Baker Hughes Announces Results for Q4, 2006

Baker Hughes Incorporated announced that income from continuing operations for the fourth quarter 2006 was $326.2 million or $1.02 per diluted share compared to $257.4 million or $0.75 per diluted share for the fourth quarter 2005 and $358.6 million or $1.09 per diluted share for the third quarter 2006. Income from continuing operations for the year 2006 was $2,398.6 million or $7.21 per diluted share, compared to $874.4 million or $2.56 per diluted share for the year 2005.

Net income for the fourth quarter 2006 was $326.2 million or $1.02 per diluted share compared to $257.9 million or $0.75 per diluted share for the fourth quarter 2005 and $358.6 million or $1.09 per diluted share for the third quarter 2006. Net income for the year 2006 was $2,419.0 million or $7.27 per diluted share, compared to $878.4 million or $2.57 per diluted share for the year 2005.

The company has determined that its previously disclosed settlement negotiations with the Securities and Exchange Commission and the Department of Justice are likely to result in a resolution of the investigations, first disclosed in 2002 and 2003, arising from activities in Angola, Kazakhstan and Nigeria. The company's best estimate of the associated financial charge of approximately $46 million before tax ($38.5 million after tax or approximately $0.12 per diluted share) was recorded in the fourth quarter of 2006 and is included in Selling, General and Administrative expenses. In addition, fourth quarter results were favorably impacted by a change in accounting procedures related to certain inventory of its Baker Atlas division. The pretax impact of this change was a $21.2 million reduction to cost of revenues.

Operating profit, which is a non-GAAP measure comprised of income from continuing operations excluding the impact of certain identified items, was $1,363.4 million or $4.10 per diluted share for the year 2006 compared to $874.4 million or $2.56 per diluted share for the year 2005. The only identified item in 2006 relates to the pre-tax gain of $1,743.5 million ($1,035.2 million after tax), recorded as a gain on the sale of our interest in an affiliate, our 30% interest in our WesternGeco seismic joint venture with Schlumberger Limited, to Schlumberger on April 28, 2006 for $2.4 billion in cash. There were no other identified items in the first, third or fourth quarters of 2006 or any quarter of 2005. Income from continuing operations is reconciled to operating profit in the section titled "Reconciliation of GAAP and Operating Profit" in this news release.

Revenue for the fourth quarter 2006 was $2,452.7 million, up 23% compared to $1,989.4 million for the fourth quarter 2005 and up 6% compared to $2,309.4 million for the third quarter 2006. Revenue for the year 2006 was $9,027.4 million, up 26% compared to $7,185.5 million for the year 2005.

Chad C. Deaton, Baker Hughes chairman and chief executive officer said, "Baker Hughes achieved record revenue and record operating income in 2006. Our operating profit before tax margin was the highest in our history reflecting continued strong global demand for our products and services. At year end we had a strong balance sheet and unprecedented financial flexibility. Our region management approach is reaping benefits as we capture international growth complementing our product-line divisions and segment structure.

"Both segments reported record revenue, operating profit and operating profit margins. Investments in new technology have resulted in revenue and profit growth at INTEQ and we expect Baker Atlas' growth to benefit from increased investment in people and equipment as 2007 unfolds. Baker Oil Tools has brought on new capacity in Louisiana and the UK, has broken ground on a new manufacturing facility in Dubai, and is making progress in restoring its ability to respond to short lead time orders.

"Global demand for oil and gas continues to grow as the world economy adjusts to higher energy prices. We believe that our customers will increase their overall spending dedicated to finding, developing and producing oil and gas around the world through the end of the decade. Our belief in the expected growth in the market outside North America in 2007 has been reinforced with major contract awards in Brazil, India and Saudi Arabia and significant planned activity increases in Algeria, Italy, Libya, Malaysia, Qatar, and Russia. Accordingly, we increased our capital spending, added approximately 5,500 employees and accelerated our training programs in 2006 to meet the demands we expect in 2007 and beyond. With several weeks remaining in the North American winter, the near term activity outlook for gas-directed drilling remains uncertain. We are encouraged by recent strong withdrawals from gas storage and remain convinced that the rebalancing of the North American natural gas market, if required, can happen relatively quickly."

