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Baker Hughes Incorporated News Release Baker Hughes Announces Third Quarter Results

The following excerpt is from the company's SEC filing.

“Finally, I would like to recognize all of our employees for their hard work, commitment to Baker Hughes, and continued focus on our customers, while working safely in an extremely difficult business environment.”

2015 Third Quarter Results

Revenue for the quarter was $3.8 billion, down 39% compared to the third quarter of 2014. Compared to the prior quarter, revenue declined $182 million or 5%.

On a GAAP basis, net loss attributable to Baker Hughes for the third quarter was $159 million or $0.36 per diluted share.

Adjusted EBITDA (a non-GAAP measure) for the third quarter of 2015 was $5 22 million, an increase of $63 million or 14% sequentially, and a decrease of $666 million or 56% compared to the third quarter of 2014.

Adjusted net loss (a non-GAAP measure) for the third quarter of 2015 was $22 million or $0.05 per diluted share. Adjusted net loss for the third quarter excludes $191 million before-tax or $137 million after-tax ($0.31 per diluted share) in adjustments. The adjustments include restructuring charges of $98 million before-tax or $70 million after-tax ($0.16 per diluted share) and $93 million before-tax or $67 million after-tax ($0.15 per diluted share) for merger and other related costs.

Free cash flow (a non-GAAP measure) for the quarter was $348 million. Excluding restructuring payments of $56 million, free cash flow would have been $404 million for the quarter.

For the quarter, capital expenditures were $178 million, a decrease of $80 million or 31% sequentially, and down $247 million or 58% compared to the third quarter of 2014. Depreciation and amortization expense for the third quarter of 2015 was $432 million, relatively flat sequentially and down 5% compared to the prior year quarter.

Excluding merger-related costs, corporate costs were $26 million, compared to $42 million in the prior quarter and $57 million in the third quarter of 2014. The reduction in corporate costs is mainly a result of workforce reductions and lower discretionary spend.

North America

North America revenue for the third quarter of $1.4 billion decreased 9% sequentially. The decline was driven primarily by reduced onshore U.S. activity, most notably in stimulation, drilling services and completions product lines, lower pricing across the region, and an unfavorable mix of activity in the Gulf of Mexico. Revenue declines in the U.S. were partially offset by the seasonal activity recovery in Canada, though to a much lesser extent than in prior years.

North America adjusted operating profit margin (a non-GAAP measure) was (11.2%) for the third quarter, compared to (8.5%) in the prior quarter. Despite the erosion of margins driven by the sharp decline in activity and an increasingly unfavorable pricing environment, decremental operating margins of 20% sequentially on reduced revenue were achieved as a result of ongoing cost reduction measures.

Compared to the prior year, revenue declined 57% as a result of a sharp drop in activity, as evident in the 54% year-over-year rig count decline, and deteriorating pricing conditions experienced by the industry since early 2015 as operators adjust their spending to a lower oil price environment. All product lines have been unfavorably impacted by the activity drop, with production chemicals and deepwater operations showing the most resilience. Year-over-year operating margins decreased from 12% in the prior year to (11.2%) in the current year as ongoing cost management efforts helped contain decremental operating margins on reduced activity and pricing to 30%; an improvement from the 35% year-over-year decremental operating margin reported last quarter.

Baker Hughes Incorporated News Release

Baker Hughes Announces Third

Latin America

Third quarter revenue for Latin America was $439 million, flat sequentially. The revenue decline resulting from reduced onshore activity and the unfavorable impact of foreign exchange rates, primarily in Brazil, was offset by share gains in the quarter.

Adjusted operating profit margin for Latin America in the second quarter was 11.6%, compared to 10.3% for the prior quarter. The sequential increase in operating profit was driven by cost savings, partially offset by foreign exchange losses and unfavorable pricing across most of the region.

Compared to the prior year, revenue decreased 23% primarily driven by activity declines across the region, predominantly in the Andean geomarket where the rig count has declined 46%. Revenue was also negatively impacted by the unfavorable change in foreign exchange rates. Year over year, margins decreased 82 bps. The impact on margins from lower revenue was partially offset by improvements made to the operating cost structure, minimizing year-over-year decremental operating margins to 15%.

Europe/Africa/Russia Caspian

Revenue in Europe/Africa/Russia Caspian of $791 million for the third quarter decreased 9% sequentially, primarily due to reduced activity in Africa and Continental Europe, as reflected in the sequential rig count decline for these areas, plus the impact of unfavorable exchange rates mostly in Russia and Norway.

Adjusted operating profit margins were 12.4% for the third quarter of 2015, compared to 6.6% for the prior quarter. The improvement in margins is primarily attributable to the result of cost saving initiatives.

