divestituresitem 15 exhibits financial statement schedules list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules schedule iivaluation qualifying accounts 3 exhibits exhibit identified filed part report exhibits designated “” filed exhibit annual report form 10k exhibits designated “” identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized known persons presents person whose signature appears constitutes appoints martin craighead peter ragauss may act without joinder true lawful attorneysinfact agents full power substitution resubstitution person name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities indicated 12th day february 2014 signature title martin craighead chairman chief executive officer martin craighead principal executive officer peter ragauss senior vice president chief financial officer peter ragauss principal financial officer alan j keifer vice president controller alan j keifer principal accounting officer signature title larry brady director larry brady clarence p cazalot jr director clarence p cazalot jr lynn l elsenhans director lynn l elsenhans anthony g fernandes director anthony g fernandes claire w gargalli director claire w gargalli pierre h jungels director pierre h jungels james lash director james lash j larry nichols director j larry nichols james w stewart director james w stewart charles l watson director charles l watson baker hughes incorporated schedule ii valuation qualifying accounts 1 represents elimination accounts receivable inventory deemed uncollectible worthless 2 represents transfers currency translation adjustments divestitures 3 year ended december 31 2013 reserve doubtful accounts receivable includes 30 million reduction due currency devaluation venezuelaitem 15 exhibits financial statement schedules list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules schedule ii valuation qualifying accounts 3 exhibits exhibit identified filed part report exhibits designated “” filed exhibit annual report form 10k exhibits designated “” identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference baker hughes incorporated schedule ii valuation qualifying accounts 1 represents elimination accounts receivable inventory deemed uncollectible worthless 2 represents transfers currency translation adjustments divestitures 3 year ended december 31 2014 2013 reserve doubtful accounts receivable includes 39 million 30 million reduction respectively due currency devaluation venezuela signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized known persons presents person whose signature appears constitutes appoints martin craighead kimberly ross may act without joinder true lawful attorneysinfact agents full power substitution resubstitution person name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities indicated 25th day february 2015 signature title martin craighead chairman chief executive officer martin craighead principal executive officer kimberly ross senior vice president chief financial officer kimberly ross principal financial officer alan j keifer vice president controller alan j keifer principal accounting officer signature title larry brady director larry brady gregory p brenneman director gregory p brenneman clarence p cazalot jr director clarence p cazalot jr william h easter iii director william h easter iii lynn l elsenhans director lynn l elsenhans anthony g fernandes director anthony g fernandes claire w gargalli director claire w gargalli pierre h jungels director pierre h jungels james lash director james lash j larry nichols director j larry nichols james w stewart director james w stewart charles l watson director charles l watsonitem 15 exhibits financial statement schedules list documents filed part annual report 1 financial statements financial statements company set forth item 8 annual report form 10k 2 financial statement schedules schedule ii valuation qualifying accounts 3 exhibits exhibit identified filed part annual report exhibits designated filed exhibit annual report form 10k exhibits designated furnished exhibit annual report form 10k exhibits designated identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference baker hughes incorporated schedule ii valuation qualifying accounts 1 represents elimination accounts receivable inventory deemed uncollectible worthless 2 represents transfers currency translation adjustments divestitures 3 year ended december 31 2014 2013 reserve doubtful accounts receivable includes 39 million 30 million reduction respectively due currency devaluation venezuela signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized known persons presents person whose signature appears constitutes appoints martin craighead kimberly ross may act without joinder true lawful attorneysinfact agents full power substitution resubstitution person name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities indicated 16th day february 2016 signature title martin craighead chairman chief executive officer martin craighead principal executive officer kimberly ross senior vice president chief financial officer kimberly ross principal financial officer alan j keifer vice president controller alan j keifer principal accounting officer signature title larry brady director larry brady gregory brenneman director gregory brenneman clarence p cazalot jr director clarence p cazalot jr william h easter iii director william h easter iii lynn l elsenhans director lynn l elsenhans anthony g fernandes director anthony g fernandes claire w gargalli director claire w gargalli pierre h jungels director pierre h jungels james lash director james lash j larry nichols director j larry nichols james w stewart director james w stewart charles l watson director charles l watsonitem 15 exhibits list documents filed part annual report 1 financial statements financial statements company set forth item 8 annual report form 10k 2 exhibits exhibit identified filed part annual report exhibits designated filed exhibit annual report form 10k exhibits designated furnished exhibit annual report form 10k exhibits designated identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference bhge llc 2017 form 10k 99 bhge llc 2017 form 10k 100 bhge llc 2017 form 10k 101 bhge llc 2017 form 10k 102 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized baker hughes ge company llc date february 23 2018 lorenzo simonelli lorenzo simonelli chairman baker hughes ge company president chief executive officer known persons presents person whose signature appears constitutes appoints lorenzo simonelli brian worrell william marsh may act without joinder true lawful attorneysinfact agents full power substitution resubstitution person name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities