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operating฀results฀of฀WesternGeco฀continued฀to฀be฀adversely฀
affected฀by฀the฀weakness฀in฀the฀seismic฀industry฀and,฀as฀a฀
result฀of฀this฀weakness,฀WesternGeco฀recorded฀certain฀impair-
ment฀and฀restructuring฀charges฀of฀$452.0฀million฀for฀impair-
ment฀of฀its฀multiclient฀seismic฀library฀and฀rationalization฀of฀its฀
marine฀seismic฀fleet.
Operating฀results฀for฀WesternGeco฀are฀expected฀to฀con-
tinue฀to฀improve฀in฀2005;฀however,฀based฀on฀the฀trend฀of฀
operating฀losses฀and฀weakness฀in฀the฀seismic฀industry฀in฀prior฀
years,฀there฀is฀uncertainty฀regarding฀the฀future฀operating฀per-
formance฀of฀WesternGeco.
Interest฀Expense
Interest฀expense฀for฀2004฀decreased฀$19.5฀million฀com-
pared฀with฀2003฀primarily฀due฀to฀lower฀total฀debt฀levels฀and฀the฀
effect฀of฀the฀interest฀rate฀swap฀agreement฀entered฀into฀in฀April฀
2004.฀The฀lower฀total฀debt฀levels฀are฀the฀result฀of฀the฀repay-
ment฀of฀$350.0฀million฀of฀long-term฀debt฀in฀the฀second฀quar-
ter฀of฀2004,฀which฀decreased฀interest฀expense฀by฀$16.0฀million฀
in฀2004฀compared฀with฀2003.฀Additionally,฀the฀interest฀rate฀
swap฀agreement฀decreased฀interest฀expense฀by฀$4.1฀million฀
in฀2004฀compared฀with฀2003.
Interest฀expense฀for฀2003฀decreased฀$8.0฀million฀compared฀
with฀2002฀due฀to฀lower฀total฀debt฀levels,฀lower฀weighted฀
average฀interest฀rates฀on฀our฀commercial฀paper฀and฀money฀
market฀borrowings฀and฀increased฀amortization฀of฀deferred฀
gains฀related฀to฀terminated฀interest฀rate฀swap฀agreements.฀
The฀lower฀total฀debt฀levels฀are฀the฀result฀of฀the฀repayment฀
of฀$100.0฀million฀of฀long-term฀debt฀in฀February฀2003.฀The฀
approximate฀weighted฀average฀interest฀rate฀on฀our฀commercial฀
paper฀and฀money฀market฀borrowings฀was฀1.2%฀in฀2003฀com-
pared฀with฀1.8%฀for฀2002.฀The฀amortization฀of฀deferred฀gains฀
related฀to฀terminated฀interest฀rate฀swap฀agreements฀reduced฀
interest฀expense฀by฀$9.9฀million฀in฀2003฀compared฀with฀
$6.0฀million฀in฀2002.
Income฀Taxes
Our฀effective฀tax฀rates฀differ฀from฀the฀U.S.฀statutory฀
income฀tax฀rate฀of฀35%฀due฀to฀state฀income฀taxes,฀differing฀
rates฀of฀tax฀on฀international฀operations฀and฀higher฀taxes฀
within฀the฀WesternGeco฀venture.
During฀2003,฀we฀recognized฀an฀incremental฀effect฀of฀
$36.3฀million฀of฀additional฀taxes฀attributable฀to฀our฀portion฀of฀
the฀operations฀of฀WesternGeco.฀Of฀this฀amount,฀$15.9฀million฀
related฀to฀the฀reduction฀in฀the฀carrying฀value฀of฀our฀equity฀
investment฀in฀WesternGeco฀for฀which฀there฀was฀no฀tax฀bene-
fit.฀The฀remaining฀$20.4฀million฀arose฀from฀operations฀of฀the฀
venture฀due฀to:฀(i)฀the฀venture฀being฀taxed฀in฀certain฀foreign฀
jurisdictions฀based฀on฀a฀deemed฀profit฀basis,฀which฀is฀a฀per-
centage฀of฀revenues฀rather฀than฀profits฀and฀(ii)฀unbenefitted฀
foreign฀losses฀of฀the฀venture,฀which฀are฀operating฀losses฀and฀
impairment฀and฀restructuring฀charges฀in฀certain฀foreign฀juris-
dictions฀where฀there฀was฀no฀current฀tax฀benefit฀and฀where฀a฀
deferred฀tax฀asset฀was฀not฀recorded฀due฀to฀the฀uncertainty฀of฀
realization.฀In฀2002,฀the฀amount฀of฀additional฀taxes฀resulting฀
from฀operations฀of฀the฀venture฀was฀$40.2฀million.
During฀2003,฀a฀benefit฀of฀$3.3฀million฀was฀recognized฀
as฀the฀result฀of฀various฀refund฀claims฀filed฀in฀the฀U.S.฀During฀
2002,฀a฀$14.4฀million฀benefit฀was฀recognized฀as฀the฀result฀of฀
the฀settlement฀of฀an฀IRS฀examination฀related฀to฀our฀September฀
30,฀1996฀through฀September฀30,฀1998฀tax฀years.
