Baker Hughes 2011 Annual Report Download

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2011 Annual Report
well
planned.
managed.
delivered.

Table of contents

  • Page 1
    well planne d. manage d. deli ver e d. 2 011 A n nu al Re p o r t

  • Page 2
    ...700 Product Lines: 22 Products & Services: 1,600 Investment in Research & Technology: $462 million Industrial Services and Other Middle East/ Asia Pacific 2011 Revenues by Segment North America 52% 6% 14% 17% Latin America Europe/Africa/ Russia Caspian 11% Total Revenues 2009 - 2011, by Quarter...

  • Page 3
    ..., except per share amounts) 2011 2010 (1) 2009 (1) 2008 2007 As Reported: Revenue Operating income Net Income Net Income attributable to Baker Hughes Per share of common stock: Net Income attributable to Baker Hughes: Basic Diluted Dividends Number of shares: Weighted average common shares diluted...

  • Page 4
    ... of Baker Hughes' pressure pumping, horizontal drilling, completions and production services is capturing increased market share and contributing to our revenue growth, primarily because we are a leading company with the capabilities to service the entire life cycle of the well. Our customers...

  • Page 5
    ... and processes are best-in-class. Baker Hughes is the first integrated oilfield service company to receive full accreditation of its Competence Management Program from the International Association of Drilling Contractors. As above-ground commercial issues become more challenging, our customers are...

  • Page 6
    ... of Drilling Contractors for our Competence Management Program. We are the only integrated service company to date to receive this recognition. We promote a culture where Stop Work Authority is exercised freely and is valued as a proactive process to control HSE&S risks and impacts. 4 Baker Hughes...

  • Page 7
    WELL PLANNED Standardized processes reduce project risk, improve return on investment 2011 Annual Report 5

  • Page 8
    ... in our sophisticated control systems create new capabilities and value for our customers. The company's recognition of the opportunities of the digital oil field can be seen in the wide range of investments Baker Hughes makes in technologies related to high-temperature capability, deep-reading...

  • Page 9
    WELL MANAGED Fast, accurate data means better production management 2011 Annual Report 7

  • Page 10
    ... hydraulic-fracturing operation. Controlled-electrolytic metallic technology has enormous potential in a wide range of oilfield applications. Our new Materials Center of Excellence is the hub of growing nanotechnology research. Controlled-electrolytic metallic technology pioneered by Baker Hughes...

  • Page 11
    WELL DELIVERED A winning combination of technology, insight and experience 2011 Annual Report 9

  • Page 12
    ...reduce costs by optimizing "manufacturability." High-speed data acquisition and transmission technologies power the Baker Hughes BEACONâ„¢ real-time remote collaboration platform and our WellLinkâ„¢ 3-D visualization service. Our customers worldwide use these tools to make cost-effective, real-time...

  • Page 13
    WELL PLANNED Advanced modeling software increases reservoir understanding 2011 Annual Report 11

  • Page 14
    .... The company's fluids and chemicals research and development work is proving that sustainability is compatible with performance. But sustainable chemistry is not all. Baker Hughes is also implementing processes and services that maximize the performance of these new products and minimize...

  • Page 15
    WELL MANAGED The right hydraulic fracturing technology for every requirement 2011 Annual Report 13

  • Page 16
    ... research scientists eager for a career in the energy industry. They landed in different locations and product lines, yet all exhibited talent and leadership traits that would earn them the opportunity to interview for the inaugural Baker Hughes Science and Technology Leadership Development Program...

  • Page 17
    ... maximum value to our customers, their solution enables quick, continuous fracturing using ball-activated sleeves that reduce the time it takes to complete the well and to maximize reservoir drainage. Commercialization of the FracPoint EX-C system has expanded Baker Hughes' technology portfolio...

  • Page 18
    ... untapped. To develop and retain its female talent, Baker Hughes has organized regionally based Women's Resource Groups that emphasize business leadership, create networking opportunities, and broaden business understanding. The efforts are paying off: More than 20% of 2011 engineer and scientist...

  • Page 19
    ... of Baker Hughes Incorporated: The Annual Meeting of the Stockholders of Baker Hughes Incorporated ("Company," "Baker Hughes," "we," "us" or "our") will be held in the Plaza Banquet Room located at 2777 Allen Parkway, Houston, Texas on Thursday, April 26, 2012, at 9:00 a.m., Central Daylight Time...

  • Page 20
    ... Vote on Executive Compensation Program ...41 Proposal No. 4 Stockholder Proposal Regarding Majority Vote Standard for Director Elections ...41 Annual Report ...43 Incorporation by Reference ...43 Stockholder Proposals...43 Other Matters ...43 Annex A - Baker Hughes Incorporated Corporate Governance...

  • Page 21
    ...written request to: Baker Hughes Incorporated, Attn: Corporate Secretary, 2929 Allen Parkway, Suite 2100, Houston, Texas 77019, +1 (713) 439-8600. Stockholders may also address future requests for separate delivery of the Proxy Statement by contacting us at the address listed above. Shares for which...