indicated 23rd day february 2018 signature title lorenzo simonelli chairman baker hughes ge company president chief executive officer lorenzo simonelli principal executive officer brian worrell chief financial officer brian worrell principal financial officer kurt camilleri vice president controller chief accounting officer kurt camilleri principal accounting officer bhge llc 2017 form 10k 103 w geoffrey beattie lead director baker hughes ge company w geoffrey beattie gregory brenneman director baker hughes ge company gregory brenneman clarence p cazalot jr director baker hughes ge company clarence p cazalot jr martin craighead vice chairman board baker hughes ge company martin craighead lynn l elsenhans director baker hughes ge company lynn l elsenhans jamie miller director baker hughes ge company jamie miller james j mulva director baker hughes ge company james j mulva john g rice director baker hughes ge company john g rice bhge llc 2017 form 10k 104item 15 exhibits financial statement schedules list documents filed part annual report 1 financial statements financial statements company set forth item 8 annual report form 10k 2 financial statement schedules listed reg 210504 omitted applicable required information shown consolidated financial statements notes thereto 3 exhibits exhibit identified filed part annual report exhibits designated filed exhibit annual report form 10k exhibits designated furnished exhibit annual report form 10k exhibits designated identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference bhge llc 2018 form 10k 102 bhge llc 2018 form 10k 103 item 16 form 10k summary none bhge llc 2018 form 10k 104 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized baker hughes ge company llc date february 19 2019 lorenzo simonelli lorenzo simonelli chairman baker hughes ge company president chief executive officer known persons presents person whose signature appears constitutes appoints lorenzo simonelli brian worrell william marsh may act without joinder true lawful attorneysinfact agents full power substitution resubstitution person name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities indicated 19th day february 2019 signature title lorenzo simonelli chairman baker hughes ge company president chief executive officer lorenzo simonelli principal executive officer brian worrell chief financial officer brian worrell principal financial officer kurt camilleri vice president controller chief accounting officer kurt camilleri principal accounting officer bhge llc 2018 form 10k 105 signature title w geoffrey beattie director baker hughes ge company w geoffrey beattie gregory brenneman director baker hughes ge company gregory brenneman clarence p cazalot jr director baker hughes ge company clarence p cazalot jr martin craighead vice chairman board baker hughes ge company martin craighead lynn l elsenhans director baker hughes ge company lynn l elsenhans jamie miller director baker hughes ge company jamie miller james j mulva director baker hughes ge company james j mulva john g rice director baker hughes ge company john g rice bhge llc 2018 form 10k 106item 15 exhibits financial statement schedules list documents filed part annual report 1 financial statements financial statements company set forth item 8 annual report form 10k 2 financial statement schedules listed reg 210504 omitted applicable required information shown consolidated combined financial statements notes thereto 3 exhibits exhibit identified filed part annual report exhibits designated filed exhibit annual report form 10k exhibits designated furnished exhibit annual report form 10k exhibits designated identified management contracts compensatory plans arrangements exhibits previously filed incorporated reference bhge llc 2019 form 10k 96 bhge llc 2019 form 10k 97 bhge llc 2019 form 10k 98 item 16 form 10k summary none bhge llc 2019 form 10k 99 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized baker hughes ge company llc date february 13 2020 lorenzo simonelli lorenzo simonelli chairman baker hughes company president chief executive officer known persons presents person whose signature appears constitutes appoints lorenzo simonelli brian worrell william marsh may act without joinder true lawful attorneysinfact agents full power substitution resubstitution person name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities indicated 13th day february 2020 signature title lorenzo simonelli chairman baker hughes company president chief executive officer lorenzo simonelli principal executive officer brian worrell chief financial officer baker hughes company brian worrell principal financial officer kurt camilleri senior vice president controller chief accounting officer baker hughes company kurt camilleri principal accounting officer bhge llc 2019 form 10k 100 signature title w geoffrey beattie director baker hughes company w geoffrey beattie gregory brenneman director baker hughes company gregory brenneman clarence p cazalot jr director baker hughes company clarence p cazalot jr gregory l ebel director baker hughes company gregory l ebel lynn l elsenhans director baker hughes company lynn l elsenhans john g rice director baker hughes company john g rice bhge llc 2019 form 10k 101item 15 exhibits financial statement schedules list documents filed part annual report 1 financial statements financial statements company set forth item 8 annual report form 10k 2 financial statement schedules listed reg 210504 omitted applicable required information shown consolidated financial statements notes thereto 3 exhibits exhibit identified filed part annual report exhibits designated filed exhibit annual report form 10k exhibits designated furnished exhibit annual report form 10k exhibits designated identified management contracts compensatory plans arrangements exhibits previously filed incorporated reference baker hughes holdings llc 2020 form 10k 90 baker hughes holdings llc 2020 form 10k 91 item 16 form 10k summary none baker hughes holdings llc 2020 form 10k 92 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized baker hughes holdings llc datefebruary 25 2021 lorenzo simonelli lorenzo simonelli chairman baker hughes company president chief executive officer known persons presents person whose signature appears constitutes appoints lorenzo simonelli brian worrell regina jones may act without joinder true lawful attorneysinfact agents full power substitution resubstitution person name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities indicated 25th day february 2021 signature title lorenzo simonelli chairman baker hughes company president chief executive officer lorenzo simonelli principal executive officer brian worrell chief financial officer brian worrell