Baker Hughes 2010 Annual Report Download

Download and view the complete annual report

Please find the complete 2010 Baker Hughes annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 158

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158

2010 annual report to stockholders
Performing
Executing
Transforming

Table of contents

  • Page 1
    Transforming Executing Performing 2010 a nnua l re por t t o st oc k hol der s

  • Page 2
    ... reduce costs, improve performance and move closer to our customers. And, in 2010, we acquired BJ Services, adding pressure pumping, coiled tubing and cementing as our newest, and largest, product line. We undertook this transformation to increase market share and realize long-term profitable growth...

  • Page 3
    ... 2008-2010, by Quarter (In millions) Total Operating Profit After Tax Per Share (Diluted) 2008-2010, by Quarter Total Debt 2008-2010, by Quarter (In millions) North America, 46% Industrial Services and Other, 7% Middle East/ Asia Pacific, 16% Europe/Africa/ Russia Caspian, 21% Latin America, 11...

  • Page 4
    ... Complete For the past several years, Baker Hughes has invested in building a diverse global workforce, expanding our infrastructure to support growing markets in North America and internationally, to develop new technology and expand our capabilities to do so, and to deliver products and equipment...

  • Page 5
    ... highest in Baker Hughes history April 28 109% date BJ Services acquired following DOJ approval growth of North America revenue in 2010 compared to 2009 In 2010, we also improved our reservoir consulting and engineering capabilities by forming the Reservoir Development Services group that combines...

  • Page 6
    .... We opened our new base in Ramallah in June 2010. Early business development successes include a contract for 162 ESP systems for the Rumailah field, and a three-year technical agreement with South Oil Company to provide wireline data acquisition and logging services. Our Asia Pacific operations...

  • Page 7
    ... in the Gulf of Mexico, boosting oil production in the Perdido field. Baker Hughes also has focused on green technology. Using our BJ SmartCareâ„¢ program, our experts design and implement frac-fluid programs that minimize environmental impact during hydraulic fracturing. Outlook Looking ahead, we...

  • Page 8
    ... compliance. The GSC group also established an enterprise Sales and Operations Planning process to anticipate and meet the need for products on a global basis. During 2010, the GSC group broadened the geographic footprint of Baker Hughes' supply chain with investments in manufacturing capability...

  • Page 9
    ...-related technologies, our customers - especially national oil companies - also now expect us to provide reservoir advice along with products and services for field development. Beginning in 2008, Baker Hughes assembled a group of industry-leading consultancies and software firms to build broad...

  • Page 10
    ... legacy BJ Services and Baker Hughes product lines have gained business because of their integration. More than half of the rigs in North America are drilling horizontal wells, and nearly all of these wells will be stimulated using staged hydraulic fracturing. To maximize production, customers are...

  • Page 11
    ... the Company's independent registered public accounting firm for fiscal year 2011; 3. The reapproval of the performance criteria for awards under the Annual Incentive Compensation Plan, as required by Section 162(m) of the Internal Revenue Code; 4. An advisory vote related to the Company's executive...

  • Page 12
    ... Vote on Executive Compensation ...39 Proposal No. 6 Stockholder Proposal Majority Vote Standard for Director Elections ...40 Annual Report ...41 Incorporation by Reference ...41 Stockholder Proposals ...41 Other Matters ...41 Annex A - Baker Hughes Incorporated Corporate Governance Guidelines ...42...

  • Page 13
    ... Company's executive offices, a written revocation or a duly executed proxy bearing a later date. The executive offices of the Company are located at 2929 Allen Parkway, Suite 2100, Houston, Texas 77019. For a period of at least ten days prior to the Annual Meeting of Stockholders, a complete list...

  • Page 14
    ...ordinary business hours at the Company's executive offices by stockholders of record for proper purposes. Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Stockholders to be Held on April 281 2011. This Proxy Statement and the Annual Report to Stockholders and...

  • Page 15
    ... and high technology knowledge and skills, his private equity leadership, manufacturing background, public service and financial expertise; Mr. Nichols' position as the executive chairman of the board and former chief executive officer of a publicly traded energy company, successful career building...

  • Page 16
    ... Officer of Baker Hughes Incorporated since October 2004; Chairman of the Board, Chief Executive Officer and President of Baker Hughes Incorporated from February 1, 2008 to July 28, 2010. Mr. Deaton was President and Chief Executive Officer of Hanover Compressor Company (compression services...

  • Page 17
    ... Chemical Corporation, and Post Oak Bank, N.A. Mr. Riley also serves as a trustee of the Museum of Fine Arts, Houston and Syracuse University. Chairman of the Board of Directors, President and Chief Executive Officer of BJ Services Company (pressure pumping services) from 1990 until its acquisition...

  • Page 18
    ... of $5,000. Each non-management director also received annual non-retainer equity in a total amount of $200,000, in the form of (i) restricted shares of the Company's 6 Baker Hughes Incorporated Common Stock with a value of $140,000 issued in January of each year that generally will vest one-third...

  • Page 19
    ...the "Corporate Governance" section of the Company's website at www.bakerhughes.com/investor. The Vice President Internal Audit and the Corporate internal audit function report directly to the Audit/Ethics Committee. The Company's Corporate Internal Audit Department sends written reports quarterly to...

