Baker Hughes Announces First Quarter 2018 Results

“We made strong progress in the quarter, securing several key commercial wins, executing on our synergy targets and delivering for our customers. I am pleased with our performance on our priorities of growing share, improving margins and generating cash,” said Lorenzo Simonelli, BHGE chairman and chief executive officer.

“In the first quarter, we delivered $5.2 billion in orders and $5.4 billion in revenue. As expected, we saw growth in our shorter-cycle businesses and declines in our longer-cycle businesses versus the previous year. Adjusted operating income* in the quarter was $228 million. Free cash flow* was $226 million.

“Market fundamentals remain supportive, as crude oil prices are relatively rangebound, providing stability to customers as they evaluate projects. The gas market continues to grow, and strong LNG demand supports the view that new capacity will be required in the early to mid-part of the next decade. BHGE is uniquely positioned across the oil and gas value chain, and well placed to benefit from the long-term industry trends.

“In our Oilfield Services (OFS) segment, we continue to focus on growing share in key markets, including North America and the Middle East, through leading technology and services and flawless execution for customers. This quarter, we secured several critical commercial wins, and our synergy efforts led to improved margin rates.

“In our Oilfield Equipment (OFE) segment, we are focused on providing our customers with new commercial models and integrated offerings to enable better outcomes. We continue to expand our leading technology portfolio to drive down total development costs. In the quarter, we announced several deals, demonstrating the strength of our offering.

“In our Turbomachinery & Process Solutions (TPS) segment, we continue to navigate the slowdown in long-cycle projects, but the outlook for LNG is becoming more positive. We are investing in technology to drive differentiation and value for our customers, while positioning the business for growth opportunities. This quarter, we secured key deals in the offshore production and onshore pipeline markets, demonstrating the breadth of our offering across multiple end markets.

“In our Digital Solutions (DS) segment, we are gaining traction with customers on our digital offerings, and our Measurement and Controls businesses are solidifying their positions as technology leaders. In the quarter we launched a new partnership with NVIDIA to expand our capabilities in image recognition and artificial intelligence, and secured key customer wins in both the hardware and software businesses.

“We continue to make progress on the integration. In the first quarter we delivered $144 million of synergies and our 2018 total year commitment of $700 million remains firmly on track.

“Looking forward, the macro outlook is favorable and we remain focused on positioning the Company for further growth and profitability. With our talented and experienced team, leading portfolio and a focus on execution, we are set up to deliver this year and beyond.”

Quarter Highlights

Customer Wins

BHGE’s fullstream portfolio continues to provide a competitive advantage. The Company secured its latest integrated win with Chrysaor, a leading independent E&P company in the UK, as a preferred service partner and main provider of oilfield services and equipment. BHGE’s OFS business will provide drilling, completions and cementing services. The OFE business will provide surface and subsea wellheads and trees, controls, flexible flowlines, risers and jumpers, and other associated services.

The OFS business secured important artificial lift wins, solidifying its leading position. BHGE was awarded a five-year contract for 100% of Kinder Morgan’s electric submersible pump (ESP) work in four Permian Basin fields, demonstrating the Company’s commitment to growing in the Permian. BHGE was also awarded a contract from Point Resources to provide ESPs for the Ringhorne development, one of the first large-scale ESP contracts in Norway in several years.

In the Gulf of Mexico (GoM), a large international oil company awarded BHGE s OFS business a contract to supply openhole and cased hole wireline services on all of its rigs, displacing multiple competitors. The award was the result of strong operational performance in 2017. BHGE also displaced competitors to provide drilling services on all of this customer’s deepwater rigs in the GoM.

In West Africa, BHGE’s OFS business advanced its strategy of expanding Upstream Chemicals into new markets. The team was awarded a three-year, $100 million contract with a major oil company for a large, mature field, displacing a competitor. This award was based largely on the strong performance of BHGE’s Upstream Chemicals business in this customer’s operations in other regions.

BHGE’s OFE business, together with McDermott International, Inc., was selected for engineering, procurement, construction and installation (EPCI) for subsea production systems (SPS) and subsea umbilicals, risers and flowlines (SURF) for BP’s Tortue/Ahmeyim Field Development, with an initial contract placed for front-end engineering design (FEED) and execution readiness.

BHGE’s TPS business was awarded a $65 million contract by Statoil to provide turbomachinery equipment to the Johan Castberg field in the Barents Sea. BHGE will provide two LM2500+ G4 gas turbine generators, coupled with two electric generators that will be pre-assembled into three modules specifically designed for floating production, storage and offloading vessels (FPSOs), which will help Statoil reduce the number of interfaces at the installation site.

BHGE’s DS business signed an agreement with an Asian refinery to provide the Company’s Predictive Corrosion Management software to enable real-time analysis of ultrasonic thermal and thickness measurements, remove manual inconsistencies and materially lower inspection costs for the customer by using sensor data and cloud-based software.