principal financial officer kurt camilleri senior vice president controller chief accounting officer kurt camilleri principal accounting officer baker hughes holdings llc 2020 form 10k 93 signature title w geoffrey beattiedirector baker hughes company w geoffrey beattie gregory brenneman director baker hughes company gregory brenneman cynthia b carrolldirector baker hughes company cynthia b carroll nelda j connorsdirector baker hughes company nelda j connors clarence p cazalot jr director baker hughes company clarence p cazalot jr gregory l ebel director baker hughes company gregory l ebel lynn l elsenhans director baker hughes company lynn l elsenhans john g rice director baker hughes company john g rice baker hughes holdings llc 2020 form 10k 94item 15 exhibits financial statement schedules list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules schedule ii valuation qualifying accounts 3 exhibits exhibit identified filed part report exhibits designated “” filed exhibit annual report form 10k exhibits designated “” identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized known persons presents person whose signature appears constitutes appoints chad c deaton g stephen finley may act without joinder true lawful attorneysinfact agents full power substitution resubstitution person name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated baker hughes incorporated schedule ii valuation qualifying accounts 1 represents reversals prior accruals receivables collected 2 represents elimination accounts receivable inventory deemed uncollectible worthless 3 represents reclasses currency translation adjustments divestitures exhibit index exhibit identified filed part report exhibits designated “” filed exhibit annual report form 10k exhibits designated “” identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference 31 restated certificate incorporation filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended june 30 2002 32 bylaws baker hughes incorporated restated october 22 2003 filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended september 30 2003 41 rights holders company’s longterm debt company longterm debt instrument regard securities authorized thereunder equal exceed 10 total assets company subsidiaries consolidated basis company agrees furnish copy longterm debt instruments sec upon request 42 restated certificate incorporation filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended june 30 2002 43 bylaws baker hughes incorporated restated october 31 2003 filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended september 30 2003 44 indenture dated may 15 1994 western atlas inc bank new york trustee providing issuance securities series 101 employment agreement baker hughes incorporated chad c deaton dated october 25 2004 filed exhibit 103 current report baker hughes incorporated form 8k filed october 7 2004 102 change control agreement baker hughes incorporated chad c deaton dated october 25 2004 filed exhibit 102 current report baker hughes incorporated form 8k filed october 7 2004 103 indemnification agreement dated october 25 2004 baker hughes incorporated chad c deaton filed exhibit 101 current report baker hughes incorporated form 8k filed october 7 2004 104 stock option agreement issued chad c deaton october 25 2004 amount 75000 shares company common stock filed exhibit 104 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 105 agreement regarding restricted stock award issued chad c deaton october 25 2004 amount 80000 shares company common stock filed exhibit 105 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 106 agreement regarding restricted stock award issued james r clark october 27 2004 amount 40000 shares baker hughes incorporated common stock filed exhibit 107 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 107 second amended restated stock matching agreement baker hughes incorporated james r clark dated october 25 2004 filed exhibit 106 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 108 form severance agreement dated march 1 2001 baker hughes incorporated certain executives executed james r clark dated march 1 2001 william p faubel dated may 29 2001 filed exhibit 1042 annual report baker hughes incorporated form 10k year ended december 31 2001 109 severance agreement baker hughes incorporated g stephen finley dated july 23 1997 filed exhibit 103 annual report baker hughes incorporated form 10k year ended december 31 2002 1010 form amendment 1 severance agreement baker hughes incorporated g stephen finley effective november 11 1998 filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended june 30 2003 1011 severance agreement baker hughes incorporated alan r crain jr dated october 25 2000 filed exhibit 106 annual report baker hughes incorporated form 10k year ended december 31 2000 1012 severance agreement baker hughes incorporated greg nakanishi dated november 1 2000 filed exhibit 107 annual report baker hughes incorporated form 10k year ended december 31 2000 1013 severance agreement dated july 23 1997 baker hughes incorporated edwin c howell amended amendment 1 severance agreement effective november 11 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 2001 1014 severance agreement dated december 3 1997 baker hughes incorporated douglas j wall amended amendment 1 severance agreement effective november 11 1998 filed exhibit 1040 annual report baker hughes incorporated form 10k year ended december 31 2001 1015 form change control severance plan filed exhibit 108 annual report baker hughes incorporated form 10k year ended december 31 2003 1016 form change control severance agreement baker hughes incorporated ray ballantyne david h barr john o’donnell effective july 28 2004 james r clark alan r crain jr william p faubel g stephen finley edwin c howell greg nakanishi douglas j wall effective january 1 2006 chris p beaver paul butero martin craighead effective february 28 2005 filed exhibit 108 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 1017 form indemnification agreement baker hughes incorporated directors executive officers filed exhibit 104 annual report baker hughes incorporated form 10k year ended december 31 2003 1018 baker hughes incorporated director retirement policy certain members board directors filed exhibit 1010 annual report baker hughes incorporated form 10k year ended december 31 2003 1019 baker hughes incorporated director compensation deferral plan amended restated effective july 24 2002 filed exhibit 1016 annual report baker hughes incorporated form 10k year ended december 31 2002 1020 baker hughes incorporated executive severance plan effective november 1 2002 filed exhibit 1013 annual report baker hughes incorporated form 10k year ended december 31 