  • Page 20
    ...plans and equity-based compensation plans; reviewing the Company's employee benefit programs; and recommending for approval all committee administrative changes that may be subject to the approval of the stockholders or the Board, reviewing and reporting to the Board of Directors the levels of stock...

  • Page 21
    ...'s Business Code of Conduct, including updates pertaining to the status of the Company's compliance with its standards, policies, procedures and processes. The Company maintains an Enterprise Risk Management ("ERM") process under which it reviews its business risk framework including an assessment...

  • Page 22
    ... related to the financial structure and activities of the Company and the Governance Committee periodically provides oversight respecting risks associated with the Company's health, safety and environmental policies and practices. The Board of Directors believes that the risk management processes...

  • Page 23
    ... are modeled after Section 303A.02 of the New York Stock Exchange's Listed Company Manual. Instead of a formalized standard, potential related party transactions are reviewed and judgment is applied by the Board of Directors in accordance with its duties under Delaware and other applicable law to...

  • Page 24
    ... individual business goals which may include specific targets related to health, safety and the environment. • Short-term incentive program allows for reduction or elimination of bonus payout if standards not upheld. Motivate management to take prudent but not excessive risks • Pay programs...

  • Page 25
    ...The data is used to assess the competitive market value for executive jobs, pay practices, validate targets for pay plans, test the compensation strategy, observe trends and provide a general competitive backdrop for decision making. The Peer Group is comprised of four direct industry peers and the...

  • Page 26
    ... considers the Company's continuing achievement of its short- and long-term goals including: • the financial performance of the Company; • the effective execution of the strategy approved by its Board of Directors; and • the development of human resource capability. In 2010, the Compensation...

  • Page 27
    ... due to the uncertain financial environment at that time. Short-Term Incentive Compensation The short-term incentive compensation program provides Senior Executives with the opportunity to earn cash bonuses based on the achievement of specific Company-wide, business unit, functional and individual...

  • Page 28
    ... integration of BJ Services, new product revenue, market share, administrative cost reduction, days sales outstanding, human capital goals pertaining to diversity, attrition, recruitment and training as well as goals related to heath, safety and environment. The 2010 health and safety goals for...

  • Page 29
    ... between the long-term value of our stock price and the potential financial gain for employees. Stock options provide Senior Executives with the opportunity to purchase our Common Stock at a price fixed on the grant date regardless of future market price. Stock options generally vest and become...

  • Page 30
    ... 2012. Any payouts under the 2010 performance units will be made in March 2013. Fixed Number of Units Granted at Beginning of Term End of Year 1 End of Year 2 End of Year 3 • 25% of Unit Value Determined • BHI Compared to Peer Group • 25% of Unit Value Determined • BHI Compared to Peer...

  • Page 31
    ... the 2009 one-year performance measurement period for each of the three revenue growth, pre-tax operating margin and return on net capital employed performance goals applicable to the performance measurement period is one-third of 25 percent of the unit value amount listed below: Peer Group Rank...

  • Page 32
    ... was the current Peer Group (listed above) plus Smith International, Inc. and BJ Services Company. Our relative ranking for the 2009 one-year performance measurement period was 4th, 4th, and 4th for the revenue growth, pre-tax operating margin and return on net capital employed performance goals...

  • Page 33
    ...Granted in Prior Years For awards granted prior to 2009, a three-year cumulative Baker Value Added ("BVA") goal was the financial metric used to determine payouts, if any, for performance units. BVA measures operating profit after-tax less the cost of capital employed. BVA is a non-GAAP measure that...

  • Page 34
    ... Complete and professional personal physical exam to be conducted on an annual basis, up to $1,800 Provides executive with access to continued medical coverage in retirement • Eligibility: retire at age 55 with at least 10 years of service • Retiree pays 100% of cost • $1,500 annual company...

  • Page 35
    ... compensation) age-based pay credit • Eligible compensation generally means all current cash wages, salaries and fees for services from the Company not in excess of applicable legal limitations ($245,000 in 2010) • Quarterly interest credits on account balance using certain annual rate of...

  • Page 36
    ... management's commitment to value creation. Senior executives are required to hold the number of shares valued at a multiple of their current base salary, in the amounts listed below: Chief Executive Officer President/Chief Operating Officer/Chief Financial Officer/ Senior Vice Presidents Corporate...

  • Page 37
    ...Principal Financial Officer Martin S. Craighead - President and Chief Operating Officer Alan R. Crain - Senior Vice President and General Counsel John A. O'Donnell - Vice President and President, Western Hemisphere Operations (1) 2010 2009 2008 2010 2009 2008 2010 2009 2008 2010 2009 2008 2010 2009...

  • Page 38
    ... stock price of a share of our Common Stock on the last trading day before the date of grant. Amounts represent potential payouts for the fiscal 2010 performance year under the Annual Incentive Compensation Plan as well as potential payouts for discretionary bonuses at the expected value threshold...

  • Page 39
    ... of Securities Underlying Unexercised Options Unexercisable (#) Stock Awards Name Option Exercise Price (1) ($) Option Expiration Date (2) Number of Shares or Units of Stock that Have Not Vested (3) (#) Market Value of Shares or Units of Stock that Have Not Vested ($) Chad C. Deaton 0 0 35...

  • Page 40
    ... table sets forth certain information regarding options and stock awards exercised and vested, respectively, during 2010 for the persons named in the Summary Compensation Table above. Option Awards Number of Shares Acquired on Exercise Name (#) Value Realized on Exercise (1) ($) Stock Awards Number...