  • Page 22
    ...ordinary business hours at the Company's executive offices by stockholders of record for proper purposes. Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Stockholders to be Held on April 26, 2012. This Proxy Statement and the Annual Report to Stockholders and...

  • Page 23
    ... manufacturer, service as a director of other public companies and a national corporate governance organization; Mr. Stewart's many years as the chairman of the board, president and chief executive officer of BJ Services Company; Mr. Watson's extensive executive leadership roles and active...

  • Page 24
    ... Operations for Baker Atlas from 2003 to 2005 and Vice President, Marketing and Business Development for Baker Atlas from 2001 to 2003. Employed by the Company in 1986. Executive Chairman of the Board of Baker Hughes Incorporated since January 2012. Chairman of the Board and Chief Executive Officer...

  • Page 25
    ... Houston and Syracuse University. Former Chairman of the Board of Directors, President and Chief Executive Officer of BJ Services Company (pressure pumping services) from 1990 until its acquisition by the Company in 2010. Prior to 1990, Mr. Stewart held various management and staff positions with BJ...

  • Page 26
    ...Chair, of the Compensation, Finance and Governance Committees received an additional annual retainer of $5,000. Each non-management director also received annual non-retainer equity in a total amount of $200,000, in the form of (i) restricted shares of the Company's Common Stock with a value of $140...

  • Page 27
    ... benefits applicable to executives; assuring that the Company's incentive compensation program, including the annual and long-term incentive plans, is administered in a manner consistent with the Company's compensation strategy; approving and/or recommending to the Board new incentive compensation...

  • Page 28
    ... the Board of Directors, reviews the structure and composition of the Board, considers the qualifications required for continuing Board service and recommends directors' compensation. The Governance Committee annually reviews the Company's Policy Statement on Shareholders' Rights Plans and reports...

  • Page 29
    ... Company's 2011 Annual Meeting. Business Code of Conduct The Company has a Business Code of Conduct (the "Code") that applies to all officers, directors and employees, which includes the code of ethics for the Company's chief executive officer, chief financial officer, and chief accounting officer...

  • Page 30
    ... related to the financial structure and activities of the Company and the Governance Committee periodically provides oversight respecting risks associated with the Company's health, safety and environmental policies and practices. The Board of Directors believes that the risk management processes...

  • Page 31
    ...in the best interests of the Company and its stockholders. In addition to the discussion under the "Business Code of Conduct" in this Proxy Statement, the "Baker Hughes Incorporated Policy for Director Independence, Audit/Ethics Committee Members and Audit Committee Financial Expert" are included as...

  • Page 32
    ... the fiscal 2008 through fiscal 2010 three-year period, our PEO's pay is aligned with the Company's TSR performance. Information on our peers for fiscal year 2011 was not available at the time of filing the Proxy Statement. Relative Pay versus Relative TSR (Baker Hughes versus Industry Peers) Upper...

  • Page 33
    ... in the base salary review that supports the Company's process and when determining annual award values for long-term incentive core values of integrity, teamwork, compensation awards. performance and learning § Short-term incentive program allows for the reduction or elimination of bonus payout if...

  • Page 34
    ... to be a meaningful level of support. In reviewing stockholder comments obtained through the Say on Pay process, the Compensation Committee carefully considered comments related to caps on bonuses paid to Senior Executives through our short-term incentive compensation programs. While certain caps...

  • Page 35
    ...we use competitive information to compare performance and compensation. Reference Group 20 companies - oilfield services, exploration & production, offshore drilling, oil and gas, and general industry: § § Compensation § Determine the § market value of jobs § § 3M Company Anadarko Petroleum...

  • Page 36
    ... Company's continuing achievement of its short- and long-term goals including: § the financial performance of the Company; § the effective execution of the strategy approved by its Board of Directors; and § the development of human resource capability. In 2011, the Compensation Committee reviewed...

  • Page 37
    .... 30), other applicable accounting rules, or consistent with the Company's policies and practices for measuring the achievement of performance goals. The following table shows the 2011 annual incentive target compensation for each of the Senior Executives. The annual incentive bonus target for each...

  • Page 38
    ... pertained to the achievement of North America and international margin targets, cost reductions related to marketing, general and administrative and supply chain, days sales outstanding targets and diversity and safety goals, delivery of new product revenue and competency assurance program as well...

