Baker Hughes 2004 Annual Report Download - page 99

The฀provision฀for฀income฀taxes฀differs฀from฀the฀amount฀
computed฀by฀applying฀the฀U.S.฀statutory฀income฀tax฀rate฀to฀
income฀from฀continuing฀operations฀before฀income฀taxes฀for฀
the฀reasons฀set฀forth฀below฀for฀the฀years฀ended฀December฀31:
฀ 2004฀ 2003฀ 2002
Statutory฀income฀
฀ tax฀at฀35%฀฀ $฀ 273.2฀ $฀ 113.6฀ $฀ 135.4
Effect฀of฀WesternGeco฀฀
฀ operations฀ ฀ 1.8฀ ฀ 36.3฀ ฀ 40.2
Effect฀of฀foreign฀฀
฀ operations฀ ฀ (28.3)฀ ฀ (5.8)฀ ฀ (14.4)
Net฀tax฀charge฀related฀
฀ to฀foreign฀losses฀ ฀ 4.0฀ ฀ 4.9฀ ฀ 10.0
State฀income฀taxes฀–฀฀
฀ net฀of฀U.S.฀tax฀benefit฀ ฀ 3.4฀ ฀ 4.0฀ ฀ 2.7
IRS฀audit฀agreement฀
฀ and฀refund฀claims฀ ฀ –฀ ฀ (3.3)฀ ฀ (14.4)
Other฀–฀net฀ ฀ (1.8)฀ ฀ (2.9)฀ ฀ (0.5)
Provision฀for฀
฀ income฀taxes฀ $฀ 252.3฀ $฀ 146.8฀ $฀ 159.0
During฀2004,฀we฀recognized฀an฀incremental฀effect฀of฀
$1.8฀million฀of฀additional฀taxes฀attributable฀to฀our฀portion฀of฀
the฀operations฀of฀WesternGeco,฀primarily฀as฀a฀result฀of฀
increased฀income฀in฀the฀U.S.฀During฀2003,฀we฀recognized฀an฀
incremental฀effect฀of฀$36.3฀million฀of฀additional฀taxes฀related฀
to฀our฀investment฀in฀WesternGeco.฀Of฀this฀amount,฀$15.9฀mil-
lion฀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.
In฀2003,฀we฀recognized฀a฀$3.3฀million฀benefit฀as฀the฀
result฀of฀refund฀claims฀filed฀in฀the฀U.S.฀In฀2002,฀a฀$14.4฀mil-
lion฀benefit฀was฀recognized฀as฀the฀result฀of฀the฀settlement฀of฀
an฀Internal฀Revenue฀Service฀examination฀related฀to฀our฀Sep-
tember฀30,฀1996฀through฀September฀30,฀1998฀tax฀years.
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.฀While฀we฀have฀pro-
vided฀for฀the฀taxes฀that฀we฀believe฀will฀ultimately฀be฀payable฀
as฀a฀result฀of฀these฀assessments,฀the฀aggregate฀assessments฀
are฀approximately฀$34.0฀million฀in฀excess฀of฀the฀taxes฀provided฀
for฀in฀our฀consolidated฀financial฀statements.
In฀addition฀to฀the฀aforementioned฀assessments฀that฀have฀
been฀received฀from฀various฀taxing฀authorities,฀we฀provide฀
for฀taxes฀in฀certain฀situations฀where฀assessments฀have฀not฀
been฀received.฀In฀those฀situations,฀we฀consider฀it฀probable฀
that฀the฀taxes฀ultimately฀payable฀will฀exceed฀those฀amounts฀
reflected฀in฀filed฀tax฀returns;฀accordingly,฀taxes฀are฀provided฀in฀
those฀situations฀under฀the฀guidance฀in฀SFAS฀No.฀5,฀Accounting฀
for฀Contingencies,฀and฀are฀included฀in฀both฀income฀taxes฀in฀
current฀liabilities฀and฀in฀deferred฀income฀taxes฀and฀other฀tax฀
liabilities฀in฀the฀consolidated฀balance฀sheets.