Compared to the prior year, revenue declined $323 million or 29%. The decrease can be attributed to activity reductions in Africa and Continental Europe, as reflected in the 30% rig count decline for those areas, the unfavorable change in exchange rates of several currencies across the region relative to the U.S. Dollar, which resulted in a reduction in revenue of approximately $110 million, and unfavorable pricing throughout the region. Additionally, revenue is down due to the deconsolidation of a joint venture in North Africa late last year. Year over year, margins decreased 99 bps primarily attributable to unfavorable pricing, approximately $43 million associated with the unfavorable change in exchange rates and lower activity. Cost-saving actions helped mitigate the impact of these unfavorable events as reflected by the 16% decremental operating margins.

Middle East/Asia Pacific

In the third quarter, revenue of $849 million in Middle East/Asia Pacific declined 1%, sequentially. The reduction in revenue from lower activity and unfavorable pricing was essentially offset by share gains primarily in drilling services and completions. Weak activity across Asia Pacific persisted, but was compensated by strength in select markets across the Middle East.

Adjusted operating profit margin was 9%, a 194 bps improvement compared to the prior quarter. The improvement in profit margins can be attributed to the benefit of cost saving measures throughout the region, and mobilization costs in the second quarter not repeating in the third quarter. The current quarter includes the unfavorable impact of charges in Iraq related to our integrated operations.

Compared to the prior year, revenue decreased $228 million, or 21%, predominantly as a result of reduced activity in Asia Pacific, as reflected in the 15% drop in the rig count, and lower revenue in the Middle East mainly as a result of a reduction in our integrated operations in Iraq. Revenue was also impacted by unfavorable pricing across the region.

Share gains in the Middle East slightly offset these declines. Year over year, margins decreased 544 bps with decremental operating margins on revenue of 35%. The reduction in margins can be attributed largely to lower activity levels and unfavorable pricing. The reduction in margins was partially offset by the benefit of cost-saving actions.

Industrial Services

Revenue for Industrial Services of $339 million in the third quarter increased 11%, sequentially. Revenue growth from the prior quarter is related to the seasonal activity increase in the process and pipeline services business and activity growth in the downstream chemical business, partially offset by lower activity in the polymers product line.

Adjusted operating profit margins were 13%, compared to 10.5% in the prior quarter. The improvement in margins can be attributed to the seasonal increase in activity and additional savings from recent cost reduction measures.

Compared to the prior year, revenue increased 2% as revenue related to the acquisition of a pipeline services business late in the third quarter of 2014 was partially offset by reduced activity. Revenue was also impacted by unfavorable changes in foreign exchange rates against the U.S. Dollar. Year-over-year operating profit margins improved 247 bps, due primarily to savings from cost reduction actions.

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Please see Table 1 for a reconciliation of GAAP to non-GAAP financial measures. A reconciliation of net (loss) income 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 Tables 5a and 5b. Decremental operating margin (a non-GAAP measure) is the decrease of adjusted operating profit (loss) before interest expense and income taxes between two periods, divided by the increase or decrease in revenue between the same two periods (see Tables 5a and 5b). Free cash flow is defined as net cash flows provided by operating activities less disbursements for capital expenditures plus proceeds from disposal of assets.

Consolidated Condensed Statements of Income (Loss)

Three Months Ended

September 30,

June 30,

(In millions, except per share amounts)

Costs and expenses:

Cost of revenue

Research and engineering

Marketing, general and administrative

Restructuring charges

Litigation settlements

Total costs and expenses

Operating (loss) income

Interest expense, net

(Loss) income before income taxes

Income taxes

Net (loss) income

Net (income) loss attributable to noncontrolling interests

Net (loss) income attributable to Baker Hughes

Basic (loss) earnings per share attributable to Baker Hughes

Diluted (loss) earnings per share attributable to Baker Hughes

Weighted average shares outstanding, basic

Weighted average shares outstanding, diluted

Capital expenditures

Nine Months Ended September 30,

12,348

17,916

11,360

14,572

13,367

16,072

(1,019

(1,181

Net loss (income) attributable to noncontrolling interests

Consolidated Condensed Balance Sheets

December 31,

(In millions)

ASSETS

Current assets:

Cash and cash equivalents

Accounts receivable - less allowance for doubtful accounts

(2015 - $366, 2014 - $224)

Inventories, net

Other current assets

Total current assets

12,045

Property, plant and equipment, net

Goodwill

Intangible assets, net

Other assets

Total assets

25,416

28,827

LIABILITIES AND EQUITY

Current liabilities:

Accounts payable

Short-term debt and current portion of long-term debt

Accrued employee compensation

Other accrued liabilities

Total current liabilities

Long-term debt

Deferred income taxes and other tax liabilities

Long-term liabilities

Equity

17,505

18,730

Total liabilities and equity

Consolidated Condensed Statements of Cash Flows

Cash flows from operating activities:

Adjustments to reconcile net (loss) income to net cash flows from operating activities:

Other, primarily working capital

Net cash flows provided by operating activities

Cash flows from investing activities:

Expenditures for capital assets

(1,288

Proceeds from disposal of assets

Acquisition of...


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