Baker Hughes Announces Third Quarter Results

HOUSTON, Oct. 19, 2012 /PRNewswire/ -- Baker Hughes Incorporated (NYSE: BHI) announced today adjusted net income (a non-GAAP measure) for the third quarter of 2012 of $322 million or $0.73 per diluted share.  This compares to adjusted net income of $1.18 per diluted share for the third quarter of 2011, and $1.00 per diluted share for the second quarter of 2012.

Adjusted net income for the third quarter of 2012 excludes an after-tax charge of $28 million ($0.07 per diluted share) related to internally developed software and other information technology assets.  It also excludes an after-tax charge of $15 million ($0.03 per diluted share) related to the closure of a chemical manufacturing facility.

Adjusted net income for the third quarter of 2012 includes after-tax charges of $27 million ($0.06 per diluted share) for bad debt provisions in Latin America and Europe.

Net income attributable to Baker Hughes (a GAAP measure) for the third quarter of 2012 was $279 million or $0.63 per diluted share compared to $1.61 per diluted share for the third quarter of 2011, and $1.00 per diluted share for the second quarter of 2012.  Please see Table 1 for a reconciliation of GAAP to non-GAAP Financial Measures.

Revenue for the third quarter of 2012 was $5.23 billion, up 3% compared to $5.06 billion for the third quarter of 2011 and remained relatively flat compared to $5.21 billion for the second quarter of 2012.

"For the third quarter, Baker Hughes' revenue was flat, despite a drop in U.S. and international rig counts," said Martin Craighead, Baker Hughes' President and Chief Executive Officer.  "However, our margins were impacted by the well-known imbalance in the North American Pressure Pumping business.  Additionally, activity was less than planned in several key geomarkets for Baker Hughes, resulting in an unfavorable mix.  The clearest example is Canada, where the seasonal return of activity was nearly 30 percent less than this time last year.  Internationally, the collective rig count in Brazil, Colombia, and Norway was down 17 percent compared to the last quarter, and these are all meaningful markets for Baker Hughes. In the fourth quarter, activity levels in our International segments are projected to rebound."

Craighead added, "Looking ahead, we are well positioned in growing and emerging markets.  Our share in the Gulf of Mexico - the fastest growing deepwater market in the world - has taken a significant step forward through a series of wins this quarter with several major clients.  In the North Sea, we are mobilizing to provide integrated drilling services for a very large contract.  In the Middle East, we continue to strengthen our Integrated Operations capabilities, and also have been assigned work in the emerging Saudi Arabian unconventional market."

Craighead continued, "We will continue investing in technologies, product lines and regions that strengthen the core of our business and supply chain.  At the same time, we remain focused on increasing returns through a disciplined approach to capital investment."

The Company recently made the decision to sell its Process and Pipeline Services ("PPS") business.  As a result, the Company has reclassified in all prior periods the revenue, expenses, cash flows, assets and liabilities of PPS to discontinued operations.  PPS previously was a component of the Industrial Services segment, which now primarily consists of the Company's downstream chemicals and specialty polymers businesses.

The Company was cash flow positive in the third quarter of 2012, as cash increased by $215 million to $1.01 billion compared to the second quarter of 2012.  Debt increased by $113 million to $5.15 billion compared to the second quarter of 2012.

Capital expenditures were $732 million, depreciation and amortization expense was $399 million, and dividend payments were $66 million in the third quarter of 2012.

Adjusted EBITDA (a non-GAAP measure) in the third quarter of 2012 was $924 million, down $66 million compared to the second quarter of 2012.  A reconciliation of net income attributable to Baker Hughes to Adjusted EBITDA is provided in Table 2.  Supplemental financial information for revenue and adjusted operating profit before tax (a non-GAAP measure) is provided in Table 5.