  • Page 41
    ...see "Note 13 - Employee Benefit Plans" of the Notes to Consolidated Financial Statements included in our Annual Report under Item 8 of the Form 10-K for the year ended December 31, 2010. Messrs. Deaton, Crain and O'Donnell are eligible for early retirement under the Pension Plan which allows them to...

  • Page 42
    ... executive life insurance); • for the remainder of the term of the employment agreement, continuation of medical insurance benefits at active employee premium rates; • a lump-sum cash payment equivalent to the monthly basic life insurance premium applicable to Mr. Deaton's basic life insurance...

  • Page 43
    ... plus one member where such board or other governing body is comprised of an odd number of directors); or • our stockholders approve a plan of complete liquidation or dissolution of us. Payments in the Event of a Change in Control and Termination of Employment by the Senior Executive for Good...

  • Page 44
    ... in Control The Baker Hughes Executive Severance Plan provides for payment of certain benefits to the Senior Executives as a result of an involuntary termination of employment provided that (i) the executive signs a release agreement substantially similar to the form of release agreement set forth...

  • Page 45
    ... and Health Insurance Benefits Perquisite Payment Payment for Loss of Thrift Plan, SRP and Pension Plan Accruals Life Insurance Premium Payment Outplacement Services Interest Paid For Section 409A Six-Month Delay TOTAL Payments upon Termination of Employment in Connection With the Sale of a Business...

  • Page 46
    ...Insurance Life Insurance Premium Payment Lump-Sum Payment Equal to Continued Company Contributions to SRP Interest Paid For Section 409A Six-Month Delay TOTAL Payments Upon Involuntary Termination of Employment Not in Connection with a Change of Control 1½ x Base Salary Outplacement Services Annual...

  • Page 47
    ... BJ Services Company Directors' Benefit Plan. This amount includes outstanding options that were granted by BJ Services and were converted into options to purchase shares of Baker Hughes upon the closing of the merger. (4) (5) (6) The Baker Hughes Incorporated Director Compensation Deferral Plan...

  • Page 48
    ... Committee assists the Board of Directors in overseeing matters relating to the accounting and reporting practices of the Company, the adequacy of the Company's disclosure controls and internal controls, the quality and integrity of the quarterly and annual financial statements of the Company, the...

  • Page 49
    ... other most highly compensated executive officers. In 1995 the Board of Directors adopted, and the stockholders approved, the Annual Incentive Compensation Plan, which provides for cash bonuses for officers and key employees of the Company and its affiliates based upon the achievement of performance...

  • Page 50
    ... royalty directly relating to the service provided) minus operating expenses (costs incurred in non-manufacturing areas to provide products and services to customers) (e.g., finance and administrative support), minus income taxes.) In the case of a participant other than a covered employee (within...

  • Page 51
    ... executives; and • set compensation and incentive levels that reflect competitive market practices. We are asking our stockholders to indicate their support for our named executive officer compensation program as described in this Proxy Statement. This vote is not intended to address any specific...

  • Page 52
    ... proposal was submitted to Baker Hughes by the United Brotherhood of Carpenters Pension Fund (with an address of 101 Constitution Avenue, N.W., Washington D.C. 20001) who is the owner of 6,531 shares of the Company's Common Stock, and is included in this Proxy Statement in compliance with SEC rules...

  • Page 53
    ...York Stock Exchange listing standards. Because our stockholders have a history of electing highly qualified and independent directors using a plurality voting system, a change in the director election process is neither necessary nor appropriate in order to enhance the Company's corporate governance...

  • Page 54
    ...and internal controls, enterprise risk management and environmental policies • Reviewing quarterly earnings release and quarterly and annual financial statements to be filed with the Securities and Exchange Commission ("SEC") • Evaluating and setting the compensation of the CEO and other members...

  • Page 55
    .... Non-management directors may not serve on more than four other boards of publicly listed companies in addition to the Company's Board of Directors. No officer of the Company may serve on a board of any company having a present or retired employee on the company's Board. Additionally, officers of...

  • Page 56
    ... of the Company's internal controls over financial reporting and disclosure controls and procedures; and the quality and integrity of the financial statements of the Company; and (ii) to oversee the Company's compliance programs. The independent auditor is ultimately accountable to the Board and the...

  • Page 57
    ...management is rewarded appropriately for its contributions to Company growth and profitability and that the executive compensation strategy supports organization objectives and stockholder interests; reviewing compensation programs to determine if there are potential risks in the programs; reviewing...

  • Page 58
    ... we do. • We maintain a competitive cost structure for the long-term. • We utilize shared services to control cost for the enterprise. • We seek the best value for Baker Hughes in our relationships with suppliers. • We ruthlessly eliminate waste without compromising safety or quality. 46...

  • Page 59
    ..., sound business judgment and support for the Core Values of the Company; vii) Understand financial statements; viii) Are independent as defined by the Securities and Exchange Commission ("SEC") and the New York Stock Exchange; ix) Support the ideals of the Company's Business Code of Conduct and are...

