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Baker Hughes, a GE Company Announces Premerger Baker Hughes Second Quarter Results

HOUSTON & LONDON--(BUSINESS WIRE)--Baker Hughes, a GE company (NYSE: BHGE) (the “Company”) announced today the premerger Baker Hughes Incorporated financial results for the second quarter of 2017. Baker Hughes, a GE company, LLC ("BHGE LLC") is the successor to Baker Hughes Incorporated. Events subsequent to June 30, 2017, including the completion of the combination with GE Oil and Gas, are not reflected in these results.

Revenue for the second quarter of 2017 was $2.4 billion, an increase of $142 million, or 6%, sequentially. The increase was driven by improved activity across U.S. operations, a seasonal activity uplift in the Russia Caspian region, process and pipeline business, and North Sea operations, and certain areas of activity growth internationally, such as Mexico, West Africa, and Iraq. This increase was partially offset by the seasonal spring break-up in Canada, price deterioration in the Middle East, and a large direct sale into China in the prior quarter, not repeating.

On a GAAP basis, net loss attributable to Baker Hughes for the second quarter of 2017 was $179 million, or $0.42 per diluted share, compared to $129 million, or $0.30 per diluted share, in the first quarter of 2017.

Adjusted net loss (a non-GAAP measure) for the second quarter of 2017 was $46 million, or $0.11 per diluted share, compared to $15 million, or $0.04 per diluted share, in the first quarter of 2017. Adjusted net loss excludes adjustments totaling $133 million after tax, or $0.31 per diluted share, primarily associated with litigation and other related matters and merger costs. A complete list of the adjusting items and associated reconciliation has been provided in Table 1a.

Adjusted EBITDA (a non-GAAP measure) was $276 million for the second quarter of 2017, a decrease of $33 million, or 11% sequentially. Adjusted EBITDA in the first quarter of 2017 included an $84-million benefit related to bad-debt recoveries in Ecuador from receiving government-backed bonds in exchange for outstanding fully reserved receivables.

Cash flows used in operating activities were ($64) million for the second quarter of 2017, compared to ($163) million in the first quarter of 2017. Free cash flow (a non-GAAP measure) for the quarter was ($135) million, compared to ($174) million in the first quarter of 2017. The sequential improvement in cash flows was mainly driven by annual compensation-related payments in first quarter of 2017 not repeating, partially offset by lower cash from operations and increased capital expenditures.

For the quarter, capital expenditures were $129 million, an increase of $42 million, or 48%, sequentially. The sequential increase in capital expenditures was mainly attributable to revenue generating assets to meet increased activity levels. Depreciation and amortization expense for the quarter was $216 million, a decline of $2 million, or 1%, sequentially.

Income tax expense was $72 million for the second quarter of 2017, an effective tax rate of (67%), compared to $47 million, an effective tax rate of (57%), in the first quarter of 2017. The negative effective tax rate was primarily due 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.

Corporate costs were $103 million in the quarter, compared to $37 million in the prior quarter. The sequential increase in corporate costs was due to a $67-million charge recorded in the quarter related to litigation and other related matters.

North America

North America revenue of $778 million for the second quarter of 2017 increased $66 million, or 9%, sequentially as a result of improved activity in the U.S., most notably onshore, partially offset by reduced activity in Canada from the seasonal spring break-up. U.S. onshore revenues grew 17% sequentially, more predominantly in the well construction product lines. In the Gulf of Mexico, revenue was up 12% with increased drilling activity and higher stimulation vessel utilization. In Canada, revenue decreased 26% sequentially as a result of the seasonal spring break-up.

Operating profit before tax for the second quarter of 2017 was $14 million, a $37 million increase compared to the prior quarter. The improved profitability was primarily driven by increased activity in the U.S., partially offset by the seasonal activity decline in Canada. During the quarter, pricing improved in select product lines and basins; however, there is still a fair amount of excess service capacity that must be absorbed before service pricing gains can take hold more broadly.

There were no adjusting items to the North America operating profit in the first quarter of 2017, or the second quarter of 2017.

Latin America

Latin America revenue of $208 million for the second quarter of 2017 increased $7 million, or 3%, sequentially. The increase was mostly driven by a shallow-water project award in Mexico and artificial lift revenue growth in Argentina, partially offset by reduced offshore cementing and vessel utilization in Brazil as well as reduced artificial lift sales in Venezuela.

