UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] | | | | | |
| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 20172021
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-09397
Baker Hughes, a GE company, | | |
| Baker Hughes Holdings LLC |
(Exact name of registrant as specified in its charter)
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| Delaware | | 76-0207995 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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17021 Aldine Westfield Road Houston, Texas | | 77073-5101 |
| Houston, | Texas | 77073-5101 |
| (Address of principal executive offices) | | (Zip Code) |
Securities registered pursuant to Section 12(b) of the Act: |
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| Title of each class | Trading Symbol | Name of each exchange on which registered |
| 5.125% Senior Notes due 2040 | - | New YorkThe Nasdaq Stock ExchangeMarket LLC |
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [ ] NO [X]Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES [ ] NO [X]Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [Not Applicable]Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer" "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filero | ☐ | | Accelerated filero | ☐ | | Non-accelerated filerþ | ☑ | | Smaller reporting companyo | ☐ | | Emerging growth companyo |
| | (Do not check if a smaller reporting company) | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shellshell company (as defined in Rule 12b-2 of the Act). YES [ ] NO [X]Yes ☐ No ☑
State the
The aggregate market value of the voting andand non-voting common equitystock held by non-affiliates computed by reference toof the price at which the common equity was last sold, or the average bid and asked price of such common equity,registrant as of the last business day of the registrant’fsregistrant’s most recently completed second fiscal quarter: [Notquarter was [NaNt Applicable].
As of February 8, 2018,7, 2022, all of the common units of the registrant are held by affiliates of the registrant. NoneNaN of the common units are publicly traded.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction 1(1)(a) and (b) of Form 10-K and is therefore filing this report with the reduced disclosure format.
Baker Hughes a GE companyHoldings LLC
Table of Contents
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | i
PART I
ITEM 1. BUSINESS
Baker Hughes Holdings LLC ("BHH LLC", "the Company", "we", "us", or "our") is an energy technology company with a GE company LLC, (thediversified portfolio of technologies and services that span the energy and industrial value chain. We conduct business in more than 120 countries. The Company BHGE LLC, we, us, or our),was formed in July 2017 as the result of a Delaware limited liability company, and a successor tocombination between Baker Hughes Incorporated a Delaware corporation (Baker Hughes) is a fullstream oilfield technology provider that has a unique mix of integrated equipment("BHI") and service capabilities.
On July 3, 2017, we closed our business combination (the Transactions) to combine the oil and gas business (GE("GE O&G)&G") of General Electric Company (GE) and("GE") ("the Transactions"). In 2020, GE launched a program to fully divest of its ownership in Baker Hughes (refer to "Note 2. Business Acquisition"Company ("Baker Hughes") and BHH LLC over approximately three years. As of the Notes to the Consolidated and Combined Financial Statements in Item 8 herein for further details on the Transactions). In connection with the Transactions, we entered into and are governed by an Amended and Restated Limited Liability Company Agreement, dated as of July 3, 2017 (the BHGE LLC Agreement). Under the BHGE LLC Agreement, EHHC Newco, LLC (EHHC), a wholly owned subsidiary of Baker Hughes, a GE company (BHGE), is our sole managing member and BHGE is the sole managing member of EHHC. As our managing member, EHHC conducts, directs and exercises full control over all our activities, including our day-to-day business affairs and decision-making, without the approval of any other member. As such, EHHC is responsible for all our operational and administrative decisions and the day-to-day management of our business.December 31, 2021, GE owns approximately 62.5%11.4% of our common units and BHGEBaker Hughes owns approximately 37.5%directly or indirectly 88.6% of our common units indirectly through two wholly owned subsidiaries.
The Transactions were treated as a “reverse acquisition” for accounting purposes and, as such, the historical financial statements of the accounting acquirer, GE O&G, are the historical financial statements of the Company. The Company’s financial statements have been prepared on a consolidated basis, effective July 3, 2017. For all periods prior to July 3, 2017, the Company’s financial statements were prepared on a combined basis. The combined financial statements combine certain accounts of GE and its subsidiaries that were historically managed as part of its oil & gas business. The historical financial results in the combined financial statements presented may not be indicative of the results that would have been achieved had GE O&G operated as a separate, stand-alone entity during those periods. The GE O&G numbers in the consolidated and combined statements of income (loss) and statements of cash flows have been reclassified to conform to the current presentation. We believe that the current presentation is a more appropriate presentation of the combined businesses.(collectively, "the Members").
