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Baker Hughes Announces First Quarter Results

- Revenue of $2.7 billion for the quarter, down 21% sequentially and 42% year-over-year- Sequential and year-over-year decremental operating margins for the quarter were 28% and 13%, respectively- GAAP net loss per share of $2.22 for the quarter includes $1.14 per share of tax valuation allowances and $0.64 per share of adjusting items- Operating results include costs in excess of 500 bps, in excess of $0.25 per share, retained in compliance with the merger agreement

HOUSTON, April 27, 2016 /PRNewswire/ -- Baker Hughes Incorporated BHI, +1.69% announced today results for the first quarter of 2016.

"During the quarter, the industry faced another precipitous decline in activity, exceeding even the most pessimistic predictions, as E&P companies further cut spending in an effort to protect cash flows," said Martin Craighead, Baker Hughes Chairman and Chief Executive Officer. "As a result of this steep decrease in customer spending, our revenue for the first quarter was down 21% sequentially. Compared to the prior year, revenue declined 42%, driven by lower activity as evident by the 41% global rig count drop, reduced pricing across most markets, and the strategic decision to continue limiting our exposure to unprofitable onshore pressure pumping business in North America.

"Despite the severity of these headwinds, decremental operating margins sequentially and year-over-year were contained to 28% and 13%, respectively. Although we have taken significant actions to manage our cost structure during the downturn, we are retaining costs in our operating profit margins in compliance with the merger agreement. Additionally, the unique circumstances in which we are operating limit our ability to consider and action a broader range of measures required to align the company with the current and near-term market conditions.

"In North America, revenue declined 28% compared to the fourth quarter of 2015, driven primarily by reduced U.S. onshore activity and the associated price erosion. Additionally, due to the unsustainable pricing in onshore pressure pumping, we continue to limit the pursuit of certain opportunities as we strive for cash-flow-positive operations in this business. In spite of the drop in revenue, decremental operating margins of 15% were achieved in the region as a result of cost-saving measures and lower depreciation expense from prior-year impairments. Internationally, revenue fell 19% sequentially for the quarter as activity declined significantly in important markets for us, such as Brazil, Southeast Asia, North Sea, West Africa, and Argentina. The reduction in revenue was exacerbated by unfavorable product mix and pricing, and resulted in a contraction of our international margins.

"In the second quarter, we forecast the North America rig count to fall 30% compared to the first quarter average. For the second half of the year, we project the U.S. rig count will begin to stabilize, although we do not expect activity to meaningfully increase in 2016. Conversely, the international rig count is predicted to drop steadily through the end of the year as we see limited new projects in the pipeline.

"In this environment, helping our customers maximize production while lowering overall costs is more critical than ever before. Our products and services put us in a remarkable position to lower the cost of well construction, optimize well production, and increase ultimate recovery as we continue to leverage opportunities to convert our capabilities into earnings."

2016 First Quarter Results

Revenue for the quarter was $2.7 billion, a decrease of $724 million, or 21% sequentially, and down $1.9 billion, or 42% compared to the first quarter of 2015.

Adjusted EBITDA (a non-GAAP measure) was $108 million for the quarter, a decrease of $268 million, or 71% sequentially, and down $350 million, or 76% compared to the first quarter of 2015.

On a GAAP basis, net loss attributable to Baker Hughes for the first quarter was $981 million, or $2.22 per diluted share. Included in our net income was tax valuation allowances of $502 million ($1.14 per diluted share), adjusting items of $280 million after-tax ($0.64 per diluted share) and merger retained costs in excess of $110 million after-tax ($0.25 per diluted share).

Adjusted net loss (a non-GAAP measure) for the quarter was $701 million, or $1.58 per diluted share. Adjusted net loss excludes impairment and restructuring charges of $145 million after-tax ($0.33 per diluted share), merger and related costs of $92 million after-tax ($0.21 per diluted share), and a loss on a firm purchase commitment of $43 million after-tax ($0.10 per diluted share). These adjustments total $280 million after-tax ($0.64 per diluted share).

Free cash flow (a non-GAAP measure) for the quarter was ($103) million. Excluding merger-related and restructuring payments of $296 million, free cash flow was $193 million for the quarter.

For the quarter, capital expenditures were $86 million, a decrease of $128 million, or 60% sequentially, and down $229 million, or 73% compared to the first quarter of 2015. The reduction in capital expenditures is attributable to lower activity levels and our continued focus on capital discipline. Depreciation and amortization expense for the quarter was $354 million, a decline of $62 million, or 15% sequentially, and down $106 million, or 23% compared to the same quarter last year. The decline in depreciation and amortization is primarily related to the prior-year impairment and restructuring actions.

Corporate costs were $32 million, compared to $29 million in the prior quarter and $49 million in the first quarter of 2015. The year-over-year reduction in corporate costs is mainly due to workforce reductions and lower spend.

Income tax expense for the quarter of $367 million includes $502 million of valuation allowances recorded primarily against U.S. and non-U.S. tax loss carryforwards and other deferred tax assets, given the uncertainty as to when, or if, in certain jurisdictions, we will generate sufficient future taxable income to utilize such carryforwards and other deferred tax assets in light of the prolonged downturn.

North America

North America revenue of $819 million for the quarter decreased 28% sequentially. The decline was driven primarily by a steep drop in U.S. onshore activity as the rig count dropped 26% compared to the prior quarter. Revenue also was impacted by share losses in onshore pressure pumping as we strive for cash-flow-positive operations in unsustainable market conditions, and increased pricing pressure, mainly in the completion and production product lines. Activity also declined in Canada, as evident in the 6% sequential rig count drop, as most projects remain uneconomical at current oil prices.