2002 1021 1995 employee annual incentive compensation plan amended amendment 19971 1995 employee annual incentive compensation plan amended amendment 19991 1995 employee annual incentive compensation plan filed exhibit 1017 annual report baker hughes incorporated form 10k year ended december 31 2002 1022 baker hughes incorporated supplemental retirement plan amended restated effective january 1 2003 filed exhibit 1012 annual report baker hughes incorporated form 10k year ended december 31 2002 1023 first amendment baker hughes incorporated supplemental retirement plan effective july 23 2003 filed exhibit 101 quarterly report baker hughes incorporated form 10q filed quarter ended september 30 2003 1024 long term incentive plan amended amendment 19991 long term incentive plan filed exhibit 1018 annual report baker hughes incorporated form 10k year ended december 31 2002 1025 baker hughes incorporated 1998 employee stock option plan amended amendment 19991 1998 employee stock option plan filed exhibit 103 quarterly report baker hughes incorporated form 10q quarter ended june 30 2003 1026 baker hughes incorporated 2002 employee longterm incentive plan filed exhibit 44 registration statement 33387372 form s8 filed may 1 2002 1027 baker hughes incorporated 2002 director officer longterm incentive plan filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended september 30 2003 1028 baker hughes incorporated employee stock purchase plan amended restated effective march 3 2003 filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended march 31 2003 1029 baker hughes incorporated pension plan effective january 1 2002 amended first amendment effective january 1 2002 filed exhibit 1051 annual report baker hughes incorporated form 10k year ended december 31 2002 1030 form nonqualified stock option agreement employees effective october 25 1995 filed exhibit 1027 annual report baker hughes incorporated form 10k year ended december 31 2001 1031 form incentive stock option agreement employees effective october 25 1995 filed exhibit 1028 annual report baker hughes incorporated form 10k year ended december 31 2001 1032 form nonqualified stock option agreement directors effective october 25 1995 filed exhibit 1026 annual report baker hughes incorporated form 10k year ended december 31 2001 1033 form stock option agreement executive officers effective october 1 1998 filed exhibit 1037 annual report baker hughes incorporated form 10k year ended december 31 2000 1034 form nonqualified stock option agreement employees effective october 1 1998 filed exhibit 104 quarterly report baker hughes incorporated form 10q quarter ended june 30 2003 1035 form nonqualified stock option agreement directors effective october 25 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 2000 1036 form stock option agreement executives effective january 26 2000 filed exhibit 1036 annual report baker hughes incorporated form 10k year ended december 31 2000 1037 form baker hughes incorporated nonqualified stock option agreement executive officers dated january 24 2001 filed exhibit 1041 annual report baker hughes incorporated form 10k year ended december 31 2001 1038 form baker hughes incorporated nonqualified stock option agreement employees dated january 30 2002 filed exhibit 1043 annual report baker hughes incorporated form 10k year ended december 31 2001 1039 form baker hughes incorporated incentive stock option agreement employees dated january 30 2002 filed exhibit 1044 annual report baker hughes incorporated form 10k year ended december 31 2001 1040 form baker hughes incorporated stock option award agreements dated july 24 2002 terms conditions employees directors officers filed exhibit 1046 annual report baker hughes incorporated form 10k year ended december 31 2002 1041 form baker hughes incorporated stock option award agreements dated january 29 2003 terms conditions employees directors officers filed exhibit 1047 annual report baker hughes incorporated form 10k year ended december 31 2002 1042 form baker hughes incorporated stock option award agreement dated july 22 2003 employees directors officers filed exhibit 101 quarterly report form 10q quarter ended june 30 2003 1043 form baker hughes incorporated stock option award agreements dated january 28 2004 terms conditions employees directors officers 1044 form baker hughes incorporated stock option award agreements dated july 28 2004 terms conditions employees directors officers 1045 form baker hughes incorporated performance award agreement including terms conditions certain executive officers dated january 1 2004 filed exhibit 104 quarterly report baker hughes incorporated form 10q quarter ended march 31 2004 1046 form restricted stock award resolution including terms conditions dated march 2 2004 filed exhibit 103 quarterly report baker hughes incorporated form 10q quarter ended march 31 2004 1047 form restricted stock award resolution including terms conditions dated april 28 2004 filed exhibit 105 quarterly report baker hughes incorporated form 10q quarter ended march 31 2004 1048 form baker hughes incorporated stock option award agreements dated january 26 2005 terms conditions employees directors officers 1049 form baker hughes incorporated restricted stock award agreement 1050 form baker hughes incorporated restricted stock award terms conditions 1051 form baker hughes incorporated restricted stock unit agreement 1052 form baker hughes incorporated restricted stock unit terms conditions 1053 compensation table named executive officers directors 1054 form credit agreement dated july 7 2003 among baker hughes incorporated thirteen banks 500000000 aggregate banks filed exhibit 105 quarterly report baker hughes incorporated form 10q quarter ended september 30 2003 1055 interest rate swap confirmation dated april 7 2004 schedule master agreement multicurrencycross border dated march 6 2000 1056 agreement plan merger among baker hughes incorporated baker hughes delaware inc western atlas inc dated may 10 1998 filed exhibit 1030 annual report baker hughes incorporated form 10k year ended december 31 2003 1057 tax sharing agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1031 annual report baker hughes incorporated form 10k year ended december 31 2003 1058 employee benefits agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1032 annual report baker hughes incorporated form 10k year ended december 31 2003 1059 master formation agreement among company schlumberger limited certain wholly owned subsidiaries schlumberger limited dated september 6 2000 filed exhibit 21 current report baker hughes incorporated form 8k dated september 7 2000 1060 shareholders’ agreement among schlumberger limited baker hughes incorporated parties listed signature