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Baker Hughes Announces First Quarter Results

April 25, 20174:41 AM Business Wire

  • Revenue of $2.3 billion for the quarter, down 6% sequentially and 15% year-over-year
  • GAAP net loss per share of $0.30 for the quarter includes $0.26 per share of adjusting items
  • Adjusted EBITDA (non-GAAP measure) was $309 million for the quarter, up 16% sequentially

HOUSTON–(BUSINESS WIRE)–Baker Hughes Incorporated (NYSE: BHI) announced today results for the first quarter of 2017.

“Baker Hughes delivered another sequential quarter of improved adjusted operating profit, despite industry headwinds in certain market segments,” said Martin Craighead, Baker Hughes Chairman and Chief Executive Officer.

“In North America we grew our well construction onshore business, particularly drill bits and rotary steerable systems. However, this growth was more than offset by the deconsolidation of the North America onshore pressure pumping business and reduced customer spending in the Gulf of Mexico. Revenue for our upstream chemicals business, which represents approximately one-quarter of our North America revenue, grew in line with production volumes, and is poised for additional growth as production increases.

“While the onshore rig count increase in North America has been more robust than many had expected, the industry is still working to absorb excess service capacity. As this capacity is being consumed, we have seen labor and materials cost inflation in select product lines and basins. For most drilling-related product lines, with the demand growth we experienced this quarter, we believe we are on the cusp of a broader pricing recovery.

“As expected, our international revenues declined as a result of year-end sales not repeating, seasonal activity reductions, and price deterioration. The decline was more pronounced in the offshore markets as a result of ongoing customer spending reductions.

“Looking forward to the rest of the year, we believe that the North America onshore market will continue to grow and service capacity will continue to be absorbed. For international onshore markets, activity has bottomed and we expect it will remain stable, with a few pockets of modest growth. And, while we expect there to be headwinds offshore throughout the rest of 2017, we are winning in the right places, as evidenced by our recent tender awards.

“In closing, with regard to the pending GE Oil & Gas combination, I am pleased with the progress to date, and I am confident that the new Baker Hughes will be the provider of choice that can uniquely combine innovative physical and digital solutions to deliver the efficiency and productivity gains that customers are asking for. With the benefits and opportunities that this transaction will create for our customers, shareholders and employees, my expectations for what this transformational combination will achieve has continued to grow as we move closer to completing it in mid-2017.”

2017 First Quarter Results

Revenue for the quarter was $2.3 billion, a decrease of $148 million, or 6%, sequentially. Compared to the same quarter last year, revenue declined $408 million, or 15%. The sequential decrease in revenue was driven primarily by the deconsolidation of the North America onshore pressure pumping business, lower revenue internationally, mainly related to non-recurring year-end product sales, seasonality and price deterioration, and reduced activity in the Gulf of Mexico. This decline was partially offset by activity growth in our North America onshore business, primarily in our well construction product lines.

On a GAAP basis, net loss attributable to Baker Hughes for the first quarter of 2017 was $129 million, or $0.30 per diluted share, compared to $417 million, or $0.98 per diluted share, in the fourth quarter of 2016, and $981 million, or $2.22 per diluted share, in the first quarter of 2016.

Adjusted net loss (a non-GAAP measure) for the quarter was $15 million, or $0.04 per diluted share. Adjusted net loss excludes adjustments totaling $114 million after tax, or $0.26 per diluted share, related to restructuring charges, asset impairments, and merger-related costs. A complete list of the adjusting items and associated reconciliation has been provided in Table 1a. Adjusted net loss includes an $84 million after-tax benefit, or $0.20 per diluted share, related to bad-debt recoveries in Ecuador as a result of receiving government-backed bonds in exchange for outstanding fully reserved invoices.

Adjusted EBITDA (a non-GAAP measure) was $309 million for the quarter, an increase of $43 million, or 16% sequentially, and up $201 million, or 186%, compared to the first quarter of 2016.

Cash flows used by operating activities were ($163) million for the first quarter of 2017, compared to $632 million in the fourth quarter of 2016, and ($99) million in the first quarter of 2016. Free cash flow (a non-GAAP measure) for the quarter was ($174) million, compared to $610 million in the fourth quarter of 2016, and ($103) million in the first quarter of 2016. The sequential decrease in cash flows was driven primarily by a tax refund in the U.S. of $415 million in the fourth quarter of 2016 and annual compensation-related payments in the first quarter of 2017.

