Baker Hughes 2008 Annual Report Download

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2008 Annual Report To Stockholders
Advancing
Reservoir
Performance

Table of contents

  • Page 1
    2008 Annual Report To Stockholders Advancing Reservoir Performance

  • Page 2
    ...-salt formations, and deep, high pressure/ high temperature wells. Baker Hughes has that technology. Baker Hughes has long been a leading provider of high-performance technology that creates value from the reservoir. Virtually every product and service we provide is designed to lower costs, reduce...

  • Page 3
    ... production from mature fields. We inaugurated our new Center for Technology Innovation in Houston, and opened a number of new operations facilities across the country. U.S. Offshore Offshore U.S., deepwater operators benefited from Baker Hughes technology and experience. Our drilling fluids...

  • Page 4
    ... Russia, adding facilities and developing our employee base. Middle East Baker Hughes opened a major new regional headquarters and education center in Dubai. Horizontal drilling and completions activity remained strong in Saudi Arabia with the introduction of new PDC bits and LWD technology. Baker...

  • Page 5
    ... Revenues 2006-2008, by Quarter (In millions) (2) Total Operating Profit After Tax Per Share (Diluted) 2006-2008, by Quarter Net Debt(3) 2006-2008, by Quarter (In millions) Canada, 5% Asia Pacific, 9% Middle East, 9% Russia, Caspian, 6% USA, 38% Africa, 9% Europe, 14% Latin America, 10% $3,500...

  • Page 6
    ... Condition and Results of Operations" contained in Items 1A and 7 of the Annual Report on Form 10-K of Baker Hughes Incorporated for its year ended December 31, 2008. The use of "Baker Hughes, " "our," "we" and similar terms are not intended to describe or imply particular corporate organizations...

  • Page 7
    2008 Annual Report 3 2008 was a successful year for Baker Hughes, at the high point of the current business cycle. Baker Hughes achieved record revenues and profits as we invested in global growth and added new capabilities to serve our customers. $0.13 per diluted share), related to the ...

  • Page 8
    ... develop unconventional gas reserves. Our AutoTrakâ„¢ rotary steerable system and advanced LWD technology help place long horizontal wells accurately within gas-bearing shales. Our FracPointâ„¢ completion system enables cost-effective staged fracturing operations that maximize productivity...

  • Page 9
    ... have invested in our research and engineering capabilities. Our new Center for Technology Innovation (CTI) began operating in 2008 to develop reservoir, completion and production technologies, with emphasis on deepwater, high temperature/high pressure, and sand control applications. On a 14-acre...

  • Page 10
    ... lines achieved strong gains in North America as operators sought to maximize production. In addition to gaining new large-scale service agreements to provide electric submersible pumps for entire onshore fields, we provided innovative ESP systems to boost production from subsea wells. Our high...

  • Page 11
    ... drill bits, drilling and LWD systems, and drilling fluids optimized for difficult applications like drilling through salt. A full range of completion technologies enable sustained, well productivity. Our chemical services and subsea booster systems assure reliable, high flow from deepwater wells...

  • Page 12
    Baker Hughes has unique capabilities in delivering systems for harsh environment wells with high temperatures and pressures. Our Center for Technology Innovation is focused on new technology and materials for HPHT, deepwater and sand control applications. The laboratory cell shown here can test ...

  • Page 13
    ...and wireline logging services. Activity suffered in the U.K. sector, as smaller operators were impacted by the financial crisis and declining oil prices. Opportunities still exist in the mature North Sea fields for our technology and services directed at optimizing production. Baker Hughes' business...

  • Page 14
    ... for a national oil company. In Australia, our directional drilling division re-entered the market as our wireline logging group provided services on a deepwater exploration well and logged a high pressure/high temperature well on land. Our fluids division helped a customer drill its first "zero...

  • Page 15
    ... fields, Baker Hughes electric submersible pumping systems are engineered to run reliably in harsh downhole environments. Intelligent Well Systems adjust flow patterns in response to changing reservoir conditions. Surface pumping units enable water flooding for enhanced recovery. Engineered chemical...

  • Page 16
    .... The Baker Hughes executive management team includes (left to right): Martin S. Craighead, Vice President and Group President, Drilling and Evaluation; Peter A. Ragauss, Senior Vice President and Chief Financial Officer; David H. Barr, Vice President and Group President, Completion and Production...

  • Page 17
    ... Time, for the purpose of considering and voting on: 1. 2. 3. 4. 5. Election of Eleven Directors; Ratification of Deloitte & Touche LLP as the Company's Independent Registered Public Accounting Firm for Fiscal Year 2009; Proposal to Approve Amendment to the Baker Hughes Incorporated Employee Stock...

  • Page 18
    ... ...Proposal No. 2, Ratification of the Company's Independent Registered Public Accounting Firm ...Fees Paid to Deloitte & Touche LLP...Proposal No. 3, Proposal to Approve Amendment of the Baker Hughes Incorporated Employee Stock Purchase Plan ...Proposal No. 4, Stockholder Proposal No. 1 Regarding...