  • Page 60
    ...the next Annual Meeting of Stockholders. EXHIBIT C BAKER HUGHES INCORPORATED POLICY FOR DIRECTOR INDEPENDENCE1 AUDIT/ETHICS COMMITTEE MEMBERS AND AUDIT COMMITTEE FINANCIAL EXPERT (As Amended October 231 2008) INDEPENDENCE I. Introduction A member of the Board of Directors ("Board") of Baker Hughes...

  • Page 61
    ...'s financial statements, or experience actively supervising one or more persons engaged in such activities; (d) An understanding of internal controls and procedures for financial reporting; and (e) An understanding of audit committee functions. 2. Under SEC rules, a director must have acquired such...

  • Page 62
    ... is a generalized summary and the specific requirements of the Bylaws shall control. In order to provide the stockholders and other interested parties of Baker Hughes Incorporated ("Company") with a direct and open line of communication to the Company's Board of Directors ("Board"), the following...

  • Page 63
    ...-Legal Compliance site. In addition to the websites, the Company has a Business Help Line brochure. No employee shall suffer retaliation in any form for reporting, in good faith, suspected violations of the Business Code of Conduct. The Board of Directors of Baker Hughes Incorporated (the "Company...

  • Page 64
    ... key member of the independent registered public accounting firm's team. • Prior to commencement of the annual audit, review with management, the corporate auditors and the independent registered public accounting firm the proposed scope of the audit plan and fees, including the areas of business...

  • Page 65
    .... Have management review the Company's financial results with the Board of Directors. • Review and discuss with management and the independent registered public accounting firm management's report on internal control prior to the filing of the Company's annual report on Form 10-K. • Establish...

  • Page 66
    ... "management" or "internal control" letter issued, or proposed to be issued, by the audit firm to the Company. With regard to its compliance responsibilities, the Committee shall: • Review policies and procedures that the Company has implemented regarding compliance with applicable federal, state...

  • Page 67
    ... adopted the Baker Hughes Incorporated 1995 Employee Annual Incentive Compensation Plan (the "Plan") for the benefit of certain employees of the Company and affiliates of the Company; WHEREAS, the Plan is a bonus program exempt from coverage under the Employee Retirement Income Security Act...

  • Page 68
    ..., or Retirement or Involuntary Termination of Employment ...62 Employment Transfers...62 Disposition of Business ...62 Separation From Service for Other Reasons...62 BANKING OF AWARDS ...63 General Banking Procedures ...63 Exceptions ...63 DEEMED INVESTMENT OF FUNDS ...63 PAYMENT OF BENEFITS...63...

  • Page 69
    ... plus the value of significant operating leases; "Operating Expenses" means costs incurred in non-manufacturing areas to provide products and services to customers (e.g., finance and administrative support) during the Performance Period; "Profit Before Tax" means the revenues of the Company for the...

  • Page 70
    ... Assets in such Asset Sale or its parent (or a majority plus one member where such board or other governing body is comprised of an odd number of directors); or (e) The stockholders of Baker Hughes approve a plan of complete liquidation or dissolution of Baker Hughes. "CIC Committee" means (i) the...

  • Page 71
    ...Termination of Employment." "Key ymployee" means a key employee of Baker Hughes or an Affiliate who, in the opinion of the Chief Executive Officer of Baker Hughes, is in a position to significantly contribute to the growth and profitability of Baker Hughes and the Affiliates. "Merger" means a merger...

  • Page 72
    ...and other costs (e.g., commission and royalty) directly relating to the service provided) minus operating expenses (costs incurred in non-manufacturing areas to provide products and services to customers (e.g., finance and administrative support)) minus income taxes. "Retirement" means a Participant...

  • Page 73
    ... compared to cost of capital, return on capital employed, return on invested capital, shareholder value, net cash flow, operating income, earnings before interest and taxes, cash flow, cash flow from operations, cost reductions, cost ratios, Profit After Tax and Baker Value Added. Performance Goals...

  • Page 74
    ... Opportunities established by the Committee based upon the recommendation of the Chief Executive Officer of Baker Hughes. 4.04 Disposition of Business. If the Participant's employer or division is disposed of during the Plan Year and such disposition does not qualify as a Change in Control, payment...

  • Page 75
    ... to a Participant's Banked Account for a Performance Period shall be deemed to be credited with interest at the annual rate equal to the Applicable Interest Rate commencing as of the Initial Payment Date. For the period commencing on the Initial Payment Date and ending on the day before the first...

  • Page 76
    ... provide for a time or form of payment that is not permitted under the Plan. A Domestic Relations Order will be disregarded to the extent it awards an Alternate Payee benefits in excess of the applicable Participant's or former Participant's Account balance under the Plan. ARTICLE VIII FORFEITURE OF...

  • Page 77
    ...the Company or any Participant, which the Plan Administrator in good faith believes to be genuine, and on any certificate, statement, report or other representation made to it by any agent or any attorney, accountant or other expert retained by it or Baker Hughes in connection with the operation and...

  • Page 78
    ... a determination in connection with the Plan, the Plan Administrator shall be entitled to rely upon the aforesaid information furnished by the Company. 11.09 Indemnity. To the extent permitted by applicable law, Baker Hughes shall indemnify and save harmless the Board, each member of the Committee...

  • Page 79
    ... board of directors or noncorporate counterpart of the Affiliate), each Affiliate shall participate in the Plan and shall be bound by all the terms, conditions and limitations of the Plan. The Plan Administrator and the Affiliate may agree to incorporate specific provisions relating to the operation...