OUR VISION & STRATEGY
WeWith the breadth of our portfolio, leading technology, and unique partnership models, we are the only fullstream provider of integrated oilfield products, services and digitalpositioned to deliver outcome-based solutions with 2017 revenue of $17.3 billion and a presence in more than 120 countries. We strive to provide best-in-class physical and digital technology solutions for customer productivity, leveraging complementary technologies to serve customers across the full spectrum ofindustry. By integrating health, safety & environment ("HSE") into everything we do, we protect our people, our customers, and the environment.
The oil and gas value chain.
macroeconomic environment continues to be dynamic. We believe that there are structural changes taking place in the world’s reliance on hydrocarbons will not disappear, and oil and gas will continue to remain relevant in meeting global energy demand. At the same time, the transition to new energy sources is accelerating. We believe the industry is going through a transformation that requirerequires a change in how we work. No matter the oil price,Irrespective of commodity prices, our customers are looking forfocused on reducing both capital and operating expenditures. Our customers expect new models and solutions to deliver higher industrial yield, which means improvingsustainable productivity improvements and efficiency and leveragingleverage economies of scale, with a lower carbon impact. While we will continue to serve customersfootprint. That is why our strategy is focused on a project basis,improving our fullstream portfolio, digital capabilitiescore competitiveness and leading technology and services will enable us to shift towards outcome-focuseddelivering higher-productivity solutions enabling customers to lower capital and operating costs, reduce non-productive time and boost resource recovery. This istoday, while positioning for the cornerstone of our corporateenergy transition.
Our strategy that is based on three pillars.key pillars:
•Transform the core: We are transforming our current business to improve margins and cash flow, which we are achieving through portfolio rationalization, cost improvements, and new business models.
•Invest for growth:We intendare driving organic and inorganic growth in high potential segments where we have a strong position, including industrial power and processes, industrial asset management, non-metallics, and chemicals.
•Position for new energy frontiers: We are making strategic investments to build market leading product companies focused on comprehensively reducing productdrive lower carbon emissions in the energy and service costs, while improving equipment efficiencyindustrial sectors, including hydrogen, geothermal, carbon capture, utilization and reliability to significantly lower project breakeven costs.
We strive to create value through integratedstorage ("CCUS"), and differentiated equipment and service modules that will impact our customers total cost of projects and operations as well as fundamentally improving industry productivity, and
We plan to continue to develop fullstream opportunities that drive value creation through radical improvements in total cost reduction and productivity increases for the industry.
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energy storage.
We expect to benefit from our strategy in the following:following ways:
Complete fullstream•Scope and scale: We have global presence and a broad, diversified portfolio. Leading portfolio capable of serving Our products, services, and expertise serve the upstream, midstreammidstream/liquefied natural gas ("LNG") and downstream sectors of the oil and gas industry, matching oilfield serviceas well as broader chemical and equipment leaders in many areas. Ourindustrial segments. We deliver through our four product lines -companies (also referred to as "operating segments"): Oilfield Services; Oilfield Equipment; Turbomachinery & Process Solutions; and Digital Solutions as discussed below under "Products and Services," and each are each among the top four providers for the majority of the product lines in their respective segments.
the markets they serve.Complementary technology. We have a•Technology:Our culture is built on a heritage of innovation and invention in research and development, with complementary capabilities. Technology remains a differentiator for us, and enablesa key enabler to drive the efficiency and productivity gains our customers need. We also have a range of technologies that support our customers' efforts to reduce their carbon footprint. We remain committed to investing in our products and services to maintain our leadership position across our offerings, including $492 million research and development spend and being granted more than 2,500 patents worldwide in 2021.
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•Digital capabilities:We expect to benefit from the emerging demand for artificial intelligence ("AI") based solutions as part of our customers’ digital transformation initiatives. Launched in 2019, our partnership with C3.ai, Inc. ("C3 AI") is enabling us to deliver across the value chain. GivenAI that is faster, easier, and more scalable to drive outcomes for our breadth and depth, we can leverage ourcustomers. We are delivering existing technology talent and expertise across our portfolio to accelerate the pace of innovation.
