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drilling,฀workover฀and฀completion฀activity฀in฀major฀markets,฀
general฀economic฀conditions,฀foreign฀currency฀exchange฀fluctu-
ations฀and฀governmental฀regulation.฀We฀compete฀with฀the฀oil฀
and฀natural฀gas฀industry’s฀largest฀diversified฀oilfield฀services฀
providers,฀as฀well฀as฀many฀small฀companies.฀We฀believe฀that฀
the฀principal฀competitive฀factors฀in฀our฀industries฀are฀product฀
and฀service฀quality,฀availability฀and฀reliability,฀health,฀safety฀and฀
environmental฀standards,฀technical฀proficiency฀and฀price.
Further฀information฀is฀contained฀in฀“Item฀7.฀Management’s฀
Discussion฀and฀Analysis฀of฀Financial฀Condition฀and฀Results฀฀
of฀Operations.”
International฀Operations
We฀operate฀in฀over฀90฀countries฀worldwide,฀and฀our฀
operations฀are฀subject฀to฀the฀risks฀inherent฀in฀doing฀business฀
in฀multiple฀countries฀with฀various฀laws฀and฀differing฀political฀
environments.฀These฀risks฀include,฀but฀are฀not฀limited฀to:฀war,฀
boycotts,฀political฀and฀economic฀changes,฀corruption,฀terrorism,฀
expropriation,฀foreign฀currency฀exchange฀controls,฀taxes฀and฀
changes฀in฀foreign฀currency฀exchange฀rates.฀Although฀it฀is฀
impossible฀to฀predict฀the฀likelihood฀of฀such฀occurrences฀or฀
their฀effect฀on฀us,฀division฀and฀corporate฀management฀routinely฀
evaluate฀these฀risks฀and฀take฀appropriate฀actions฀to฀mitigate฀the฀
risks฀where฀possible.฀However,฀there฀can฀be฀no฀assurance฀that฀
an฀occurrence฀of฀any฀one฀or฀more฀of฀these฀events฀would฀not฀
have฀a฀material฀adverse฀effect฀on฀our฀operations.
Further฀information฀is฀contained฀in฀“Item฀7.฀Management’s฀
Discussion฀and฀Analysis฀of฀Financial฀Condition฀and฀Results฀
of฀Operations.”
Research฀and฀Development;฀Patents
We฀are฀engaged฀in฀research฀and฀development฀activities฀
directed฀primarily฀toward฀the฀improvement฀of฀existing฀prod-
ucts฀and฀services,฀the฀design฀of฀specialized฀products฀to฀meet฀
specific฀customer฀needs฀and฀the฀development฀of฀new฀products,฀
processes฀and฀services.฀For฀information฀regarding฀the฀amounts฀
of฀research฀and฀development฀expense฀in฀each฀of฀the฀three฀years฀
in฀the฀period฀ended฀December฀31,฀2004,฀see฀Note฀17฀of฀the฀
Notes฀to฀Consolidated฀Financial฀Statements฀in฀Item฀8฀herein.
We฀have฀followed฀a฀policy฀of฀seeking฀patent฀and฀trade-
mark฀protection฀both฀inside฀and฀outside฀the฀United฀States฀for฀
products฀and฀methods฀that฀appear฀to฀have฀commercial฀signifi-
cance.฀We฀believe฀our฀patents฀and฀trademarks฀to฀be฀adequate฀
for฀the฀conduct฀of฀our฀business,฀and฀aggressively฀pursue฀pro-
tection฀of฀our฀patents฀against฀patent฀infringement฀worldwide.฀
While฀we฀regard฀patent฀and฀trademark฀protection฀as฀impor-
tant฀to฀our฀business฀and฀future฀prospects,฀we฀consider฀our฀
established฀reputation,฀the฀reliability฀and฀quality฀of฀our฀products฀
and฀the฀technical฀skills฀of฀our฀personnel฀to฀be฀more฀important.฀
No฀single฀patent฀or฀trademark฀is฀considered฀to฀be฀of฀a฀critical฀
nature฀to฀our฀business.
Raw฀Materials
We฀purchase฀various฀raw฀materials฀and฀component฀parts฀
for฀use฀in฀manufacturing฀our฀products.฀The฀principal฀materials฀
we฀purchase฀are฀steel฀alloys฀(including฀chromium฀and฀nickel),฀
titanium,฀beryllium,฀copper,฀tungsten฀carbide,฀synthetic฀and฀
natural฀diamonds,฀printed฀circuit฀boards฀and฀other฀electronic฀
components฀and฀hydrocarbon-based฀chemical฀feed฀stocks.฀All฀
of฀these฀materials฀are฀available฀from฀numerous฀sources฀and฀
could฀be฀subject฀to฀rising฀costs.฀We฀have฀not฀experienced฀any฀
significant฀shortages฀of฀these฀materials฀and฀normally฀do฀not฀
carry฀inventories฀of฀such฀materials฀in฀excess฀of฀those฀reasonably฀
required฀to฀meet฀our฀production฀schedules.฀We฀do฀not฀expect฀
any฀significant฀interruptions฀in฀supply,฀but฀there฀can฀be฀no฀
assurance฀that฀there฀will฀be฀no฀price฀or฀supply฀issues฀over฀the฀
long฀term.