For the quarter, capital expenditures were $87 million, down $19 million, or 18%, sequentially, and relatively flat compared to the first quarter of 2016. The sequential reduction in capital expenditures was attributable to reduced activity levels internationally and our continued focus on capital discipline. Depreciation and amortization expense for the quarter was $218 million, a decline of $27 million, or 11%, sequentially, and down $136 million, or 38%, compared to the same quarter last year. The sequential decline in depreciation and amortization expense was primarily driven by lower capital spending and the deconsolidation of the North America onshore pressure pumping business.

Corporate costs were $37 million in the quarter, compared to $19 million in the prior quarter and $32 million in the first quarter of 2016. The sequential increase in corporate costs was due primarily to a one-time $23-million investment gain recognized in the prior quarter.

Income tax expense was $47 million for the quarter, an effective tax rate of (57%), compared to (35%) in the fourth quarter of 2016. The negative effective tax rate was due primarily to the geographical mix of earnings and losses, which resulted in taxes in certain jurisdictions, including withholding and deemed profit taxes, exceeding the tax benefit from the losses in other jurisdictions due to valuation allowances provided in most loss jurisdictions.

North America

North America revenue of $712 million for the quarter decreased $63 million, or 8%, sequentially. The sequential decrease in revenue was driven by $83 million related to the deconsolidation of the North America onshore pressure pumping business and a steep activity decline in the Gulf of Mexico, partially offset by an increase in the U.S. onshore business and a seasonal activity uplift in Canada. Excluding the $83 million of onshore pressure pumping revenue from the fourth quarter results, North America revenue was up $20 million, or 3%, sequentially.

Operating loss before tax for the quarter was $23 million, a $63 million improvement compared to the prior quarter. The reduced losses were driven primarily by a $42-million benefit related to the deconsolidation of the North America onshore pressure pumping business and a $30-million inventory write-off in the prior quarter not repeating in the current quarter. As a result of the limited price recovery experienced in the market so far, incremental operating profit from the North America onshore revenue growth was more than offset by reduced profitability from the steep activity decline in the Gulf of Mexico. Also, the sharp onshore activity ramp up in North America has caused short-term supply chain challenges in certain product lines and basins, resulting in some labor and materials cost inflation.

Adjusted operating loss before tax (a non-GAAP measure), which excludes a $30-million inventory-related adjustment in the fourth quarter of 2016, improved $33 million, from $56 million in the prior quarter to $23 million in the first quarter of 2017.

Latin America

Latin America revenue of $201 million decreased $24 million, or 11%, sequentially. The decrease in revenue was driven mainly by activity declines across the region and year-end product sales not repeating.

Operating profit before tax for the first quarter was $84 million, an increase of $71 million, compared to $13 million in the prior quarter. The increase in profitability was mainly the result of $84 million of bad-debt recoveries in Ecuador due to obtaining government-backed bonds in exchange for fully reserved receivables. This was partially offset by reduced profitability from declined activity, particularly the higher-margin year-end product sales.

There were no adjusting items to the Latin America operating profit in the fourth quarter of 2016, or the first quarter of 2017.

Europe/Africa/Russia Caspian

Europe/Africa/Russia Caspian revenue of $461 million for the quarter decreased $29 million, or 6%, sequentially, primarily due to year-end product sales not repeating, seasonal activity reductions, mostly in the Russia Caspian area, and lower activity in West Africa, particularly Nigeria, as a result of labor union strikes.

Operating profit before tax for the quarter was $1 million, an increase of $20 million, compared to an operating loss before tax of $19 million in the prior quarter. Despite a reduction in revenue, profitability improved sequentially as a result of $14 million of foreign exchange losses in Egypt in the fourth quarter of 2016 not repeating and savings from ongoing cost reduction efforts in the region.

There were no adjusting items to this segment’s operating profit in the fourth quarter of 2016, or the first quarter of 2017.

Middle East/Asia Pacific

Middle East/Asia Pacific revenue of $661 million for the quarter was down $26 million, or 4%, sequentially, driven primarily by year-end product sales in the fourth quarter of 2016 not repeating and the impact of additional price reductions in the region.

Operating profit before tax for the first quarter was $72 million, a decrease in profitability of $19 million compared to $91 million in the prior quarter. The decrease in profitability was driven primarily by reduced revenue, mainly from the impact of pricing reductions, and $14 million of bad debt recoveries in fourth quarter of 2016 not repeating in first quarter of 2017.

There were no adjusting items to this segment’s operating profit in the fourth quarter of 2016, or the first quarter of 2017.