Digital capabilities. We expect to be able to continue to develop software offerings on any operating platform, for new and extended applications in the oil and gas customers and othercollaborating on new AI applications specific for oil and gas outcomes. We are also deploying C3 AI applications internally to improve operational efficiencies, specifically for inventory optimization. In addition, we have continued to invest in our industrial ecosystems,asset management capabilities, including the acquisition of ARMS Reliability and an investment in Augury, a machine health technology company, to support our customers’ digital transformation programs across industrial end markets.
•Energy transition solutions: We are positioned to support our customers' efforts to reduce their carbon footprint with a range of emissions-reduction products and services. This includes more efficient power generation and compression technology that reduces carbon emissions, including CCUS, as well as hydrogen technologies. We also have a range of inspection and sensor technologies that can monitor and help reduce flaring and emissions. In 2021, we made strategic investments in emerging energy technologies to advance CCUS and hydrogen with companies such as machineEkona Power, Electrochaea, and equipment health, reliabilitythe Hy24 Hydrogen Fund; and entered into new partnerships with Shell, Air Products, and Bloom Energy, among others. We also continue to expand our emissions management capabilities, helping customers to detect and quantify emissions more efficiently and accurately, and complementing our existing methane detection and quantification solutions available today.
In 2021, we took additional steps to accelerate our strategy and to view our Company in two broad business areas: Oilfield Services & Equipment and Industrial Energy Technology. This approach aims to better position Baker Hughes for today and in the coming years. We believe that focusing on two major business areas with close alignment will enhance our flexibility, improve commercial and operational execution, and provide long-term optionality as the energy markets evolve.
On the Oilfield Services & Equipment ("OFSE") side of the Company, we have a technology-leading global enterprise with core strengths in drilling services, high-end completion tools, flexible pipe, artificial lift, and production and downstream chemicals. OFSE is poised to benefit from cyclical growth in the coming years as we believe that we are in the early stages of a broad based, multi-year recovery that will be characterized by longer term investments into the core OPEC+ countries.
The Industrial Energy Technology ("IET") encompasses a more closely integrated Turbomachinery & Process Solutions and Digital Solutions. Both businesses have compelling portfolios that are beginning to see significant secular growth opportunities, particularly in areas such as hydrogen and CCUS. With core competencies across a number of offerings like power generation, compression, and condition monitoring, as well as a growing presence in flow control and industrial asset management, we have a strong foundation on which to build an even more comprehensive presence in the broad industrial energy technology markets.
More recently, we created the Climate Technology Solutions ("CTS") and the Industrial Asset Management ("IAM") groups to further support the strategy of the Company. CTS will include CCUS, hydrogen, emissions management, and maintenance optimization.
clean and integrated power solutions. IAM will bring together key digital capabilities, software, and hardware from across the Company to help customers increase efficiencies, improve performance, and reduce emissions for their energy and industrial assets. We believe the creation of these two groups will help accelerate the speed of commercial development for solutions-based business models across our new energy and industrial asset management offerings. These actions, including the steps taken to view our Company in two broad areas, OFSE and IET, will not change our current segment reporting structure.
CORPORATE RESPONSIBILITY
We believe we are positionedhave an important role to assist our customersplay in society as they balance investment decisions between greenfield projects, brownfield projectsan industry leader and optimizing existing assetspartner. We view environmental, social, and governance ("ESG") as a result ofkey lever to transform the current macroeconomic environment and the potentially prolonged period of lower oil prices. We expect that aging fields will require increased maintenance and intervention to sustain production later into the well life cycle when depletion accelerates. We believe our strategy coupled with our capabilities will help us compete and win in the current environment, while positioning us for the future.
