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34
Cost of Revenue
Cost of revenue as a percentage of revenue was 80% and 83% for 2014 and 2013, respectively. The
improvement in cost of revenue as a percentage of revenue was due primarily to the continued improvement in our
U.S. onshore pressure pumping business, which resulted in higher asset utilization and organizational efficiencies,
as well as improved contractual terms. In Latin America, margins improved due to cost reduction strategies
implemented throughout the region in the second half of 2013. Margins in the MEAP segment were improved by
higher incremental profit on increased revenue, combined with a favorable shift in product mix. Reduced
disruptions in our Iraq operations for 2014 also contributed to lower cost of revenue in the MEAP segment. In the
EARC segment, profitability increased in Continental Europe, the United Kingdom and most of Africa but were
partially offset by restructuring charges of $58 million associated with our operations in North Africa, primarily from
disruptions in Libya. These improvements were partially offset by $113 million of increased depreciation expense
across all segments except Latin America; $29 million of severance charges in North America; and $29 million of
costs associated with a technology royalty agreement.
Cost of revenue as a percentage of revenue was 83% and 81% for 2013 and 2012, respectively. The increase
in cost of revenue as a percentage of revenue was due primarily to lower margins in our pressure pumping product
line in North America as a result of the overcapacity in the pressure pumping industry. Additionally, depreciation
expense across all segments increased cost of revenue by $160 million in 2013 compared to 2012. In Latin
America, lower pricing on the drilling services contract in Brazil led to an increase in cost of revenue relative to
revenue. In Europe, reduced pricing and increased start-up costs on a new drilling services contract in Norway
decreased margins, as well as an unfavorable change in sales mix. Margins in the Middle East were negatively
impacted by third party costs related to our Iraq integrated contracts. Further, cost of revenue was negatively
impacted from a disruption to our operations in Iraq in the fourth quarter of 2013. In 2013, margins were favorably
impacted by higher incremental profit on revenue in Asia Pacific, and improvement of sales mix in Africa, Russia
Caspian and the Gulf of Mexico.
Research and Engineering
Research and engineering expenses increased 10% in 2014 compared to 2013 as we continued our
commitment to invest in the research and product development required to meet our customers' need for innovative
new products and emerging technologies, focusing on lowering the cost of well construction, optimizing well
production and increasing ultimate recoveries. As a result of our research and development activities in 2014, we
commercially launched over 160 new products and services.
Research and engineering expenses increased 12% in 2013 compared to 2012. In 2013, we continued to ramp
up our research and development activities at our technology centers, which resulted in higher personnel and
material costs. As a result of our research and development activities in 2013, we commercially launched over 100
new products and services. We are committed to expanding our core services to include critical capabilities and
emerging technologies.
Marketing, General and Administrative
Marketing, general and administrative (“MG&A”) expenses decreased 3% in 2014 compared to 2013. MG&A
expenses in 2014 includes a net gain of $34 million recognized on the deconsolidation of a jointly owned legal
entity. For further discussion, see Note 3. "Acquisitions and Deconsolidation" of the Notes to Consolidated
Financial Statements in Item 8 herein. Cost savings experienced across the organization were mostly offset by a
charge of $14 million related to the impairment of a technology investment and $11 million of merger related
expenses. Also included in MG&A in 2014 and 2013 are foreign exchange losses of $12 million and $23 million,
respectively, due to the currency devaluation in Venezuela.
MG&A expenses decreased 1% in 2013 compared to 2012. MG&A expenses in 2013 decreased as a result of
non-recurring charges recorded in 2012 including $43 million related to the impairment of certain information
technology assets as well as the winding down of our worldwide integration efforts subsequent to our acquisition of
BJ Services in 2010. The conclusion of our integration efforts resulted in decreased costs related to technology,
project management and personnel, and led to improved efficiencies among our global operations and support
functions. The reduction in MG&A was largely offset by the loss of $23 million due to the currency devaluation in