North America adjusted operating profit margin (a non-GAAP measure) was (21.2%) for the first quarter, compared to (11.2%) in the prior quarter. Despite the erosion of margins driven by the sharp decline in activity and an increasingly unfavorable pricing environment, a sequential 15% decremental operating margin was achieved as a result of ongoing cost reduction measures, lower depreciation and amortization from prior-year impairments, and reduced liquidated damages and other costs related to sand supply contracts.

Compared to the same quarter last year, revenue declined 59% as a result of a steep drop in activity, as reflected in the 58% year-over-year rig count decline, and deteriorating pricing conditions as operators further adjust their spending in 2016. All product lines have been unfavorably impacted by the activity drop, with production chemicals, deepwater operations, and artificial lift showing the most resilience. Revenue also has been impacted by onshore pressure pumping share reductions. Year-over-year operating margins decreased from (2.5%) in the prior year to (21.2%) in the current year as a result of reduced activity and ongoing price erosion. Actions taken to reduce operating costs, combined with reduced depreciation and amortization from the prior-year impairments, helped mitigate the impact on margins of the precipitous decline in revenue.

Latin America

First quarter revenue for Latin America was $277 million, down 35% sequentially. The decline in revenue was driven mainly by the steep activity reduction in offshore Brazil, Argentina, and the Andean area, as reflected in the 33% sequential rig count decline for these critical markets. Activity also declined in Mexico as a result of ongoing budgetary constraints in the country.

Adjusted operating profit margin for Latin America for the quarter was (23.8%), compared to 3.5% for the prior quarter. The sequential decrease in operating profit was driven by the abrupt reduction in activity and an unfavorable product mix as a result of lower activity in offshore and artificial lift markets. The current quarter included $42 million of provisions for doubtful accounts, mostly as a result of ongoing collection challenges from a cash-constrained customer in Ecuador, an $8 million increase from the prior quarter. Also, the first quarter results include an expense of $15 million related to local non-income taxes.

Compared to the prior year, revenue decreased 44%, primarily driven by activity declines, as evident in the 46% rig count drop, exclusive of Venezuela, where we have limited presence. Activity has declined swiftly across the entire region, with the Andean area experiencing the largest decline. Year over year, margins decreased from 9.1% in the first quarter of 2015 to (23.8%) in the current quarter. The impact on margins from lower revenue was exacerbated by an unfavorable product mix from reduced offshore and artificial lift activity. The first quarter of 2016 also included an additional $33 million of provisions for doubtful accounts and an expense of $15 million related to local non-income taxes, which have reduced the benefit of implemented cost reduction measures.

Europe/Africa/Russia Caspian

Europe/Africa/Russia Caspian revenue of $611 million for the quarter decreased 15% sequentially, primarily as a result of reduced activity and price deterioration in the North Sea and West Africa, as customers reduce spending. Revenue also was unfavorably impacted by foreign exchange rates, particularly in the European and Russian currencies.

Adjusted operating profit margins were (3.1%) for the first quarter of 2016, compared to 6.6% for the prior quarter. In addition to reduced activity and pricing, margins were negatively impacted by an unfavorable product and geographic mix resulting from lower offshore activity in key markets. Margins for the quarter also were unfavorably impacted by foreign exchange losses and provisions for doubtful accounts, which impacted margins by 260 bps.

Compared to the prior year, revenue declined $284 million, or 32%. The decrease can be attributed to activity reductions across all markets, primarily in West Africa, the UK, and Continental Europe; price deterioration throughout the region; and the unfavorable change in exchange rates, mainly in the European and Russian currencies. Year over year, margins decreased 88 bps, as the decline in operating profit from reduced activity and unfavorable pricing was entirely offset by improved profitability from implemented cost-saving actions and a $60 million decline in provisions for doubtful accounts, primarily in Africa.

Middle East/Asia Pacific

Middle East/Asia Pacific revenue of $718 million for the quarter declined 12% sequentially. The reduction in revenue is driven primarily by lower activity in Southeast Asia and Australia, where the rig count has dropped 18% compared to the prior quarter. Revenue was also negatively impacted by unfavorable pricing across the region.

Adjusted operating profit margin was 6.8%, a 304 bps improvement compared to the fourth quarter. Despite reduced activity and pricing, profit margins improved as a result of cost-saving measures implemented throughout the region and of prior-quarter one-time charges in Iraq and in Asia Pacific not repeating.

Compared to the prior year, revenue decreased $198 million, or 22%, predominantly as a result of reduced activity in Southeast Asia, Australia, and Iraq, and significant pricing pressure across the region. Year over year, margins remained unchanged, despite lower activity levels and unfavorable pricing, due to the benefit from cost-saving actions and from $22 million of provisions for doubtful accounts in the prior year that did not repeat in the current quarter.

Industrial Services

Industrial Services revenue of $245 million for the quarter decreased 14% sequentially. The decline in revenue was related mainly to ongoing project delays in the process and pipeline services business stemming from reduced customer spending associated with the lower commodity pricing environment. Revenue also was negatively impacted by the seasonal drop in activity that occurs in the first quarter.

Adjusted operating profit margins were (1.6%), compared to 7.7% in the prior quarter. The decline in margins was attributable to the drop in activity and an increase in environmental costs.

Compared to the prior year, revenue decreased 14% due to activity declines across all business lines as a result of customers reducing spending and delaying projects. Revenue also was negatively impacted by pricing and the unfavorable change in foreign exchange rates. Year-over-year operating profit margins declined 515 bps from 3.5% in the prior year, due primarily to activity reductions and price concessions.

Please see Table 1 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. 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 Table 5). Free cash flow is defined as net cash flows provided by operating activities less disbursements for capital expenditures plus proceeds from disposal of assets.

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Consolidated Condensed Statements of Income (Loss)1



Three Months Ended


March 31,


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