Baker Hughes Announces Second Quarter Results
Operating profit, which is a non-GAAP measure comprised of income from continuing operations excluding the impact of certain identified items, was $349.6 million or $1.09 per diluted share for the second quarter of 2007 compared to $359.8 million or $1.07 per diluted share for the second quarter 2006 and $374.7 million or $1.17 per diluted share for the first quarter 2007. The operating profit for the second quarter of 2006 excludes the pre-tax gain of $1,743.5 million ($1,035.2 million after-tax) from the sale of our 30% interest in WesternGeco in April 2006 for $2.4 billion in cash. There were no other items identified for exclusion in calculating operating profit in the first or second quarter of 2007 or any other quarter of 2006. Income from continuing operations is reconciled to operating profit in the section titled "Reconciliation of GAAP and Operating Profit" in this news release.
The results for the second quarter of 2007 include $9.3 million ($0.03 per diluted share) of additional taxes and related interest and penalties associated with disallowed tax deductions, taken in previous years, arising from the previously announced resolution of investigations with the Securities and Exchange Commission and the Department of Justice.
Revenue for the second quarter 2007 was $2,537.5 million, up 15% compared to $2,203.3 million for the second quarter 2006 and up 3% compared to $2,472.8 million for the first quarter 2007.
Chad C. Deaton, Baker Hughes chairman and chief executive officer said, "A 21% year-over-year increase in revenue in the second quarter from outside North America was partially offset by weaker activity in Canada and the U.S. offshore market. Net income in the quarter was impacted by lower profit from our Drilling and Evaluation business in Canada. In response to the weakness in Canada, we have adjusted our staffing levels, relocating key personnel to markets, which are showing better prospects for near-term growth while preserving our ability to respond to future increases in customer spending.
"In North America, we expect drilling to remain at or near current levels but there are a number of factors that could drive short-term volatility. We believe that any correction in drilling activity due to economic or weather events will unmask the impact of the high decline rates of U.S. natural gas production and that the market will rebalance.
"We believe that we are experiencing a multi-year expansion in oil and gas exploration, completion and production expenditures, particularly outside of North America. Baker Hughes will continue to invest in the people, technology and infrastructure necessary to support this expansion. Our company has made good progress over the past two years in our targeted countries through the introduction of new technologies, improvement of our reliability and execution, and implementation of our regional organization. We are, however, not satisfied with the incremental profits we delivered in the second quarter, and we are focused on improving our productivity and efficiency while enhancing our ability to grow both the top and bottom line."
During the second quarter 2007, debt decreased $7.5 million to $1,073.8 million, and cash and short-term investments decreased $76.2 million to $839.8 million. In the second quarter 2007, the company's capital expenditures were $276.4 million, depreciation and amortization was $126.1 million and dividend payments were $41.6 million.
During the second quarter of 2007, the company repurchased 1.2 million shares of common stock at an average price of $82.26 per share for a total of $98.8 million. On July 26, 2007 the company's Board of Directors authorized a plan to repurchase $1 billion of the company's common stock in addition to the existing stock repurchase plan. As of July 26, 2007, the company had authorization remaining to repurchase approximately $1.212 billion of common stock.
