Second Quarter 2001

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HOUSTON--(BUSINESS WIRE)--July 26, 2001--Baker Hughes Incorporated (NYSE:BHI)(PCX:BHI)(EBS:BHI) announced today that operating profit after tax, excluding an extraordinary item, for the second quarter of 2001 was $105.3 million, or $0.31 per share (diluted), up 169% compared to $39.2 million, or $0.12 per share (diluted), for the second quarter of 2000. Total revenues for the second quarter of 2001 were $1,342.0 million, compared to $1,255.5 million reported for the second quarter of 2000. Oilfield Operations revenues for the second quarter of 2001, excluding Western Geophysical, were $1,257.8 million, up 27% from $993.0 million for the second quarter of 2000. Baker Process revenues for the second quarter of 2001 were $84.2 million, up 4% from the $81.1 million reported for the second quarter of 2000. Operating profits for the second quarter of 2001 exclude the impact of a $1.5 million extraordinary loss, net of tax, from the redemption of the company's convertible long-term debt issue.

Net income for the second quarter of 2001 was $103.8 million, or $0.31 per share (diluted), compared to net income of $62.7 million, or $0.19 per share (diluted), for the second quarter of 2000.

Cash earnings (after-tax operating profit, excluding after-tax goodwill amortization) for the second quarter of 2001 were $115.0 million, or $0.34 per share (diluted), compared with $50.1 million, or $0.15 per share (diluted), for the second quarter of 2000.

Total revenues for the second quarter of 2001 were up $113.5 million, or 9%, compared to the first quarter of 2001. Oilfield revenues for the second quarter of 2001, excluding Western Geophysical, were up $101.6 million, or 9%, while Baker Process' revenues rose $11.9 million compared to the first quarter of 2001. Total operating profit after tax, excluding the extraordinary item, was up $30.1 million sequentially.

Michael E. Wiley, Baker Hughes chairman, president and chief executive officer, said, "Our record-setting oilfield operating margin of 17% is a result of continued strong North American drilling activity, improving international activity, productivity gains at every division, and pricing improvements. I am pleased that our oilfield operations earned their cost of capital in the quarter."

Commenting on the outlook for drilling activity, Mr. Wiley added, "While demand for natural gas in North America has moderated due to high prices at the beginning of the year and general economic conditions, I am confident that sustained natural gas development will be necessary to meet North America's long-term energy demands. This combined with rising international oil-directed drilling, where Baker Hughes has historically derived two thirds of its revenues, should result in continued growth opportunities for us. We are well positioned to benefit from these long-term trends as we have the capacity available to continue to grow without a significant increase in capital expenditures."

Financial Information
A table of comparative results follows:

                                    Three Months Ended
(In millions, except      -----------------------------------
 per share amounts)              June 30,
UNAUDITED                 -----------------------    March 31,
                             2001          2000         2001
                          ----------   ----------   ----------
Revenues                   $1,342.0     $1,255.5     $1,228.5
                          ----------   ----------   ----------
Costs and Expenses:
 Cost of revenues             961.8        968.6        890.0
 Selling, general
  and administrative          198.7        185.6        203.2
 Unusual charge
  (credit), net                  --        (23.7)         7.0
                          ----------   ----------   ----------
    Total costs
     and expenses           1,160.5      1,130.5      1,100.2
                          ----------   ----------   ----------
Operating income              181.5        125.0        128.3
Equity in income
 of affiliates                  8.8          1.3         10.5
Interest expense              (32.3)       (44.0)       (34.1)
Interest income                 0.4          0.5          1.4
Gain on trading
 securities                      --         10.1           --
                          ----------   ----------   ----------
Income before
 income taxes,
 extraordinary
 loss and cumulative
 effect of accounting
 change                       158.4         92.9        106.1
Income taxes                  (53.1)       (30.2)       (35.8)
                          ----------   ----------   ----------
Income before
 extraordinary
 loss and cumulative
 effect of accounting
 change                       105.3         62.7         70.3
Extraordinary
 loss (net of
 $0.8 income tax
 benefit)                      (1.5)          --           --
Cumulative effect
 of accounting
 change for
 derivative
 instruments
 (net of $0.5 income
 tax expense)                    --           --          0.8
                          ----------   ----------   ----------
Net income                   $103.8        $62.7        $71.1
                          ==========   ==========   ==========
Net income per share:
 Basic                        $0.31        $0.19        $0.21
 Diluted                       0.31         0.19         0.21