Industrial Services

Industrial Services revenue of $227 million for the quarter decreased $6 million, or 3%, sequentially. The decrease in revenue was related mainly to a seasonal activity decline in the pipeline inspection business, and reduced activity in our downstream chemicals business resulting from lower refinery utilization.

Operating loss before tax for the quarter was $6 million, a decrease of $17 million, compared to an operating profit before tax of $11 million in the prior quarter. The decrease in profitability was driven by an unfavorable mix of revenue and the seasonal activity decline. Profitability also was negatively impacted by mobilization costs for upcoming projects and other one-time expenses.

There were no adjusting items to the Industrial Services operating profit in the fourth quarter of 2016, or the first quarter of 2017.

___________________________________________________________________________________________

Please see Tables 1a and 1b for a reconciliation of GAAP to non-GAAP financial measures. A reconciliation of net income (loss) attributable to Baker Hughes to Adjusted EBITDA is provided in Table 2. Supplemental segment financial information for revenue, adjusted operating profit (loss) before tax (a non-GAAP measure), and adjusted operating profit before tax margin is provided in Table 5. Free cash flow is defined as net cash flows provided by (used in) operating activities less expenditures for capital assets plus proceeds from disposal of assets.

Consolidated Condensed Statements of Income (Loss)

   
Three Months Ended
March 31,     December 31,
(In millions, except per share amounts)     2017     2016     2016
Revenue 2,262     2,670 2,410
Costs and expenses:
Cost of revenue 1,888 2,658 2,144
Research and engineering 99 102 92
Marketing, general and administrative 184 207 183
Impairment and restructuring charges 90 160 145
Merger and related costs     31       102       19  
Total costs and expenses     2,292       3,229       2,583  
Operating loss (30 ) (559 ) (173 )
Loss on sale of business interest — —

(97

)
Interest expense, net     (35 )     (55 )     (36 )
Loss before income tax and equity in loss of affiliate (65 ) (614 ) (306 )
Equity in loss of affiliate (18 ) — —
Income tax provision     (47 )     (367 )     (107 )
Net loss (130 ) (981 ) (413 )
Net (income) loss attributable to noncontrolling interests     1       —       (4 )
Net loss attributable to Baker Hughes     $ (129 )     $ (981 )     $ (417 )
 
Basic and diluted loss per share attributable to Baker Hughes (0.30 ) (2.22 ) (0.98 )
 
Weighted average shares outstanding, basic and diluted 429 442 427
 
Depreciation and amortization expense 218 354 245
Capital expenditures 87 86 106
 
 

Consolidated Condensed Balance Sheets

       
March 31, December 31,
(In millions)     2017     2016
ASSETS
Current assets:
Cash and cash equivalents $ 4,222 $ 4,572

Accounts receivable – less allowance for doubtful accounts (2017 – $396, 2016 – $509)

2,162 2,251
Inventories, net 1,907 1,809
Other current assets     673       535
Total current assets     8,964       9,167
Property, plant and equipment, net 4,128 4,271
Goodwill 4,090 4,084
Intangible assets, net 294 318
Other assets     1,200       1,194
Total assets     $ 18,676       $ 19,034

LIABILITIES AND EQUITY

Current liabilities:
Accounts payable $ 1,088 $ 1,027
Short-term debt and current portion of long-term debt 134 132
Accrued employee compensation 420 566
Other accrued liabilities     488       579
Total current liabilities     2,130       2,304
Long-term debt 2,884 2,886
Deferred income taxes and other tax liabilities 334 328
Long-term liabilities 777 779
Equity     12,551       12,737
Total liabilities and equity     $ 18,676       $ 19,034
 
 

Consolidated Condensed Statements of Cash Flows

   
Three Months Ended March 31,
(In millions)     2017     2016
Cash flows from operating activities:    
Net loss $ (130 ) $ (981 )
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization 218 354
Impairment of assets 19 118
Other noncash items (87 ) 404
Working capital and other     (183 )     6  
Net cash flows used in operating activities     (163 )     (99 )
Cash flows from investing activities:
Expenditures for capital assets (87 ) (86 )
Proceeds from disposal of assets 76 82
Proceeds from maturities of investment securities 3 202
Purchases of investment securities     (68 )     (137 )
Net cash flows provided by (used in) investing activities     (76 )     61  
Cash flows from financing activities:
Net repayments of short-term debt and other borrowings (6 ) (5 )
Dividends (74 ) (74 )
Other     (32 )     (16 )
Net cash flows used in financing activities     (112 )     (95 )
Effect of foreign exchange rate changes on cash and cash equivalents     1       1  
Decrease in cash and cash equivalents (350 ) (132 )
Cash and cash equivalents, beginning of period     4,572       2,324  
Cash and cash equivalents, end of period     $ 4,222       $ 2,192  
 