Financial Information
Consolidated Statements of Operations
Three Months Ended
(In millions, except per ----------------------------------
share amounts) June 30, March 31,
----------------------------------
UNAUDITED 2007 2006 2007
-------- -------- -------
Revenues:
Sales $1,259.0 $1,120.6 $1,200.9
Services and rentals 1,278.5 1,082.7 1,271.9
-------- -------- --------
Total revenues 2,537.5 2,203.3 2,472.8
-------- -------- --------
Costs and Expenses:
Cost of sales 782.7 661.5 733.5
Cost of services and rentals 772.1 679.1 750.3
Research and engineering 92.6 82.0 91.6
Selling, general and administrative 353.0 292.2 337.2
-------- -------- --------
Total costs and expenses 2,000.4 1,714.8 1,912.6
-------- -------- --------
Operating income 537.1 488.5 560.2
Equity in income of affiliates 0.2 11.3 0.2
Gain on sale of interest in affiliate -- 1,743.5 --
Interest expense (16.2) (17.0) (16.8)
Interest and dividend income 10.7 24.2 11.5
-------- -------- --------
Income from continuing
operations before income taxes 531.8 2,250.5 555.1
Income taxes (182.2) (855.5) (180.4)
-------- -------- --------
Income from continuing operations 349.6 1,395.0 374.7
Income from discontinued
operations, net of tax -- -- --
-------- -------- --------
Net income $349.6 $1,395.0 $374.7
======== ======== ========
Basic earnings per share:
Income from continuing operations $1.10 $4.15 $1.17
Income from discontinued operations -- -- --
-------- -------- --------
Net income $1.10 $4.15 $1.17
======== ======== ========
Diluted earnings per share:
Income from continuing operations $1.09 $4.14 $1.17
Income from discontinued operations -- -- --
-------- -------- --------
Net income $1.09 $4.14 $1.17
======== ======== ========
Weighted average shares
outstanding, basic (thousands) 319,106 335,830 319,124
Weighted average shares
outstanding, diluted (thousands) 321,307 337,364 321,020
Depreciation and amortization
expense $126.1 $104.6 $119.8
Capital expenditures $276.4 $208.1 $262.0
Financial Information
Consolidated Statements of Operations
Six Months Ended
(In millions, except per -----------------------------------
share amounts) June 30,
-----------------------------------
UNAUDITED 2007 2006
-------- --------
Revenues:
Sales $2,459.9 $2,157.1
Services and rentals 2,550.4 2,108.2
-------- --------
Total revenues 5,010.3 4,265.3
-------- --------
Costs and Expenses:
Cost of sales 1,516.2 1,283.4
Cost of services and rentals 1,522.4 1,328.3
Research and engineering 184.2 160.4
Selling, general and administrative 690.2 564.3
-------- --------
Total costs and expenses 3,913.0 3,336.4
-------- --------
Operating income 1,097.3 928.9
Equity in income of affiliates 0.4 59.5
Gain on sale of interest in affiliate -- 1,743.5
Interest expense (33.0) (33.5)
Interest and dividend income 22.2 31.5
-------- --------
Income from continuing
operations before income taxes 1,086.9 2,729.9
Income taxes (362.6) (1,016.1)
-------- --------
Income from continuing operations 724.3 1,713.8
Income from discontinued operations,
net of tax -- 20.4
-------- --------
Net income $724.3 $1,734.2
======== ========
Basic earnings per share:
Income from continuing operations $2.27 $5.06
Income from discontinued operations -- 0.06
-------- --------
Net income $2.27 $5.12
======== ========
Diluted earnings per share:
Income from continuing operations $2.26 $5.04
Income from discontinued operation -- 0.06
-------- --------
Net income $2.26 $5.10
======== ========
Weighted average shares
outstanding, basic (thousands)
Weighted average shares
outstanding, diluted (thousands) 321,163 340,043
Depreciation and amortization expense $245.9 $204.7
Capital expenditures $538.4 $367.2
Reconciliation of GAAP and Operating Profit (1)The following table reconciles GAAP and operating profit referenced in this news release.
Reconciliation of GAAP and Operating Profit (1)
(for the three months ended June 30, 2006)
Profit Profit Diluted
Before After Earnings
UNAUDITED Tax Tax Tax Per Share
(In millions except
earnings per share)
Income from continuing
operations (GAAP) $2,250.5 $(855.5) $1,395.0 $4.14
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Less certain identified items:
Gain on sale of interest in
WesternGeco 1,743.5 (708.3) 1,035.2 3.07
--------------------------------------------------------------------------
Operating results, excluding
the impact of certain
identified items $507.0 $(147.2) $359.8 $1.07
==========================================================================
(1) Operating profit before tax and operating profit after tax are
non-GAAP measures comprised of income from continuing operations
excluding the impact of certain identified items. The item in the
second quarter of 2006 related to the pre-tax gain of $1,743.5 million
($1,035.2 million after tax) from the sale of our 30% interest in
WesternGeco, our seismic joint venture with Schlumberger Limited, to
Schlumberger on April 28, 2006 for $2.4 billion in cash. There were
no other items identified for exclusion in calculating operating
profit in 2007 or any other quarter of 2006. 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 operating profit internally as a measure
of the performance of the company's operations. Income from
continuing operations is reconciled to operating profit in this
section of this news release. Reconciliation of GAAP and operating
profit for historical periods can be found on the company's website at
http://www.bakerhughes.com/investor in the "Financial Information"
section.
