Baker Hughes Announces Record Fourth Quarter Results

...$106.0 million or $0.32 per diluted share for the fourth quarter 2003 and $137.3 million or $0.41 per diluted share for the third quarter 2004.

Income from continuing operations for the year 2004 was $528.2 million or $1.57 per diluted share, compared to $177.9 million or $0.53 per diluted share for the year 2003.

Net income for the fourth quarter 2004 was $179.6 million or $0.53 per diluted share, compared to $101.6 million or $0.30 per diluted share for the fourth quarter 2003 and $137.5 million or $0.41 per diluted share for the third quarter 2004. Net income for the year 2004 was $528.6 million or $1.58 per diluted share, compared to $128.9 million or $0.38 per diluted share for the year 2003.

Operating profit, which is a non-GAAP measure comprised of income from continuing operations excluding the impact of certain identified non- operational items, was $179.8 million or $0.53 per diluted share for the fourth quarter 2004, compared to $106.0 million or $0.32 per diluted share for the fourth quarter 2003 and $137.3 million or $0.41 per diluted share for the third quarter 2004. Operating profit was $528.2 million or $1.57 per diluted share for the year 2004, compared to $328.0 million or $0.98 per diluted share for the year 2003. There were no non-operational items in 2004. The non- operational items in 2003 were impairment and restructuring charges related to our 30% minority interest in WesternGeco, our seismic joint venture, impairment of our investment in WesternGeco and the reversal of a restructuring charge recorded in 2000. 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 Results and Operating Results in this news release.

Revenue for the fourth quarter 2004 was $1,679.1 million, up 18% compared to $1,428.0 million for the fourth quarter 2003 and up 9% compared to $1,538.1 million for the third quarter 2004. Revenue for the year 2004 was $6,103.8 million, up 16% compared to $5,252.4 million for 2003.

Chad C. Deaton, Baker Hughes chairman and chief executive officer, said, "Baker Hughes had a record fourth quarter. We reported record revenues, profits and operating margins."

Mr. Deaton continued, "2004 was an excellent year for Baker Hughes and we expect 2005 to be an even better year. The oil and natural gas industry has recognized the need to invest to meet consumer demand, offset depletion, rebuild inventories and restore some cushion of productive capacity. We expect that our customers' investments will grow the most in Russia, the Caspian area and in the Middle East and remain strong in North America. Increased raw material and labor costs will present challenges; however, the capital discipline in the service industry over the last few years has laid the foundation for improved profitability in 2005."

Mr. Deaton concluded, "In my first 100 days with Baker Hughes, I have met with a number of our stakeholders. Our employees are enthusiastic, professional and dedicated to executing our Strategic Framework and living our Core Values. Our customers have been pleased with our performance and have helped us identify opportunities for growth. The company is well positioned and I am excited about the opportunities that lie ahead."

Financial Flexibility

During the fourth quarter 2004, debt increased $40.9 million to $1,162.3 million, and cash increased $212.2 million to $319.0 million. In the fourth quarter 2004, the company's capital expenditures were $106.0 million, depreciation and amortization was $95.8 million and dividend payments were $38.7 million.

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 fourth quarter 2004, the company did not purchase any shares. In total, the company has purchased approximately 8.1 million shares at a cost of $230.5 million and has authorization remaining to purchase up to $44.5 million in stock.

Revenue for the fourth quarter 2004 increased 18% compared to the fourth quarter 2003 and increased 9% compared to the third quarter 2004. Sequentially, revenues increased at all divisions except Baker Petrolite, which generally has its seasonal peak earnings in the third quarter of each year. In addition to record revenues for our Oilfield Operations, Baker Atlas, Baker Oil Tools, Hughes Christensen, and INTEQ (drilling and evaluation and drilling fluids combined) each had record revenues in the fourth quarter.

Every division reported improved profits in the fourth quarter 2004 compared to the fourth quarter 2003 and every division except Baker Petrolite reported improved profits compared to the third quarter 2004. In addition to record profits for our Oilfield Operations, Baker Atlas, Hughes Christensen and INTEQ (drilling and evaluation and drilling fluids combined) each reported record profits in the fourth quarter 2004.

The non-GAAP measure of pre-tax operating margin, which is operating profit before tax divided by revenue, was 19.0% for the fourth quarter 2004 compared to 15.1% for the fourth quarter 2003 and 16.8% for the third quarter 2004. In addition to record operating margins for our Oilfield Operations, Baker Atlas and INTEQ (drilling and evaluation and drilling fluids combined) each reported record operating margins in the fourth quarter 2004, and every division, except Baker Hughes Drilling Fluids, reported at least double digit operating margins. The operating margin for the year 2004 was 16.9% compared to 14.4% in 2003.

Corporate, Net Interest and Other

Corporate, net interest and other expenses were $71.0 million in the fourth quarter 2004, up $9.3 million from the fourth quarter 2003 and up $0.7 million from the third quarter 2004. The increase in corporate, net interest and other costs compared to the fourth quarter a year ago was primarily due to increased audit, legal and compliance costs, charges incurred that were related to assets retained from the sale of the former Process group, offset partially by lower 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 the section titled "Forward-Looking Statements" in this news release. These statements do not include the potential impact of any acquisition, disposition, merger, joint venture, or other transaction that could occur in the future. These statements do not include the impact from the adoption of the revised FAS 123R, Accounting for Stock-Based Compensation, which we will adopt in the third quarter 2005. Statements regarding WesternGeco are based on information provided by WesternGeco, and therefore, are subject to the accuracy of that information. Additionally, forward-looking statements relating to WesternGeco are also subject to the factors listed in Forward- Looking Statements in this news release.

• Revenues for the year 2005 are expected to be up 9% to 11% compared to the year 2004. Revenues in the first quarter 2005 are expected to be up 14% to 16% compared to the first quarter 2004 and down 4% to 6%compared to the fourth quarter 2004.
• WesternGeco is expected to contribute $55 to $65 million in equity in income of affiliates for the year 2005 and $15 to $20 million for the first quarter 2005.
• Corporate and other expenses, excluding interest expense, are expected to be between $185 and $200 million for the year 2005 and approximately $49 to $52 million in the first quarter 2005.
• Net interest expense is expected to be between $55 and $60 million for the year 2005 and approximately $15 to $17 million in the first quarter 2005.
• Income from continuing operations per diluted share is expected to be between $1.80 and $1.95 for the year 2005. Income from continuing operations per diluted share is expected to be between $0.39 and $0.42 in the first quarter 2005.
• Capital spending is expected to be between $440 and $460 million for the year 2005.
• Depreciation and amortization expense is expected to be between $410 and $430 million for the year 2005.
• The tax rate on operating results for the year 2005 is expected to be approximately 34.0%.

The outlook for corporate and other expenses and income from continuing operations per diluted share do not consider the impact from the adoption of the revised FAS 123R, which the company will adopt in the third quarter of 2005. The company is currently in the process of evaluating the impact of this accounting standard. If it is adopted on a prospective basis it is expected to reduce income from continuing operations per diluted share by approximately $0.03 for the last six months of 2005.

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