  • Page 39
    ... While the values of stock options and restricted stock awards tie directly to our stock price, performance units reward contributions to our financial performance and mitigate the impact of the volatility of the stock market on our long-term incentive compensation program. 2012 Proxy Statement 19

  • Page 40
    ...Peer Group End of Year 3 § 25% of Unit Value Determined § BHI Compared to Peer Group Fixed Number of Units Granted at Beginning of Term Total Unit Value Calculated and Paid at End of Term 3 Year Total § 25% of Unit Value Determined § BHI Compared to Peer Group 20 Baker Hughes Incorporated

  • Page 41
    ... Peer Group The Peer Group consists of a group of five companies identified by the Compensation Committee (as listed below): Peer Group Baker Hughes Incorporated Halliburton Company National Oilwell Varco, Inc. Schlumberger Limited Weatherford International Ltd. 2012 Proxy Statement 21

  • Page 42
    ... Smith International, Inc. and BJ Services Company. Our relative ranking for the 2009 one year performance measurement period was 4th, 4th and 4th for the revenue growth, pre-tax operating margin and return on capital employed performance goals, respectively, resulting in a total per unit value of...

  • Page 43
    ... Annual Incentive Compensation Plan and (ii) certain options and certain other long-term performance-based stock or cash awards granted pursuant to the 2002 Employee Long-Term Incentive Plan and the 2002 Director & Officer Long-Term Incentive Plan (the "2002 D&O Plan"). We may from time to time pay...

  • Page 44
    ...vesting in employee deferrals and Company matching contributions; full vesting of age-based contributions after three years of service Short-Term Disability Long-Term Disability Life Insurance and Accidental Death and Dismemberment Business Travel Accident Insurance Thrift Plan 24 Baker Hughes...

  • Page 45
    ... eligible compensation) age-based pay credit § Eligible compensation generally means all current cash wages, salaries and fees for services from the Company not in excess of applicable legal limitations ($245,000 in 2011) § Quarterly interest credits on account balance using certain annual rate of...

  • Page 46
    ...levels high enough to assure our stockholders of management's commitment to value creation. Senior executives are required to hold the number of shares valued at a multiple of their current base salary, in the amounts listed below: Executive Chairman/President and Chief Executive Officer Senior Vice...

  • Page 47
    ...50% of the net profit shares remaining after the payment of applicable taxes must be held. Certification of Stock Ownership Levels The Compensation Committee annually reviews each Senior Executive's compensation and stock ownership levels to determine whether they are appropriate. In 2011, the NEOs...

  • Page 48
    ...A. Ragauss - Principal Financial Officer 2011 2010 2009 Martin S. Craighead - President and Chief Operating Officer Alan R. Crain - Senior Vice President and General Counsel Derek Mathieson - President, Global Products and Technology (4) (4) 2011 2010 2009 2011 2010 2009 2011 1,158,828 (5) 1,552...

  • Page 49
    ...is the closing stock price of a share of our Common Stock on the last trading day before the date of grant. (4) Amounts represent potential payouts for the fiscal 2011 performance year under the Annual Incentive Compensation Plan as well as potential payouts for discretionary bonuses at the expected...

  • Page 50
    ...2011 for the PEO and each NEO. The table also shows unvested and unearned stock awards assuming a market value of $48.64 a share (the closing market price of the Company's stock on December 30, 2011). Option Awards Number...9,801 3,400 4,391 4,133 3,543 41,326 2,010,097 30 Baker Hughes Incorporated

  • Page 51
    ... difference between the market price of the stock at exercise and the exercise price of the option. (2) The value realized upon the vesting of the stock awards is determined by multiplying the number of shares of stock by the market value of the stock on the vesting date. 2012 Proxy Statement 31

  • Page 52
    ... term of the employment agreement; § a lump-sum cash payment equal to his expected value incentive bonus for the year of termination; and Mr. Deaton's Restated Employment Agreement was effective on January 1, 2012, the date Mr. Deaton transitioned from the roles of CEO and Chairman to Executive...

  • Page 53
    ...in connection with any tax audit or proceeding relating to the application of parachute payment excise taxes to any payment or benefit under the Change in Control Agreement; and § an amount equal to his Annual Incentive Compensation Plan bonus computed as if the target level of performance had been...

  • Page 54
    ... such board or other governing body is comprised of an odd number of directors); or § our stockholders approve a plan of complete liquidation or dissolution of us. Payments in the Event of a Change in Control and Termination of Employment by the Senior Executive for Good Reason or by the Company or...

  • Page 55
    ... equal to his earned Annual Incentive Compensation Plan bonus, prorated based upon the number of months of the Senior Executive's participation in the Annual Incentive Compensation Plan during the calendar year. The Baker Hughes Executive Severance Plan provides for payment of certain benefits...

  • Page 56
    ..., 2011, the last business day of the fiscal year. The value of equity compensation awards (accelerated vesting of stock options and restricted stock awards) is based on the closing price of our common stock of $48.64 on the New York Stock Exchange on December 30, 2011, the last trading date of 2011...

  • Page 57
    ...Stock Option Terms and Conditions. Messrs. Ragauss and Mathieson are not Retirement eligible under any plan. (5) Executives receive an amount equal to the earned Annual Incentive Compensation Plan bonus, reduced so it reflects only participation prior to separation from service. The Annual Incentive...