Calculation of EBIT and EBITDA (non-GAAP measures) (1)
Three Months Ended
--------------------------------------
UNAUDITED June 30, March 31,
------------------- ----------
(In millions) 2007 2006 2007
-------- -------- --------
Income from continuing
operations before income taxes $531.8 $2,250.52(2) $555.1
Gain on sale of interest in
affiliate -- (1,743.5) --
-------- --------- --------
Operating income (Income from
continuing operations before
income taxes excluding gain
on sale of interest in
WesternGeco) 531.8 507.0 555.1
Interest expense 16.2 17.0 16.8
-------- --------- --------
Earnings before interest
expense and taxes (EBIT) 548.0 524.0 571.9
Depreciation and amortization
expense 126.1 104.6 119.8
-------- --------- --------
Earnings before interest
expense, taxes, depreciation
and amortization (EBITDA) 674.1 $628.6 $691.7
======== ========= ========
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(1) EBIT and EBITDA (as defined in the calculations above) 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 investors to make informed investment decisions.
(2) Includes the pre-tax gain on the sale of our interest in WesternGeco
sold to Schlumberger on April 28, 2006.
Consolidated Balance Sheets
UNAUDITED AUDITED
(In millions) June 30, 2007 December 31, 2006
=========================================================================
ASSETS
Current Assets:
Cash and cash equivalents $654.6 $750.0
Short-term investments 185.2 353.7
Accounts receivable, net 2,158.5 2,055.1
Inventories 1,698.8 1,528.8
Deferred income taxes 174.9 167.8
Other current assets 118.3 112.4
-------------------------------------------------------------------------
Total current assets 4,990.3 4,967.8
-------------------------------------------------------------------------
Property, net 2,063.1 1,800.5
Goodwill 1,350.1 1,347.0
Intangible assets, net 181.6 190.4
Other assets 414.2 400.0
-------------------------------------------------------------------------
Total assets $8,999.3 $8,705.7
=========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $579.7 $648.8
Short-term borrowings 2.2 1.3
Accrued employee compensation 362.9 484.2
Income taxes 63.2 150.0
Other accrued liabilities 219.7 337.6
-------------------------------------------------------------------------
Total current liabilities 1,227.7 1,621.9
-------------------------------------------------------------------------
Long-term debt 1,071.6 1,073.8
Deferred income taxes and other 389.0 300.2
tax liabilities
Liabilities for pensions and 346.9 339.3
other postretirement benefits
Other liabilities 110.9 127.6
Stockholders' Equity:
Common stock 319.7 319.9
Capital in excess of stock value 1,568.4 1,600.6
Retained earnings 4,111.8 3,509.6
Accumulated other comprehensive loss (146.7) (187.2)
-------------------------------------------------------------------------
Total stockholders' equity 5,853.2 5,242.9
-------------------------------------------------------------------------
Total liabilities and
stockholders' equity $8,999.3 $8,705.7
=========================================================================Segment Highlights
We report our operating results under two segments: Drilling and Evaluation, and Completion and Production. In April 2006, we sold our 30% interest in the WesternGeco seismic joint venture to Schlumberger. Operational highlights for the three months ended June 30, 2007, June 30, 2006 and March 31, 2007 are detailed below. All results are unaudited and shown in millions.