Depreciation,
 depletion and
 amortization expense,
 excluding goodwill
 amortization                 $68.9       $131.4        $76.5
Goodwill
 amortization                  10.8         12.2         10.8
                          ----------   ----------   ----------
Total depreciation,
 depletion and
 amortization expense         $79.7       $143.6        $87.3
                          ==========   ==========   ==========
Capital
 expenditures                 $83.6       $121.6        $52.7

Shares outstanding,
 basic (millions)             335.7        330.5        335.0
Shares outstanding,
 diluted (millions)           337.6        332.8        337.6

Earnings before
 interest expense
 and taxes
 (EBIT)(1)                   $190.7       $103.1       $147.2

Earnings before
 interest expense,
 taxes, depreciation,
 depletion and
 amortization
 (EBITDA)(1)                 $270.4       $246.7       $234.5

(1) Computed excluding non-operational items, extraordinary items and
    cumulative effects of accounting changes.


Financial Information
A table of comparative results follows:

(In millions, except                         Six Months Ended
 per share amounts)                         ------------------
UNAUDITED                                       June 30,
                                            ------------------
                                          2001              2000
                                         ------            ------
Revenues                                 $2,570.5         $2,496.3
                                        ---------        ---------
Costs and Expenses:
  Cost of revenues                        1,851.8          1,957.3
  Selling, general and
   administrative                           401.9            377.8
  Unusual charge (credit) net                 7.0            (23.7)
                                        ---------        ---------
    Total costs and expenses              2,260.7          2,311.4
                                        ---------        ---------
Operating income                            309.8            184.9
Equity in income of affiliates               19.3              1.3
Interest expense                            (66.4)           (88.2)
Interest income                               1.8              1.0
Gain on trading securities                     --             17.2
                                        ---------        ---------
Income before income taxes,
 extraordinary loss and
 cumulative effect of
 accounting change                          264.5            116.2
Income taxes                                (88.9)           (38.1)
                                        ---------        ---------
Income before extraordinary loss
 and cumulative effect of
 accounting change                          175.6             78.1
Extraordinary loss (net of $0.8
 income tax benefit)                         (1.5)              --
Cumulative effect of accounting
 change for derivative instruments
 (net of $0.5 income tax expense)             0.8               --
                                        ---------        ---------
Net income                                 $174.9            $78.1
                                        =========        =========
Net income per share:
     Basic                                  $0.52            $0.24
     Diluted                                 0.52             0.24

Depreciation, depletion
 and amortization expense, excluding
 goodwill amortization                     $145.4           $287.4
Goodwill amortization                        21.6             24.3
                                        ---------        ---------
Total depreciation,
 depletion and
 amortization expense                      $167.0           $311.7
                                        =========        =========
Capital expenditures                       $136.3           $318.1

Shares outstanding,
 basic (millions)                           335.3            330.2
Shares outstanding,
 diluted (millions)                         337.6            331.7

Earnings before interest
 expense and taxes (EBIT)(1)               $337.9           $163.5

Earnings before interest
 expense, taxes, depreciation,
 depletion and amortization (EBITDA)(1)    $504.9           $475.2

(1) Computed excluding non-operational items, extraordinary items, and
    cumulative effects of accounting changes.


Segment Highlights
Operational highlights for the three months ended June 30, 2001,
June 30, 2000 and March 31, 2001 are detailed below.