  • Page 58
    ... effective date of their retirement, all of their restricted stock awards outstanding became fully vested. (4) This amount includes outstanding options that were granted by BJ Services and were converted into options to purchase shares of Baker Hughes upon the closing of the merger on April 28, 2010...

  • Page 59
    .../Ethics Committee assists the Board of Directors in overseeing matters relating to the accounting and reporting practices of the Company, the adequacy of the Company's disclosure controls and internal controls, the quality and integrity of the quarterly and annual financial statements of the Company...

  • Page 60
    ... 2011 and 2010. These amounts include fees paid or to be paid by the Company for (i) professional services rendered for the audit of the Company's annual financial statements, review of quarterly financial statements and audit services related to the effectiveness of the Company's internal control...

  • Page 61
    ... compensation and incentive levels that reflect competitive market practices. We are asking our stockholders to indicate their support for our named executive officer compensation program as described in this Proxy Statement. This is an advisory vote to approve named executive officer compensation...

  • Page 62
    ... highly qualified directors using a plurality voting system, a change in the director election process is neither necessary nor appropriate in order to enhance the Company's corporate governance. In evaluating this proposal, the Board has determined that the Director Resignation Policy incorporated...

  • Page 63
    .... However, the Annual Report is not part of the proxy soliciting information. These Baker Hughes Incorporated Corporate Governance Guidelines are established by the Board of Directors ("Board") as the principles for conduct of the Company's business affairs to benefit its stockholders. Board The...

  • Page 64
    ... or any member of the senior management of the Company, subject to additional qualifications prescribed under the listing standards of the New York Stock Exchange. The Company will not make any personal loans or extensions of credit to directors or executive officers. Size and Term of the Board - In...

  • Page 65
    ... will perform an annual evaluation Governance Committee Purpose: The Committee's purpose is to develop and recommend to the Board a set of corporate governance principles applicable to the Company ("Corporate Governance Guidelines") and to oversee compliance with, conduct reviews of and recommend...

  • Page 66
    ... of and monitoring of compliance with the Company's Business Code of Conduct and Foreign Corrupt Practices Act Policy, establishing formal procedures for (i) the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or audit...

  • Page 67
    ... to Company growth and profitability and that the executive compensation strategy supports organization objectives and stockholder interests; reviewing compensation programs to determine if there are any potential risks in the programs; reviewing and approving corporate goals and objectives relevant...

  • Page 68
    ... maintain a competitive cost structure for the long-term. § We utilize shared services to control cost for the enterprise. § We seek the best value for Baker Hughes in our relationships with suppliers. § We ruthlessly eliminate waste without compromising safety or quality. Employing our resources...

  • Page 69
    ...those pertaining to the service sector of the oil and gas and energy related industries; v) Will dedicate sufficient time to Company business; vi) Exhibit integrity, sound business judgment and support for the Core Values of the Company; vii) Understand financial statements; viii) Are independent as...

  • Page 70
    ... an immediate family member for service as a non-executive employee of the Company need not be considered in determining independence under this test. 3. A director who is affiliated with or employed by a present or former internal or external auditor of the Company is 50 Baker Hughes Incorporated

  • Page 71
    ... the Company's present executives serve on that company's compensation committee is not "independent" until three years after the end of such service or the employment relationship. 5. A director who is an executive officer or an employee, or whose immediate family member is an executive officer, of...

  • Page 72
    ... or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or (d) Other relevant experience. EXHIBIT D BAKER HUGHES INCORPORATED POLICY AND SUBMISSION PROCEDURES FOR STOCKHOLDER RECOMMENDED DIRECTOR CANDIDATES...

  • Page 73
    ... the Board of Directors of the Company. PURPOSE Complaints or concerns regarding accounting, internal accounting controls or auditing matters may be submitted by employees and/or third parties to the Business Help Line or the Chief Compliance Officer ("CCO"). Concerns received by the Business Help...

  • Page 74
    ... Company's internal controls over financial reporting and disclosure controls and procedures, and the quality and integrity of the financial statements of the Company; and (ii) to oversee the Company's compliance programs. The independent auditor is ultimately accountable to the Board of Directors...

  • Page 75
    ... function. § Review guidelines and policies on enterprise risk management including risk assessment and risk management related to the Company's major financial risk exposures and the steps management has taken to monitor and control such exposures. § Annually prepare an audit committee report for...

  • Page 76
    ..., independent audit firm regarding its quality assurance review of the Company's internal audit function. § Review membership of the Company's Disclosure Control and Internal Control Committee ("DCIC"), the DCIC's scheduled activities and the DCIC's quarterly report. Review on an annual basis the...

  • Page 77
    ... as of the last business day of the registrant's most recently completed second fiscal quarter (based on the closing price on June 30, 2011 reported by the New York Stock Exchange) was approximately $31,476,833,000. As of February 16, 2012, the registrant has outstanding 437,571,000 shares of common...

