BAKER HUGHES NET LOSS $129 MLN
BAKER HUGHES - 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 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 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 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 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.
Consolidated Condensed Statements of Income (Loss)
|Three Months Ended|
|March 31,||December 31,|
|(In $ millions, except per share amounts)||2017||2016||2016|
|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|
|Loss on sale of business interest||—||—||
|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 (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|
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