Baker Hughes Announces Second Quarter Results

Click here for PDF version

    HOUSTON, July 24 /PRNewswire-FirstCall/ -- Baker Hughes Incorporated
(NYSE: BHI; PCX; EBS) announced today that income from continuing operations
in accordance with generally accepted accounting principles (GAAP) for the
second quarter of 2003 was $81.6 million or $0.24 per share (diluted) compared
to $68.6 million or $0.20 per share (diluted) for the second quarter of 2002
and $47.4 million or $0.14 per share (diluted) for the first quarter of 2003.
Net income for the second quarter of 2003 was $81.6 million or $0.24 per share
(diluted) compared to $72.4 million or $0.21 per share (diluted) for the
second quarter of 2002 and $44.5 million or $0.13 per share (diluted) for the
first quarter of 2003.
    In the first quarter of 2003, the company recorded a after-tax charge of
$5.6 million or $0.02 per share (diluted) related to the cumulative effect of
an accounting change resulting from the adoption of SFAS 143, Asset Retirement
Obligations.  In the second quarter of 2002, the company recorded a
$1.2 million after-tax credit, or $0.00 per share (diluted), related to the
reversal of an excess restructuring accrual for the German operation of Bird
Machine in the company's Process segment.
    Operating profit, which is a non-GAAP measure for income from continuing
operations excluding the impact of non-operational items, was the same in the
first and second quarters of 2003 as income from continuing operations.
Operating profit for the second quarter of 2002, excluding the credit
referenced above, was $67.4 million or $0.20 per share (diluted).  The company
believes that operating profit is useful to investors because it is a
consistent measure of the underlying results of the company's business.
Furthermore, management uses the calculation of operating profit internally as
a measure of the performance of the company's divisions.  (See Reconciliation
of GAAP Results and Operating Results below.)
    Revenue for the second quarter of 2003 was $1,341.4 million, compared to
$1,245.1 million for the second quarter of 2002 and $1,226.5 million for the
first quarter of 2003.  Oilfield Operations revenue for the second quarter of
2003 was $1,314.8 million, up 8.5% compared to $1,211.8 million for the second
quarter of 2002, and up 9.6% compared to $1,200.1 million for the first
quarter of 2003.
    Michael E. Wiley, Baker Hughes' Chairman, President, and Chief Executive
Officer, said, "International market conditions impacting the first quarter
improved in the second quarter and domestic land activity continued to
increase.  Baker Hughes is positioned to take advantage of further
improvements in the market as the balance between supply and demand for our
products and services continues to tighten."

    Financial Flexibility
    As previously announced, the company entered into a $500 million three-
year revolving credit facility in July 2003, which will be used for commercial
paper back-up and general corporate purposes.  The facility replaces an
aggregate of $594 million in credit lines that were scheduled to mature in the
fall of 2003.
    In September 2002, the company's Board of Directors authorized the company
to repurchase up to $275.0 million of its common stock.  During the second
quarter of 2003, approximately 2.2 million shares were purchased at an average
price of $28.69 per share and retired.  The company has authorization
remaining to purchase up to $153.0 million in stock.  During the second
quarter of 2003, debt increased $89.1 million to $1,606.3 million, and cash
increased $19.3 million to $71.0 million.


    Financial Information                          Three Months Ended
    (In millions, except per share amounts)---------------------------------
                                                  June 30,         March 31,
                                           ---------------------   ---------
    UNAUDITED                                 2003        2002       2003
                                           ---------   ---------   ---------