  • Page 19
    ... Public Accounting Firm for fiscal year 2009, FOR approval of the Amendment to the Baker Hughes Incorporated Employee Stock Purchase Plan, and AGAINST Stockholder Proposal No. 1 regarding Calling Special Shareowners Meetings. Proxies may be revoked at any time prior to the exercise thereof by filing...

  • Page 20
    ... of the ratification of Deloitte & Touche LLP as the Company's Independent Registered Public Accounting Firm for fiscal year 2009, for the approval of the amendment to the Baker Hughes Incorporated Employee Stock Purchase Plan ("ESPP") and for the approval of Stockholder Proposal No. 1, regarding...

  • Page 21
    .../West Africa Division from 1992 to 1994. In 1992, he was named Vice President, Texaco. He is a director and Executive Committee member of both the U.S. Saudi Arabian Business Council and the American Petroleum Institute. Chairman of the Board, President and Chief Executive Officer of Baker Hughes...

  • Page 22
    ...and its predecessor company (high technology venture capital firm) since 1982. Former First Selectman, Greenwich, Connecticut (city government) from 2003 to 2007. Mr. Lash also served as Chairman and Chief Executive Officer of Reading Tube Corporation from 1982 to 1996. Mr. Lash is a director of the...

  • Page 23
    ... incorporated), the rules and listing standards of the NYSE and SEC regulations, as well as best practices suggested by recognized governance authorities. The Board has established the Company's Corporate Governance Guidelines as the principles of conduct of the Company's business affairs to benefit...

  • Page 24
    ...be accessed electronically under the "Corporate Governance" section of the Company's website at www.bakerhughes.com/investor. The functions performed by the Compensation Committee include reviewing and approving Baker Hughes' executive salary and bonus structure; reviewing Baker Hughes' stock option...

  • Page 25
    ..., Governance Committee of the Board of Directors, P.O. Box 4740, Houston, Texas, 77210, or to the Corporate Secretary, c/o Baker Hughes Incorporated, 2929 Allen Parkway, Suite 2100, Houston, Texas, 77019. Such recommendations should be accompanied by the information required under the Company...

  • Page 26
    8 Baker Hughes Incorporated SECURITY OWNERSHIP OF MANAGEMENT Set forth below is certain information with respect to beneficial ownership of the Common Stock as of February 26, 2009 by each director nominee, the persons named in the Summary Compensation Table below and the directors and executive ...

  • Page 27
    ...of the Senior Executives; (ix) reviewing and reporting to the Board the levels of stock ownership by the Senior Executives in accordance with the Stock Ownership Policy; (xi) reviewing the Company's employee benefit programs and recommending for approval all committee administrative changes that may...

  • Page 28
    10 Baker Hughes Incorporated Cogent assists the Compensation Committee by providing comparative market data on compensation practices and programs (the "Survey Data") based on an analysis of ten publicly traded, energy-related companies that are competitors of ours (the "Peer Group") plus published...

  • Page 29
    ...is profit after tax ("PAT"). PAT means revenues minus cost of sales (the cost of products sold and the cost of providing services, including personnel costs, repair and maintenance costs, freight/custom, depreciation and other costs directly relating to the service provided) minus operating expenses...

  • Page 30
    ... opportunity for earnings through compensation programs which are at risk and dependent on Company performance. When considering adjustment of a Senior Executive's base salary, the Compensation Committee reviews Survey Data and evaluates the Senior Executive's level of responsibility and experience...

  • Page 31
    ... Executives with the opportunity to earn cash bonuses based on the achievement of specific Company-wide, business unit, division or function and individual performance goals. The Compensation Committee designs the annual incentive component of our compensation program to align Senior Executive pay...

  • Page 32
    14 Baker Hughes Incorporated Discretionary Bonuses From time to time we pay the Senior Executives discretionary cash bonuses based upon the achievement of non-financial goals. We made cash-based awards under the 2002 Director & Officer Long-Term Incentive Plan (the "2002 D&O Plan") to certain of ...

  • Page 33
    ... units are designed to encourage long-range planning and reward sustained stockholder value creation. The objectives of the performance units are to (i) ensure a long-term focus on capital employment; (ii) develop human resource capability; (iii) enable long-term growth opportunities; (iv) motivate...

  • Page 34
    ... life insurance may be paid from a Senior Executive's perquisite allowance. We offer retirement programs that are intended to supplement the employee's personal savings and social security. The programs include the Baker Hughes Incorporated Thrift Plan ("Thrift Plan"), which is a 401(k) plan...

  • Page 35
    ... compensation. Eligible compensation generally means all wages, salaries and fees for services from the Company. The following are the quarterly pay crediting rates under the Pension Plan: Pay Credit as a Percentage of Quarterly Eligible Compensation Age at End of Quarter Accordingly, Executive...

  • Page 36
    .... Additional severance benefits payable to our PEO are addressed in his employment agreement discussed below. The Senior Executives are covered under a general severance plan known as the Baker Hughes Incorporated Executive Severance Plan (the "Severance Plan"). The Severance Plan is designed to...