Consolidated Condensed Statements of Income

(Unaudited)























Three Months Ended



September 30,


June 30,

(In millions, except per share amounts)


2012


2011


2012

Revenue


$ 5,228


$ 5,064


$ 5,212

Costs and Expenses:







Cost of revenue


4,305


3,843


4,168

Research and engineering


117


115


126

Marketing, general and administrative


344


301


298

Total costs and expenses


4,766


4,259


4,592

Operating income


462


805


620

Interest expense, net


(49)


(58)


(50)

Loss on early extinguishment of debt



(40)


Income from continuing operations before income taxes


413


707


570

Income taxes


(143)


(9)


(144)

Income from continuing operations


270


698


426

Income from discontinued operations, net of tax


14


8


12

Net income


284


706


438

Net (income) loss attributable to noncontrolling interests


(5)



1

Net income attributable to Baker Hughes


$   279


$   706


$   439








Amounts attributable to Baker Hughes:







Income from continuing operations


$   265


$   698


$   427

Income from discontinued operations


14


8


12

Net income attributable to Baker Hughes


$   279


$   706


$   439








Basic earnings per share:







Income from continuing operations


$   0.60


$   1.60


$   0.97

Income from discontinued operations


0.03


0.02


0.03

Basic earnings per share attributable to Baker Hughes


$   0.63


$   1.62


$   1.00








Diluted earnings per share:







Income from continuing operations


$   0.60


$   1.59


$   0.97

Income from discontinued operations


0.03


0.02


0.03

Diluted earnings per share attributable to Baker Hughes


$   0.63


$   1.61


$   1.00








Weighted average shares outstanding, basic


440


437


439

Weighted average shares outstanding, diluted


441


439


440

Depreciation and amortization expense


$    399


$    322


$    370

Capital expenditures


$    732


$    627


$    764

















Consolidated Condensed Statements of Income

(Unaudited)










Nine Months Ended September 30,

(In millions, except per share amounts)

2012


2011

Revenue

$ 15,708


$ 14,136

Costs and Expenses:




Cost of revenue

12,660


10,900

Research and engineering

366


331

Marketing, general and administrative

975


862

Total costs and expenses

14,001


12,093

Operating income

1,707


2,043

Interest expense, net

(153)


(164)

Loss on early extinguishment of debt


(40)

Income from continuing operations before income taxes

1,554


1,839

Income taxes

(479)


(434)

Income from continuing operations

1,075


1,405

Income from discontinued operations, net of tax

27


20

Net income

1,102


1,425

Net (income) attributable to noncontrolling interests

(5)


Net income attributable to Baker Hughes

$  1,097


$  1,425





Amounts attributable to Baker Hughes:




Income from continuing operations

$  1,070


$  1,405

Income from discontinued operations

27


20

Net income attributable to Baker Hughes

$  1,097


$  1,425





Basic earnings per share:




Income from continuing operations

$   2.43


$   3.22

Income from discontinued operations

0.06


0.05

Basic earnings per share attributable to Baker Hughes

$   2.49


$   3.27





Diluted earnings per share:




Income from continuing operations

$   2.43


$   3.21

Income from discontinued operations

0.06


0.04

Diluted earnings per share attributable to Baker Hughes

$   2.49


$   3.25





Weighted average shares outstanding, basic

440


436

Weighted average shares outstanding, diluted

441


438

Depreciation and amortization expense

$  1,122


$   951

Capital expenditures

$  2,160


$  1,624











Consolidated Condensed Balance Sheets

(Unaudited)




September 30,


December 31,

(In millions)


2012


2011

ASSETS





Current Assets:





Cash and cash equivalents


$  1,007


$  1,050

Accounts receivable - less allowance for doubtful accounts

        (2012 - $255, 2011 - $226)


5,003


4,794

Inventories, net


3,879


3,211

Other current assets


684


644

Assets of discontinued operations


707


646

Total current assets


11,280


10,345

Property, plant and equipment, net


8,225


7,245

Goodwill


5,612


5,637

Intangible assets, net


989


1,086

Other assets


650


534

Total assets


$ 26,756


$ 24,847

LIABILITIES AND EQUITY





Current Liabilities:





Accounts payable


$  1,829


$  1,774

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


1,306


224

Accrued employee compensation


661


695

Other accrued liabilities


681


752

Liabilities of discontinued operations


55


56

Total current liabilities


4,532


3,501

Long-term debt


3,839


3,845

Deferred income taxes and other tax liabilities


602


810

Long-term liabilities


712


727

Equity


17,071


15,964

Total liabilities and equity


$ 26,756


$ 24,847





Consolidated Condensed Statements of Cash Flows

(Unaudited)










Nine Months Ended September 30,

(In millions)

2012


2011

Cash flows from operating activities:




Income from continuing operations

$  1,075


$  1,405

Adjustments to reconcile income from continuing operations to

net cash flows from operating activities:




Depreciation and amortization

1,122


951

Other, primarily working capital

(1,250)


(1,674)

Net cash flows from operating activities

947


682

Cash flows from investing activities:




Expenditures for capital assets

(2,160)


(1,624)

Other

264


447

Net cash flows from investing activities

(1,896)


(1,177)

Cash flows from financing activities:




Net proceeds (payments) of debt

1,075


(112)

Dividends

(197)


(195)

Other

24


143

Net cash flows from financing activities

902


(164)

Effect of foreign exchange rate changes on cash

4


6

Decrease in cash and cash equivalents

(43)


(653)

Cash and cash equivalents, beginning of period

1,050


1,456

Cash and cash equivalents, end of period

$  1,007


$   803

 

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


The following table reconciles net income attributable to Baker Hughes, which is the directly comparable financial result determined in accordance with Generally Accepted Accounting Principles (GAAP), to adjusted net income 1 (a non-GAAP financial measure).  This excludes identified items with respect to the third quarter of 2012 and 2011.  There were no identified items requiring adjustment for the second quarter of 2012.












Three Months Ended September 30, 2012

(Unaudited)

(In millions, except per share amounts)


Net

Income


Diluted

Earnings

Per Share

Net income attributable to Baker Hughes (GAAP)


$    279


$    0.63

Identified Items:





Information technology charges 2


28


0.07

Facility closure 3


15


0.03

Adjusted net income (non-GAAP) 1


$    322


$    0.73





Three Months Ended September 30, 2011

(Unaudited)

(In millions, except per share amounts)


Net

Income


Diluted

Earnings

Per Share

Net income attributable to Baker Hughes (GAAP)


$    706


$    1.61

Identified Item:





Tax benefit associated with reorganization 4


(214)


(0.49)

Loss on early extinguishment of debt 5


26


0.06

Adjusted net income (non-GAAP) 1


$    518


$    1.18



1


Adjusted net income is a non-GAAP measure comprised of net income attributable to Baker Hughes excluding the impact of certain identified items.  The Company believes that adjusted net income is useful to investors because it is a consistent measure of the underlying results of the Company's business.  Furthermore, management uses adjusted net income as a measure of the performance of the Company's operations.  Reconciliation of net income attributable to Baker Hughes, a GAAP measure, to adjusted net income for historical periods can be found in the Supplemental Financial Information on the Company's website at:  www.bakerhughes.com/investor.

2


Charge of $43 million before-tax ($28 million after-tax) related to internally developed software and other information technology assets in the third quarter of 2012.

3


Charge of $20 million before-tax ($15 million after-tax) resulting from the closure of a chemical manufacturing facility in the United Kingdom in the third quarter of 2012.

4


Noncash tax benefit of $214 million associated with the reorganization of certain foreign subsidiaries in the third quarter of 2011.

5


Loss of $40 million before-tax ($26 million after-tax) related to the early extinguishment in the third quarter of 2011 of $500 million notes due 2013.