    Revenues                               $1,341.4    $1,245.1    $1,226.5
                                           ---------   ---------   ---------
    Costs and Expenses:
      Cost of revenues                        970.7       901.2       923.3
      Selling, general and administrative     213.4       219.8       201.8
      Restructuring charge reversal             ---        (1.9)        ---
                                           ---------   ---------   ---------
        Total costs and expenses            1,184.1     1,119.1     1,125.1
                                           ---------   ---------   ---------
    Operating income                          157.3       126.0       101.4
    Equity in income (loss) of affiliates      (3.6)        5.9        (0.4)
    Interest expense                          (24.6)      (27.4)      (28.4)
    Interest income                             0.5         1.1         2.6
                                           ---------   ---------   ---------
    Income from continuing operations
     before income taxes                      129.6       105.6        75.2
    Income taxes                              (48.0)      (37.0)      (27.8)
                                           ---------   ---------   ---------
    Income from continuing operations          81.6        68.6        47.4
    Discontinued operations:
      Income from operations of
       E&P and EIMCO                            ---         3.8         1.1
      Gain on disposal of E&P                   ---         ---         4.1
      Loss on disposal of EIMCO                 ---         ---        (2.5)
                                           ---------   ---------   ---------
      Income from discontinued operations,
       net of tax                               ---         3.8         2.7
    Income before cumulative effect of
     accounting change                         81.6        72.4        50.1
    Cumulative effect of accounting change,
     net of tax                                 ---         ---        (5.6)
                                           ---------   ---------   ---------
    Net income                                $81.6       $72.4       $44.5
                                           =========   =========   =========
    Basic earnings per share:
      Income from continuing operations       $0.24       $0.20       $0.14
      Income from discontinued operations       ---        0.01        0.01
      Cumulative effect of accounting
       change                                   ---         ---       (0.02)
                                           ---------   ---------   ---------
      Net income                              $0.24       $0.21       $0.13
                                           =========   =========   =========
    Diluted earnings per share:
      Income from continuing operations       $0.24       $0.20       $0.14
      Income from discontinued operations       ---        0.01        0.01
      Cumulative effect of accounting
       change                                   ---         ---       (0.02)
                                           ---------   ---------   ---------
      Net income                              $0.24       $0.21       $0.13
                                           =========   =========   =========
    Shares outstanding, basic                 335.4       337.3       336.7

    Shares outstanding, diluted               336.3       338.8       337.7

    Depreciation and amortization expense     $81.9       $74.2       $79.5

    Capital expenditures                      $74.8       $73.9       $76.2


    Financial Information                              Six Months Ended
                                                   -------------------------
    (In millions, except per share amounts)                June 30,
                                                   -------------------------
    UNAUDITED                                         2003           2002
                                                   ----------     ----------
    Revenues                                        $2,567.9       $2,448.1
                                                   ----------     ----------
    Costs and Expenses:
      Cost of revenues                               1,894.0        1,776.4
      Selling, general and administrative              415.2          424.8
      Restructuring charge reversal                      ---           (1.9)
                                                   ----------     ----------
        Total costs and expenses                     2,309.2        2,199.3
                                                   ----------     ----------
    Operating income                                   258.7          248.8
    Equity in income (loss) of affiliates               (4.0)          19.0
    Interest expense                                   (53.0)         (55.8)
    Interest income                                      3.1            2.2
                                                   ----------     ----------
    Income from continuing operations before
     income taxes                                      204.8          214.2
    Income taxes                                       (75.8)         (75.0)
                                                   ----------     ----------
    Income from continuing operations                  129.0          139.2
    Discontinued operations:
      Income from operations of E&P and EIMCO            1.1            9.0
      Gain on disposal of E&P                            4.1            ---
      Loss on disposal of EIMCO                         (2.5)           ---
                                                   ----------     ----------
      Income from discontinued operations,
       net of tax                                        2.7            9.0
                                                   ----------     ----------
    Income before cumulative effect of
     accounting change                                 131.7          148.2
    Cumulative effect of accounting change,
     net of tax                                         (5.6)         (42.5)
                                                   ----------     ----------
    Net income                                        $126.1         $105.7
                                                   ==========     ==========
    Basic earnings per share:
      Income from continuing operations                $0.38          $0.41
      Income from discontinued operations               0.01           0.03
      Cumulative effect of accounting change           (0.02)         (0.13)
                                                   ----------     ----------
      Net income                                       $0.37          $0.31
                                                   ==========     ==========
    Diluted earnings per share:
      Income from continuing operations                $0.38          $0.41
      Income from discontinued operations               0.01           0.02
      Cumulative effect of accounting change           (0.02)         (0.12)
                                                   ----------     ----------
      Net income                                       $0.37          $0.31
                                                   ==========     ==========
    Shares outstanding, basic                          336.0          337.1

    Shares outstanding, diluted                        337.0          338.4

    Depreciation and amortization expense             $161.4         $147.8

    Capital expenditures                              $151.0         $136.0


     Calculation of EBIT and EBITDA (non-GAAP measures) (A)

