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of฀essential฀electronic฀components฀used฀in฀our฀products;฀
the฀effect฀of฀competition,฀particularly฀our฀ability฀to฀intro-
duce฀new฀technology฀on฀a฀forecasted฀schedule฀and฀at฀fore-
casted฀costs;฀potential฀impairment฀of฀long-lived฀assets;฀the฀
accuracy฀of฀our฀estimates฀regarding฀our฀capital฀spending฀
requirements;฀unanticipated฀changes฀in฀the฀levels฀of฀our฀
capital฀expenditures;฀the฀need฀to฀replace฀any฀unanticipated฀
losses฀in฀capital฀assets;฀the฀development฀of฀technology฀by฀
us฀or฀our฀competitors฀that฀lowers฀overall฀finding฀and฀
development฀costs;฀labor-related฀actions,฀including฀strikes,฀
slowdowns฀and฀facility฀occupations.
•฀ Litigation฀and฀changes฀in฀laws฀or฀regulatory฀conditions฀–฀
the฀potential฀for฀unexpected฀litigation฀or฀proceedings;฀the฀
legislative,฀regulatory฀and฀business฀environment฀in฀the฀U.S.฀
and฀other฀countries฀in฀which฀we฀operate;฀outcome฀of฀gov-
ernment฀and฀internal฀investigations฀and฀legal฀proceedings;฀
new฀laws,฀regulations฀and฀policies฀that฀could฀have฀a฀signif-
icant฀impact฀on฀the฀future฀operations฀and฀conduct฀of฀all฀
businesses;฀changes฀in฀export฀control฀laws฀or฀exchange฀
control฀laws;฀additional฀restrictions฀on฀doing฀business฀in฀
countries฀subject฀to฀sanctions:฀changes฀in฀laws฀in฀Russia฀or฀
other฀countries฀identified฀by฀management฀for฀immediate฀
focus;฀changes฀in฀accounting฀standards;฀changes฀in฀tax฀
laws฀or฀tax฀rates฀in฀the฀jurisdictions฀in฀which฀we฀operate;฀
resolution฀of฀audits฀by฀various฀tax฀authorities;฀ability฀to฀
fully฀utilize฀our฀tax฀loss฀carryforwards฀and฀tax฀credits.
•฀ Economic฀conditions฀–฀worldwide฀economic฀growth;฀for-
eign฀currency฀exchange฀fluctuations฀and฀changes฀in฀the฀
capital฀markets฀in฀international฀locations฀where฀we฀operate;฀
the฀condition฀of฀the฀capital฀and฀equity฀markets฀in฀general;฀
our฀ability฀to฀estimate฀the฀size฀of฀and฀changes฀in฀the฀world-
wide฀oil฀and฀natural฀gas฀industry.
•฀ Environmental฀matters฀–฀unexpected,฀adverse฀outcomes฀฀
or฀material฀increases฀in฀liability฀with฀respect฀to฀environ-
mental฀remediation฀sites฀where฀we฀have฀been฀named฀฀
as฀a฀potentially฀responsible฀party;฀the฀discovery฀of฀new฀
environmental฀remediation฀sites;฀changes฀in฀environ-
mental฀regulations;฀the฀discharge฀of฀hazardous฀materials฀
or฀hydrocarbons฀into฀the฀environment.฀See฀also฀the฀฀
“Environmental฀Matters”฀section฀in฀Item฀1฀contained฀
herein฀for฀further฀information.
For฀additional฀risk฀factors฀and฀cautions฀regarding฀forward-
looking฀statements,฀see฀the฀“Risk฀Factors฀Related฀to฀the฀
Worldwide฀Oil฀and฀Natural฀Gas฀Industry”฀and฀“Forward-Looking฀
Statements”฀sections฀contained฀herein.฀This฀list฀of฀risk฀factors฀
is฀not฀intended฀to฀be฀all฀inclusive.
Critical฀Accounting฀Estimates
The฀preparation฀of฀our฀consolidated฀financial฀statements฀
requires฀us฀to฀make฀estimates฀and฀judgments฀that฀affect฀the฀
reported฀amounts฀of฀assets,฀liabilities,฀revenues฀and฀expenses฀
and฀related฀disclosures฀about฀contingent฀assets฀and฀liabilities.฀
We฀base฀these฀estimates฀and฀judgments฀on฀historical฀experi-
ence฀and฀other฀assumptions฀and฀information฀that฀are฀believed฀
to฀be฀reasonable฀under฀the฀circumstances.฀Estimates฀and฀
assumptions฀about฀future฀events฀and฀their฀effects฀cannot฀be฀
perceived฀with฀certainty,฀and฀accordingly,฀these฀estimates฀may฀
change฀as฀new฀events฀occur,฀as฀more฀experience฀is฀acquired,฀
as฀additional฀information฀is฀obtained฀and฀as฀the฀business฀envi-
ronment฀in฀which฀we฀operate฀changes.