During the fourth quarter of 2006, debt decreased $6.0 million to $1,075.1 million, and cash and short-term investments decreased $237.9 million to $1,103.7 million. In the fourth quarter of 2006, the company's capital expenditures were $320.6 million, depreciation and amortization was $118.0 million and dividend payments were $41.4 million. For the year 2006, capital expenditures were $922.2 million and depreciation and amortization expense was $433.7 million compared to $478.3 million and $382.4 million in 2005, respectively.

During the fourth quarter of 2006, the company repurchased 3.4 million shares of common stock at an average price of $69.89 for a total of $234.8 million. During 2006, the company repurchased 24.3 million shares of common stock at an average price of $76.50 for a total of $1.86 billion. As of December 31, 2006, the company had authorization remaining to repurchase approximately $345.5 million in common stock.

Oilfield Operations

Unless otherwise noted, all comments in this section refer to Oilfield Operations, excluding WesternGeco.

The following table details the percentage change in revenue in the fourth quarter 2006 compared to the fourth quarter 2005 and third quarter 2006.



                            Comparison of Revenue
  (For the Three Months Ended December 31, 2006 Compared to the Three Months
               Ended December 30, 2005 and September 30, 2006)
                                  UNAUDITED
                                       December 31, 2005    September 30, 2006
    --------------------------------------------------------------------------
      Baker Atlas                             7%                     16%
      Baker Hughes Drilling Fluids           17%                     (4)%
      Hughes Christensen                     22%                      2%
      INTEQ                                  30%                      2%
    --------------------------------------------------------------------------
    Drilling & Evaluation Segment            20%                      4%

      Baker Oil Tools                        36%                     12%
      Baker Petrolite                        21%                      0%
      Centrilift                             10%                      7%
    --------------------------------------------------------------------------
    Completion & Production Segment[A]       27%                      9%

    Oilfield Operations                      23%                      6%
    --------------------------------------------------------------------------

     [A] Includes the ProductionQuest (formerly Production
         Optimization)business unit

Oilfield Operations revenue was up 23% in the fourth quarter of 2006 compared to the fourth quarter of 2005, and up 6% sequentially compared to the third quarter of 2006. Operating profit before tax was up 44% compared to the fourth quarter of 2005 and up 8% sequentially compared to the third quarter of 2006. The quarterly year-over-year incremental pre-tax margin (a non-GAAP measure of the change in operating profit before tax divided by the change in revenue) was 40%. The pre-tax operating margin (a non-GAAP measure of operating profit before tax divided by revenue) in the fourth quarter of 2006 was 25% compared to 21% in the fourth quarter of 2005 and 24% in the third quarter of 2006.

Excluding the favorable impact of the change in accounting procedures at Baker Atlas: operating profit before tax was up 39% compared to the fourth quarter of 2005 and was up 4% sequentially compared to the third quarter of 2006; the quarterly year-over-year incremental pre-tax margin (a non-GAAP measure of the change in operating profit before tax divided by the change in revenue) was 36%; the pre-tax operating margin (a non-GAAP measure of operating profit before tax divided by revenue) was 24% compared to 21% in the fourth quarter of 2005 and 24% in the third quarter of 2006.

Drilling and Evaluation

Drilling and Evaluation revenue was up 20% in the fourth quarter of 2006 compared to the fourth quarter of 2005, and up 4% sequentially compared to the third quarter of 2006. Baker Atlas, Hughes Christensen, and INTEQ reported record revenue in the fourth quarter of 2006. Operating profit before tax was up 50% compared to the fourth quarter of 2005 and up 11% sequentially compared to the third quarter of 2006. The quarterly year-over-year incremental pre- tax margin was 57%. The pre-tax operating margin in the fourth quarter of 2006 was 28% compared to 23% in the fourth quarter of 2005 and 27% in the third quarter of 2006. Baker Hughes Drilling Fluids sequential revenues declined primarily due to weak Gulf of Mexico continental shelf activity.