  • Page 37
    ... time to time by the Board of Directors or the Compensation Committee: •฀ a฀base฀salary; •฀ the฀opportunity฀to฀earn฀annual฀cash฀bonuses฀in฀amounts฀ that may vary from year to year and that are based upon achievement of performance goals; •฀ long-term฀incentives...

  • Page 38
    ...Senior Executive's Highest Bonus Amount (as defined below), prorated based upon the number of days of his service during the performance period (reduced by any payments received by the Senior Executive under our Annual Incentive Compensation Plan, as amended, in connection with the Change in Control...

  • Page 39
    ... the Company. The Policy is designed to satisfy an individual Senior Executive's need for portfolio diversification, while maintaining management stock ownership at levels high enough to assure our stockholders of management's commitment to value creation. The Compensation Committee annually reviews...

  • Page 40
    ... the sale of shares, the Senior Executive will (a) still own a number of shares equal to at least the Required Ownership Shares or (b) still be in compliance with the Stock Ownership Level as of the day the shares are sold based on current share price and salary level. Annual Review The Compensation...

  • Page 41
    ... of $97,064 paid in connection with such compensation) and (v) $10,395 in life insurance premiums paid by the Company on behalf of Mr. Barr. April 30, 2009, Mr. Barr will retire from the Company and Mr. Craighead is being promoted to the position of Senior Vice President and Chief Operating Officer...

  • Page 42
    ... paid in cash. Amounts shown represent the number of shares granted in 2008 for RSAs. Our practice is that the exercise price for each stock option is the fair market value on the date of grant. Under our long-term incentive program, fair market value is the closing stock price on the day before the...

  • Page 43
    ... unvested and unearned stock awards (both time-based awards and performancecontingent) assuming a market value of $32.07 a share (the closing market price of the Company's stock on December 31, 2008). Outstanding Equity Awards at Fiscal Year-End Table Option Awards Number of Securities Underlying...

  • Page 44
    26 Baker Hughes Incorporated Option Exercises and Stock Vested The following table sets forth certain information regarding options and stock awards exercised and vested, respectively, during 2008 for the persons named in the Summary Compensation Table above. Option Exercises and Stock Vested ...

  • Page 45
    ... the remaining term of the employment agreement; b. we will pay him or his beneficiary a lump sum in cash equal to his expected value incentive bonus for the year of termination; and c. the substantial risk of forfeiture restrictions applicable to 20,000 restricted shares of our stock granted by us...

  • Page 46
    ... under the terms of the employee benefit plans in which he is a participant as of the date of termination and a lump sum amount in cash equal to the sum of his base salary through the date of termination and any accrued vacation pay, in each case to the extent not theretofore paid. Change in Control...

  • Page 47
    ... would have become fully exercisable on December 31, 2008, if a Change of Control were to have occurred on that date. Under the terms of Mr. Craighead's stock options, he would have to pay an aggregate of $2,586,862 to purchase these shares. Accordingly, the maximum value of the accelerated vesting...

  • Page 48
    30 Baker Hughes Incorporated material to his total compensation or (vi) our failure to continue to provide the Senior Executive with benefits substantially similar to those enjoyed by him under any of our pension, savings, life insurance, medical, health and accident, or disability plans in which ...

  • Page 49
    ... April 30, 2009. The amounts we will pay to Mr. Barr in connection with his retirement are discussed below under the heading "Retirement Agreement With David H. Barr." Baker Hughes Incorporated Executive Severance Plan On November 1, 2002, we adopted an executive severance program, the Baker Hughes...

  • Page 50
    32 Baker Hughes Incorporated If the Senior Executive meets the criteria for payment of severance benefits due to an Involuntary Termination, we (or our successor) will pay him the following benefits in addition to any benefits he is due under our employee benefit plans and equity and incentive ...

  • Page 51
    ... sold a business unit, (ii) on December 31, 2008 the Senior Executive's employment with us terminated in connection with the sale and (iii) the sale did not constitute a 2002 D&O Plan Change in Control, a pro-rata portion of the Senior Executive's then outstanding restricted stock awards granted...

  • Page 52
    ... stock awards granted by us would have become fully vested and nonforfeitable. For this purpose a Senior Executive is treated as having incurred a disability if he qualifies for long-term disability benefits under our longterm disability program. For each Senior Executive, the number of shares...

  • Page 53
    2008 Proxy Statement 35 If Mr. Barr had terminated employment with us on December 31, 2008 due to retirement his options to purchase an aggregate of 37,886 of our shares, with a value of $32.07 per share would have become fully exercisable on December 31, 2008. Under the terms of Mr. Barr's stock ...

  • Page 54
    ... base thrift deferral account, Company pension deferral account and Company discretionary deferral account under the SRP. For this purpose, "retirement" means termination of employment with us on or after (i) attaining the age of 65 or (ii) attaining the age of 55 and completing ten years of service...