We฀have฀defined฀a฀critical฀accounting฀estimate฀as฀one฀that฀
is฀both฀important฀to฀the฀portrayal฀of฀our฀financial฀condition฀
and฀results฀of฀operations฀and฀requires฀us฀to฀make฀difficult,฀
subjective฀or฀complex฀judgments฀or฀estimates฀about฀matters฀
that฀are฀uncertain.฀We฀have฀discussed฀the฀development฀and฀
selection฀of฀our฀critical฀accounting฀estimates฀with฀the฀Audit/
Ethics฀Committee฀of฀our฀Board฀of฀Directors฀and฀the฀Audit/Eth-
ics฀Committee฀has฀reviewed฀the฀disclosure฀presented฀below.฀
During฀the฀past฀three฀fiscal฀years,฀we฀have฀not฀made฀any฀
material฀changes฀in฀accounting฀methodology฀used฀to฀establish฀
the฀critical฀accounting฀estimates฀discussed฀below.฀We฀believe฀
that฀the฀following฀are฀the฀critical฀accounting฀estimates฀used฀
in฀the฀preparation฀of฀our฀consolidated฀financial฀statements.฀
In฀addition,฀there฀are฀other฀items฀within฀our฀consolidated฀
financial฀statements฀that฀require฀estimation฀but฀are฀not฀
deemed฀critical฀as฀defined฀above.
Allowance฀for฀Doubtful฀Accounts
The฀determination฀of฀the฀collectibility฀of฀amounts฀due฀
from฀our฀customers฀requires฀us฀to฀use฀estimates฀and฀make฀
judgments฀regarding฀future฀events฀and฀trends,฀including฀moni-
toring฀our฀customers’฀payment฀history฀and฀current฀credit฀worthi-
ness฀to฀determine฀that฀collectibility฀is฀reasonably฀assured,฀as฀
well฀as฀consideration฀of฀the฀overall฀business฀climate฀in฀which฀
our฀customers฀operate.฀Inherently,฀these฀uncertainties฀require฀
us฀to฀make฀frequent฀judgments฀and฀estimates฀regarding฀our฀
customers’฀ability฀to฀pay฀amounts฀due฀us฀in฀order฀to฀determine฀
the฀appropriate฀amount฀of฀valuation฀allowances฀required฀
for฀doubtful฀accounts.฀Provisions฀for฀doubtful฀accounts฀are฀
recorded฀when฀it฀becomes฀evident฀that฀the฀customer฀will฀not฀
make฀the฀required฀payments฀at฀either฀contractual฀due฀dates฀
or฀in฀the฀future.฀At฀December฀31,฀2004฀and฀2003,฀reserves฀
for฀doubtful฀accounts฀totaled฀$50.5฀million,฀or฀3.6%,฀and฀
$61.8฀million,฀or฀5.1%,฀of฀total฀accounts฀receivable฀before฀
reserves,฀respectively.฀We฀believe฀that฀our฀reserve฀for฀doubtful฀
accounts฀is฀adequate฀to฀cover฀anticipated฀losses฀under฀current฀
conditions;฀however,฀uncertainties฀regarding฀changes฀in฀the฀
financial฀condition฀of฀our฀customers,฀either฀adverse฀or฀positive,฀
could฀impact฀the฀amount฀and฀timing฀of฀any฀additional฀provi-
sions฀for฀doubtful฀accounts฀that฀may฀be฀required.฀A฀five฀percent฀
change฀in฀this฀reserve฀would฀have฀had฀a฀pre-tax฀impact฀of฀
approximately฀$2.5฀million฀in฀2004.
Inventory฀Reserves
Inventory฀is฀a฀significant฀component฀of฀current฀assets฀and฀
is฀stated฀at฀the฀lower฀of฀cost฀or฀market.฀This฀requires฀us฀to฀
record฀provisions฀and฀maintain฀reserves฀for฀excess฀or฀obsolete฀
inventory.฀To฀determine฀these฀reserve฀amounts,฀we฀regularly฀
review฀inventory฀quantities฀on฀hand฀and฀compare฀them฀to฀esti-
mates฀of฀future฀product฀demand,฀market฀conditions,฀produc-
tion฀requirements฀and฀technological฀developments.฀These฀
estimates฀and฀forecasts฀inherently฀include฀uncertainties฀and฀
24฀฀฀฀฀Baker฀Hughes฀Incorporated