Baker Hughes 2015 Annual Report Download - page 41

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third quarter of 2014. Profitability in the segment decreased as a result of integration expenses related to this
acquisition, along with an increase in environmental costs compared to the prior year.
Costs and Expenses
The table below details certain data from our consolidated statements of income (loss) and as a percentage of
revenue.
2015 2014 2013
$ % $ % $ %
Revenue $ 15,742 100% $ 24,551 100% $ 22,364 100%
Cost of revenue 14,502 92% 19,746 80% 18,553 83%
Research and engineering 483 3% 613 2% 556 2%
Marketing, general and administrative 1,173 7% 1,271 5% 1,306 6%
Cost of Revenue
Cost of revenue as a percentage of revenue was 92% and 80% for 2015 and 2014, respectively. As a result of
the steep decline in activity and customer spending, we experienced significant pricing pressure and a decline in
the demand for our products and services. Despite actions to restructure our global operations to operate in a
lower price and activity environment, the decline in revenue has outpaced the benefit of cost saving measures.
Additionally, the product lines most significantly impacted by the downturn in rig activity are also the most capital-
intensive. Accordingly, the fixed costs associated with those product lines lessened the positive impact of our cost
reduction efforts in 2015. Cost of revenue for 2015 was also negatively impacted by a charge of $194 million to
adjust the carrying value of certain inventory due to the industry-wide market decline, and $87 million of expenses
related to the Merger.
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.
Research and Engineering
Research and engineering expenses decreased 21% in 2015 compared to 2014, yet increased slightly as a
percentage of revenue. The reduction in research and engineering expense was driven by cost reduction
measures, partially offset by $17 million of expenses related to the Merger.
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.