Deferred฀income฀taxes฀reflect฀the฀net฀tax฀effects฀of฀tempo-
rary฀differences฀between฀the฀carrying฀amounts฀of฀assets฀and฀
liabilities฀for฀financial฀reporting฀purposes฀and฀the฀amounts฀
used฀for฀income฀tax฀purposes,฀as฀well฀as฀operating฀loss฀and฀
tax฀credit฀carryforwards.฀The฀tax฀effects฀of฀our฀temporary฀dif-
ferences฀and฀carryforwards฀are฀as฀follows฀at฀December฀31:
฀ 2004฀ 2003
Deferred฀tax฀assets:฀
฀ Receivables฀ $฀ 9.7฀ $฀ 15.4฀
฀ Inventory฀ ฀ 110.6฀ ฀ 122.8฀
฀ Employee฀benefits฀ ฀ 25.0฀ ฀ 27.3฀
฀ Other฀accrued฀expenses฀ ฀ 26.5฀ ฀ 45.1฀
฀ Operating฀loss฀carryforwards฀ ฀ 49.1฀ ฀ 77.3฀
฀ Tax฀credit฀carryforwards฀ ฀ 76.9฀ ฀ 79.8฀
฀ Capitalized฀research฀and฀฀
฀ ฀ development฀costs฀ ฀ 74.1฀ ฀ 87.8฀
฀ Other฀ ฀ 47.1฀ ฀ 17.9
฀ Subtotal฀ ฀ 419.0฀ ฀ 473.4฀
฀ Valuation฀allowances฀ ฀ (36.7)฀ ฀ (54.1)
Total฀ ฀ 382.3฀ ฀ 419.3
Deferred฀tax฀liabilities:฀
฀ Property฀ ฀ –฀ ฀ 40.1฀
฀ Goodwill฀ ฀ 105.4฀ ฀ 89.9฀
฀ Undistributed฀earnings฀
฀ ฀ of฀foreign฀subsidiaries฀ ฀ 34.7฀ ฀ 19.6฀
฀ Other฀ ฀ 20.1฀ ฀ 18.6
Total฀ ฀ 160.2฀ ฀ 168.2
Net฀deferred฀tax฀asset฀฀ $฀ 222.1฀ $฀ 251.1
We฀record฀a฀valuation฀allowance฀when฀it฀is฀more฀likely฀
than฀not฀that฀some฀portion฀or฀all฀of฀the฀deferred฀tax฀assets฀
will฀not฀be฀realized.฀The฀ultimate฀realization฀of฀the฀deferred฀
tax฀assets฀depends฀on฀the฀ability฀to฀generate฀sufficient฀taxable฀
income฀of฀the฀appropriate฀character฀in฀the฀future฀and฀in฀the฀
appropriate฀taxing฀jurisdictions.฀We฀have฀provided฀a฀valuation฀
allowance฀for฀operating฀loss฀carryforwards฀in฀certain฀non-U.S.฀
jurisdictions฀where฀our฀operations฀have฀decreased,฀currently฀
ceased฀or฀we฀have฀withdrawn฀entirely.
Provision฀has฀been฀made฀for฀U.S.฀and฀additional฀foreign฀
taxes฀for฀the฀anticipated฀repatriation฀of฀certain฀earnings฀of฀our฀
foreign฀subsidiaries.฀We฀consider฀the฀undistributed฀earnings฀of฀
our฀foreign฀subsidiaries฀above฀the฀amount฀already฀provided฀to฀
be฀indefinitely฀reinvested,฀as฀we฀have฀no฀intention฀to฀repatriate฀
these฀earnings.฀These฀additional฀foreign฀earnings฀could฀become฀
2004฀Form฀10-K฀฀฀฀฀49