                                                  Three Months Ended
                                         -----------------------------------
    (In millions)                              June 30,           March 31,
                                         ---------------------    ----------
    UNAUDITED                             2003          2002         2003
                                         ------        -------    ----------
    Income from continuing
     operations before income taxes      $129.6        $105.6       $75.2
    Interest expense                       24.6          27.4        28.4
    Reversal of excess
     restructuring accrual                  ---          (1.9)        ---
                                         ------        -------    ----------
    Earnings before interest expense
     and taxes (EBIT)                     154.2         131.1       103.6
    Total depreciation and
     amortization expense                  81.9          74.2        79.5
                                         ------        -------    ----------
    Earnings before interest expense,
     taxes, depreciation
     and amortization (EBITDA)           $236.1        $205.3      $183.1
                                        =======        =======    ==========


                                           Six Months Ended
                                        ----------------------
    (In millions)                              June 30,
                                        ----------------------
    UNAUDITED                             2003          2002
                                        -------        -------

    Income from continuing operations
     before income taxes                 $204.8        $214.2
    Interest expense                       53.0          55.8
    Reversal of excess restructuring
     accrual                                ---          (1.9)
                                        -------        -------
    Earnings before interest expense
     and taxes (EBIT)                     257.8         268.1
    Total depreciation and amortization
     expense                              161.4         147.8
                                        -------        -------
    Earnings before interest expense,
     taxes, depreciation
     and amortization (EBITDA)           $419.2        $415.9
                                        =======        =======

    (A) EBIT and EBITDA are non-GAAP measurements.  Management uses EBIT and
        EBITDA because it believes that such measurements are widely accepted
        financial indicators used by investors and analysts to analyze and
        compare companies on the basis of operating performance and that
        these measurements may be used by some investors and others to make
        informed investment decisions.


     Consolidated Condensed Balance Sheets

                                                    UNAUDITED       AUDITED
                                                    June 30,    December 31,
    (In millions)                                     2003           2002
    =========================================================================
    ASSETS
    Current Assets:
      Cash and cash equivalents                        $71.0         $143.9
      Accounts receivable, net                       1,174.1        1,110.6
      Inventories                                    1,081.4        1,032.0
      Other current assets                             209.8          204.7
      Assets of discontinued operations                  ---           64.3
    -------------------------------------------------------------------------
        Total current assets                         2,536.3        2,555.5
    -------------------------------------------------------------------------
    Investment in affiliates                           899.5          872.0
    Property, net                                    1,362.4        1,354.7
    Goodwill                                         1,234.0        1,226.6
    Intangible assets, net                             142.8          136.8
    Other assets                                       262.4          255.2
    -------------------------------------------------------------------------
    Total assets                                    $6,437.4       $6,400.8
    =========================================================================
    LIABILITIES AND STOCKHOLDERS' EQUITY
    Current Liabilities:
      Accounts payable                                $396.3         $389.2
      Short-term borrowings and current
       portion of long-term debt                        34.7          123.5
      Accrued employee compensation                    217.3          254.0
      Other accrued liabilities                        280.4          267.4
      Liabilities of discontinued operations             ---           46.0
    -------------------------------------------------------------------------
        Total current liabilities                      928.7        1,080.1
    -------------------------------------------------------------------------
    Long-term debt                                   1,571.6        1,424.3
    Deferred income taxes                              117.0          166.7
    Other long-term liabilities                        360.3          332.5

    Stockholders' equity:
      Common stock                                     334.7          335.8
      Capital in excess of par value                 3,074.7        3,111.6
      Retained earnings                                245.1          196.3
      Accumulated other comprehensive loss            (194.7)        (246.5)
    -------------------------------------------------------------------------
    Total stockholders' equity                       3,459.8        3,397.2
    -------------------------------------------------------------------------
    Total liabilities and stockholders' equity      $6,437.4       $6,400.8
    =========================================================================


    Reconciliation of GAAP Results and Operating Results
    The following table reconciles GAAP and operating results referenced in
this news release.  Reconciliation of other prior periods can be found on the
company's website at http://www.bakerhughes.com/investor .