                Comparison of Quarters - Year over Year
         (for the Three Months Ended June 30, 2001 and 2000)
                               UNAUDITED

                                                      Operating Profit
                                 Revenue                Before Tax
                               ($ millions)             ($ millions)
                          June 2001  June 2000    June 2001  June 2000
                          --------------------    --------------------
Oilfield Operations,
 excluding
 Western Geophysical
 and Western GECO         $1,257.8     $993.0        $214.3    $113.5
Western Geophysical             --      181.4            --      15.6
Western GECO                    --         --           9.2        --
                          --------------------------------------------
Oilfield Operations        1,257.8    1,174.4         223.5     129.1
Baker Process
 Operations                   84.2       81.1          (1.9)     (0.4)
Corporate, net
 interest and other             --         --         (63.2)    (69.6)
Non-operational
 items(1)                       --         --            --      33.8
                          --------------------------------------------
Total                     $1,342.0   $1,255.5        $158.4     $92.9
                          ============================================

                  Comparison of Quarters - Sequential
     (for the Three Months Ended June 30, 2001 and March 31, 2001)
                               UNAUDITED

                                                    Operating Profit
                               Revenue                 Before Tax
                            ($ millions)              ($ millions)
                         June 2001  March 2001   June 2001  March 2001
                         ---------------------   ---------------------
Oilfield Operations,
 excluding
 Western Geophysical
 and Western GECO         $1,257.8   $1,156.2        $214.3    $173.2
Western Geophysical             --         --            --        --
Western GECO                    --         --           9.2       9.9
                          --------------------------------------------
Oilfield Operations        1,257.8    1,156.2         223.5     183.1
Baker Process
 Operations                   84.2       72.3          (1.9)     (5.4)
Corporate, net
 interest and other             --         --         (63.2)    (64.6)
Non-operational
 items(1)                       --         --            --      (7.0)
                          --------------------------------------------
Total                     $1,342.0   $1,228.5        $158.4    $106.1
                          ============================================

(1) Please visit www.bakerhughes.com/investor for a reconciliation of
    non-operational items for prior periods.

Oilfield Operations Segment

All comments in this section refer to Baker Hughes Oilfield Operations excluding Western Geophysical and Western GECO unless otherwise noted.

The following table details the percentage change in revenue for each oilfield product line in the June 2001 quarter compared to the June 2000 quarter and March 2001 quarter.

                         Comparison of Revenue
               For the Three Months Ended June 30, 2001
                  Compared to the Three Months Ended
                               UNAUDITED

    Product Line            June 30, 2000           March 31, 2001
------------------          -------------           --------------
Baker Hughes INTEQ               42%                      13%
Baker Atlas                      34%                      11%
Baker Oil Tools                  33%                      10%
Baker Petrolite                  12%                       7%
Centrilift                       16%                      10%
Hughes Christensen               31%                       5%

Revenues for the second quarter of 2001 increased 27% compared to the second quarter of 2000. Every division reported increases in revenue in the June 2001 quarter compared to the June 2000 quarter. North American revenue increased 37%, Western Hemisphere revenue increased 33% and Eastern Hemisphere revenue increased 19% in the June 2001 quarter, in each case, compared to the June 2000 quarter. Comparing the June 2001 quarter to the March 2001 quarter, revenue was up 7% in North America and the Western Hemisphere and up 12% in the Eastern Hemisphere.

At 17%, the operating margin in the June 2001 quarter was greater than any quarter since 1982. Operating profits and margins improved at every division compared to both the June 2000 quarter and the March 2001 quarter. Operating margins in the June 2001 quarter exceeded 10% at every division. Three divisions, Hughes Christensen, Centrilift and Baker Atlas, posted record operating profits and operating margins in the June 2001 quarter. Comparing the second quarter of 2001 to the second quarter of 2000, the incremental operating profit before tax margin was 38%.

Returns for Baker Hughes Oilfield Operations exceeded the cost of capital in the June 2001 quarter. Returns at Centrilift, Hughes Christensen, Baker Oil Tools, and Baker Atlas exceeded the cost of capital in the June 2001 quarter. Baker Petrolite and INTEQ had returns that exceeded the cost of capital excluding goodwill in the June 2001 quarter.