  • Page 78
    .... Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions, and Director Independence ...Principal Accounting Fees and Services...

  • Page 79
    ...manufacturing of our products and services. The supply chain organization also focuses on product reliability and quality, process efficiency and increased tool utilization. On April 28, 2010, we completed the acquisition of BJ Services Company ("BJ Services"), a leading provider of pressure pumping...

  • Page 80
    ...Mexico and Canada) § Latin America § Europe/Africa/Russia Caspian § Middle East/Asia Pacific In addition to the above, we report in our Industrial Services and Other segment the financial results for downstream chemicals, process and pipeline services, and the reservoir development services group...

  • Page 81
    ... specific customer needs and the development of new products, processes and services. We have technology centers located in the U.S. (Claremore, Oklahoma; and several in Houston, Texas and surrounding areas), Germany (Celle), Brazil (Rio de Janeiro), Russia (Novosibirsk), and Saudi Arabia (Dhahran...

  • Page 82
    ..., Marketing and Business Development for Baker Atlas from 2001 to 2003. Employed by the Company in 1986. Peter A. Ragauss 54 Senior Vice President and Chief Financial Officer of the Company since 2006. Segment Controller of Refining and Marketing for BP plc from 2003 to 2006. Chief Executive Officer...

  • Page 83
    ...Chief Executive Officer since January 2012. President Western Hemisphere Operations from May 2009 to December 2011. President of Baker Petrolite Corporation from 2005 to May 2009. President of Baker Hughes Drilling Fluids from 2004 to 2005. Vice President, Business Process Development of the Company...

  • Page 84
    ..., 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 amounts for environmental site evaluation, remediation or related activities, and such amounts can be reasonably estimated. In general, we...

  • Page 85
    ...customers' spending levels and reduce our revenue and operating results. Incremental weakness in global economic activity, particularly in China, India, Europe, the Middle East and developing countries in Asia, will reduce demand for oil and natural gas and result in lower oil and natural gas prices...

  • Page 86
    ... and services, maintain market share and negotiate acceptable contract terms with our customers. In order to be competitive, we must provide new technologies, reliable products and services that perform as expected and that create value for our customers, and successfully recruit and train competent...

  • Page 87
    ... our ability to continue to manage our agents and business partners, and supervise, train and retain competent employees. Our compliance program is also dependent on the efforts of our employees to comply with applicable law and the Baker Hughes Business Code of Conduct. We would be subject to...

  • Page 88
    ... 1, 2010. These developments may curtail production and demand for fossil fuels such as oil and natural gas in areas of the world where our customers operate and thus adversely affect future demand for our services, which may in turn adversely affect future results of operations. 10 Baker Hughes...

  • Page 89
    ... to market conditions, such as the trading prices for our stock, as well as the terms of any stock purchase plans intended to comply with Rule 10b5-1 or Rule 10b-18 of the Exchange Act. Management, in its discretion, may engage in or discontinue stock repurchases at any time. The Company's revenue...

  • Page 90
    ... grinding plants, drilling fluids and chemical processing centers, and research and technology centers to be our principal properties. The following sets forth the location of our principal owned or leased facilities for our oilfield operations by geographic segment: North America: Houston, Pasadena...

  • Page 91
    ... Total Return * Baker Hughes Incorporated; S&P 500 Index and S&P 500 Oil and Gas Equipment and Services Index $200.00 $150.00 $100.00 $50.00 $0.00 2006 2007 2008 2009 2010 2011 Baker Hughes S&P 500 Index S&P 500 Oil and Gas Equipment and Services Index 2006 2007 2008 2009 2010 2011...

  • Page 92
    ... attributable to Baker Hughes Per share of common stock: Net income attributable to Baker Hughes: Basic Diluted Dividends Balance Sheet Data: Cash, cash equivalents and short-term investments Working capital (current assets minus current liabilities) Total assets Long-term debt Equity $ $ $ 421...

  • Page 93
    ... downstream refining and process and pipeline industries as well as reservoir development services. We operate our business primarily through geographic regions that have been aggregated into five reportable segments: North America, Latin America, Europe/Africa/ Russia Caspian, Middle East/Asia...

  • Page 94
    ... components of product sales and services are similar. All dollar amounts in tabulations in this section are in millions of dollars, unless otherwise stated. U.S. - land and inland waters U.S. - offshore Canada North America Latin America North Sea Continental Europe Africa Middle East Asia Pacific...

  • Page 95
    ... 275 $ 5,417 55% 39% 11% 26% 28% 38% Year Ended December 31, 2011 2010 Increase (decrease) % Change Profit Before Tax: North America Latin America Europe/Africa/Russia Caspian Middle East/Asia Pacific Industrial Services and Other Total $ $ 1,929 227 342 321 53 2,872 $ $ 1,163 74 260 177 99 1,773...