Other฀Developments
In฀October฀2003,฀we฀signed฀a฀definitive฀agreement฀for฀
the฀sale฀of฀BIRD฀Machine฀(“BIRD”),฀the฀remaining฀division฀of฀
the฀former฀Process฀segment,฀and฀recorded฀charges฀totaling฀
$37.4฀million,฀net฀of฀tax฀of฀$10.9฀million,฀which฀consisted฀of฀
a฀loss฀of฀$13.5฀million฀on฀the฀write฀down฀of฀BIRD฀to฀fair฀value,฀
$6.2฀million฀of฀severance฀and฀warranty฀accruals฀and฀a฀loss฀of฀
$17.7฀million฀related฀to฀the฀recognition฀of฀cumulative฀foreign฀
currency฀translation฀adjustments฀into฀earnings.฀In฀January฀2004,฀
we฀completed฀the฀sale฀of฀BIRD฀and฀recorded฀an฀additional฀loss฀
on฀the฀sale฀of฀$0.5฀million฀with฀no฀tax฀benefit.฀We฀received฀
$5.6฀million฀in฀proceeds,฀which฀were฀subject฀to฀post-closing฀
adjustments฀to฀the฀purchase฀price,฀and฀retained฀certain฀
accounts฀receivable,฀inventories฀and฀other฀assets.฀During฀
the฀second฀quarter฀of฀2004,฀we฀made฀a฀net฀payment฀of฀
$6.8฀million฀to฀the฀buyer฀in฀settlement฀of฀the฀final฀purchase฀
price฀adjustments.฀The฀adjustments฀were฀the฀result฀of฀changes฀
in฀the฀value฀of฀assets฀sold฀to฀and฀liabilities฀assumed฀by฀the฀
buyer฀between฀the฀date฀the฀initial฀sales฀price฀was฀negotiated฀
and฀the฀closing฀of฀the฀sale.
In฀February฀2004,฀we฀completed฀the฀sale฀of฀our฀minority฀
interest฀in฀Petreco฀International฀for฀$35.8฀million,฀of฀which฀
$7.4฀million฀is฀held฀in฀escrow฀pending฀the฀outcome฀of฀poten-
tial฀indemnification฀obligations฀pursuant฀to฀the฀sales฀agree-
ment.฀We฀recognized฀a฀gain฀on฀the฀sale฀of฀$1.3฀million,฀net฀
of฀tax฀of฀$1.5฀million.
In฀September฀2004,฀we฀completed฀the฀sale฀of฀Baker฀
Hughes฀Mining฀Tools,฀a฀product฀line฀group฀within฀the฀Oilfield฀
segment฀that฀manufactured฀rotary฀drill฀bits฀used฀in฀the฀mining฀
industry,฀for฀$31.5฀million.฀We฀recorded฀a฀gain฀on฀the฀sale฀of฀
$0.2฀million,฀net฀of฀tax฀of฀$3.6฀million,฀which฀consisted฀of฀a฀
gain฀on฀disposal฀of฀$6.8฀million฀offset฀by฀a฀loss฀of฀$6.6฀million฀
related฀to฀the฀recognition฀of฀the฀cumulative฀foreign฀currency฀
translation฀adjustments฀into฀earnings.
Employees
At฀December฀31,฀2004,฀we฀had฀approximately฀26,900฀
employees,฀as฀compared฀with฀approximately฀26,500฀employees฀
at฀December฀31,฀2003.฀Approximately฀2,300฀of฀these฀employees฀
are฀represented฀under฀collective฀bargaining฀agreements฀or฀sim-
ilar-type฀labor฀arrangements,฀of฀which฀the฀majority฀are฀outside฀
the฀U.S.฀Based฀upon฀the฀geographic฀diversification฀of฀these฀
employees,฀we฀believe฀any฀risk฀of฀loss฀from฀employee฀strikes฀
or฀other฀collective฀actions฀would฀not฀be฀material฀to฀the฀con-
duct฀of฀our฀operations฀taken฀as฀a฀whole.฀We฀believe฀that฀our฀
relations฀with฀our฀employees฀are฀good.
8฀฀฀฀฀Baker฀Hughes฀Incorporated