pages thereto dated november 30 2000 filed exhibit 101 current report baker hughes incorporated form 8k dated november 30 2000 211 subsidiaries registrant 231 consent deloitte touche llp 311 certification chad c deaton chief executive officer dated february 25 2005 pursuant rule 13a14a securities exchange act 1934 amended 312 certification g stephen finley chief financial officer dated february 25 2005 pursuant rule 13a14a securities exchange act 1934 amended 32 statement chad c deaton chief executive officer g stephen finley chief financial officer dated february 25 2005 furnished pursuant rule 13a14b securities exchange act 1934 amended 991 administrative proceeding file 310572 dated september 12 2001 issued securities exchange commission filed exhibit 991 current report form 8k filed september 19 2001item 15 exhibits financial statement schedules list documents filed part report 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules schedule ii valuation qualifying accounts exhibit identified filed part report exhibits designated “” filed exhibit annual report form 10k exhibits designated “” identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference 31 restated certificate incorporation filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended june 30 2002 32 certificate amendment restated certificate incorporation filed exhibit 31 current report baker hughes incorporated form 8k filed may 4 2005 33 bylaws baker hughes incorporated restated april 27 2006 filed exhibit 32 quarterly report baker hughes incorporated form 10q quarter ended march 31 2006 41 rights holders company’s longterm debt company longterm debt instrument regard securities authorized thereunder equal exceed 10 total assets company subsidiaries consolidated basis company agrees furnish copy longterm debt instruments sec upon request 42 restated certificate incorporation filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended june 30 2002 43 certificate amendment restated certificate incorporation filed exhibit 31 current report baker hughes incorporated form 8k filed may 4 2005 44 bylaws baker hughes incorporated restated april 27 2006 filed exhibit 32 quarterly report baker hughes incorporated form 10q quarter ended march 31 2006 45 indenture dated may 15 1994 western atlas inc bank new york trustee providing issuance securities series filed exhibit 44 annual report baker hughes incorporated form 10k year ended december 31 2004 101 employment agreement baker hughes incorporated chad c deaton dated october 25 2004 filed exhibit 103 current report baker hughes incorporated form 8k filed october 7 2004 102 change control agreement baker hughes incorporated chad c deaton dated october 25 2004 filed exhibit 102 current report baker hughes incorporated form 8k filed october 7 2004 103 indemnification agreement dated october 25 2004 baker hughes incorporated chad c deaton filed exhibit 101 current report baker hughes incorporated form 8k filed october 7 2004 104 stock option agreement issued chad c deaton october 25 2004 amount 75000 shares company common stock filed exhibit 104 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 105 agreement regarding restricted stock award issued chad c deaton october 25 2004 amount 80000 shares company common stock filed exhibit 105 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 106 agreement regarding restricted stock award issued james r clark october 27 2004 amount 40000 shares baker hughes incorporated common stock filed exhibit 107 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 107 second amended restated stock matching agreement baker hughes incorporated james r clark dated october 25 2004 filed exhibit 106 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 108 letter dated october 26 2005 james r clark clarifying mr clark’s employment terms filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended september 30 2005 109 restated retirement consulting agreement g stephen finley baker hughes incorporated dated march 27 2006 filed exhibit 102 current report form 8k filed march 31 2006 1010 letter agreement peter ragauss baker hughes incorporated dated march 27 2006 filed exhibit 101 current report form 8k filed march 31 2006 1011 form change control severance plan filed exhibit 108 annual report baker hughes incorporated form 10k year ended december 31 2003 1012 form change control severance agreement baker hughes incorporated david h barr john o’donnell effective july 28 2004 james r clark alan r crain jr greg nakanishi douglas j wall effective january 1 2006 chris p beaver paul butero martin craighead effective february 28 2005 richard l williams effective may 2 2005 charles wolley effective january 1 2006 gary g rich effective september 15 2006 filed exhibit 108 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 1013 form indemnification agreement baker hughes incorporated directors executive officers filed exhibit 104 annual report baker hughes incorporated form 10k year ended december 31 2003 1014 baker hughes incorporated director retirement policy certain members board directors filed exhibit 1010 annual report baker hughes incorporated form 10k year ended december 31 2003 1015 baker hughes incorporated director compensation deferral plan amended restated effective july 24 2002 filed exhibit 1016 annual report baker hughes incorporated form 10k year ended december 31 2002 1016 baker hughes incorporated executive severance plan effective november 1 2002 filed exhibit 1013 annual report baker hughes incorporated form 10k year ended december 31 2002 1017 baker hughes incorporated annual incentive compensation plan amended restated effective january 1 2005 filed exhibit 101 quarterly report baker hughes incorporated 10q quarter ended march 31 2006 1018 baker hughes incorporated supplemental retirement plan amended restated effective january 1 2005 filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended september 30 2005 1019 first amendment baker hughes incorporated supplemental retirement plan amended restated effective january 1 2005 dated february 9 2007 effective january 1 2007 1020 longterm incentive plan amended amendment 19991 longterm incentive plan filed exhibit 1018 annual report baker hughes incorporated form 10k year ended december 31 2002 1021 baker hughes incorporated 1998 employee stock option plan amended amendment 19991 1998 employee stock option plan filed exhibit 103 quarterly report baker hughes incorporated form 10q quarter ended june 30 2003 1022 baker hughes incorporated 2002 employee longterm incentive plan filed exhibit 44 registration statement 33387372 form s8 filed may 1 2002 1023 baker hughes incorporated 2002 director officer longterm incentive plan filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended september 30 2003 1024 amendment 2002 director officer longterm incentive plan effective october 27 2005 filed exhibit 103 quarterly report form 10q quarter ended september 30 2005 1025 baker hughes incorporated employee stock purchase plan amended restated effective march 3 2003 filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended march 31 2003 1026 baker hughes incorporated pension plan effective january 1 2002 amended first amendment effective january 1 2002 filed exhibit 1051 annual report baker hughes incorporated form 10k year ended december 31 2002 1027 form stock option agreement executive officers effective october 1 1998 filed exhibit 1037 annual report baker hughes incorporated form 10k year ended december 31 2000 1028 form nonqualified stock option agreement directors effective october 25 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 2000 1029 form baker hughes incorporated nonqualified stock option agreement executive officers dated january 24 2001 filed exhibit 1041 annual report baker hughes incorporated form 10k year ended december 31 2001 1030 form baker hughes incorporated nonqualified stock option agreement employees dated january 30 2002 filed exhibit 1043 annual report baker hughes incorporated form 10k year ended december 31 2001 1031 form baker hughes incorporated incentive stock option agreement employees dated january 30 2002 filed exhibit 1044 annual report baker hughes incorporated form 10k year ended december 31 2001 1032 form baker hughes incorporated stock option award agreements terms conditions filed exhibit 1046 annual report baker hughes incorporated form 10k year ended december 31 2002 1033 form baker hughes incorporated performance award agreement including terms conditions certain executive officers filed exhibit 104 quarterly report baker hughes incorporated form 10q quarter ended march 31 2004 1034 form restricted stock award resolution including terms conditions filed exhibit 103 quarterly report baker hughes incorporated form 10q quarter ended march 31 2004 1035 form baker hughes incorporated restricted stock award agreement filed exhibit 1054 annual report form 10k year ended december 31 2004 1036 form baker hughes incorporated restricted stock award terms conditions filed exhibit 1054 annual report form 10k year ended december 31 2004 1037 form baker hughes incorporated restricted stock unit agreement filed exhibit 1054 annual report form 10k year ended december 31 2004 1038 form baker hughes incorporated restricted stock unit terms conditions filed exhibit 1054 annual report form 10k year ended december 31 2004 1039 form baker hughes incorporated restricted stock award including terms conditions directors filed exhibit 1040 annual report form 10k year ended december 31 2005 1040 form baker hughes incorporated stock option award agreement including terms conditions directors filed exhibit 1041 annual report form 10k year ended december 31 2005 1041 baker hughes incorporated amended restated nonqualified stock option agreement dated february 24 2006 baker hughes incorporated anthony g fernandes 1042 form baker hughes incorporated performance unit award agreement including terms conditions filed exhibit 1042 annual report form 10k year ended december 31 2005 1043 performance goals performance unit award granted 2006 filed exhibit 1043 annual report form 10k year ended december 31 2005 1044 form performance goals performance unit awards 1045 compensation table named executive officers directors 1046 form credit agreement dated july 7 2005 among baker hughes incorporated jpmorgan chase bank na administrative agent fourteen lenders 500 million aggregate banks filed exhibit 101 current report baker hughes incorporated form 8k filed july 11 2005 1047 first amendment credit agreement dated june 7 2006 among baker hughes incorporated fifteen banks 500 million aggregate banks filed exhibit 101 current report baker hughes incorporated form 8k filed june 12 2006 1048 agreement plan merger among baker hughes incorporated baker hughes delaware inc western atlas inc dated may 10 1998 filed exhibit 1030 annual report baker hughes incorporated form 10k year ended december 31 2003 1049 tax sharing agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1031 annual report baker hughes incorporated form 10k year ended december 31 2003 1050 employee benefits agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1032 annual report baker hughes incorporated form 10k year ended december 31 2003 1051 master formation agreement among company schlumberger limited certain wholly owned subsidiaries schlumberger limited dated september 6 2000 filed exhibit 21 current report baker hughes incorporated form 8k dated september 7 2000 1052 master sales agreement among schlumberger limited baker hughes incorporated parties listed signature pages thereto dated april 20 2006 filed exhibit 21 quarterly report baker hughes incorporated form 10q quarter ended march 31 2006 211 subsidiaries registrant 231 consent deloitte touche llp 311 certification chad c deaton chief executive officer dated february 23 2007 pursuant rule 13a14a securities exchange act 1934 amended 312 certification peter ragauss chief financial officer dated february 23 2007 pursuant rule 13a14a securities exchange act 1934 amended 32 statement chad c deaton chief executive officer peter ragauss chief financial officer dated february 23 2007 furnished pursuant rule 13a14b securities exchange act 1934 amended 991 administrative proceeding file 310572 dated september 12 2001 issued securities exchange commission filed exhibit 991 current report baker hughes incorporated form 8k filed september 19 2001 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized known persons presents person whose signature appears constitutes appoints chad c deaton peter ragauss may act without joinder true lawful attorneysinfact agents full power substitution resubstitution person name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated baker hughes incorporated schedule ii valuation qualifying accounts 1 represents reversals prior accruals receivables collected 2 represents elimination accounts receivable inventory deemed uncollectible worthless 3 represents reclasses currency translation adjustments divestitures index exhibits exhibit identified filed part report exhibits designated “” filed exhibit annual report form 10k exhibits designated “” identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference 31 restated certificate incorporation filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended june 30 2002 32 certificate amendment restated certificate incorporation filed exhibit 31 current report baker hughes incorporated form 8k filed may 