Table 1a: Reconciliation of GAAP and Non-GAAP Net Loss

The following table reconciles net loss attributable to Baker Hughes, which is the directly comparable financial result determined in accordance with Generally Accepted Accounting Principles (GAAP), to adjusted net loss1 (a non-GAAP financial measure). Adjusted net loss excludes identified items with respect to 2016 and 2017 as disclosed below:

   
Three Months Ended
March 31,     December 31,
(In millions, except per share amounts)     2017     2016     2016
Net loss attributable to Baker Hughes (GAAP) $ (129 )     $ (981 )     $ (417 )
Identified item:
Impairment and restructuring charges2 90 160 145
Merger and related costs3 31 102 19
Inventory adjustment4 — — 30
Loss on sale of business interest5 — — 97
Loss on firm purchase commitment6     —       51       —  
Total identified items     121       313       291  
Income tax on identified items7     (7 )     (33 )     —  
Identified items, net of income tax     114       280       291  
Adjusted net loss (non-GAAP)1     $ (15 )     $ (701 )     $ (126 )
 
Basic and diluted loss per share attributable to Baker Hughes (GAAP) $ (0.30 ) $ (2.22 ) $ (0.98 )
Adjusted basic and diluted loss per share attributable to Baker Hughes (non-GAAP) $ (0.04 ) $ (1.58 ) $ (0.30 )
 
 
1 Adjusted net loss is a non-GAAP measure comprised of net loss attributable to Baker Hughes, excluding the impact of certain identified items. The Company believes that adjusted net loss is useful to investors because it is a consistent measure of the underlying results of the Company’s business. Furthermore, management uses adjusted net loss as a measure of the performance of the Company’s operations.
2 Impairment and restructuring charges associated with asset impairments, workforce reductions, facility closures, and contract terminations.
3 Merger and related costs recorded in 2017 and 2016.
4 Inventory adjustments include costs to write off and dispose of certain excess inventory.
5 Loss on sale of a majority interest in the North America onshore pressure pumping business.
6 Loss on firm commitment was recorded in North America during the first quarter of 2016.
7 Represents the tax effect of the aggregate identified items, generally based on statutory tax rates, offset by valuation allowances and the benefits of certain tax credits.
 

Table 1b: Reconciliation of GAAP and Non-GAAP Financial Measures

The following table reconciles net cash flows provided by operating activities, which is the directly comparable financial result determined in accordance with Generally Accepted Accounting Principles (GAAP), to free cash flow (a non-GAAP financial measure). Free cash flow is defined as net cash flows provided by (used in) operating activities less expenditures for capital assets plus proceeds from disposal of assets. Management is providing this measure because it believes that such measure is a widely accepted financial indicator used by investors and analysts to analyze and compare companies on the basis of liquidity. Free cash flow does not represent the residual cash flow available for discretionary expenditures.

   
Three Months Ended
      March 31,     December 31,
(In millions)     2017     2016     2016
Cash flows from operating activities:        
Net loss $ (130 ) $ (981 ) $ (413 )
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization 218 354 245
Impairment of assets 19 118 30
Other noncash items (87 ) 404 211
Working capital and other     (183 )     6       559  
Net cash flows provided by (used in) operating activities (GAAP)     (163 )     (99 )     632  
 
Expenditures for capital assets (87 ) (86 ) (106 )
Proceeds from disposal of assets     76       82       84  
Free cash flow (Non-GAAP)     $ (174 )     $ (103 )     $ 610  
 

Table 2: Calculation of EBIT, EBITDA, and Adjusted EBITDA1

   
Three Months Ended
March 31,     December 31,
(In millions)     2017     2016     2016
Net loss attributable to Baker Hughes $ (129 )     $ (981 )     $ (417 )
Net income (loss) attributable to noncontrolling interests (1 ) — 4
Income tax provision 47 367 107
Equity in loss of affiliate     18       —       —  
Loss before income tax and equity in loss of affiliate (65 ) (614 ) (306 )
Interest expense, net     35       55       36  
Loss before interest and taxes (EBIT)1 (30 ) (559 ) (270 )
Depreciation and amortization expense     218       354       245  