Operating profit before tax for the second quarter of 2017 was $12 million, a decrease of $72 million, compared to $84 million in the prior quarter. The decrease in profitability was mainly the result of an $84-million benefit in the first quarter of 2017 related to obtaining government-backed bonds in Ecuador for outstanding fully reserved receivables. The second quarter of 2017 reflected an $8-million gain on the sale of those bonds.

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

Europe/Africa/Russia Caspian

Europe/Africa/Russia Caspian revenue of $504 million for the second quarter of 2017 increased $43 million, or 9%, sequentially, primarily due to the seasonal activity increase in the Russia Caspian and North Sea areas, along with improved activity in West Africa, partially from the Nigerian labor union strikes ending.

Operating profit before tax of $15 million for the second quarter of 2017, increased $14 million, compared to $1 million in the prior quarter. The increased profitability was mostly driven by the revenue growth and recently implemented cost reductions.

There were no adjusting items to the Europe/Africa/Russia Caspian operating profit in the first quarter of 2017, or the second quarter of 2017.

Middle East/Asia Pacific

Middle East/Asia Pacific revenue of $661 million for the second quarter of 2017 was unchanged sequentially, as activity increases in Iraq, Kuwait, Vietnam, and Oman, were offset by a large direct sale into China in the first quarter not repeating, price deterioration across the region, and fewer frac stages in Saudi Arabia.

Operating profit before tax for the second quarter of 2017 was $63 million, a decrease in profitability of $9 million compared to $72 million in the prior quarter. The decrease in profitability was mainly driven by the impact of pricing reductions across the region, partially offset by bad debt recoveries in the current quarter.

There were no adjusting items to the Middle East/Asia Pacific operating profit in the first quarter of 2017, or the second quarter of 2017.

Industrial Services

Industrial Services revenue of $253 million for the second quarter of 2017 increased $26 million, or 11%, sequentially. The increase in revenue mainly was related to maintenance and pre-commissioning pipeline projects along with the seasonal activity increase in the pipeline inspection business.

Operating loss before tax for the second quarter of 2017 was $8 million, compared to $6 million in the prior quarter. The profitability increase related to the activity growth experienced in the second quarter was more than offset by increased operational costs related to a pipeline pre-commissioning project in Latin America and higher environmental costs in the downstream chemical business.

There were no adjusting items to the Industrial Services operating loss in the first quarter of 2017, or the second quarter of 2017.

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Please see Tables 1a and 1b for a reconciliation of GAAP to non-GAAP financial measures. A reconciliation of net income (loss) attributable to BHGE LLC 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. 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.

Condensed Consolidated Statements of Income (Loss)

Three Months Ended
June 30, March 31,
(In millions, except per share amounts) 2017 2016 2017
Revenue $ 2,404 $ 2,408 $ 2,262
Costs and expenses:
Cost of revenue 2,084 3,112 1,888
Research and engineering 102 99 99
Marketing, general and administrative 225 222 184
Impairment and restructuring charges 1,126 90
Goodwill impairment 1,841
Merger and related costs, net 49 78 31
Merger termination fee (3,500 )
Total costs and expenses 2,460 2,978 2,292
Operating loss (56 ) (570 ) (30 )
Loss on early extinguishment of debt (142 )
Interest expense, net (30 ) (48 ) (35 )
Loss before income tax and equity in loss of affiliate (86 ) (760 ) (65 )
Equity in loss of affiliate (21 ) (18 )
Income tax provision (72 ) (152 ) (47 )
Net loss (179 ) (912 ) (130 )
Net loss attributable to noncontrolling interests 1 1
Net loss attributable to BHGE LLC $ (179 ) $ (911 ) $ (129 )
Basic and diluted loss per share attributable to BHGE LLC $ (0.42 ) $ (2.08 ) $ (0.30 )
Weighted average shares outstanding, basic and diluted 429 438 429
Depreciation and amortization expense $ 216 $ 305 $ 218
Capital expenditures $ 129 $ 70 $ 87

Condensed Consolidated Statements of Income (Loss)

Six Months Ended June 30,
(In millions, except per share amounts) 2017 2016
Revenue 4,666 5,078
Costs and expenses:
Cost of revenue 3,972 5,770
Research and engineering 201 201
Marketing, general and administrative 409...

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