4 2005 33 bylaws baker hughes incorporated restated april 27 2006 filed exhibit 32 quarterly report baker hughes incorporated form 10q quarter ended march 31 2006 41 rights holders company’s longterm debt company longterm debt instrument regard securities authorized thereunder equal exceed 10 total assets company subsidiaries consolidated basis company agrees furnish copy longterm debt instruments sec upon request 42 restated certificate incorporation filed exhibit 31 quarterly report baker hughes incorporated form 10q quarter ended june 30 2002 43 certificate amendment restated certificate incorporation filed exhibit 31 current report baker hughes incorporated form 8k filed may 4 2005 44 bylaws baker hughes incorporated restated april 27 2006 filed exhibit 32 quarterly report baker hughes incorporated form 10q quarter ended march 31 2006 45 indenture dated may 15 1994 western atlas inc bank new york trustee providing issuance securities series filed exhibit 44 annual report baker hughes incorporated form 10k year ended december 31 2004 101 employment agreement baker hughes incorporated chad c deaton dated october 25 2004 filed exhibit 103 current report baker hughes incorporated form 8k filed october 7 2004 102 change control agreement baker hughes incorporated chad c deaton dated october 25 2004 filed exhibit 102 current report baker hughes incorporated form 8k filed october 7 2004 103 indemnification agreement dated october 25 2004 baker hughes incorporated chad c deaton filed exhibit 101 current report baker hughes incorporated form 8k filed october 7 2004 104 stock option agreement issued chad c deaton october 25 2004 amount 75000 shares company common stock filed exhibit 104 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 105 agreement regarding restricted stock award issued chad c deaton october 25 2004 amount 80000 shares company common stock filed exhibit 105 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 106 agreement regarding restricted stock award issued james r clark october 27 2004 amount 40000 shares baker hughes incorporated common stock filed exhibit 107 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 107 second amended restated stock matching agreement baker hughes incorporated james r clark dated october 25 2004 filed exhibit 106 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 108 letter dated october 26 2005 james r clark clarifying mr clark’s employment terms filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended september 30 2005 109 restated retirement consulting agreement g stephen finley baker hughes incorporated dated march 27 2006 filed exhibit 102 current report form 8k filed march 31 2006 1010 letter agreement peter ragauss baker hughes incorporated dated march 27 2006 filed exhibit 101 current report form 8k filed march 31 2006 1011 form change control severance plan filed exhibit 108 annual report baker hughes incorporated form 10k year ended december 31 2003 1012 form change control severance agreement baker hughes incorporated david h barr john o’donnell effective july 28 2004 james r clark alan r crain jr greg nakanishi douglas j wall effective january 1 2006 chris p beaver paul butero martin craighead effective february 28 2005 richard l williams effective may 2 2005 charles wolley effective january 1 2006 gary g rich effective september 15 2006 filed exhibit 108 quarterly report baker hughes incorporated form 10q quarter ended september 30 2004 1013 form indemnification agreement baker hughes incorporated directors executive officers filed exhibit 104 annual report baker hughes incorporated form 10k year ended december 31 2003 1014 baker hughes incorporated director retirement policy certain members board directors filed exhibit 1010 annual report baker hughes incorporated form 10k year ended december 31 2003 1015 baker hughes incorporated director compensation deferral plan amended restated effective july 24 2002 filed exhibit 1016 annual report baker hughes incorporated form 10k year ended december 31 2002 1016 baker hughes incorporated executive severance plan effective november 1 2002 filed exhibit 1013 annual report baker hughes incorporated form 10k year ended december 31 2002 1017 baker hughes incorporated annual incentive compensation plan amended restated effective january 1 2005 filed exhibit 101 quarterly report baker hughes incorporated 10q quarter ended march 31 2006 1018 baker hughes incorporated supplemental retirement plan amended restated effective january 1 2005 filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended september 30 2005 1019 first amendment baker hughes incorporated supplemental retirement plan amended restated effective january 1 2005 dated february 9 2007 effective january 1 2007 1020 longterm incentive plan amended amendment 19991 longterm incentive plan filed exhibit 1018 annual report baker hughes incorporated form 10k year ended december 31 2002 1021 baker hughes incorporated 1998 employee stock option plan amended amendment 19991 1998 employee stock option plan filed exhibit 103 quarterly report baker hughes incorporated form 10q quarter ended june 30 2003 1022 baker hughes incorporated 2002 employee longterm incentive plan filed exhibit 44 registration statement 33387372 form s8 filed may 1 2002 1023 baker hughes incorporated 2002 director officer longterm incentive plan filed exhibit 102 quarterly report baker hughes incorporated form 10q quarter ended september 30 2003 1024 amendment 2002 director officer longterm incentive plan effective october 27 2005 filed exhibit 103 quarterly report form 10q quarter ended september 30 2005 1025 baker hughes incorporated employee stock purchase plan amended restated effective march 3 2003 filed exhibit 101 quarterly report baker hughes incorporated form 10q quarter ended march 31 2003 1026 baker hughes incorporated pension plan effective january 1 2002 amended first amendment effective january 1 2002 filed exhibit 1051 annual report baker hughes incorporated form 10k year ended december 31 2002 1027 form stock option agreement executive officers effective october 1 1998 filed exhibit 1037 annual report baker hughes incorporated form 10k year ended december 31 2000 1028 form nonqualified stock option agreement directors effective october 25 1998 filed exhibit 1039 annual report baker hughes incorporated form 10k year ended december 31 2000 1029 form baker hughes incorporated nonqualified stock option agreement executive officers dated january 24 2001 filed exhibit 1041 annual report baker hughes incorporated form 10k year ended december 31 2001 1030 form baker hughes incorporated nonqualified stock option agreement employees dated january 30 2002 filed exhibit 1043 annual report baker hughes incorporated form 