  • Page 96
    ... partially offset by increased revenue and related profitability. 2010 Compared to 2009 Year Ended December 31, 2010 2009 Increase (decrease) % Change Revenue: North America Latin America Europe/Africa/Russia Caspian Middle East/Asia Pacific Industrial Services and Other Total $ 6,621 1,569 3,006...

  • Page 97
    ... the Saudi Arabia, Egypt, Australasia and Southeast Asia geomarkets, driven by higher activity benefiting our chemicals, artificial lift and completion systems products and services. These increases were offset by decreased revenue primarily in the Middle East Gulf and India geomarkets. MEAP profit...

  • Page 98
    ...increase resulted primarily from costs associated with finance redesign efforts, software implementation activities and the acquisition of BJ Services. Income Taxes Total income tax expense was $596 million for 2011. This amount includes a $214 million tax benefit associated with the reorganization...

  • Page 99
    ...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...

  • Page 100
    ... 2011, which indicates high levels of corruption. We devote significant resources to the development, maintenance, communication and enforcement of our Business Code of Conduct, our anti-bribery compliance policies, our internal control processes and procedures and other compliance related policies...

  • Page 101
    ... use of commercial sales representatives and processing agents, including the reduction of customs agents. § We use technology to monitor and report on compliance matters, including a web-based antiboycott reporting tool and a global trade management software tool. § We have a program designed to...

  • Page 102
    ... or expand our operations into new markets or product lines. We may also from time to time sell business operations that are not considered part of our core business. During 2010, we paid cash of $680 million, net of cash acquired of $113 million, related to the BJ Services acquisition, and we paid...

  • Page 103
    ... market conditions, applicable legal requirements, our liquidity and other considerations. We anticipate paying dividends of between $257 million and $267 million in 2012; however, the Board of Directors can change the dividend policy at any time. For all pension plans, we make annual contributions...

  • Page 104
    ... be settled as a result of expiring statutes, audit activity, competent authority proceedings related to transfer pricing, or final decisions in matters that are the subject of litigation in various taxing jurisdictions in which we operate. The timing of any particular settlement will depend on the...

  • Page 105
    ...judgments regarding long-term forecasts of future revenue and costs related to the assets subject to review. These forecasts are uncertain in that they require assumptions about demand for our products and services, future market conditions and technological developments. Income Taxes The liability...

  • Page 106
    ... age, mortality and turnover, are also evaluated periodically and are updated to reflect our actual and expected experience. The discount rate enables us to determine expected future cash flows at a present value on the measurement date. The development of the discount rate for our largest plans...

  • Page 107
    ...-looking statement. Our expectations 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, the business plans of our customers, market share...

  • Page 108
    ... the required cash payments for our indebtedness, which bear a fixed rate of interest and are denominated in U.S. Dollars, and the related weighted average interest rates by expected maturity dates as of December 31, 2011 and 2010. (In millions) 2011 2012 2013 2014 2015 2016 Thereafter Total As of...

  • Page 109
    ... effectiveness of the Company's internal control over financial reporting. Martin S. Craighead President and Chief Executive Officer Houston, Texas February 22, 2012 Peter A. Ragauss Senior Vice President and Chief Financial Officer Alan J. Keifer Vice President and Controller 2011 Form 10-K 31

  • Page 110
    ...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, 2011 and 2010, and the related consolidated statements of operations, changes in equity, and cash...

  • Page 111
    ..., except per share amounts) 2011 2010 2009 Revenue: Sales Services Total revenue Costs and expenses: Cost of sales Cost of services Research and engineering Marketing, general and administrative Impairment of trade names Acquisition-related costs Total costs and expenses Operating income Gain on...

  • Page 112
    ... Common stock, one dollar par value (shares authorized - 750; issued and outstanding: 2011 - 437; 2010 - 432) Capital in excess of par value Retained earnings Accumulated other comprehensive loss Baker Hughes stockholders' equity Noncontrolling interests Total equity Total liabilities and equity 437...

  • Page 113
    ... Defined benefit pension plans, net of tax of $(5) Total comprehensive income Issuance of common stock, to acquire BJ Services Issuance of common stock Stock-based compensation cost Cash dividends ($0.60 per share) Acquisition of noncontrolling interests Balance, December 31, 2010 Comprehensive...

  • Page 114
    ...receivable Inventories Accounts payable Accrued employee compensation and other accrued liabilities Income taxes payable Other operating items, net Net cash flows from operating activities Cash flows from investing activities: Expenditures for capital assets Proceeds from disposal of assets Purchase...

  • Page 115
    ... FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Baker Hughes Incorporated ("Baker Hughes," "Company," "we," "our," or "us,") is a leading supplier of oilfield services, products, technology and systems used for drilling, formation evaluation, completion...

  • Page 116
    ...financial condition, including monitoring our customers' payment history and current credit worthiness. We do not generally require collateral in support of our trade receivables, but we may require payment in advance or security in the form of a letter of credit or bank guarantee. During 2011, 2010...