  • Page 80
    ... 20 business days of selection, the appointed arbitrators will appoint a neutral arbitrator from the panel of AAA National Panel of Employee Benefit Plan Claims Arbitrators. The arbitrators shall issue their written decision (including a statement of finding of facts) within 30 days from the date of...

  • Page 81
    ... number 1-9397 Baker Hughes Incorporated (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 2929 Allen Parkway, Suite 2100, Houston, Texas (Address of principal executive offices) 76-0207995 (I.R.S. Employer Identification...

  • Page 82
    .... Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...Certain Relationships and Related Transactions, and Director Independence ...Principal Accountant Fees and Services...

  • Page 83
    ... have manufacturing operations in various countries, including, but not limited to, the United States (Texas, Oklahoma and Louisiana), Canada (Calgary), Europe (Scotland, England and Germany), Latin America (Venezuela and Argentina), the Middle East (UAE and Saudi Arabia) and Asia Pacific (Thailand...

  • Page 84
    ... for Middle East - including Egypt, and Asia Pacific) In addition to the above, we report in our Industrial Services and Other segment, the financial results for our downstream chemicals business, process and pipeline services, and reservoir and technology consulting group. Further information about...

  • Page 85
    ... of existing products and services, the design of specialized products to meet specific customer needs and the development of new products, processes and services. Our primary technology centers are located in the U.S. (Blacksburg, Virginia; Claremore, Oklahoma; several in Houston, Texas and...

  • Page 86
    ... to 1999, and Assistant General Counsel from 1988 to 1996, of Union Texas Petroleum Holdings, Inc. Employed by the Company in 2000. Martin S. Craighead 51 President since 2010 and Chief Operating Officer since 2009. Senior Vice President from 2009 to 2010. Group President of Drilling and Evaluation...

  • Page 87
    ... Baker Petrolite Corporation from 2005 to May 2009. President of Baker Hughes Drilling Fluids from 2004 to 2005. Vice President, Business Process Development of the Company from 1998 to 2002; Vice President, Manufacturing, of Baker Oil Tools from 1990 to 1998 and Plant Manager of Hughes Tool Company...

  • Page 88
    ... cash flows and, thus, the value of an investment in our Company. Risk Factors Related to the Worldwide Oil and Natural Gas Industry Our business is focused on providing products and services to the worldwide oil and natural gas industry; therefore, our risk factors include those factors that impact...

  • Page 89
    ... our products and services and ability to pay amounts owed us could be impacted by economic conditions. Access to capital is dependent on our customers' ability to access the funds necessary to develop economically attractive projects based upon their expectations of future energy prices, required...

  • Page 90
    ... are a key resource to developing, manufacturing and delivering our products and services to our customers around the world. Our ability to manage the recruiting, training and retention of the highly skilled workforce required by our plans and to manage the associated costs could impact our business...

  • Page 91
    ... we operate. Our ability to manage our compliance costs and compliance programs will impact our ability to meet our earnings goals. Compliance related issues could also limit our ability to do business in certain countries. Changes that could impact the legal environment include new legislation, new...

  • Page 92
    ... revenue and expenses reported in U.S. Dollars and may impact our results of operations. The condition of the capital markets and equity markets in general can affect the price of our common stock and our ability to obtain financing, if necessary. If the Company's credit rating is downgraded, this...

  • Page 93
    ...Germany; (iv) Middle East/Asia Pacific - Dubai, United Arab Emirates; Dhahran, Saudi Arabia; Singapore; and Chonburi, Thailand. We own or lease numerous other facilities such as service centers, shops and sales and administrative offices throughout the geographic regions in which we operate. We also...

  • Page 94
    ...price related to stock-for-stock exchanges in option exercises or to satisfy the tax withholding obligations in connection with the vesting of restricted stock awards and restricted stock units. There were no share repurchases as part of a publicly announced program during the fourth quarter of 2010...

  • Page 95
    ... (change in year-end stock price plus reinvested dividends) assumes that $100 was invested on December 31, 2005 in Baker Hughes common stock, the S&P 500 Index and the S&P 500 Oil and Gas Equipment and Services Index. The Corporate Performance Graph and related information shall not be deemed...

  • Page 96
    ... share amounts) 2010 2009 2008 2007 2006 Revenues Costs and expenses: Cost of revenues Research and engineering Marketing, general and administrative Acquisition-related costs Litigation settlement Total costs and expenses Operating income Equity in income of affiliates Gain on sale of product line...

  • Page 97
    ... oil prices, many international projects have attractive economic returns. In North America, customer spending increased for both oil and gas projects resulting in a 44% increase in the North America rig count in 2010 compared to 2009. The increase in oil-directed drilling reflected the global price...

  • Page 98
    ..., Africa - excluding Egypt, and Russia and the republics of the former Soviet Union) • Middle East/Asia Pacific ("MEAP") (Middle East - including Egypt) • Industrial Services and Other (downstream chemicals, process and pipeline services, and reservoir and technology consulting businesses) The...

  • Page 99
    ...14,414 49 % Year Ended December 31, 2010 2009 Increase (decrease) % Change Segment Profit Before Tax: North America Latin America Europe/Africa/Russia Caspian Middle East/Asia Pacific Industrial Services and Other Segment profit before tax Revenues for 2010 increased $4.75 billion or 49% compared...