             Reconciliation of GAAP Results and Operating Results
                  (for the three months ended June 30, 2002)
    --------------------------------------------------------------------------
    UNAUDITED                                Profit           Profit  Diluted
    (in millions except         Recorded     Before           After  Earnings
     earnings per share)           As         Tax      Tax     Tax   Per Share
    --------------------------------------------------------------------------
    Income from continuing
     operations (GAAP)                       $105.6   $(37.0)  $68.6  $0.20
    Non-operational item:
      Reversal of excess
       restructuring accrual
       for Bird Machine's    Restructuring
       German operation     charge reversal    (1.9)     0.7    (1.2) (0.00)
    --------------------------------------------------------------------------
    Operating profit,
     excluding impact of
     non-operational item                    $103.7   $(36.3)  $67.4  $0.20
    ==========================================================================


    Segment Highlights
    Operational highlights for the three months ended June 30, 2003,
June 30, 2002, and March 31, 2003 are detailed below.  All results are
unaudited and shown in millions.

                   Comparison of Quarters -- Year over Year
             (for the three months ended June 30, 2003 and 2002)
    --------------------------------------------------------------------------
                                        Revenue            Operating Profit
                                                              Before Tax
                                Q2 2003       Q2 2002     Q2 2003    Q2 2002
    --------------------------------------------------------------------------
    Oilfield Operations,
     excluding WesternGeco      $1,314.8     $1,211.8      $198.6    $163.4
    WesternGeco                      ---          ---        (5.8)      4.0
    --------------------------------------------------------------------------
    Oilfield Operations          1,314.8      1,211.8       192.8     167.4
    Process Operations              26.6         33.3        (1.6)     (1.1)
    Corporate, net interest
     and other                       ---          ---       (61.6)    (62.6)
    Restructuring charge
     reversal                                                 ---       1.9
    --------------------------------------------------------------------------
    Total                       $1,341.4     $1,245.1      $129.6    $105.6
    ==========================================================================


                     Comparison of Quarters -- Sequential
        (for the three months ended June 30, 2003 and March 31, 2003)
    --------------------------------------------------------------------------
                                        Revenue            Operating Profit
                                                              Before Tax
                                Q2 2003       Q1 2003     Q2 2003    Q1 2003
    --------------------------------------------------------------------------
    Oilfield Operations,
     excluding WesternGeco      $1,314.8     $1,200.1      $198.6    $141.4
    WesternGeco                      ---          ---        (5.8)     (1.3)
    --------------------------------------------------------------------------
    Oilfield Operations          1,314.8      1,200.1       192.8     140.1
    Process Operations              26.6         26.4        (1.6)     (4.8)
    Corporate, net interest
     and other                       ---          ---       (61.6)    (60.1)
    --------------------------------------------------------------------------
    Total                       $1,341.4     $1,226.5      $129.6     $75.2
    ==========================================================================


    Oilfield Operations Segment
    Unless otherwise noted, all comments in this section refer to Baker
Hughes' Oilfield Operations, excluding WesternGeco, the company's seismic
venture with Schlumberger Ltd.
    The following table details the percentage change in revenue in the
June 2003 quarter compared to the June 2002 quarter and the March 2003
quarter.

                            Comparison of Revenue
 for the three months ended June 30, 2003 compared to the three months ended:
                                  UNAUDITED

    Product Line                    June 30, 2002          March 31, 2003
    --------------------------------------------------------------------------
      INTEQ                                2%                     3%
      Baker Atlas                         17%                    19%
      Baker Oil Tools                      5%                    11%
      Baker Petrolite                     10%                     5%
      Centrilift                          12%                    22%
      Hughes Christensen                  18%                     3%
    Geography
    --------------------------------------------------------------------------
      North America                       16%                     4%
      Western Hemisphere                  12%                     7%
      Eastern Hemisphere                   5%                    12%

    Oilfield Operations revenue for the second quarter of 2003 increased 8.5%
compared to the second quarter of 2002 and increased 9.6% compared to the
first quarter of 2003.  Revenue increased both sequentially and compared to
the same period a year ago at every division.  Substantially all of the
product shipments delayed in the first quarter of 2003 were shipped in the
second quarter.
    The non-GAAP measure of operating profit before tax margin ("operating
margin") was 15.1% for the second quarter of 2003 compared to 13.5% in the
second quarter of 2002, and 11.8% in the first quarter of 2003.  Operating
margins improved sequentially at all divisions and improved compared to the
same period a year ago at all divisions except INTEQ.  Every division except
INTEQ reported operating margins of at least 10% in the second quarter of
2003.