Technology and Innovation

BHGE’s OFS business set another record in the Marcellus Basin with its high efficiency integrated drilling solution. The system drilled the longest extended reach single-run ever recorded, a total of over 20,000 feet in just eight days, in a completely remote drilling operation. In addition to eliminating 12 hours of rig time, a team comprised of the customer’s geologists and BHGE’s remote engineers and directional drillers collaborated to achieve a total in-zone percentage of 95.5%.

BHGE and NVIDIA announced a partnership to significantly advance image recognition capabilities in the industry and disrupt conventional modeling techniques. The companies will use artificial intelligence and advanced computing to help the oil and gas industry use data to reduce operational costs and improve productivity. The partnership is expected to leverage the combination of BHGE’s portfolio and industry experience with NVIDIA’s computing power.

Executing for Customers

BHGE’s BLITZ™ coiled tubing frac sleeve system, which was commercialized in January, performs fast, effective fractures with unmatched precision and speed in multistage fracturing operations. On a recent job in Alberta, Canada the system treated a record-setting 157 stages in only one trip. With 86 total hours of fracturing time, an average of 33 minutes per stage, the BLITZ™ system completed the well 26% faster than the previous record.

OFE continues to build innovative commercial models that deliver better outcomes for customers. For the last two years, OFE has partnered with Diamond Offshore Drilling and Transocean Limited to develop a new service model for offshore drilling equipment. This shift from traditional, transactional relationships benefits all stakeholders and is driving industry-leading reliability. Diamond is experiencing a significant reduction in subsea non-productive time (NPT) - achieving less than 0.75% NPT over the last six months. Transocean awarded BHGE with a performance bonus at the end of 2017.

BHGE’s OFE team continues to support Eni Angola and Sonangol’s deepwater Ochigufu project, which commenced production in the first quarter, one-and-a-half years after the presentation of their development plan. BHGE’s Angola-based team provided critical services, with technical personnel supporting the installation and commissioning phase in this first quarter. The team completed all modifications and subsea control software upgrades in a matter of days, which will allow the customer to remotely monitor the new field.

Orders for the quarter were $5,238 million, down 8% sequentially and up 9% year-over-year. This sequential decrease was mainly driven by typical seasonality, with equipment orders down 14% and service orders down 4%. The 9% year-over-year growth was driven by both strong equipment and services orders across all product companies. Year-over-year equipment orders were up 9% and service orders were up 8%.

The Company s total book-to-bill ratio in the first quarter was 1.0; equipment book-to-bill ratio in the first quarter was 0.9.

Backlog in the first quarter ended at $22.2 billion, an increase of $1.2 billion or 6% from the fourth quarter of 2017. The increase was primarily driven by the impact from adopting the new revenue recognition accounting standard (ASC Topic 606, Revenue from Contracts with Customers). Equipment backlog was $5.4 billion, up 1%, sequentially. Services backlog was $16.8 billion, up $1.1 billion, or 7%, sequentially.

Going forward, the Company will report Remaining Performance Obligation (RPO), a requirement under ASC 606. For the first quarter of 2018, RPO at the reporting date was $21.3 billion.

Revenue for the quarter was $5,399 million, a decrease of $400 million, or 7%, sequentially. The decrease was driven primarily by lower revenue in Turbomachinery & Process Solutions which was down 12%, as well as seasonality in Digital Solutions and Oilfield Services, which were down 17% and 4%, respectively. Compared to the same quarter last year, revenue was up 1%. The short-cycle businesses grew partially offset by a decline within the long-cycle businesses. Oilfield Services was up 12% and Digital Solutions was up 4%, offset by a decrease in Turbomachinery & Process Solutions which was down 11%, and Oilfield Equipment which was down 7%.

On a GAAP basis, operating loss for the first quarter of 2018 was $41 million. Operating loss decreased 63% sequentially and increased unfavorably year-over-year. Total segment operating income was $327 million for the first quarter of 2018, down 13% sequentially and down 26% year-over-year.

Adjusted operating income (a non-GAAP measure) for the first quarter of 2018 was $228 million, which excludes adjustments totaling $269 million before tax, mainly related to restructuring charges, inventory impairments and merger and related costs. A complete list of the adjusting items and associated reconciliation from GAAP has been provided in Table 1a in the section entitled “Charges and Credits”. Adjusted operating income for the first quarter was down $56 million, or 20%, sequentially, primarily driven by declines in Turbomachinery & Process Solutions and Digital Solutions, partially offset by growth in Oilfield Services. Adjusted operating income was down $55 million, or 19%, year-over-year driven by Oilfield Equipment and Turbomachinery & Process Solutions, partially offset by growth in Oilfield Services and Digital Solutions.

Depreciation and Amortization for the first quarter of 2018 was $388 million.

