Baker Hughes 2010 Annual Report Download - page 102

20 B a k e r H u g h e s I n c o r p o r a t e d
Cost of Revenues
Cost of revenues as a percentage of revenues was 78%
and 77% for 2010 and 2009, respectively. The increase was
primarily due to pricing pressures and higher operating costs
for our geomarket organization which we are mitigating
through productivity improvements and cost cutting measures.
The additional depreciation and amortization expense for
the eight months since the acquisition date of approximately
$93 million for tangible and intangible assets associated with
the BJ Services acquisition also contributed to the increase.
Cost of revenues as a percentage of revenues was 77%
and 67% for 2009 and 2008, respectively. The increase was
primarily due to significant declines in activity worldwide
resulting in excess manufacturing capacity, lower utilization
of our rental tools and price deterioration, primarily in North
America. Additional contributing factors to this increase include
costs associated with employee severance of $73 million; an
increase in the net provision for doubtful accounts of $73 mil-
lion; and a change in the geographic and product mix from
the sale of our products and services as we continue to
emphasize productivity and cost improvements.
Research and Engineering
Research and engineering expenses increased 8% in 2010
compared to 2009. We continue to be committed to develop-
ing and commercializing new technologies as well as investing
in our core product offerings. Research and development costs
increased 23% in 2010 compared to 2009.
Research and engineering expenses decreased 7% in 2009
compared to 2008. The decrease was in line with the decrease
in activity. The decrease was offset by $5 million associated
with employee severance. Research and development costs
decreased 12% in 2009 compared to 2008.
Marketing, General and Administrative
Marketing, general and administrative (“MG&A”) expenses
increased 12% in 2010 compared to 2009. The increase
resulted primarily from costs associated with finance redesign
efforts, software implementation activities and the acquisition
of BJ Services.
MG&A expenses increased 7% in 2009 compared to 2008.
This increase resulted primarily from an increase in costs associ-
ated with enterprise-wide accounting system implementations
and reorganization activities of $46 million, and employee sev-
erance of $14 million. These increases were partially offset by
lower marketing and compliance related expenses.
Acquisition-Related Costs
Acquisition-related costs are being expensed as incurred.
They include expenses directly related to acquiring BJ Services
and integration expenses incurred in combining the compa-
nies. During 2010 and 2009, we incurred $134 million and
$18 million, respectively, of total acquisition-related costs.
Interest Expense, net
Net interest expense increased $16 million in 2010 com-
pared to 2009. The increase was primarily due to the issuance
of $1.5 billion of debt in August 2010 and the assumption
of $500 million of debt associated with the acquisition of
BJ Services, partially offset by gains on our interest rate swaps
of $16 million.
Net interest expense increased $63 million in 2009 compared
to 2008 primarily due to the new long-term debt issuances of
$1.25 billion in October 2008 resulting in higher average debt
levels throughout 2009, and a reduction in the average interest
rate earned and the average investment balance.
Income Taxes
Our effective tax rates in 2010, 2009 and 2008 were
36.1%, 31.1%, and 29.5% respectively. The current year
effective tax rate is higher than the U.S. statutory income tax
rate of 35% due to higher rates of tax on certain international
operations and state income taxes partially offset by tax bene-
fits arising from the repatriation of foreign earnings. The prior
two years’ effective tax rates were lower than the U.S. statu-
tory income tax rate of 35% due to lower rates of tax on cer-
tain international operations offset by state income taxes.
Our tax filings for various periods are subject to audit
by the tax authorities in most jurisdictions where we conduct
business. These audits may result in assessment of additional
taxes that are resolved with the authorities or through the
courts. We believe these assessments may occasionally be
based on erroneous and even arbitrary interpretations 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 believe we have sub-
stantial defenses to the questions being raised and will pursue
all legal remedies should an unfavorable outcome result. How-
ever, resolution of these matters involves uncertainties and
there are no assurances that the outcomes will be favorable.
OUTLOOK
This section should be read in conjunction with the factors
described in “Part I, Item 1A. Risk Factors” and in the “Forward-
Looking Statements” section in this Part II, Item 7, both con-
tained herein. These factors could impact, either positively or
negatively, our expectation for: oil and natural gas demand; oil
and natural gas prices; exploration and development spending
and drilling activity; and production spending.
Our industry is cyclical, and past cycles have been driven
primarily by alternating periods of ample supply or shortage of
oil and natural gas relative to demand. As an oilfield services
company, our revenue is dependent on spending by our cus-
tomers for oil and natural gas exploration, field development
and production. This spending is dependent on a number of
factors, including our 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
economic recession, the negative impact of the moratorium
and new regulations following the Deepwater Horizon acci-
dent in the Gulf of Mexico, and drilling in the U.S. oil-and-gas
shale plays are expected to be the primary drivers impacting
the 2011 business environment.