  • Page 100
    ... benefiting our chemicals, artificial lift and completion systems products and services. These increases were offset by decreased revenue primarily in the Middle East Gulf and India geomarkets. Middle East/Asia Pacific profit before tax decreased 27% in 2010 compared to 2009. Excluding BJ Services...

  • Page 101
    ... increases in drilling fluids and production-related artificial lift and oilfield chemicals. Middle East/Asia Pacific profit before tax decreased 42% in 2009 compared to 2008 where lower utilization levels and price erosion was partly offset by cost management programs. Profit before tax declined...

  • Page 102
    ... customers' forecasts of future energy demand, their expectations for future energy prices, their access to resources to develop and produce oil and gas, the impact of new government regulations and their ability to fund their capital programs. The depth and pace of economic recovery from the global...

  • Page 103
    ...oil and gas companies expect for developing oil and gas reserves. Our forecasts are based on our analysis of information provided by our customers as well as market research and analyst reports including the Short Term Energy Outlook ("STEO") published by the Energy Information Administration of the...

  • Page 104
    ... to conduct operations. Compliance-related issues have limited our ability to do business and/or have raised the cost of operating in these countries. In order to provide products and services in some of these countries, we may in the future utilize ventures with third parties, sell products to...

  • Page 105
    ... taxes payable provided $23 million in 2010 and used $169 million in cash 2009. The use of cash in 2009 was primarily due to federal income tax payments made in 2009 of $155 million for two quarterly installment payments related to 2008. The U.S. Internal Revenue Service allowed companies impacted...

  • Page 106
    ... or expand our operations into new markets or product lines. We may also from time to time sell business operations that are not considered part of our core business. During 2010, we paid cash of $680 million, net of cash acquired of $113 million, related to the BJ Services acquisition, and we paid...

  • Page 107
    ...with sufficient capital resources and liquidity to manage our working capital needs, meet contractual obligations, fund capital expenditures, and support the development of our short-term and long-term operating strategies. We may issue commercial paper or other short-term debt to fund cash needs in...

  • Page 108
    ... change as new events occur, as more experience is acquired, as additional information is obtained and as the business environment in which we operate changes. We have defined a critical accounting estimate as one that is both important to the portrayal of either our financial condition or results...

  • Page 109
    ... long-term forecasts of future revenues and costs related to the assets subject to review. In turn, these forecasts are uncertain in that they require assumptions about demand for our products and services, future market conditions and technological developments. We perform an annual impairment...

  • Page 110
    ... benefit obligations and related expenses, such as demographic factors like retirement age, mortality and turnover, are also evaluated periodically and are updated to reflect our actual and expected experience. The discount rate enables us to state expected future cash flows at a present value...

  • Page 111
    ...forward-looking statement. Our expectations regarding our business outlook, including changes in revenue, pricing, capital spending, profitability, strategies for our operations, impact of any common stock repurchases, oil and natural gas market conditions, market share and contract terms, costs and...

  • Page 112
    ... costs or net deferred gains on terminated interest rate swap agreements. Fair market value of fixed rate long-term debt was $4,218 million at December 31, 2010 and $2,111 million at December 31, 2009. FOREIGN CURRENCY AND FOREIGN CURRENCY FORWARD CONTRACTS We conduct operations around the world...

  • Page 113
    ... of financial statements for external purposes in accordance with generally accepted accounting principles. Our control environment is the foundation for our system of internal control and is embodied in our Business Code of Conduct, which sets the tone of our Company and includes our Core Values of...

  • Page 114
    ... INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Baker Hughes Incorporated Houston, Texas We have audited the internal control over financial reporting of Baker Hughes Incorporated and subsidiaries (the "Company") as of December 31, 2010, based on criteria...

  • Page 115
    ... ACCOUNTING FIRM To the Board of Directors and Stockholders of Baker Hughes Incorporated Houston, Texas We have audited the accompanying consolidated balance sheets of Baker Hughes Incorporated and subsidiaries (the "Company") as of December 31, 2010 and 2009, and the related consolidated statements...

  • Page 116
    ...of services Research and engineering Marketing, general and administrative Acquisition-related costs Litigation settlement Total costs and expenses Operating income Equity in income of affiliates Gain on sale of product line Gain (loss) on investments Interest expense, net Income before income taxes...

  • Page 117
    CONSOLIDATED BALANCE SHEETS December 31, (In millions, except par value) 2010 2009 ASSETS Current Assets: Cash and cash equivalents Short-term investments Accounts receivable - less allowance for doubtful accounts (2010 - $162; 2009 - $157) Inventories, net Deferred income taxes Other current ...

  • Page 118
    ... adjustments Defined benefit pension plans, net of tax of $5 Total comprehensive income Issuance of common stock, to acquire BJ Services Issuance of common stock, pursuant to employee stock plans Tax provision on stock plans Stock-based compensation Cash dividends ($0.60 per share) Acquisition of...

  • Page 119
    ...loss on investments Stock-based compensation Benefit for deferred income taxes Gain on sale of product line Gain on disposal of assets Provision for doubtful accounts Changes in operating assets and liabilities: Accounts receivable Inventories Accounts payable Accrued employee compensation and other...

  • Page 120
    ...OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Baker Hughes Incorporated ("Baker Hughes") is engaged in the oilfield services industry. We are a leading supplier of wellbore-related products and technology services and systems and provide products and services for drilling, pressure pumping...