Excluding the favorable impact of the change in accounting procedures at Baker Atlas: operating profit before tax was up 41% compared to the fourth quarter of 2005 and was up 5% sequentially compared to the third quarter of 2006; the quarterly year-over-year incremental pre-tax margin (a non-GAAP measure of the change in operating profit before tax divided by the change in revenue) was 47%; the pre-tax operating margin (a non-GAAP measure of operating profit before tax divided by revenue) was 27% compared to 23% in the fourth quarter of 2005 and 27% in the third quarter of 2006.

Completion and Production

Completion and Production revenue was up 27% in the fourth quarter of 2006 compared to the fourth quarter of 2005 and up 8% sequentially compared to the third quarter of 2006. Baker Oil Tools, Baker Petrolite, and Centrilift reported record revenue in the fourth quarter of 2006. Operating profit before tax was up 36% compared to the fourth quarter of 2005 and up 4% sequentially compared to the third quarter of 2006. The quarterly year-over- year incremental pre-tax margin was 26%. The pre-tax operating margin in the fourth quarter of 2006 was 21% compared to 19% in the fourth quarter of 2005 and 22% in the third quarter of 2006.

Corporate and Other

Corporate and other expense was up $4.3 million in the fourth quarter of 2006 compared to the fourth quarter of 2005, due primarily to higher cost center spending partially offset by a gain on the sale of real estate and foreign exchange transactions. Sequentially, corporate and other spending was up $18.4 million due primarily to increased legal and compliance spending and increased cost center spending partially offset by a gain on the sale of real estate.

Geographic Highlights

Revenue by geographic area for the three months ended December 31, 2006, September 30, 2006 and December 31, 2005, are detailed below. All results are unaudited and shown in millions. Additional information for prior periods beginning with the three months ended March 31, 2001 can be found on our website at http://www.bakerhughes.com/investor in the "investor relations/financial information" section of the website.



                             Revenue by Geography
    (For the Three Months Ended December 31, 2006, September 30, 2006, and
                              December 31, 2005)
    --------------------------------------------------------------------------
                                                Europe,  Middle East,    Total
                           North     Latin      Africa,    Asia       Oilfield
    Three Months Ended    America[A] America[B] CIS3[C]  Pacific[D] Operations
    --------------------------------------------------------------------------
    December 31, 2006     $1,045.7   $233.7     $677.6     $495.7     $2,452.7
    September 30, 2006     1,037.6    208.6      635.0      428.2      2,309.4
    December 31, 2005        840.5    198.5      548.5      401.9      1,989.4
    --------------------------------------------------------------------------

     [A] United States and Canada.

     [B] Mexico, Central America and South America.

     [C] Europe, Africa, Russia and the Caspian area, excluding Egypt.

     [D] Middle East and Asia Pacific, including Egypt.

North America revenue increased 24% in the fourth quarter of 2006 compared to the fourth quarter of 2005 and increased 1% sequentially compared to the third quarter of 2006. Latin America revenue increased 18% in the fourth quarter of 2006 compared to the fourth quarter of 2005 and increased 12% sequentially compared to the third quarter of 2006. Europe, Africa, and CIS revenue increased 24% in the fourth quarter of 2006, compared to the fourth quarter of 2005, and increased 7% sequentially compared to the third quarter of 2006. Middle East and Asia Pacific revenue increased 23% in the fourth quarter of 2006, compared to the fourth quarter of 2005 and increased 16% sequentially compared to the third quarter of 2006.

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 the section titled "Forward-Looking Statements" in this news release. These statements include the impact from the adoption of FAS 123, Share-Based Payment; the sale of our interest in WesternGeco to Schlumberger at the end of April 2006; and the impact of expected stock repurchases. These statements do not include the potential impact of any other acquisition, disposition, merger, joint venture, the final outcome of the previously disclosed governmental investigations, or other transaction that could occur in the future.

  • Non-North American revenue for the year 2007 is expected to be up 17-19% compared to the year 2006.
  • Corporate and other expenses, excluding interest expense and interest and dividend income, are expected to be between $235 and $255 million for the year 2007.
  • Capital spending is expected to be between $1.0 billion and $1.2 billion for the year 2007.
  • Depreciation and amortization expense is expected to be between $500 and $550 million for the year 2007.
  • The tax rate on operating results for the year 2007 is expected to be between 32% and 33%.
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