    Process Operations Segment
    Process Operations revenues were $26.6 million in the second quarter of
2003, compared to $33.3 million in the second quarter of 2002, and
$26.4 million in the first quarter of 2003.  The operating loss was
($1.6) million, which compares to a loss of ($1.1) million in the same period
a year ago, and a loss of ($4.8) million in the first quarter of 2003.  Demand
for capital equipment in the chemical market remains depressed.  In response,
Bird Machine incurred costs in the first and second quarters of 2003
associated with reductions made to its workforce to more closely match
decreased market demand.

    Corporate, Net Interest and Other
    Corporate, net interest and other expenses were $61.6 million in the
June 2003 quarter, down $1.0 million when compared to the June 2002 quarter
and up $1.5 million when compared to the March 2003 quarter.  The increase in
the June 2003 quarter, as compared to the March 2003 quarter, was due
primarily to increased corporate spending offset by a reduction in net
interest expense.

    Outlook
    The following statements are based on current expectations.  These
statements are forward-looking, and actual results may differ materially.
Factors affecting these forward-looking statements are detailed below under
Forward-Looking Statements.  These statements do not include the potential
impact of any acquisition, disposition, merger or joint venture that could
occur in the future.  Statements made regarding WesternGeco are based upon
information provided by WesternGeco, and therefore, are subject to the
accuracy of that information.  Additionally, any forward-looking statements
relating to WesternGeco are also subject to the factors listed in Forward-
Looking Statements in this news release.

     --  Oilfield revenues are expected to be up 6% to 8% for the year 2003
         as compared to the year 2002.  Oilfield revenues are expected to be
         up 6% to 8% in the third quarter of 2003 compared to the third
         quarter of 2002 and up 1% to 3% in the third quarter of 2003
         compared to the second quarter of 2003.

     --  WesternGeco is expected to be breakeven for both the year 2003 and
         the third quarter of 2003.

     --  Process is expected to post a ($10) to ($15) million operating loss
         before tax for the year 2003.  Process is expected to lose ($2) to
         ($3) million in the third quarter of 2003.

     --  Corporate and other expenses, excluding interest expense, are
         expected to be between $150 and $160 million for the year 2003 or
         approximately $37 to $42 million per quarter.

     --  Net interest expense is expected to be between $95 and $100 million
         for the year 2003 or approximately $23 to $25 million per quarter.

     --  Income from continuing operations per share (diluted) is expected to
         be between $0.97 and $1.07 for the year 2003.  Income from
         continuing operations per share (diluted) is expected to be between
         $0.26 and $0.29 for the three months ended September 30, 2003.

     --  Capital spending is expected to be between $310 and $330 million for
         the year 2003.  Baker Hughes' expectation regarding its level of
         capital expenditures is only its forecast regarding this matter.
         This forecast may be substantially different from actual results.
         In addition to the factors described in Forward-Looking Statements -
         General Outlook below, the following factors could affect levels of
         capital expenditures:  the accuracy of the company's estimates
         regarding its spending requirements; the occurrence of any
         unanticipated acquisition or research and development opportunities;
         changes in the company's strategic direction; and the need to
         replace any unanticipated losses in capital assets.

     --  Depreciation and amortization expense is expected to be between
         $320 and $340 million for 2003.  Baker Hughes' expectation regarding
         its depreciation and amortization expense is only its forecast
         regarding this matter.  This forecast may be substantially different
         from actual results, which could be impacted by an unexpected
         increase in the company's assets that are subject to depreciation or
         amortization or an unexpected casualty, impairment or other loss in
         those assets.

     --  The tax rate on operating results for the year ended
         December 31, 2003 is expected to be approximately 37.0%.  Baker
         Hughes' expectation regarding its tax rate is only its forecast
         regarding this matter.  This forecast may be substantially different
         from actual results.  In addition to the factors described in
         Forward-Looking Statements - General Outlook below, the following
         factors could affect the tax rate: the level and sources of the
         profitability of the company; changes in tax laws or tax rates in
         the jurisdictions in which the company operates; and the ability of
         the company to fully utilize tax loss carry-forwards and credits in
         various jurisdictions.