  • Page 55
    ... his company base thrift deferral account, company pension deferral account and company discretionary deferral account under the SRP without regard to his tenure with us. For this purpose, a Senior Executive has a disability if he is eligible for benefits under our long-term disability plan. Messrs...

  • Page 56
    ... and other awards payable to the Company's directors, please refer to the section titled "Corporate Governance - Board of Directors" contained elsewhere in this proxy statement. Non-Equity Incentive Plan Compensation ($) All Other Compensation ($) Name Fees Earned or Paid in Cash ($) Stock Awards...

  • Page 57
    ...31, 2008 with management, the Company's internal auditors and Deloitte & Touche. Deloitte & Touche informed the Audit/Ethics Committee that the Company's audited financial statements are presented fairly in conformity with accounting principles generally accepted in the United States of America. The...

  • Page 58
    ...the Company's annual financial statements, review of quarterly financial statements and audit services related to the effectiveness of the Company's internal control over financial reporting. Audit-related fees consist primarily of attestation services related to business restructurings and services...

  • Page 59
    2008 Proxy Statement 41 PROPOSAL NO. 3 PROPOSAL TO APPROVE AMENDMENT OF THE BAKER HUGHES INCORPORATED EMPLOYEE STOCK PURCHASE PLAN The Board of Directors adopted the Baker Hughes Incorporated Employee Stock Purchase Plan ("ESPP" or the "Plan"), as amended and restated February 26, 2009, to be ...

  • Page 60
    ...withhold employment and income taxes upon the exercise of options granted under plans that qualify under section 423 of the Code. Recommendation of the Board of Directors Your Board of Directors recommends a vote FOR approval of amendment of the Baker Hughes Incorporated Employee Stock Purchase Plan...

  • Page 61
    ...Statement and form of proxy relating to that meeting. Such proposals should be mailed to the Company's Corporate Secretary, c/o Baker Hughes Incorporated, 2929 Allen Parkway, Suite 2100, Houston, Texas 77019. Nominations of directors by stockholders must be received by the Chairman of the Governance...

  • Page 62
    ... for the benefit of the eligible employees of Baker Hughes Incorporated; and WHEREAS, the Plan has, from time to time, been amended and restated; and WHEREAS, the Company desires to restate the Plan and to amend the Plan to increase by eight million (8,000,000) shares the number of shares available...

  • Page 63
    ... Company. "Company" means Baker Hughes Incorporated, a Delaware corporation. "Compensation Committee" means the Compensation Committee of the Board. "Date of Exercise" means, for each Option Period, the last day that the principal securities exchange on which the Common Stock is listed is open for...

  • Page 64
    ... Value of a share of Common Stock on the Date of Exercise. "Participant" means each Eligible Employee who elects to participate in the Plan. "Plan" means the Baker Hughes Incorporated Employee Stock Purchase Plan, as amended from time to time. "Plan Administrator" means the Company, acting through...

  • Page 65
    ...may retire under the Plan. The Participant may, at his election by written notice to the Plan Administrator, either (A) exercise his Option as of his termination date, in which event the Employer shall apply the amount accrued under the Plan at that time to the purchase at the Option Price of shares...

  • Page 66
    ... the Company or of any of its subsidiaries or related corporations at a rate which exceeds $25,000 in Fair Market Value of Common Stock (determined at the Date of Grant of the Option), and no Employee shall be granted Options for more than 2,500 shares of Common Stock under the Plan at the time the...

  • Page 67
    ...the Plan and the Options granted hereunder shall not limit, affect or restrict in any way the right or power of the Board or the Company's stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the capital stock of the Company or its business...

  • Page 68
    ... all the terms, conditions and limitations of the Plan except those, if any, specifically described in the adoption instrument, and providing all information required by the Plan Administrator. The Plan Administrator and the adopting Affiliate may agree to incorporate specific provisions relating to...

  • Page 69
    ... the Plan or funds held in the ESPP Account. 8.2 Amendment to the Plan. The Board or the Compensation Committee may amend the Plan at any time and from time to time, subject to the limitation that approval by the vote of the holders of a majority of the outstanding securities of the Company entitled...

  • Page 70
    A-9 Baker Hughes Incorporated IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on this _____ day of _____, 2009. BAKER HUGHES INCORPORATED By: Title: Signature page to Baker Hughes Incorporated Employee Stock Purchase Plan (As Amended and Restated Effective as of February ...

  • Page 71
    ...Proxy Statement B-1 ANNEX B BAKER HUGHES INCORPORATED POLICY FOR DIRECTOR INDEPENDENCE, AUDIT/ETHICS COMMITTEE MEMBERS AND AUDIT COMMITTEE FINANCIAL EXPERT (As Amended October 23, 2008) INDEPENDENCE I. Introduction A member of the Board of Directors ("Board") of Baker Hughes Incorporated ("Company...

  • Page 72
    ...; (b) The ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves; (c) Experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are...

  • Page 73
    ... meet in executive session at each regularly scheduled meeting, including separate, private meetings with the independent registered public accounting firm, corporate auditors, general counsel and compliance officer. The Committee shall also meet in executive session with such other employees as it...