ORDERS AND BACKLOG
We are a global business with consolidated 2017 revenue of $17,259 million. We generate revenue and orders from a combination of equipment sales and services. In 2017, 42% of revenue was generated from equipment sales and 58% from services, while 39% of orders were for equipment and 61% for services. In 2016 and 2015, 46% and 50% of revenue was generated from equipment sales, and 54% and 50% of revenue was from services, respectively. We recognized orders of $17,376 million, $11,273 million, and $15,385 million, respectively, in 2017, 2016 and 2015. Due to the natureperformance of our business, including the time requiredCompany and our industry. In January 2019, we made a commitment to manufacture equipmentreduce Scope 1 and the long-term nature of many of its service contracts, there is a backlog of unfilled customer orders2 carbon emissions from our operations by 50% by 2030, achieving net zero emissions by 2050. In 2020, we reset our carbon emissions reduction base year from 2012 to 2019 to account for equipment salescorporate changes, new acquisitions, divestitures, and services, which as of December 31, 2017, 2016 and 2015 totaled $21,022 million, $21,697 million, and $23,941 million, respectively.
Our statement of income (loss) displays sales and costs of salesto reflect changes in methodology in accordance with SEC regulations under which “goods” is requiredthe Greenhouse Gas Protocol. We are investing in our portfolio of advanced technologies to include all sales of tangible products and “services” must include all other sales, including other services activities. For the amounts shown above, as well as in the orders and backlog charts included in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 in thisassist customers with reducing their carbon footprint.
Baker Hughes Holdings LLC 2021 Form 10-K we distinguish between “equipment”| 2
We continue to make progress on emissions reductions. Baker Hughes reported in its 2020 Corporate Responsibility report a 15% reduction in operating greenhouse gas emissions over the prior year. This reduction was partially due to lower activity during the COVID-19 pandemic, but also due to efficiency and “product services,” where product services refersemissions reduction efforts across our global business, including facility energy efficiency and operational energy efficiency, uptake of renewable and zero-carbon energy, and emissions reduction in our vehicle fleets. We will continue to sales under product services agreements, including salesemploy a broad range of both goods (such as spare partsemissions reduction initiatives across manufacturing, supply chain, logistics, energy sourcing and equipment upgrades) and related services (such as monitoring, maintenance and repairs), which is an important part of its operations. We refer to “product services” simply as “services” within this Business section and the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 in this Form 10-K.generation.
Backlog is defined as unfilled customer orders for products and services believed to be firm. For product services, an amount is included for the expected life of the contract.
PRODUCTS AND SERVICES
We are a fullstream provider of oilfield products, services and digital solutions. Following the Transactions, we revised our segment structure and began to manage and report our operating results throughOur four operating segments - Oilfield Services, Oilfield Equipment, Turbomachinery & Processing Solutions, and Digital Solutions. Ourproduct companies, or operating segments, are organized based on the nature of our markets and customers.customers and consist of similar products and services. We have reflected this revised structure for all historical periods presented. The majoritysell to our customers through direct and indirect channels. Our primary sales channel is through our direct sales force, which has a strong regional focus with local teams close to the customer, who are able to draw support from centers of excellence in each of our major product lines. Our products and services are sold in highly competitive markets and the Baker Hughes business operations are included in the Oilfield Services (OFS) segment from July 3, 2017, the date of the Transactions.
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competitive environment varies by product line. See discussion below by segment.
Oilfield Services
The OFSOilfield Services ("OFS") segment providesdesigns and manufactures products and provides services for ononshore and offshore oil and gas operations across the lifecycle of a well, ranging fromincluding exploration, drilling, evaluation, completion, production, intervention, and intervention. The segment is comprised of eight product lines that design and manufactureabandonment.
OFS products and services to help operators find, evaluate, drill, and produce hydrocarbons.
Products and services include diamond and tri-cone drill bits, drilling services including directional drilling, technology, measurement whilemeasurement-while-drilling, and logging-while-drilling, drilling and logging while drilling,fluids, wireline services, drillingcompletions including tools, systems, and completions fluids, completions tools and systems, wellborepressure pumping, well intervention, tools and services, artificial lift systems, and oilfield and industrial chemicals. chemicals, and integrated well services. These offerings are enabled and enhanced by reservoir technical services and digital technologies that include modeling, remote capabilities, and automation.
OFS’ coreOFS evaluation capabilities and drilling technologies provide greater understanding of the subsurface to enable smoother, faster drilling and precise wellbore placement, leading to improved recovery and project economics. With the industry’s broadestbroad completions portfolio, OFS can provide tailored well integrity solutions for all well types. Drawingdrawing from a wide range of artificial lift technology, coupled with enterprisetechnologies, production chemicals, and production optimization software, OFS can help lower the cost per barrel for the life of an asset. maximize production while simultaneously lowering production costs. OFS also provides integrated well services to plan and execute projects ranging from well construction and production through well abandonment.