Comparison of Quarters -- Year over Year
(For the Three Months Ended June 30, 2007 and 2006)
-------------------------------------------------------------------------
Revenue Operating Profit
Before Tax (1)
Q2 2007 Q2 2006 Q2 2007 Q2 2006
-------------------------------------------------------------------------
Drilling and Evaluation $1,278.7 $1,118.4 $328.5 $290.1
Completion and
Production 1,258.7 1,084.9 266.9 248.2
-------------------------------------------------------------------------
Oilfield Operations 2,537.4 2,203.3 595.4 538.3
WesternGeco -- -- -- 10.8
-------------------------------------------------------------------------
Total Oilfield 2,537.4 2,203.3 595.4 549.1
-------------------------------------------------------------------------
Interest expense -- -- (16.2) (17.0)
Interest and -- -- 10.7 24.2
dividend income
Corporate and other 0.1 -- (58.1) (49.3)
-------------------------------------------------------------------------
Corporate, net
interest and other 0.1 -- (63.6) (42.1)
-------------------------------------------------------------------------
Total $2,537.5 $2,203.3 $531.8 $507.0
=========================================================================
Comparison of Quarters -- Sequential
(For the Three Months Ended June 30, 2007 and March 31, 2007)
-------------------------------------------------------------------------
Revenue Operating Profit
Before Tax (1)
Q2 2007 Q1 2007 Q2 2007 Q1 2007
-------------------------------------------------------------------------
Drilling and Evaluation $1,278.7 $1,288.5 $328.5 $366.62
Completion and
Production 1,258.7 1,184.2 266.9 246.4
-------------------------------------------------------------------------
Oilfield Operations 2,537.4 2,472.7 595.4 613.02
WesternGeco -- -- -- --
-------------------------------------------------------------------------
Total Oilfield 2,537.4 2,472.7 595.4 613.02
-------------------------------------------------------------------------
Interest expense -- -- (16.2) (16.8)
Interest and
dividend income -- -- 10.7 11.5
Corporate and other 0.1 0.1 (58.1) (52.6)
-------------------------------------------------------------------------
Corporate, net
interest and other 0.1 0.1 (63.6) (57.9)
-------------------------------------------------------------------------
Total $2,537.5 $2,472.8 $531.8 $555.1(2)
=========================================================================
(1) Operating profit before tax and operating profit after tax are
non-GAAP measures comprised of income from continuing operations
excluding the impact of certain identified items. The item in the
second quarter of 2006 related to the pre-tax gain of $1,743.5 million
($1,035.2 million after-tax) from the sale of our 30% interest in
WesternGeco, our seismic joint venture with Schlumberger, to
Schlumberger on April 28, 2006 for $2.4 billion in cash. There were
no other items identified for exclusion in calculating operating
profit in 2007 or any other quarter of 2006. 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 operating profit internally as
a measure of the performance of the company's operations. Income from
continuing operations is reconciled to operating profit in the section
titled Reconciliation of GAAP and Operating Profit in this news
release. Reconciliation of GAAP and operating profit for historical
periods can be found on the company's website at
http://www.bakerhughes.com/investor in the "Financial Information"
section.
(2) In the first quarter of 2007 Baker Atlas increased the depreciable
lives of certain assets. The pretax impact of this change is a
reduction to cost of services and rentals of approximately $6.0
million per quarter.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 second quarter 2007 compared to the second quarter 2006 and first quarter 2007.
Comparison of Revenue
(For the Three Months Ended June 30, 2007 Compared to the
Three Months Ended June 30, 2006 and March 31, 2007)
UNAUDITED
June 30, 2006 March 31, 2007
-------------------------------------------------------------------------
Baker Atlas 19% 1%
BakerHughes Drilling Fluids 0% 1%
Hughes Christensen 4% (3)%
INTEQ 23% (2)%
-------------------------------------------------------------------------
Drilling & Evaluation Segment 14% (1)%
Baker Oil Tools 18% 6%
Baker Petrolite 11% 3%
Centrilift 20% 14%
-------------------------------------------------------------------------
Completion & Production Segment(1) 16% 6%
Oilfield Operations 15% 3%
-------------------------------------------------------------------------
(1) Includes the ProductionQuest business unitOilfield Operations revenue was up 15% in the second quarter of 2007 compared to the second quarter of 2006, and up 3% sequentially compared to the first quarter of 2007. Operating profit before tax was up 11% compared to the second quarter of 2006 and down 3% sequentially compared to the first quarter of 2007. 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 17%. The pre-tax operating margin (a non-GAAP measure of operating profit before tax divided by revenue) in the second quarter of 2007 was 23% compared to 24% in the second quarter of 2006 and 25% in the first quarter of 2007.