10k year ended december 31 2001 1031 form baker hughes incorporated incentive stock option agreement employees dated january 30 2002 filed exhibit 1044 annual report baker hughes incorporated form 10k year ended december 31 2001 1032 form baker hughes incorporated stock option award agreements terms conditions filed exhibit 1046 annual report baker hughes incorporated form 10k year ended december 31 2002 1033 form baker hughes incorporated performance award agreement including terms conditions certain executive officers filed exhibit 104 quarterly report baker hughes incorporated form 10q quarter ended march 31 2004 1034 form restricted stock award resolution including terms conditions filed exhibit 103 quarterly report baker hughes incorporated form 10q quarter ended march 31 2004 1035 form baker hughes incorporated restricted stock award agreement filed exhibit 1054 annual report form 10k year ended december 31 2004 1036 form baker hughes incorporated restricted stock award terms conditions filed exhibit 1054 annual report form 10k year ended december 31 2004 1037 form baker hughes incorporated restricted stock unit agreement filed exhibit 1054 annual report form 10k year ended december 31 2004 1038 form baker hughes incorporated restricted stock unit terms conditions filed exhibit 1054 annual report form 10k year ended december 31 2004 1039 form baker hughes incorporated restricted stock award including terms conditions directors filed exhibit 1040 annual report form 10k year ended december 31 2005 1040 form baker hughes incorporated stock option award agreement including terms conditions directors filed exhibit 1041 annual report form 10k year ended december 31 2005 1041 baker hughes incorporated amended restated nonqualified stock option agreement dated february 24 2006 baker hughes incorporated anthony g fernandes 1042 form baker hughes incorporated performance unit award agreement including terms conditions filed exhibit 1042 annual report form 10k year ended december 31 2005 1043 performance goals performance unit award granted 2006 filed exhibit 1043 annual report form 10k year ended december 31 2005 1044 form performance goals performance unit awards 1045 compensation table named executive officers directors 1046 form credit agreement dated july 7 2005 among baker hughes incorporated jpmorgan chase bank na administrative agent fourteen lenders 500 million aggregate banks filed exhibit 101 current report baker hughes incorporated form 8k filed july 11 2005 1047 first amendment credit agreement dated june 7 2006 among baker hughes incorporated fifteen banks 500 million aggregate banks filed exhibit 101 current report baker hughes incorporated form 8k filed june 12 2006 1048 agreement plan merger among baker hughes incorporated baker hughes delaware inc western atlas inc dated may 10 1998 filed exhibit 1030 annual report baker hughes incorporated form 10k year ended december 31 2003 1049 tax sharing agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1031 annual report baker hughes incorporated form 10k year ended december 31 2003 1050 employee benefits agreement dated october 31 1997 western atlas inc unova inc filed exhibit 1032 annual report baker hughes incorporated form 10k year ended december 31 2003 1051 master formation agreement among company schlumberger limited certain wholly owned subsidiaries schlumberger limited dated september 6 2000 filed exhibit 21 current report baker hughes incorporated form 8k dated september 7 2000 1052 master sales agreement among schlumberger limited baker hughes incorporated parties listed signature pages thereto dated april 20 2006 filed exhibit 21 quarterly report baker hughes incorporated form 10q quarter ended march 31 2006 211 subsidiaries registrant 231 consent deloitte touche llp 311 certification chad c deaton chief executive officer dated february 23 2007 pursuant rule 13a14a securities exchange act 1934 amended 312 certification peter ragauss chief financial officer dated february 23 2007 pursuant rule 13a14a securities exchange act 1934 amended 32 statement chad c deaton chief executive officer peter ragauss chief financial officer dated february 23 2007 furnished pursuant rule 13a14b securities exchange act 1934 amended 991 administrative proceeding file 310572 dated september 12 2001 issued securities exchange commission filed exhibit 991 current report baker hughes incorporated form 8k filed september 19 2001item 15 exhibits financial statement schedules list documents filed part annual report 1 financial statements financial statements company set forth item 8 annual report form 10k 2 financial statement schedules schedule ii valuation qualifying accounts 3 exhibits exhibit identified filed part annual report exhibits designated filed exhibit annual report form 10k exhibits designated furnished exhibit annual report form 10k exhibits designated identified management contracts compensatory plans arrangements exhibits previously filed indicated incorporated reference baker hughes incorporated schedule ii valuation qualifying accounts 1 represents elimination accounts receivable inventory deemed uncollectible worthless see note 10 inventories notes consolidated financial statements item 8 herein discussion inventory writeoffs related reserves 2 represents transfers currency translation adjustments divestitures 3 year ended december 31 2014 reserve doubtful accounts receivable includes 39 million reduction due currency devaluation venezuela signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized baker hughes incorporated date february 7 2017 martin craighead martin craighead chairman chief executive officer known persons presents person whose signature appears constitutes appoints martin craighead kimberly ross may act without joinder true lawful attorneysinfact agents full power substitution resubstitution person name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities indicated 7th day february 2017 signature title martin craighead chairman chief executive officer martin craighead principal executive officer kimberly ross senior vice president chief financial officer kimberly ross principal financial officer kelly c janzen vice president controller chief accounting officer kelly c janzen principal accounting officer gregory brenneman director gregory brenneman clarence p cazalot jr director clarence p cazalot jr william h easter iii director william h easter iii lynn l elsenhans director lynn l elsenhans anthony g fernandes director anthony g fernandes claire w gargalli director claire w gargalli pierre h jungels director pierre h jungels james lash director james lash j larry nichols director j larry nichols james w stewart director james w stewart charles l watson director charles l watson