Corporate costs were $98 million in the first quarter of 2018, compared to $92 million in the prior quarter and $158 million in the first quarter of 2017.

Other Financial Items

Benefit for income taxes was $86 million for the first quarter. Included is a $124 million benefit related to the impact of the U.S. tax reform in December 2017.

GAAP diluted earnings per share were $0.17. Adjusted diluted earnings per share were $0.09. Excluded from adjusted earnings per share were all items listed in Table 1a in the section entitled "Charges and Credits" as well as the "other adjustments (non-operating)" found in Table 1b. The other adjustments (non-operating) were primarily driven by the $124 million benefit from adjusting the impact of U.S. tax reform.

Cash flows generated from operating activities were $294 million for the first quarter of 2018. Free cash flow (a non-GAAP measure) for the quarter was $226 million. Free cash flow included $100 million of merger and restructuring-related cash payments. A reconciliation from GAAP has been provided in Table 1c in the section entitled "Charges and Credits."

Capital expenditures, net of proceeds from disposal of assets, were $69 million for the first quarter of 2018.

During the three months ended March 31, 2018, we repurchased approximately $500 million of the Company s common stock, consisting of approximately $187 million of Class A common stock and approximately $313 million of Class B common stock including the paired units in BHGE LLC from GE. The buyback was completed on a pro-rata basis and did not result in a change of GE s approximately 62.5% interest in BHGE LLC.

Results by Reporting Segment

The following segment discussions and variance explanations are intended to reflect management s view of the relevant comparisons of financial results on a sequential or year-over-year basis, depending on the business dynamics of the reporting segments.

Oilfield Services

Oilfield Services (OFS) revenue of $2,678 million for the quarter decreased by $103 million, or 4%, sequentially. The sequential decrease in revenue was mainly driven by seasonality.

North America revenue was $1,094 million, flat sequentially. International revenue was $1,584 million, a decrease of 6% sequentially, primarily driven by lower activity in Latin America, Asia and the Middle East, partially offset by higher volume in Sub-Saharan Africa and Europe. From a product line perspective, the sequential decline of 4% in OFS was driven primarily by Artificial Lift and Completions. This volume decline was partially offset by higher volume in Drilling Services.

Segment operating income before tax for the quarter was $141 million. Operating income for the first quarter of 2018 was up $39 million, or 39%, sequentially, primarily driven by product mix, synergy benefit realization and lower depreciation and amortization, partially offset by the impact of lower volume.

Oilfield Equipment

Oilfield Equipment (OFE) orders were up 5% year-over-year, with equipment orders down 5%, mainly driven by lower orders due to decreased activity in the Drilling Systems business, Flexible Pipe business and Offshore business, partially offset by higher orders in Subsea Production Systems. Services orders increased by 18% driven by strong orders intake in both Subsea Services and Drilling Systems, partially offset with lower orders in the Surface Pressure Control business.

OFE revenue of $664 million for the quarter decreased $52 million, or 7%, year-over-year. The decrease was driven by the lower backlog in the Subsea Production Systems business, as well as lower convertible orders across the Drilling Systems and Flexible Pipe businesses, partially offset by higher volume in the Surface Pressure Control and Services businesses.

Segment operating loss before tax for the quarter was $6 million, an unfavorable decline versus the prior year. The loss was driven by lower volume, cost productivity and product mix.

Turbomachinery & Process Solutions

urbomachinery & Process Solutions (TPS) orders were up 10% year-over-year. Equipment orders were up 23% driven by higher new units volume in the onshore/offshore end markets. Service orders were up 4% primarily driven by increased upgrades, partially offset by lower contractual services volume.

TPS revenue of $1,460 million for the quarter decreased $184 million, or 11%, year-over-year. The decrease was driven by lower new units and services volume in the upstream segment, partially offset by increased volume in the businesses that serve the downstream segments. Equipment revenue in the quarter represented 41%, and Service revenue represented 59% of total revenue.

Segment operating income before tax for the quarter was $119 million, down $133 million, or 53%, year-over-year. The decline was driven primarily by lower volume and cost productivity, as well as unfavorable equipment and services mix.

Digital Solutions

Digital Solutions (DS) orders were up 3% year-over-year, primarily due to increased volume in the oil and gas end markets, offset by declines in the power end markets. From a product line perspective, the growth was driven by the Pipeline and Process Solutions and Inspection Technologies businesses, offset with declines in the Controls and Measurement and Sensing businesses.

DS revenue of $598 million for the quarter increased 4% year-over-year, mainly driven by the Pipeline and Process Solutions and Inspection Technologies businesses, partially offset by a decline in the Controls business.

Segment operating income before tax for the quarter was $73 million, down 39% sequentially and up 16% year-over-year. The sequential decline was driven primarily by typical seasonally lower volume and cost productivity. The year-over-year improvement was primarily driven by increased volume and positive cost leverage.