Baker Process Operations Segment

Baker Process' revenues improved in the June 2001 quarter compared to both the June 2000 and March 2001 quarters. The EIMCO division of Baker Process posted a profit that was offset by operational losses at Bird Machine and the Production and Refining division, which were impacted by customer project delays.

Corporate, Net Interest and Other

Corporate, net interest and other expenses were $63.2 million in the June 2001 quarter, down $6.4 million from the June 2000 quarter and down $1.4 million from the March 2001 quarter. The improvement in the June 2001 quarter as compared to the June 2000 quarter was due to lower interest expense, offset partially by higher corporate expenses. The improvement in the June 2001 quarter as compared to the March 2001 quarter, was due to lower 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. Information regarding Western GECO is based upon information that Western GECO has provided to Baker Hughes. Information derived from this information is subject to the accuracy of the information that Western GECO provided. Additionally, any forward-looking statements relating to Western GECO are also subject to the factors listed in Forward-Looking Statements in this news release.

  • Oilfield revenues are expected to be up 18-20% for the year 2001 as compared to the year 2000, excluding Western Geophysical.

  • Incremental profit before tax margin from oilfield revenue, excluding Western GECO, for each of the quarters in 2001 is expected to be between 35% and 40% compared to the same quarter of the prior year.

  • Western GECO is expected to contribute $45 to $50 million in pre-tax profit for the year 2001. Third quarter 2001 pre-tax profit from Western GECO is expected to be between $7 and $9 million.

  • Baker Process is expected to be near breakeven in the third quarter of 2001, and breakeven for the year 2001.

  • Corporate expenses, excluding interest expense, are expected to be between $120 and $130 million for the year 2001 and are expected to be between $30 and $32.5 million per quarter during 2001.

  • Interest expense is expected to be between $122 and $130 million for the year 2001.

  • Operational earnings per share (diluted) are expected to be between $1.20 and $1.25 for the year 2001. Operational earnings per share (diluted) are expected to be between $0.33 and $0.35 per share for the third quarter of 2001.

  • Capital spending is expected to be between $300 and $360 million for the year 2001. 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 $85 and $90 million per quarter or between $340 and $360 million for 2001. 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 12 months ended December 31, 2001 is expected to be approximately 33.5%. 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 in today's earnings announcement. The call will begin at 8:30 A.M. Eastern time, 7:30 A.M. Central time. To access the call, which is open to the public, please contact the conference call operator at 712/257-3641, 20 minutes prior to the scheduled start time, and ask for the "Baker Hughes Conference Call." A replay will be available through Thursday, August 2, 2001. The number for the replay is 402/998-1032. The call and replay will also be webcast on 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", "intends", "will" and similar expressions are intended to identify forward-looking statements.

General Outlook -- Oilfield Segment: Baker Hughes' expectations in this news release, regarding its outlook for its oilfield businesses (including, without limitation, the company's oilfield operations and the production and refining component of the company's process segment), improved 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 effect of competition; 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 sub contracting 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; world economic conditions; price of, and the demand for, crude oil and natural gas; drilling activity; weather; the legislative environment in the United States and other countries; OPEC policy; conflict in the Middle East and other major petroleum-producing or consuming regions; the development of technology that lowers overall finding and development costs; the condition of the capital and equity markets and the timing of any of the foregoing.

Oilfield Pricing Improvement: Baker Hughes expectation's regarding pricing improvements for its products and services are only its expectations regarding pricing. Actual pricing improvement could be substantially different from the company's expectations, which are affected by many of the factors listed above in "General Outlook - Oilfield Businesses" 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 Baker Process' business 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; world economic conditions; the legislative and regulatory environment in the United States and other countries; 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

--30--EB/ho*

CONTACT: Baker Hughes Incorporated, Houston
Gary R. Flaharty, 713/439-8039
gary.flaharty@bakerhughes.com
or
Kyle J. Leak, 713/439-8042
kyle.leak@bakerhughes.com