OurOFS customers include the large integrated major and super-major oil and natural gas companies, U.S. and international independent oil and natural gas companies, and the national or state-owned oil companies as well as oilfield service companies.
OFS believes that its principal competitive factors in the industries and markets it serves are product and service quality, efficiency, reliability and availability, HSE standards, technical proficiency, and price. OFS products and services are sold in highly competitive markets, and revenue and earnings are affected by changes in commodity prices, fluctuations in levels of drilling, workover and completion activity in major markets, general economic conditions, foreign currency exchange fluctuations, and governmental regulations. While OFS may have contracts that include multiple well projects and that may extend over a period of time ranging from two to four years, its services and products are generally provided on a well-by-well basis. Most contracts cover pricing of the products and services but do not necessarily establish an obligation to use OFS products and services. OFS competitors include Schlumberger, Halliburton, and ChampionX.
Oilfield Equipment
The Oilfield Equipment (OFE)("OFE") segment provides a broad portfolio of mission critical products and services that serve as the last line of defense during drilling and over the life of a field. These products and services are required to facilitate the safe and reliable control and flow of hydrocarbons from the subsea wellhead to the surface production facilities. The OFE operationportfolio has solutions for the subsea, offshore surface and onshore operating environments. OFE designs and manufactures onshoresubsea and offshore drilling andsurface production systems and equipment for floating production platforms and provides a full range of services related to onshore and offshore drilling activities.production operations.
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OFE portfolio includes deepwater drilling equipment,products and services include subsea production systems (SPS)("SPS"), flexible pipe systems for subsea flowlines, risers and onshore pipes, surface and subsea wellheads, surface pressure control solutions, subsea well intervention solutions, and related service solutions. The OFE drilling and production systems product line offers blowout preventers, control systems, marine drilling risers, wellhead connectors, diverters and related services. OFE offers SPS, includingOFE’s subsea portfolio includes subsea trees, control systems, manifolds, connections,connection systems, wellheads, specialty connectors &and pipes for all environments, installation and decommissioning solutions, and related services.services for life-of-field solutions and well intervention. OFE also provides advanced offshore flexible pipe products including risers, flowlines, fluid transfer lines and subsea jumpers, for both subsea and FPSO (floatingfloating production storage & offloading)-based productionfacilities across a range of operating environments. Investment in composite technology is enabling BHGE to extend the capabilitiesIn addition, OFE offers a full range of BHGE’s flexibles even further.onshore and offshore wellhead products, flow-control equipment, valves, actuators, and related services. OFE also offers a range of comprehensive, worldwide services for installation, technical support, well access through subsea intervention systems, operating resources and tools, offshore products, and brownfield asset integrity solutions.
OFE customers are oil and gas field developers, drillingoperators and oil companiesengineering, procurement, and construction ("EPC") contractors seeking to undertake new subsea and surface projects, mid-life upgrades and maintenance, well interventions and workover campaigns. OFE differentiates itself in SPS and deepwater drilling systems. OFE’s key competitive areas arestrives for a leadership position within the large-bore gas fields, deepwater oilfieldsand ultra-deepwater oil and gas fields, and fields with long tieback distances. Additionally, through Subsea Connect, OFE offers integrated solutions to our customers.
OFE believes that the principal competitive factors in the industries and markets it serves are product and service quality, reliability and on time delivery, HSE standards, technical proficiency, availability of spare parts, and price. In addition to a robust presence in other subsea areas, including high-pressure high-temperature (HPHT) fields, OFE’sthe SPS product lines’ production systems are amongline, the industry’s most reliable, with uptimeprimary competitors of OFE include Schlumberger, TechnipFMC, Aker Solutions ASA, and Dril-Quip Inc. In the critical control system exceeding 99.8%.
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offshore flexible pipe product line, main competitors include TechnipFMC and NOV Inc.
