Baker Hughes 2013 Annual Report Download - page 62

2013 Annual Report 32
extinguishment in the third quarter of 2011 of our 6.5% senior notes due in November 2013 and the increase in
capitalized interest in 2012 associated with the increase in our capital expenditures. The decrease in interest
expense was partially offset by the issuance of $750 million 3.2% senior notes in August 2011, the inception of two
capital leases in the second and third quarters of 2011 for pumping vessels and increased borrowings under our
commercial paper program in 2012.
Loss on Early Extinguishment of Debt
In 2011, we redeemed in full $500 million of debt maturing November 2013 and paid a redemption premium of
$63 million. The redemption resulted in a pre-tax loss of $40 million on the early extinguishment of debt, which
included the redemption premium and the write off of the remaining original debt issuance costs and debt discount,
partially offset by the $25 million gain from the termination of two related interest rate swap agreements.
Income Taxes
Total income tax expense was $612 million, $665 million and $596 million for 2013, 2012 and 2011,
respectively. Income tax expense in 2011 includes a $214 million tax benefit associated with the reorganization of
certain foreign subsidiaries. Excluding the impact of the reorganization in 2011, our effective tax rate on operating
profits in 2013, 2012, and 2011 was 35.7%, 33.6% and 34.6%, respectively. The 2013 effective tax rate is higher
than the U.S. statutory income tax rate of 35% due to higher rates on certain international operations, primarily
resulting from foreign losses with no tax benefit, and state income taxes partially offset by adjustments to prior
years’ tax positions. The 2012 and 2011 effective tax rates were lower than the U.S. statutory income tax rate of
35% due to lower rates of tax on certain international operations and adjustments to prior years' tax positions
partially offset by state income taxes.
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 contained 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 customers 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 natural gas, their ability to fund
their capital programs and the impact of new government regulations.
Our outlook for exploration and development spending is based upon our expectations for customer spending in
the markets in which we operate, and is driven primarily by our perception of industry expectations for oil and
natural gas prices and their likely impact on customer capital and operating budgets as well as other factors that
could impact the economic return oil and natural gas companies expect for developing oil and natural gas reserves.
Our forecasts are based on evaluating a number of external sources as well as our internal estimates. External
sources include publications by the IEA, OPEC, Energy Information Administration (“EIA”), and the Organization for
Economic Cooperation and Development (“OECD”). We acknowledge that there is a substantial amount of
uncertainty regarding these forecasts, thus, while we have internal estimates regarding economic expansion,
hydrocarbon demand and overall oilfield activity, we position ourselves to be flexible and responsive to a wide range
of potential outcomes.
We consider the primary drivers impacting the 2014 business environment to include the following:
• Worldwide Economic Growth - In general, there is a strong correlation between overall economic growth
and global demand for hydrocarbons. The economic outlook for 2014 includes strengthened economic
activity but also heightened risks: European countries face concerns over rising sovereign debt levels,
China's economy is experiencing a slowdown in growth, and the U.S. continues its moderate pace of
recovery. The sovereign debt crisis in Europe has affected the economies of major commodities exporters,