Earnings (loss) before interest, taxes, depreciation and amortization (EBITDA)1

 

188 (205 ) (25 )
Adjustments to EBITDA:
Impairment and restructuring charges2 90 160 145
Merger and related costs3 31 102 19
Inventory adjustments4 — — 30
Loss on sale of business interest5 — — 97
Loss on firm purchase commitment6     —       51       —  
Adjusted EBITDA1     $ 309       $ 108       $ 266  
 
 
1 EBIT, EBITDA, and Adjusted EBITDA (as defined in the calculations above) are non-GAAP measures. Management is providing these measures because it believes that such measures are widely accepted financial indicators used by investors and analysts to analyze and compare companies on the basis of operating performance.
2 Impairment and restructuring charges associated with asset impairments, workforce reductions, facility closures, and contract terminations.
3 Merger and related costs recorded in 2017 and 2016.
4 Inventory adjustments include costs to write off and dispose of certain excess inventory.
5 Loss on sale of a majority interest in the North America onshore pressure pumping business.
6 Loss on firm commitment was recorded in North America during the first quarter of 2016.
 

Table 3: Segment Revenue, Operating Profit (Loss) Before Tax, and Operating Profit Before Tax Margin1

   
Three Months Ended
March 31,     December 31,
(In millions)     2017     2016     2016
Segment Revenue    
North America $ 712 $ 819 $ 775
Latin America 201 277 225
Europe/Africa/Russia Caspian 461 611 490
Middle East/Asia Pacific 661 718 687
Industrial Services     227       245       233  
Total Operations     $ 2,262       $ 2,670       $ 2,410  
Operating Profit (Loss) Before Tax
North America $ (23 ) $ (225 ) $ (86 )
Latin America 84 (66 ) 13
Europe/Africa/Russia Caspian 1 (19 ) (19 )
Middle East/Asia Pacific 72 49 91
Industrial Services     (6 )     (4 )     11  
Total Operations     128       (265 )     10  
Corporate and Other Profit (Loss) Before Tax
Corporate $ (37 ) $ (32 ) $ (19 )
Loss on sale of business interest — — (97 )
Interest expense, net (35 ) (55 ) (36 )
Impairment and restructuring charges (90 ) (160 ) (145 )
Merger and related costs     (31 )     (102 )     (19 )
Corporate, net interest and other     (193 )     (349 )     (316 )
Loss Before Income Tax and Equity in Loss of Affiliate     $ (65 )     $ (614 )     $ (306 )
Operating Profit Before Tax Margin1
North America (3.2

)%

(27.5 )% (11.1 )%
Latin America 41.8

%

(23.8 )% 5.8 %
Europe/Africa/Russia Caspian 0.2 % (3.1 )% (3.9 )%
Middle East/Asia Pacific 10.9 % 6.8 % 13.2 %
Industrial Services     (2.6 )%     (1.6 )%     4.7 %
Total Operations     5.7 %     (9.9 )%     0.4 %
 
 
1 Operating profit before tax margin is a non-GAAP measure defined as operating profit (loss) before tax divided by revenue. Management uses the operating profit before tax margin because it believes it is a widely accepted financial indicator used by investors and analysts to analyze and compare companies on the basis of operating performance.
 

Table 4: Adjustments to Segment Operating Profit (Loss) Before Tax1,4

   
Three Months Ended
March 31,     December 31,
(In millions)     20163     20162
Adjustments to Operating Profit (Loss) Before Tax1
North America $ 51 $ 30
Latin America — —
Europe/Africa/Russia Caspian — —
Middle East/Asia Pacific — —
Industrial Services     —     —
Total     $ 51     $ 30
 
 
1 The Company believes that adjusting these identified items from the segment operating profit (loss) before tax provides investors and analysts a measure to compare companies more consistently on the basis of operating performance.
2 Inventory adjustments to write off and dispose of certain excess inventory.
3 Firm purchase commitment loss recorded in the first quarter of 2016. During the second quarter of 2016, we reached a settlement with a third party and the loss was reversed.
4 There were no items identified requiring adjustment to our segments in the first quarter of 2017.
 

Table 5: Supplemental Segmen

Contacts

Baker Hughes Incorporated
Investor Contact:
Alondra Oteyza, +1-713-439-8822
alondra.oteyza@bakerhughes.com
or
Media Contact:
Melanie Kania, +1-713-439-8303
melanie.kania@bakerhughes.com

Read full story here

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