Turbomachinery & Process Solutions
The Turbomachinery & Process Solutions (TPS)("TPS") segment provides equipment and related services for mechanical-drive, compression, and power-generation applications across the oilenergy and industrial market, including the on-and-offshore, LNG, pipeline and gas industry as well as products and services to serve the downstream segments of the industry includingstorage, refining, petrochemical, distributed gas, flow and process control, and other industrial applications. Thesegments such as nuclear, marine, food and beverage, and utilities. TPS segment is a leader in designing, manufacturing, maintaining, and upgrading rotating equipment across the oilentire energy value chain.
TPS products and gas, petro-chemical and industrial sectors.
The TPS portfolio includesservices include drivers, driven equipment, flow control, and turnkey solutions. Drivers are comprised of aero-derivative gas turbines, heavy-duty gas turbines, small- to medium-sized industrial gas turbines, steam turbines, slow speed and integrated gas engines, hot gas and turbo expanders and synchronous and induction electric motors.expanders. TPS’ driven equipment consists of electric generators and reciprocating, centrifugal, axial, direct-drive high speed, integratedzero emission, and subsea compressors, and turbo-expanders.compressors. TPS’ flow controlportfolio includes pumps, valves, regulators, control systems, and other flow and process control technologies. As part of its turnkey solutions, TPS offers power generation and gas compression modules, waste heat/energyenergy/pressure recovery, energy storage, modularized small and large liquefaction plants, carbon capture, and storage/use facilities.solutions. TPS also offers a variety ofgenuine spare parts, system upgrades, and conversion solutions, digital advanced services and turnkey solutions to refurbish, rejuvenate, and improve the output from a single machine up to full plant debottlenecking and modernization.
TPS’ products enable customers to increase upstream oil and gas production, liquefy natural gas, compress gas for transport via pipelines, generate electricity, store gas and energy, refine oil and gas and produce petro-chemicals, while minimizing both operational and environmental risks in the most extreme service conditions. TPS’ customers are upstream, midstream and downstream, onshore and offshore, and small to large scale. Midstream and downstream customers include liquefied natural gas (LNG) plants, pipelines, storage facilities, refineries and a wide range of industrial and engineering, procurement and construction (EPC) companies.an entire plant.
TPS’ value proposition is founded on its turbomachinery and flow control technology, a unique competence to integrate gas turbines and compressors in the most critical natural gas applications, best-in-class manufacturing and testing capabilities, reliable maintenance and service operations, and innovative real-time diagnostics and control systems, enabling condition-based maintenance and increasing overall productivity, availability, efficiency, and reliability for oil and gas and industrial assets. TPS differentiates itself from competitors with its expertise in technology and project management, local presence and partnerships, as well as the deep industry know-how of its teams to provide fully integrated equipment and services solutions with state-of-art technology from design and manufacture through to operations.
TPS’ solutions enable customers to increase upstream oil and gas production, liquefy natural gas, compress gas for transport via pipelines, generate electricity, store gas and energy, refine oil and gas, and produce petrochemicals, while minimizing both operational and environmental risks in the most extreme service conditions and enhancing overall efficiency. TPS products are also used in new energy applications, including hydrogen, CCUS, and blended fuels. TPS’ customers are upstream, midstream and downstream, onshore and offshore, and small to large scale. Midstream and downstream customers include LNG plants, pipelines, storage facilities, refineries, and a wide range of industrial and EPC companies. As a supplier of turbomachinery equipment and solutions, TPS uses technology to help customers reduce their environmental impact by making their operations
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more efficient and enhancing their productivity, reducing emissions through flaring, venting and fuel combustion, and introducing new technologies that improve their ability to reduce unwanted fugitive emissions.
TPS believes that the principal competitive factors in the industries and markets it serves are product range (or power range measured in megawatts) coverage, efficiency, product reliability and availability, project execution and service capabilities, references, emissions, and price. Our primary equipment competitors include Siemens Energy, Solar (a Caterpillar company), MAN Energy Solutions, Mitsubishi Heavy Industries, and Elliot Group (an Ebara company). In the valves and pumps product line, competitors include Emerson, Flowserve, Metso:Outotec, Sulzer, and IMI. Our aftermarket equipment product line competes with independent service providers such as Masaood John Brown, EthosEnergy, Sulzer, MTU, Chromalloy, and Siemens Energy.