    Conference Call
    The company has scheduled a conference call to discuss the results of
today's earnings announcement.  The call will begin at 8:30 A.M. Eastern time,
7:30 A.M. Central time on Thursday, July 24, 2003.  To access the call, which
is open to the public, please contact the conference call operator at
706-643-3468, 20 minutes prior to the scheduled start time, and ask for the
"Baker Hughes Conference Call."  A replay will be available through Thursday,
July 31, 2003.  The number for the replay is 706-645-9291 and the access code
is 1225572.  The call and replay will also be webcast on
http://www.bakerhughes.com/investor .

    Forward-Looking Statements
    This news release (and oral statements made regarding the subjects of this
release, including on the conference call announced herein) contain forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended.  The words "expect," "expected," "will," "could be," "could," and
similar expressions are intended to identify forward-looking statements.
    General Outlook - Oilfield Segment:  Baker Hughes' expectation regarding
its outlook for its oilfield businesses (including, without limitation, its
minority interest in WesternGeco and other similar businesses), changes in
profitability and growth in those businesses and the oil and gas industry are
only its forecasts regarding these matters.  These forecasts may be
substantially different from actual results, which are affected by the
following factors: the level of petroleum industry exploration and production
expenditures; drilling rig and oil and gas industry manpower and equipment
availability; the company's ability to implement and effect price increases
for its products and services; the company's ability to control its costs; the
availability of sufficient manufacturing capacity and subcontracting capacity
at forecasted costs to meet the company's revenue goals; the ability of the
company to introduce new technology on its forecasted schedule and at its
forecasted cost; the ability of the company's competitors to capture market
share; the company's ability to retain or increase its market share; world
economic conditions; the price of, and the demand for, crude oil and natural
gas; drilling activity; weather conditions that affect the demand for energy
and severe weather conditions, such as hurricanes, that affect exploration and
production activities; the legislative and regulatory environment in the
United States and other countries in which the company operates; Organization
of Petroleum Exporting Countries (OPEC) policy and the adherence by OPEC
nations to their OPEC production quotas; war, military action or extended
period of international conflict, particularly involving the United States,
Middle East or other major petroleum-producing or consuming regions; any
future acts of war, armed conflicts or terrorist activities; civil unrest or
in-country security concerns where the company operates; the development of
technology by Baker Hughes or its competitors that lowers overall finding and
development costs; new laws and regulations that could have a significant
impact on the future operations and conduct of all businesses as a result of
the financial deterioration and bankruptcies of large U.S. entities; labor-
related actions, including strikes, slowdowns and facility occupations; the
condition of the capital and equity markets in general; adverse foreign
exchange fluctuations and adverse changes in the capital markets in
international locations where the company operates; and the timing of any of
the foregoing.

    Oilfield Pricing Changes: Baker Hughes expectation's regarding pricing
changes for its products and services are only its forecasts regarding
pricing.  Actual pricing changes could be substantially different from the
company's expectations, which are affected by many of the factors listed above
in "General Outlook - Oilfield Segment," as well as existing legal and
contractual commitments to which the company is subject.
    General Outlook - Process Segment:  Baker Hughes' expectations in this
news release regarding its outlook for its process segment and improvement and
growth in Process' businesses and its markets are only its forecasts regarding
these matters.  These forecasts may be substantially different from actual
results, which are affected by the following factors: the effect of
competition; the health of the markets of the company's customers, including,
without limitation, the production and refining, industrial, chemical,
municipal wastewater and mining markets; the level of customer expenditures
and investment, especially in the oil and gas, industrial, chemical, municipal
wastewater and mining markets; the company's ability to control its costs; the
ability of the company's competitors to capture market share; the company's
ability to retain or increase its market share; world economic conditions; the
legislative and regulatory environment in the United States and other
countries in which the company operates; the condition of the capital and
equity markets and the timing of any of the foregoing.

    Baker Hughes is a leading provider of drilling, formation evaluation,
completion and production products and services to the worldwide oil and gas
industry.

                     NOT INTENDED FOR BENEFICIAL HOLDERS

     Contact:
     Gary R. Flaharty (713) 439-8039
     gary.flaharty@bakerhughes.com

     Kyle J. Leak (713) 439-8042
     kyle.leak@bakerhughes.com