 

Table 2: Calculation of EBIT, EBITDA and Adjusted EBITDA (non-GAAP measures) 1















Three Months Ended



September 30,


June 30,

(In millions)


2012


2011


2012

Net income attributable to Baker Hughes


$   279


$   706


$   439

Net income attributable to noncontrolling interests


5



(1)

Income from discontinued operations, net of tax


(14)


(8)


(12)

Income taxes


143


9


144

Income from continuing operations before income taxes


413


707


570

Interest expense, net


49


58


50

Earnings before interest and taxes (EBIT)


462


765


620

Depreciation and amortization expense


399


322


370

Earnings before interest, taxes, depreciation and

amortization (EBITDA)


861


1,087


990

Adjustments to EBITDA:







Information technology charges 2


43





Facility closure 3


20





Loss on early extinguishment of debt 4




40



Adjusted EBITDA


$   924


$  1,127


$   990











Nine Months Ended September 30,

(In millions)


2012


2011

Net income attributable to Baker Hughes


$  1,097


$  1,425

Net income attributable to noncontrolling interests


5


Income from discontinued operations, net of tax


(27)


(20)

Income taxes


479


434

Income from continuing operations before income taxes


1,554


1,839

Interest expense, net


153


164

Earnings before interest and taxes (EBIT)


1,707


2,003

Depreciation and amortization expense


1,122


951

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


2,829


2,954

Adjustments to EBITDA:





Information technology charges 2


43



Facility closure 3


20



Expenses related to Libya 5




70

Loss on early extinguishment of debt 4




40

Adjusted EBITDA


$  2,892


$  3,064




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


Charge of $43 million before-tax ($28 million after-tax) related to internally developed software and other information technology assets in the third quarter of 2012.

3


Charge of $20 million before-tax ($15 million after-tax) resulting from the closure of a chemical manufacturing facility in the United Kingdom in the third quarter of 2012.

4


Loss of $40 million before-tax ($26 million after-tax) related to the early extinguishment in the third quarter of 2011 of $500 million notes due 2013.

5


Expenses of $70 million (before and after-tax) associated with increasing the allowance for doubtful accounts and reserves for inventory and certain other assets in the second quarter of 2011 as a result of civil unrest in Libya.


 

Table 3: Segment Revenue, Profit Before Tax, and Profit Before Tax Margin 1














Three Months Ended



September 30,


June 30,

(In millions)


2012


20112


2012

Segment Revenue







North America


$   2,742


$   2,721


$   2,672

Latin America


583


570


604

Europe/Africa/Russia Caspian


866


863


925

Middle East/Asia Pacific


844


711


804

Industrial Services 3


193


199


207

Total Operations


$   5,228


$   5,064


$   5,212

Profit Before Tax







North America


$    288


$    602


$   357

Latin America 4


45


71


77

Europe/Africa/Russia Caspian 4


104


103


156

Middle East/Asia Pacific


71


75


87

Industrial Services 3


13


32


25

Total Operations


$    521


$    883


$   702

Corporate and Other Profit Before Tax







Interest expense, net


(49)


(58)


(50)

Loss on early extinguishment of debt



(40)


Corporate and other


(59)


(78)


(82)

Corporate, net interest and other


(108)


(176)


(132)

Profit Before Tax


$    413


$    707


$    570

Profit Before Tax Margin 1







North America


11%


22%


13%

Latin America 4


8%


12%


13%

Europe/Africa/Russia Caspian 4


12%


12%


17%

Middle East/Asia Pacific


8%


11%


11%

Industrial Services 3


7%


16%


12%

Total Operations


10%


17%


13%

<



1


Profit before tax margin is a non-GAAP measure defined as profit before tax ("income from continuing operations before income taxes") divided by revenue.  Management uses the 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.

2


The revenue and profit before tax of Reservoir Development Services was reclassified from the Industrial Services segment into the geographic operating segments at the beginning of 2012.  Quarterly segment revenue and profit before tax for the two years ended December 31, 2011 have been reclassified to reflect this change and are available online at:  www.bakerhughes.com/investor in the financial information section.