  • Page 121
    ... interest and penalties related to uncertain tax positions as income taxes in our financial statements. Environmental Matters Estimated remediation costs are accrued using currently available facts, existing environmental permits, technology and enacted laws and regulations. For sites where we are...

  • Page 122
    ...completion of the sale, the Hold Separate Stipulation and Order terminated, and we commenced integration activities on a global basis. Consideration Under the terms of the acquisition agreement, BJ Services stockholders received $2.69 per share in cash and 0.40035 Baker Hughes shares of common stock...

  • Page 123
    ... benefits We assumed several defined benefit pension plans covering certain employees primarily in the U.K., Norway and Canada. Property, plant and equipment ("PP&E") A step-up adjustment of $418 million was recorded to present the PP&E acquired at its fair value. The weighted average useful life...

  • Page 124
    ... and life insurance benefits for retired employees, primarily in the U.S., who meet specified age and service requirements. A step-up adjustment of $32 million was recorded to present these liabilities at fair value. The following is a summary of the funded position of the assumed BJ Services plans...

  • Page 125
    ... Middle East/Asia Pacific ("MEAP") (including Egypt) • Industrial Services and Other (downstream chemicals, process and pipeline services, reservoir and technology consulting businesses) During 2010, we changed our internal reporting structure to align with this new geographical and product line...

  • Page 126
    ...benefit Stock-based compensation costs, net of tax The following table presents geographic consolidated revenues for the years ended December 31: 2010 2009 2008 $ 87 (18) $ 88 $ 60 (15) (11) United States Canada and other North America Latin America Europe/Africa/ Russia Caspian Middle East/Asia...

  • Page 127
    ... dividend yield is based on our history of dividend payouts. 2010 2009 2008 The following table presents the changes in stock options outstanding and related information (in thousands, except per option prices): Weighted Average Exercise Price Per Option Number of Options Outstanding at December...

  • Page 128
    ... table presents the changes in RSAs and RSUs and related information (in thousands, except per share/unit prices): RSA Number of Shares Weighted Average Grant Date Fair Value Per Share RSU Number of Units Weighted Average Grant Date Fair Value Per Unit Nonvested balance at December 31, 2009 Granted...

  • Page 129
    ... to income before income taxes for the reasons set forth below for the years ended December 31: 2010 2009 2008 Expected life (years) Risk-free interest rate Volatility Dividend yield Fair value per share of the 15% cash discount Fair value per share of the look-back provision Total weighted average...

  • Page 130
    ...positions Increase in current year tax positions Decrease related to settlements with taxing authorities Decrease related to lapse of statute of limitations Increase due to effects of foreign currency translation Balance at January 1, 2010 Acquisition of BJ Services Increase (decrease) in prior year...

  • Page 131
    ... 31: 2010 2009 2008 Weighted average common shares outstanding for basic EPS Effect of dilutive securities - stock plans Adjusted weighted average common shares outstanding for diluted EPS Future potentially dilutive shares excluded from diluted EPS: Options with an exercise price greater than...

  • Page 132
    ... below by reportable segment. Europe/ Africa/ Russia Caspian Middle East/ Asia Pacific Industrial Services and Other Drilling and Evaluation Completion and Production North America Latin America Total Balance as of December 31, 2009 Reallocation for change in segments Acquisitions Other...

  • Page 133
    ... as of each period end and any ineffective portion is recognized in the consolidated statement of operations. The fair value of the Swap Agreements was determined using a model with Level 2 inputs including quoted market prices for contracts with similar terms and maturity dates. 2010 Form 10-K 51

  • Page 134
    ... risk, we believe that our risk is minimized since the majority of our business is conducted with major companies within the industry. We perform periodic credit evaluations of our customers' financial condition and generally do not require collateral for our accounts receivable. In some cases...

  • Page 135
    ... employees primarily in the U.S., Canada, the U.K., Germany and several other countries in the Middle East and Asia Pacific region. Under the provisions of the U.S. qualified pension plan, a hypothetical cash balance account is established for each participant. Such accounts receive pay credits...

  • Page 136
    ... of year Service cost Interest cost Actuarial loss (gain) Benefits paid Curtailment Acquisitions of businesses Plan amendments Other Exchange rate adjustments Benefit obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer...

  • Page 137
    ...average assumptions used to determine net periodic benefit costs for these plans are as follows for the years ended December 31: U.S. Pension Benefits 2010 2009 2008 Non-U.S. Pension Benefits 2010 2009 2008 Other Postretirement Benefits 2010 2009 2008 Discount rate Expected long-term return on plan...

  • Page 138
    Health Care Cost Trend Rates Assumed health care cost trend rates have a significant effect on the amounts reported for other postretirement benefits. As of December 31, 2010, the health care cost trend rate was 8.0% for employees under age 65 and 6.5% for participants over age 65, with each ...

  • Page 139
    ... grade corporate bonds. Invests passively in Sterling-denominated government issued bonds. Invests in broad equity funds based on securities offered in various regions or countries. Equity funds are allocated by region as follows: 47% Global, 25% U.K., 8% North America, 8% Asia Pacific, 7% Europe...

  • Page 140
    ... retirement plan ("SRP") for certain officers and employees whose benefits under the Thrift Plan and/or the U.S. defined benefit pension plan are limited by federal tax law. The SRP also allows the eligible employees to defer a portion of their eligible compensation and provides for employer...