Our฀tax฀filings฀for฀various฀periods฀are฀subjected฀to฀audit฀by฀
tax฀authorities฀in฀most฀jurisdictions฀where฀we฀conduct฀busi-
ness.฀These฀audits฀may฀result฀in฀assessments฀of฀additional฀
taxes฀that฀are฀resolved฀with฀the฀authorities฀or฀potentially฀
through฀the฀courts.฀We฀believe฀that฀these฀assessments฀may฀
occasionally฀be฀based฀on฀erroneous฀and฀even฀arbitrary฀inter-
pretations฀of฀local฀tax฀law.฀We฀have฀received฀tax฀assessments฀
from฀various฀taxing฀authorities฀and฀are฀currently฀at฀varying฀
stages฀of฀appeals฀and/or฀litigation฀regarding฀these฀matters.฀฀
We฀have฀provided฀for฀the฀amounts฀we฀believe฀will฀ultimately฀
result฀from฀these฀proceedings.฀We฀believe฀we฀have฀substantial฀
defenses฀to฀the฀questions฀being฀raised฀and฀will฀pursue฀all฀legal฀
remedies฀should฀an฀unfavorable฀outcome฀result.฀However,฀res-
olution฀of฀these฀matters฀involves฀uncertainties฀and฀there฀are฀
no฀assurances฀that฀the฀outcomes฀will฀be฀favorable.
Cumulative฀Effect฀of฀Accounting฀Change
On฀January฀1,฀2003,฀we฀adopted฀SFAS฀No.฀143,฀Accounting฀
for฀Asset฀Retirement฀Obligations.฀SFAS฀No.฀143฀requires฀that฀
the฀fair฀value฀of฀a฀liability฀associated฀with฀an฀asset฀retirement฀
obligation฀(“ARO”)฀be฀recognized฀in฀the฀period฀in฀which฀it฀is฀
incurred฀if฀a฀reasonable฀estimate฀can฀be฀made.฀The฀liability฀for฀
the฀ARO฀is฀revised฀each฀subsequent฀period฀due฀to฀the฀passage฀
of฀time฀and฀changes฀in฀estimates.฀The฀associated฀retirement฀
costs฀are฀capitalized฀as฀part฀of฀the฀carrying฀amount฀of฀the฀long-
lived฀asset฀and฀subsequently฀depreciated฀over฀the฀estimated฀
useful฀life฀of฀the฀asset.฀The฀adoption฀of฀SFAS฀No.฀143฀in฀2003฀
resulted฀in฀a฀charge฀of฀$5.6฀million,฀net฀of฀tax฀of฀$2.8฀million,฀
recorded฀as฀the฀cumulative฀effect฀of฀accounting฀change฀in฀the฀
consolidated฀statement฀of฀operations.฀In฀conjunction฀with฀the฀
adoption,฀we฀recorded฀ARO฀liabilities฀of฀$11.4฀million฀primarily฀
for฀anticipated฀costs฀of฀obligations฀associated฀with฀the฀future฀
disposal฀of฀power฀source฀units฀at฀certain฀of฀our฀divisions฀and฀
refurbishment฀costs฀associated฀with฀certain฀leased฀facilities฀in฀
Europe฀and฀with฀a฀fleet฀of฀leased฀railcars฀and฀tanks.
On฀January฀1,฀2002,฀we฀adopted฀SFAS฀No.฀142,฀Goodwill฀
and฀Other฀Intangible฀Assets.฀The฀adoption฀of฀SFAS฀No.฀142฀
required฀us฀to฀cease฀amortizing฀goodwill฀and฀to฀perform฀a฀
transitional฀impairment฀test฀of฀goodwill฀in฀each฀of฀our฀report-
ing฀units฀as฀of฀January฀1,฀2002.฀The฀reporting฀units฀were฀
based฀on฀our฀organizational฀and฀reporting฀structure.฀Corpo-
rate฀and฀other฀assets฀and฀liabilities฀were฀allocated฀to฀the฀
reporting฀units฀to฀the฀extent฀that฀they฀related฀to฀the฀opera-
tions฀of฀these฀reporting฀units.฀Valuations฀of฀the฀reporting฀
units฀were฀performed฀by฀a฀third฀party.฀The฀goodwill฀in฀both฀
the฀EIMCO฀and฀BIRD฀operating฀divisions฀of฀the฀former฀Process฀
segment฀was฀determined฀to฀be฀impaired฀using฀a฀combination฀
of฀a฀market฀value฀and฀discounted฀cash฀flows฀approach฀to฀฀
estimate฀fair฀value.฀Accordingly,฀we฀recognized฀transitional฀
impairment฀losses฀of฀$42.5฀million,฀net฀of฀tax฀of฀$20.4฀million,฀
in฀2002฀as฀the฀cumulative฀effect฀of฀accounting฀change฀in฀the฀
consolidated฀statement฀of฀operations.
28฀฀฀฀฀Baker฀Hughes฀Incorporated