  • Page 74
    .... 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...

  • Page 75
    ...in฀the฀proxy฀ statement as required by applicable rules. •฀ Review฀actions฀taken฀by฀management฀on฀the฀independent฀ registered public accounting firm and corporate auditors' recommendations relating to organization, internal controls and operations. •฀ Meet฀separately...

  • Page 76
    ..., to resolve disagreements, if any, between management and the independent auditor or to assure compliance with laws and regulations or with Company policies. Meetings The Committee will meet at least five times per year as determined by the Board of Directors. Special meetings may be called, as...

  • Page 77
    ... basic 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 not engaged in any activity adverse to, or do not serve on the board of another...

  • Page 78
    ... Incorporated ANNEX E BAKER HUGHES INCORPORATED STOCKHOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS 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...

  • Page 79
    ... EXCHANGE ACT OF 1934 Commission file number 1-9397 OR Form 10-K 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...

  • Page 80
    .... Controls and Procedures ...Item 9B. Other Information ... 15 17 18 34 36 66 66 66 PART III Item Item Item Item Item 10. 11. 12. 13. 14. Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related...

  • Page 81
    ...and services for drilling, formation evaluation, completion and production and reservoir technology and consulting to the worldwide oil and natural gas industry. We may conduct our operations through subsidiaries, affiliates, ventures and alliances. Our annual reports on Form 10-K, quarterly reports...

  • Page 82
    ... directional control and improved rate of penetration. Measurement-While-Drilling. Directional drilling systems need real-time measurements of the location and orientation of the bottom-hole assembly to operate effectively. MWD systems are downhole tools that provide this directional information...

  • Page 83
    2008 Form 10-K 3 In both MWD and LWD systems, surface communication with the tool is achieved through mud-pulse telemetry, which uses pulse signals (pressure changes in the drilling fluids traveling through the drill string) to communicate the operating conditions and location of the bottom-hole ...

  • Page 84
    ... and production of oil and gas reservoirs. Services include well planning, drilling optimization, formation evaluation and imaging, well placement, sand control completions and stimulation and fracturing operations. We also provide consulting services to assist customers with operations management...

  • Page 85
    ...steel and crop protection. Pipeline Management. Baker Hughes offers a variety of products and services for the pipeline transportation industry. We offer custom turnkey cleaning programs that improve efficiency by combining chemical treatments with brush and scraper tools that are pumped through the...

  • Page 86
    ... production. The main drivers of customer purchasing decisions for both permanent monitoring and chemical automation include application engineering expertise, ability to integrate a complete system, product reliability, functionality and local field support. Specific opportunities for competitive...

  • Page 87
    ... 57% work outside the United States. The business operations of our two segments are organized around four primary geographic regions: North America; Latin America; Europe, Africa, Russia and the Caspian; and Middle East, Asia Pacific. Through this structure, we have placed our management close to...

  • Page 88
    ... 2005. Vice President of Worldwide Operations for Baker Atlas from 2003 to 2005 and Vice President, Marketing and Business Development for Baker Atlas from 2001 to 2003; Region Manager for Baker Atlas in Latin America and Asia and Region Manager for E&P Solutions from 1995 to 2001. Employed by the...

  • Page 89
    ... of Baker Petrolite Corporation since 2005. 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 from...

  • Page 90
    10 Baker Hughes Incorporated presently enacted laws and regulations. For sites where we are primarily responsible for the remediation, our cost estimates are developed based on internal evaluations and are not discounted. We record accruals when it is probable that we will be obligated to pay ...

  • Page 91
    ... based upon their expectations of future energy prices, required investments and resulting returns. Limited access to external sources of funding has caused many customers to reduce their capital spending plans to levels supported by internally-generated cash flow. In addition, the combination of...

  • Page 92
    ...contract terms and conditions with our customers, especially state-owned national oil companies, our ability to manage warranty claims and our ability to effectively manage our commercial agents can also impact our results of operations. Managing development of competitive technology and new product...

  • Page 93
    ... compliance program, including our ability to continue to manage our agents and business partners and supervise, train and retain competent employees and the efforts of our employees to comply with applicable law and the Baker Hughes Business Code of Conduct. Compliance with and changes in laws...

  • Page 94
    ...manufacturing facilities are well maintained and suitable for their intended purposes. The table below shows our principal manufacturing plants by segment and geographic region: Europe, Africa, Russia and the Caspian MIddle East, Asia Pacific Segment North America Latin America Total Completion...

  • Page 95
    ... stock determined under the terms of the Plan each trading day based on the trading price of the stock on that day. Shares were repurchased under the Plan by the agent at the prevailing market prices, in open market transactions which complied with Rule 10b-18 of the Exchange Act. Average price...

  • Page 96
    ... on investment (change in year-end stock price plus reinvested dividends) assumes that $100 was invested on December 31, 2003 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...