  • Page 117
    ... 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 environmental site evaluation, remediation or related activities, and such costs can be reasonably estimated. As additional information...

  • Page 118
    ..., and Baker Hughes options with a fair value of $56 million in exchange for BJ Services options held by BJ Services employees and directors, all of which we assumed. Revenue and net income of BJ Services from the acquisition date included in our consolidated statement of operations for 2010 were...

  • Page 119
    ... life (years) Risk-free interest rate Volatility Dividend yield Weighted average fair value per share at grant date 5.0 1.8% 40.8% 0.9% $ 24.20 5.0 2.2% 39.8% 1.2% $ 16.24 6.0 2.6% 41.2% 1.8% $ 12.66 The following table presents the changes in stock options outstanding and related information...

  • Page 120
    ... table presents the changes in RSAs and RSUs and related information (in thousands, except per share/ unit prices): RSA Number of Shares Weighted Average Grant Date Fair Value Per Share RSA Number of Units Weighted Average Grant Date Fair Value Per Unit Unvested balance at December 31, 2010 Granted...

  • Page 121
    Employee Stock Purchase Plan The Employee Stock Purchase Plan ("ESPP") provides for eligible employees to purchase shares on an after-tax basis in an amount between 1% and 10% of their annual pay: (i) on June 30 of each year at a 15% discount of the fair market value of our common stock on January 1...

  • Page 122
    ... intangibles of $155 million includes a reduction of $95 million related to the impairment of the BJ Services trade name. At December 31, 2011, we had approximately $92 million of foreign tax credits which may be carried forward indefinitely under applicable foreign law and $278 million of foreign...

  • Page 123
    ...months due to expiring statutes, audit activity, tax payments, competent authority proceedings related to transfer pricing, or final decisions in matters that are the subject of litigation in various taxing jurisdictions in which we operate. At December 31, 2011, we had approximately $159 million of...

  • Page 124
    ... below by reportable segment. North America Latin America Europe/Africa/ Russia Caspian Middle East/ Asia Pacific Industrial Services And Other Total Balance at December 31, 2010 Purchase price adjustments for previous acquisitions Acquisitions Other Balance at December 31, 2011 $ 2,731...

  • Page 125
    ... Latin America Europe/Africa/Russia Caspian Middle East/Asia Pacific Industrial Services and Other Total $ $ 105 64 48 47 51 315 NOTE 9. FINANCIAL INSTRUMENTS Fair Value of Financial Instruments Our financial instruments include cash and cash equivalents, short-term investments, accounts receivable...

  • Page 126
    ... tax effects): Amount of Gain (Loss) Recognized in Income Derivative Statement of Operations Location 2011 2010 2009 Foreign Currency Forward Contracts Interest Rate Swaps Marketing, general and administrative Interest expense, net $ (7) $ 8 $ (7) $ 16 $ 11 $ 6 48 Baker Hughes Incorporated

  • Page 127
    ..., Gulf of Mexico and Canada) § Latin America § Europe/Africa/Russia Caspian § Middle East/Asia Pacific § Industrial Services and Other We aggregate our operating segments within each reportable segment, as they have similar economic characteristics and because the long-term financial performance...

  • Page 128
    Summarized financial information is shown in the following table. 2011 Segments Revenue Profit (Loss) Revenue 2010 Profit (Loss) Revenue 2009 Profit (Loss) North America Latin America Europe/Africa/Russia Caspian Middle East/Asia Pacific Industrial Services and Other Total Operations Corporate ...

  • Page 129
    ... tables present geographic consolidated revenue and consolidated revenue for each group of similar products and services for the years ended December 31: 2011 2010 2009 United States Canada and other North America Latin America Europe/Africa/Russia Caspian Middle East/Asia Pacific Total $ 9,131...

  • Page 130
    ...percentage according to the employee's age on the last day of the quarter applied to quarterly eligible compensation. In addition a cash balance account receives interest credits based on the balance in the account on the last day of the quarter. The U.S. qualified pension plan also includes frozen...

  • Page 131
    ... to employee service to date and present compensation levels. The ABO differs from the PBO in that the ABO does not include any assumptions about future compensation levels. Information for the plans with ABOs in excess of plan assets is as follows at December 31: U.S. Pension Benefits 2011 2010...

  • Page 132
    ...on the basis of their net asset values, which are provided by the investment sponsor or third party administrator. The fair values of investments in real estate funds are based on appraised values developed using comparable market transactions or discounted cash flows. 54 Baker Hughes Incorporated

  • Page 133
    ...$ - $ 31 80 40 114 174 - $ 19 16 Bonds - U.K. - Corporate (2) Bonds - U.K. - Government (3) Equities (4) Real Estate Funds (5) Insurance contracts Total (1) Invests in mixes of global common stocks and bonds to achieve broad diversification. $ 526 $ - $ 492 $ 34 $ 474 $ - $ 439 $ 35...