Digital Solutions
The Digital Solutions (DS) segment provides operating technologies helping to improve the health, productivity and safety of asset intensive industries and enable the Industrial Internet of Things. DS includes the Measurement & Controls business for industry-leadingcombines sophisticated hardware technologies as well aswith enterprise-class software products and analytics to connect industrial assets, providing customers with the software businesses of GE Oil & Gasdata, safety and Baker Hughes that leverages best-of-class cloudsecurity needed to reliably and efficiently improve operations.
DS products and services including GE's Predix application development platform.
The DS portfolio includesinclude condition monitoring, inspectionindustrial controls, non-destructive technologies, measurement, sensing, and pipeline solutions. Condition monitoring technologies include the Bently Nevada® and System 1® brands, providing rack-based vibration monitoring equipment sensors, software cyber security solutions and industrial controlssensors primarily for power generation and oil and gas operations. The DS InspectionWaygate Technologies product line includes non-destructive testing technology, software, and services, including industrial radiography, ultrasonic sensors, testing machines and gauges, NDT film, and remote visual inspection. Through its acquisition of ARMS reliability and its investment and alliance with Augury, DS also provides integrated asset performance management offerings.
The DS Process and Pipeline Services product line (PPS)("PPS") provides pre-commissioning and maintenance services to improve throughput and asset integrity for process facilities and pipelines while achieving the highest returns possible. In addition, theThe PPS product line also provides inline inspection solutions to support pipeline integrity and includes nitrogen, bolting, torqueing and leak detection services, as well as the world’s largest fleet of air compressors to dry pipelines after hydrotesting. The DS MeasurementPanametrics, Druck, and SensingReuter-Stokes product line provideslines provide instrumentation and sensor-based technologies to better detect and analyze pressure, flow, gas, moisture, radiation, and moisture conditions and more.
related conditions. The DS segmentNexus Controls product line provides comprehensive, scalable industrial controls systems, safety systems, hardware, software cybersecurity solutions and services.
DS helps companies monitor and optimize industrial assets while mitigating risk and boosting safety, by providing performance management, and condition and asset health monitoring. It also provides
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customers the technical capabilities to drive enterprise wide digital transformation of business processes and to focus on better production outcomes along the entire oil &and gas value chain and adjacent industries, using sensors, services, and inspections to connect industrial assets to the Industrial Internet. The DS software portfolio is built to handle big data at an industrial scale and with industrial-strength security, giving customers the power to innovate and make faster, more confident decisions. The combination of deep domain expertise with modern data management and deep learning techniques gives customers the ability to maximize asset and operations performance.
Further information about our segments is set forth in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and "Note 13. Segment Information" of the Notes to Consolidated and Combined Financial Statements in Item 8 herein.
MARKETS AND COMPETITION
We sell to our customers through direct and indirect channels. Our primary sales channel is through our direct sales force, which has a strong regional focus with local teams close to the customer, who are able to draw support from centers of excellence in each of our major product lines. Our sales force also uses its application engineers, field application engineers, service engineers, commercial and sales managers, and account executives to help deliver and provide customers with the best product and service solutions which BHGE can offer. No single customer accounted for 10% or more of our revenue in the current year.
Our productsinternet. Products and services are sold in highly competitive markets and the competitive environment varies by produce line, as discussed below:a diversified, fragmented arena to a broad range of customers.
Oilfield Services
Our OFS product lineDS believes that the principal competitive factors in the industries and markets it serves are product and service quality, reliability and availability, health, safety and environmental standards, technical proficiency and price. Our products and services are sold in highly competitive markets and revenue and earnings are affected by changes in commodity prices, fluctuations in the level of drilling, workover and completion activity in major markets, general economic conditions, foreign currency exchange fluctuations and governmental regulations. While we may have contracts with customers that include multiple well projects and that may extend over a period of time ranging from two to four years, our services and products are generally provided on a well-by-well basis. Most contracts cover our pricing of the products and services, but do not necessarily establish an obligation to use our products and services. OFS product line competitors include Schlumberger, Halliburton and Weatherford International.
Oilfield Equipment
Our OFE product line believes that the principal competitive factors in the industries and markets it serves are product and service quality, reliability and on time delivery, health, safety and environmental standards, technical proficiency, availability of spare parts and price. Its strong track record of innovation enables OFE to enter into long-term, performance-based service agreements with our customers. In the SPS product line, the primary competitors of OFE include Schlumberger, TechnipFMC, Aker Solutions ASA, Proserv and Dril-Quip Inc. In the flexible pipe product line, competitors include TechnipFMC, National Oilwell Varco (NOV), Airborne, and Magma. In the drilling sub-product line, competitors include NOV, Schlumberger and Horn Equipment.