  • Page 97
    ... of accounting change Cumulative effect of accounting change, net of tax Net income Per share of common stock: Income from continuing operations: Basic Diluted Dividends Balance Sheet Data: Cash, cash equivalents and short-term investments Working capital Total assets Long-term debt Stockholders...

  • Page 98
    ...EXECUTIVE SUMMARY We are a major supplier of wellbore related products and technology services and systems and provide products and services for drilling, formation evaluation, completion and production, and reservoir technology and consulting to the worldwide oil and natural gas industry. We report...

  • Page 99
    ...declining oil prices, lower natural gas prices, and a weakening global economic outlook are all impacting our business environment. Our customers typically fund their activity through a combination of borrowed funds and internally-generated cash flow. The limited availability of commercial credit is...

  • Page 100
    ... of drill bits. Our rig counts are summarized in the table below as averages for each of the periods indicated. 2008 2007 2006 U.S. - land and inland waters U.S. - offshore Canada North America Latin America North Sea Other Europe Africa Middle East Asia Pacific Outside North America Worldwide...

  • Page 101
    ... systems as well as multiple product lines in the Drilling and Evaluation segment in both Kazakhstan and Russia partially offset by lower drilling activity in the U.K. Middle East, Asia Pacific revenues increased 8%. Middle East revenues increased 9% compared to a 6% increase in the rig count. Asia...

  • Page 102
    .... Research and development costs increased 12% in 2008 compared with 2007 and 8% in 2007 compared with 2006. During 2007, we opened the first phase of the Center for Technology and Innovation in Houston, Texas. This facility focuses on research and development of completion and production systems in...

  • Page 103
    ... expected free cash flow. In North America, the outlook for spending in 2009 is also dependent on the outlook for the natural gas industry. Increased drilling activity and the application of horizontal drilling and advanced fracturing and completion technologies in the unconventional gas fields has...

  • Page 104
    ... industry reports, our outlook for oil and natural gas prices described above, and our outlook for drilling activity, as measured by the Baker Hughes rig count. We believe that our customers' 2009 spending plans are based on forecasts of oil and gas prices and energy demand similar to those stated...

  • Page 105
    ...Center for Technology and Innovation in Houston, a research and engineering facility to design advanced completion systems for high pressure, high temperature hostile environments. The second phase was completed in 2008. Also in 2008, we opened our new campus in Dubai which includes our Middle East...

  • Page 106
    ... antiboycott reporting tool and a global trade management software tool currently being implemented; •฀ We฀have฀a฀whistleblower฀program฀designed฀to฀encourage฀ reporting of any ethics or compliance matter without fear of retaliation including a worldwide Business Helpline operated...

  • Page 107
    ...enhance the value of our company. In 2008, we used cash for a variety of activities including working capital needs, acquisition of businesses, payment of dividends, share repurchases and capital expenditures. Cash Flows Cash flows provided (used) by continuing operations by type of activity were as...

  • Page 108
    ...The proceeds of the Program are used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchases. Commercial paper issued under the Program is scheduled to mature within approximately 270 days of issuance. The commercial paper is not redeemable...

  • Page 109
    ... In 2009, we believe cash on hand and operating cash flows will provide us 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...

  • Page 110
    ...do not include any unamortized discounts, deferred issuance costs or net deferred gains on terminated interest rate swap agreements. Amounts represent the expected cash payments for interest on our long-term debt. We enter into operating leases in the normal course of business. Some lease agreements...

  • Page 111
    ... judgments regarding 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. Significant and...

  • Page 112
    ...actual and expected experience. The discount rate enables us to state expected future cash flows at a present value on the measurement date. The development of the discount rate for our U.S. plans was based on a bond matching model whereby a hypothetical bond portfolio of high-quality, fixed-income...

  • Page 113
    ... 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 availability of resources, economic and...

  • Page 114
    ... a fixed rate of interest and are denominated in U.S. Dollars, and the related weighted average effective interest rates by expected maturity dates as of December 31, 2008 and 2007 (dollar amounts in millions). 2010 2011 2012 2013 Thereafter Total 2008 2009 As of December 31, 2008: Long-term debt...

  • Page 115
    ... We conduct operations around the world in a number of different currencies. A number of our significant foreign subsidiaries have designated the local currency as their functional currency. As such, future earnings are subject to change due to fluctuations in foreign currency exchange rates when...

  • Page 116
    ... Baker Hughes Incorporated ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Management's Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Exchange...

  • Page 117
    2008 Form 10-K 37 REPORT OF 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...

  • Page 118
    ... 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, 2008 and 2007, and the related consolidated statements...

  • Page 119
    2008 Form 10-K 39 CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, (In millions, except per share amounts) 2008 2007 2006 Revenues: Sales Services and rentals Total revenues Costs and expenses: Cost of sales Cost of services and rentals Research and engineering Marketing, general and ...

  • Page 120
    40 Baker Hughes Incorporated CONSOLIDATED BALANCE SHEETS December 31, (In millions, except par value) 2008 2007 Assets Current Assets: Cash and cash equivalents Accounts receivable - less allowance for doubtful accounts (2008 - $74; 2007 - $59) Inventories Deferred income taxes Other current ...