  • Page 141
    ... Employees' Retirement System, et al. v. BJ Services Company, et al., Cause No. 2009-57320, 80th Judicial District Court of Harris County, Texas. Customer Claim On November 19, 2009, BJ Services received correspondence from a customer operating in the North Sea, claiming that BJ Services' decision...

  • Page 142
    ... outstanding for purchase obligations related to capital expenditures and inventory under purchase orders and contracts of approximately $264 million at December 31, 2010. It is not practicable to estimate the fair value of these financial instruments. None of the off-balance sheet arrangements...

  • Page 143
    ...) Third Quarter Fourth Quarter Total Year 2010 Revenues Gross profit (1) Net income attributable to Baker Hughes Basic earnings per share of Baker Hughes Diluted earnings per share of Baker Hughes Dividends per share Common stock market prices: High Low 2009 Revenues Gross profit (1) Net income...

  • Page 144
    ...DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information regarding the Business Code of Conduct and Code of Ethical Conduct Certificates for our principal executive officer, principal financial officer and principal accounting officer are described in Item 1. Business of this Annual Report...

  • Page 145
    ... set forth below. The per share purchase price under the Baker Hughes Incorporate Employee Stock Purchase Plan is determined in accordance with section 423 of the Code as 85% of the lower of the fair market value of a share of our common stock on the date of grant or the date of purchase. (2) 2010...

  • Page 146
    ...Plan, there were no shares exercised during fiscal 2010 and approximately 0.5 million shares remained available for future options. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information for this item is set forth in the sections entitled "Corporate Governance...

  • Page 147
    ...The Bank of New York Mellon Trust Company, N.A., as trustee (filed as Exhibit 4.1 to Current Report of Baker Hughes Incorporated on Form 8-K filed October 29, 2008). 4.7 Officers' Certificate of Baker Hughes Incorporated dated October 28 2008 establishing the 6.50% Senior Notes due 2013 and the 7.50...

  • Page 148
    ...Baker Hughes Incorporated and each of the directors and executive officers effective as of January 1, 2009 (filed as Exhibit 10.4 to Current Report of Baker Hughes Incorporated on Form 8-K filed December 19, 2008). Baker Hughes Incorporated Director Retirement Policy for Certain Members of the Board...

  • Page 149
    ... and Conditions (filed as Exhibit 10.2 to Current Report of Baker Hughes Incorporated on Form 8-K filed March 31, 2009). Performance Goals adopted October 21, 2010 for the Performance Unit Awards Granted in 2009 under the Baker Hughes Incorporated 2002 Director & Officer Long-Term Incentive Plan...

  • Page 150
    ... Amendment to Baker Hughes Incorporated Executive Severance Plan dated April 22, 2010 (filed as Exhibit 10.1 to Current Report on Baker Hughes Incorporated Form 8-K filed on April 23, 2010). 10.50+ Amendment to Baker Hughes Incorporated 2002 Director & Officer Long-Term Incentive Plan dated March 31...

  • Page 151
    ...Agreement between Baker Hughes Services International, Inc. and the United States Department of Justice filed on April 26, 2007, with the United States District Court of Texas, Houston Division (filed as Exhibit 10.5 to Quarterly Report of Baker Hughes Incorporated on Form 10-Q for the quarter ended...

  • Page 152
    ... United States Attorney's Office for the Southern District of Texas and the United States Department of Justice (filed as Exhibit 99.1 to Quarterly Report of Baker Hughes Incorporated on Form 10-Q for the quarter ended March 31, 2007). Baker Hughes Services International, Inc. Information document...

  • Page 153
    ... 2010 Form 10-K 71 Title Chairman of the Board and Chief Executive Officer (principal executive officer) Senior Vice President and Chief Financial Officer (principal financial officer) Vice President and Controller (principal accounting officer) Director Director Director Director Director Director...

  • Page 154
    BAKER HUGHES INCORPORATED SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Balance at Beginning of Period Charged to Cost and Expenses Balance at End of Period (In millions) Write-offs (1) Other Changes (2) Year ended December 31, 2010 Reserve for doubtful accounts receivable Reserve for ...

  • Page 155
    ... • provides assistance to the board in overseeing matters related to risk analysis and risk management; • annually reviews compliance with our Business Code of Conduct and Foreign Corrupt Practices Act policies. The Baker Hughes Business Code of Conduct and Code of Ethical Conduct Certifications...

  • Page 156
    ... Certification Policy Statement on Shareholder Rights Plans Business Code of Conduct Environmental Policy Biographies of Board Members Biographies of Executive Officers Ownership Structure Investors Source Shares (millions) % of Total Capital Research Global Investors Wellington Management Company...

  • Page 157
    ... Listings Ticker Symbol "BHI" New York Stock Exchange, Inc. SWX Swiss Exchange Investor Relations Office Gary R. Flaharty Vice President, Investor Relations Baker Hughes Incorporated P.O. Box 4740 Houston, Texas 77210-4740 [email protected] Form 10-K Additional copies of the Company's Annual Report...

  • Page 158
    2929 Allen Parkway, Suite 2100 Houston, Texas 77019-2118 P.O. Box 4740 Houston, Texas 77210-4740 (713) 439-8600 www.bakerhughes.com