Drilling and Evaluation
Drilling and Evaluation revenue was up 14% in the second quarter of 2007 compared to the second quarter of 2006, and down 1% sequentially compared to the first quarter of 2007. Segment revenue was impacted by decreases in customer activity in Canada and in the U.S. offshore compared to both the second quarter of 2006 and the first quarter of 2007. Results for Baker Hughes Drilling Fluids were impacted by changes in their product mix and share losses in certain markets. At Baker Atlas, significant increases in international revenue offset weaker wireline sales in North America. Operating profit before tax in the second quarter of 2007 was up 13% compared to the second quarter of 2006 and down 10% sequentially compared to the first quarter of 2007. The quarterly year-over-year incremental pre-tax margin was 24%. The pre-tax operating margin in both the second quarter of 2007 and 2006 was 26%, compared to 28% in the first quarter of 2007. Segment operating profit in the second quarter of 2007 was negatively impacted by an increase in repair and maintenance costs at INTEQ of approximately $10.0 million compared to the first quarter of 2007.
Completion and Production
Completion and Production revenue was up 16% in the second quarter of 2007 compared to the second quarter of 2006 and up 6% sequentially compared to the first quarter of 2007. Operating profit before tax in the second quarter of 2007 was up 8% compared to both the second quarter of 2006 and to the first quarter of 2007. The quarterly year-over-year incremental pre-tax margin was 11%. The pre-tax operating margin in the second quarter of 2007 was 21% compared to 23% in the second quarter of 2006 and 21% in the first quarter of 2007.
Corporate and Other
Corporate and other expense was up $8.8 million in the second quarter of 2007 compared to the second quarter of 2006 due primarily to an increase in headcount and related expenses. Sequentially, from the first quarter of 2007, corporate and other expense was up $5.5 million due primarily to unfavorable foreign exchange.
Geographic Highlights
Revenue by geographic area for the three months ended June 30, 2007, March 31, 2007 and June 30, 2006, are detailed below. All results are unaudited and shown in millions.
Revenue by Geography
(For the Three Months Ended June 30, 2007, March 31, 2007, and June 30, 2006)
-------------------------------------------------------------------------
Middle
Three Months Europe, East, Total
Ended North Latin Africa, Asia Oilfield
America(1) America(2) CIS(3) Pacific(4) Operations
-------------------------------------------------------------------------
June 30, 2007 $1,049.7 $237.8 $765.3 $484.6 $2,537.4
March 31, 2007 1,072.7 232.7 703.5 463.8 2,472.7
June 30, 2006 975.0 198.7 604.0 425.6 2,203.3
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(1) United States and Canada.
(2) Mexico, Central America and South America.
(3) Europe, Africa, Russia and the Caspian area, excluding Egypt.
(4) Middle East and Asia Pacific, including Egypt.North America revenue increased 8% in the second quarter of 2007 compared to the second quarter of 2006 and decreased 2% sequentially compared to the first quarter of 2007. Activity in North America was impacted by significant declines in drilling activity in Canada, where the rig count was down 51% for the second quarter of 2007 compared to the second quarter of 2006 and down 72% compared to the first quarter of 2007, and the U.S. offshore, where the rig count was down 20% for the second quarter of 2007 compared to the second quarter of 2006 and down 7% compared to the first quarter of 2007 Latin America revenue increased 20% in the second quarter of 2007 compared to the second quarter of 2006 and increased 2% compared to the first quarter of 2007. Europe, Africa, and CIS revenue increased 27% in the second quarter of 2007 compared to the second quarter of 2006, and increased 9% sequentially compared to the first quarter of 2007 with strong revenue from the UK, Norway and Russia. Middle East and Asia Pacific revenue increased 14% in the second quarter of 2007 compared to the second quarter of 2006 and increased 5% sequentially compared to the first quarter of 2007.
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 do not include the potential impact of any expected stock repurchases, acquisition, disposition, merger, joint venture, or other transaction or event that could occur in the future.
-- Outside North America revenue for the year 2007 is expected to be up
between 19% and 21% compared to the year 2006.
-- Corporate and other expenses, excluding interest expense and interest
and dividend income, are expected to be between $235 million and $255
million for the year 2007.
-- Capital spending is expected to be between $1.1 billion and $1.2
billion for the year 2007.
-- Depreciation and amortization expense is expected to be between $500
million and $530 million for the year 2007.
-- The tax rate on operating results for the year 2007 is expected to be
between 32.5% and 33.5% reflecting the charge associated with the
disallowed tax deductions disclosed in this news release. The tax rate
for the second half of 2007 is expected to be between 32% and 33%.
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