  • Page 121
    ... income Issuance of common stock, pursuant to employee stock plans Tax benefit on stock plans Stock-based compensation Repurchase and retirement of common stock Cash dividends ($0.56 per share) Balance, December 31, 2008 See Notes to Consolidated Financial Statements $ 342 $ 3,293 $ 1,263 2,419...

  • Page 122
    ... taxes payable Income taxes paid on sale of interest in affiliate Liabilities for pensions and other postretirement benefits and other liabilities Other Net cash flows from continuing operations Cash flows from investing activities: Expenditures for capital assets Purchase of short-term investments...

  • Page 123
    ... for drilling, formation evaluation, completion and production, and reservoir technology and consulting to the worldwide oil and natural gas industry. Basis of Presentation The consolidated financial statements include the accounts of Baker Hughes and all majority owned subsidiaries ("Company," "we...

  • Page 124
    ...Once the tool has been completed, the cost of the tool is reflected in capital expenditures and the tool is classified as rental tools and equipment in PP&E. Maintenance and repairs are charged to expense as incurred. The capitalized costs of computer software developed or purchased for internal use...

  • Page 125
    ... permits, technology and presently enacted laws and regulations. For sites where we are primarily responsible for the remediation, our cost estimates are developed based on internal evaluations and are not discounted. Accruals are recorded when it is probable that we will be obligated to pay for...

  • Page 126
    ..., and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008. We will adopt the new disclosure requirements of SFAS 161 in the first quarter of 2009. In December 2008, the FASB issued FSP FAS 132(R)-1 Employers' Disclosures about Postretirement Benefit Plan Assets...

  • Page 127
    ...fourth quarter of 2005, our management initiated and our Board of Directors approved a plan to sell the Baker Supply Products Division ("Baker SPD"), a product line group within the Completion and Production segment, which distributes basic supplies, products and small tools to the drilling industry...

  • Page 128
    48 Baker Hughes Incorporated The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model. The following table presents the weighted average assumptions used in the option pricing model for options granted. The expected life of the ...

  • Page 129
    ...a straight-line basis over the vesting or service period and is net of forfeitures. A summary of our RSA and RSU activity and related information is presented below (in thousands, except per share/unit prices): RSA Number of Shares Weighted Average Grant Date Fair Value Per Share RSU Number of Units...

  • Page 130
    50 Baker Hughes Incorporated NOTE 5. INCOME TAXES The provision for income taxes on income from continuing operations is comprised of the following for the years ended December 31: 2008 2007 2006 Current: United States Foreign Total current Deferred: United States Foreign Total deferred Provision ...

  • Page 131
    ... of foreign currency translation Balance at December 31, 2008 It is expected that the amount of unrecognized tax benefits will change in the next twelve months due to expiring statutes, audit activity, tax payments, competent authority proceedings related to transfer pricing, or final decisions in...

  • Page 132
    ... the average market price for the period 307 2 318 2 331 2 NOTE 9. GOODWILL AND INTANGIBLE ASSETS The changes in the carrying amount of goodwill are detailed below by segment: Drilling and Evaluation Completion and Production Total 309 320 333 Balance as of December 31, 2006 Purchase price...

  • Page 133
    ... 2008, 2007 or 2006 related to the annual impairment test. Intangible assets are comprised of the following at December 31: 2008 Gross Carrying Amount Gross Carrying Amount 2007 Accumulated Amortization Net Accumulated Amortization Net Technology-based Contract-based Marketing-related Customer...

  • Page 134
    ... retirement plan for certain officers and employees whose benefits under the Thrift Plan and/or U.S. defined benefit pension plan are limited by federal tax law. The assets of both plans consist primarily of mutual funds and to a lesser extent equity securities. We hold the assets of these plans...

  • Page 135
    ... 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, we will require payment in advance...

  • Page 136
    ...drilling fluids), Hughes Christensen (oilfield drill bits), INTEQ (drilling, measurement-while-drilling and logging-while-drilling) and Baker Atlas (wireline formation evaluation and wireline completion services) divisions and also includes our reservoir technology and consulting group. The Drilling...

  • Page 137
    ...is shown in the following table. Drilling and Evaluation Completion and Production Oilfield Operations Corporate and Other Total 2008 Revenues Equity in income of affiliates Segment profit (loss) Total assets Investment in affiliates Capital expenditures Depreciation and amortization 2007 Revenues...

  • Page 138
    ...,864 $ 10,428 The following table presents net property, plant and equipment based on the location of the asset at December 31: 2008 2007 2006 United States Canada and other North America Latin America Europe, Africa, Russia and the Caspian Middle East, Asia Pacific Total $ 1,356 104 1,460 259...

  • Page 139
    ... at beginning of year Actual return on plan assets Employer contributions Benefits paid Other Exchange rate adjustments Fair value of plan assets at end of year Funded status over (under) at measurement date Employer contributions - fourth quarter Funded status over (under) at end of year $ 280...