  • Page 134
    ...Purchases Ending balance at December 31, 2011 $ 19 (6) 13 1 14 2 (15) 4 $ 5 $ 5 (5) 110 $ 18 1 19 19 $ 19 $ 7 1 (1) 7 9 16 (2) 1 $ 44 2 (6) (1) 39 1 9 49 7 (5) (17) 115 $ 110 $ 15 $ 149 Expected Cash Flows For all pension plans, we make annual contributions to the plans in amounts equal...

  • Page 135
    ..., natural gas development and hydraulic fracturing. We are reviewing the subpoena and discussing its contents with the New York Attorney General's office in anticipation of our responding as appropriate. In July 2011, we settled the previously reported customer claim against BJ Services relating to...

  • Page 136
    ... either has, or is likely to have, a material effect on our consolidated financial statements. We also had commitments outstanding for purchase obligations related to capital expenditures and inventory under contracts of approximately $2.1 billion at December 31, 2011. 58 Baker Hughes Incorporated

  • Page 137
    ...) First Quarter Second Quarter Third Quarter (2) Fourth Quarter (3) Total Year 2011 Revenue Gross profit (1) Net income attributable to Baker Hughes Basic earnings per share of Baker Hughes Diluted earnings per share of Baker Hughes Dividends per share Common stock market prices: High Low 74...

  • Page 138
    ... executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reporting There has been no change in our internal controls over financial reporting during the quarter ended December 31, 2011...

  • Page 139
    ... equity compensation plans, including the Baker Hughes Incorporated 2002 Employee Long-Term Incentive Plan, the Baker Hughes Incorporated 2002 Directors & Officers Long-Term Incentive Plan, the BJ Services 1995 Incentive Plan, the BJ Services 1997 Incentive Plan, the BJ Services 2000 Incentive Plan...

  • Page 140
    ...the Director Compensation Deferral Plan. A description of each of these plans is set forth below. (2) 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% of the lower of the fair market value of...

  • Page 141
    ...of New York Mellon Trust Company, N.A., as trustee (including form of Notes) (filed as Exhibit 4.2 to Current Report of Baker Hughes Incorporated on Form 8-K filed August 23, 2011). Officers' Certificate of Baker Hughes Incorporated dated October 28, 2008 establishing the 6.50% Senior Notes due 2013...

  • Page 142
    ... 19, 2008). Baker Hughes Incorporated Director Retirement Policy for Certain Members of the Board of Directors (filed as Exhibit 10.10 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2003). Baker Hughes Incorporated Director Compensation Deferral Plan, as...

  • Page 143
    ...the quarter ended June 30, 2008). Amendment to Baker Hughes Incorporated 2002 Director & Officer Long-Term Incentive Plan dated March 31, 2010 (filed as Annex G to the Registration Statement No. 333-162463 on Form S-4 filed on February 9, 2010). Baker Hughes Incorporated Employee Stock Purchase Plan...

  • Page 144
    ... Incorporated Incentive Stock Option Agreement for employees, dated January 30, 2002 (filed as Exhibit 10.44 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2001). Form of Baker Hughes Incorporated Stock Option Award Agreements, with Terms and Conditions...

  • Page 145
    ... 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 March 31, 2007). Agreement and Plan of Merger dated as of August 30, 2009, among Baker Hughes Incorporated, BSA Acquisition LLC and BJ Services Company (filed...

  • Page 146
    ... States Attorney's Office for the Southern District of Texas and the United States Department of Justice (filed as Exhibit 99.1 to Quarterly Report of Baker Hughes Incorporated on Form 10-Q for the quarter ended March 31, 2007). Baker Hughes Services International, Inc. Information document filed on...

  • Page 147
    ... duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BAKER HUGHES INCORPORATED Date: February 23, 2012 /s/MARTIN S. CRAIGHEAD Martin S. Craighead President and Chief Executive Officer KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature...

  • Page 148
    BAKER HUGHES INCORPORATED SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (In millions) Balance at Beginning of Period Charged to Cost and Expenses Write-offs (1) Other Changes (2) Balance at End of Period Year ended December 31, 2011 Reserve for doubtful accounts receivable Reserve for inventories...

  • Page 149
    ... website: http://www.bakerhughes.com/annualreport Annual Meeting The Company's Annual Meeting of Stockholders will be held: 9:00 a.m. Central Daylight Time April 26, 2012 Plaza Banquet Room 2777 Allen Parkway Houston, Texas 77019-2118 Corporate Office Location and Mailing Address 2929 Allen Parkway...

  • Page 150
    2929 Allen Parkway, Suite 2100 Houston, Texas 77019-2118 P.O. Box 4740 Houston, Texas 77210-4740 (713) 439-8600 www.bakerhughes.com ©2012 Baker Hughes Incorporated. All rights reserved. 34732