  • Page 140
    ... n/a n/a The development of the discount rate for our U.S. plans was based on a bond matching model whereby a hypothetical bond portfolio of high-quality, fixed-income securities is selected that will match the cash flows underlying the projected benefit obligation. The discount rate assumption for...

  • Page 141
    ... the employer and employee contributions are invested. The Thrift Plan does not offer Baker Hughes company stock as an investment option. Our contributions to the Thrift Plan and several other non-U.S. defined contribution plans amounted to $137 million, $131 million and $102 million in 2008, 2007...

  • Page 142
    62 Baker Hughes Incorporated 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 matching and base contributions pursuant to limitations. Both non-...

  • Page 143
    ... information that we have disclosed to the DOJ regarding our operations in Nigeria, Angola, Kazakhstan, Indonesia, Russia, Uzbekistan, Turkmenistan, and Azerbaijan, among other countries. On the same date, the Court also accepted a plea of guilty by our subsidiary Baker Hughes Services International...

  • Page 144
    ... permits, technology and presently enacted laws and regulations. Remediation cost estimates include direct costs related to the environmental investigation, external consulting activities, governmental oversight fees, treatment equipment and costs associated with long-term operation, maintenance and...

  • Page 145
    ... of prior service cost Amortization of actuarial net loss Actuarial net losses arising in the year Adjustment to reflect change in measurement date Effect of exchange rate Deferred taxes Balance at December 31, 2008 NOTE 17. QUARTERLY DATA (UNAUDITED) First Quarter Second Quarter $ (127) 2 3 106...

  • Page 146
    ... procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial...

  • Page 147
    ... 2002 Employee Long-Term Incentive Plan and the Director Compensation Deferral Plan. A description of each of these plans is set forth below. The per share purchase price under the Baker Hughes Incorporated Employee Stock Purchase Plan is determined in accordance with section 423 of the Code as 85...

  • Page 148
    ... than 2.7 million available for grant as awards other than options (the number of shares is subject to adjustment for changes in our common stock). The 2002 Employee LTIP is the companion plan to the Baker Hughes Incorporated 2002 Director & Officer Long-Term Incentive Plan, which was approved by...

  • Page 149
    ... year. The compensation deferrals may be stock option-related deferrals or cash-based deferrals. If a director elects a stock option-related deferral, on the last day of each calendar quarter he or she will be granted a nonqualified stock option. The number of shares subject to the stock option is...

  • Page 150
    ... Baker Hughes Incorporated restated as of October 23, 2008 and effective until April 23, 2009 (filed as Exhibit 3.2 to Quarterly Report of Baker Hughes Incorporated on Form 10-Q for the quarter ended September 30, 2008). 4.1 Rights of Holders of the Company's Long-Term Debt. The Company has no long...

  • Page 151
    ...2005). Amendment to Baker Hughes Incorporated 2002 Director & Officer Long-Term Incentive Plan effective July 24, 2008 (filed as Exhibit 10.3 to Quarterly Report of Baker Hughes Incorporated on Form 10-Q for the quarter ended June 30, 2008). Baker Hughes Incorporated Employee Stock Purchase Plan, as...

  • Page 152
    ... Resolution, including Terms and Conditions (filed as Exhibit 10.3 to Quarterly Report of Baker Hughes Incorporated on Form 10-Q for the quarter ended March 31, 2004). 10.34+ Form of Baker Hughes Incorporated Restricted Stock Award Agreement (filed as Exhibit 10.54 to Annual Report on Form 10-K for...

  • Page 153
    ...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 154
    ... caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BAKER HUGHES INCORPORATED Date: February 26, 2009 /s/CHAD C. DEATON Chad C. Deaton Chairman of the Board, President and Chief Executive Officer KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose...

  • Page 155
    2008 Form 10-K 75 BAKER HUGHES INCORPORATED SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Deductions Balance at Beginning of Period Additions Charged to Cost and Expenses Reversal of Prior Deductions (1) Charged to Other Accounts (3) Balance at End of Period (In millions) Write-offs (2) Year ...

  • Page 156
    ... 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...

  • Page 157
    ...that executive compensation supports both company and stockholder interests; •฀ reviews฀our฀long-term฀equity฀incentive฀plans฀(and฀makes฀ grants thereunder), employee retirement income plans, the employee thrift plan and the employee stock purchase plan; •฀ annually฀approves...

  • Page 158
    ...฀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 New York Stock Exchange Last year our...

  • Page 159
    ... G. Martin Vice President, Chief Compliance Officer ฀ and฀Senior฀Deputy฀General฀Counsel Didier Charreton Vice President, Human Resources Design: SAVAGE, Branding + Corporate Design, Houston, Texas Board of Directors Larry D. Brady Former Chairman and Chief฀Executive฀Officer, Intermec...

  • Page 160
    Baker Hughes Incorporated 2929 Allen Parkway, Suite 2100 Houston, Texas 77019-2118 P.O. Box 4740 Houston, TX 77210-4740 (713) 439-8600 www.bakerhughes.com