Turbomachinery & Process Solutions
Our TPS product line believes that the principal competitive factors in the industries and markets it serves are product range (or power range measured in Megawatts) coverage, efficiency, product reliability and availability, service capabilities, packages, references, emissions and price. In upstream and midstream applications, our primary equipment competitors include Siemens (Power and Gas business unit), Solar (a Caterpillar company), MAN Turbo and Mitsubishi Heavy Industries. In downstream applications, TPS primarily competes with OEMs and independent service providers, including Flowserve, Pentair, Emerson, Siemens, Hitachi, Solar (a Caterpillar company), Ariel, MAN Turbo, Burckhardt, Elliott Ebara and Mitsubishi Heavy Industries. Our aftermarket equipment product line competes with smaller independent local providers such as Masaood John Brown, Sulzer, MTU, Trans Canada Turbine, Chromalloy and Ethos Energy (a joint venture of Siemens and the Wood Group).
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Digital Solutions
Our DS product line believes that the principal competitive factors in the industries and markets it serves are superior product technology, service, quality, and reliability. Our DS product line competes across a wide range of industries, including Oil & Gas, Power Generation, Aerospace,oil and Lightgas, power generation, aerospace, and Heavy Industrials. The productslight and services are sold in a diversified, fragmented arena with a broad range of competitors.heavy industrials. Although no single company competes directly with DS across all its product lines, various companies compete in one or more products. Primary competitorsCompetitors include Emerson, ABB, Schneider Electric, Fortive, Olympus, Comet Group, Honeywell Process Solutions, Roper Technology,Olympus, Schneider Electric, Siemens, Spectris, Aspentech and OSISoft.ABB.
CONTRACTS
We conduct our business under various types of contracts in the upstream, midstream, and downstream segments, including fixed-fee or turnkey contracts, transactional agreements for products and services, and long-term aftermarket service agreements.
We enjoy stable relationships with many of our customers based on long-term project contracts and master service agreements. Several of those contracts require us to commit to a fixed price based on the customer’s technical specifications with little or no legal relief available due to changes in circumstances, such as changes in local laws or industry or geopolitical events.circumstances. In some cases, failure to deliver products or perform services within contractual commitments may lead to liquidated damages claims. We seek to mitigate these exposures through close collaboration with our customers.
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We strive to negotiate the terms of our customer contracts consistent with what we consider to be industry best practices. Our customers typically indemnify us for certain claims arising from: the injury or death of their employees and often their other contractors; the loss of or damage to their facility and equipment, and often that of their other contractors; pollution originating from their equipment or facility; and all liabilities related to the well and subsurface operations, including loss or damage to the well or reservoir, loss of well control, fire, explosion, or any uncontrolled flow of oil or gas. Conversely, we typically indemnify our customers for certain claims arising from: the injury or death of our employees and sometimesoften that of our subcontractors; the loss of or damage to our equipment (other than equipment lost in the hole);equipment; and surface pollution originating from our equipment above the surface of the earth while inunder our care, custody, and control. Where the above indemnities do not apply or are not consistent with industry best practices, we typically provide a capped indemnity for damages caused to the customer by our negligence, or the negligence of our contractors, and include an overall limitation of liability clause. It is also our general practice to include a limitation of liability for consequential loss, including loss of profits and loss of revenue, in all customer contracts.
Our indemnity structure may not protect us in every case. Certain U.S. states such as Texas, Louisiana, Wyoming, and New Mexico have enacted oil and natural gas specific anti-indemnity statutes. These statutes that can void the allocation of liability agreed to in a contract, however, both the Texas and Louisiana anti-indemnity statutes include important exclusions. The Louisiana statute does not apply to property damage, and the Texas statute allows mutual indemnity agreements that are supported by insurance and has exclusions, which include, among other things, loss or liability for property damage that results from pollution and the cost of well control events. Statecontract. Applicable law laws or public policy in countries outside the U.S., or the negotiated terms of a customer contract may also limit indemnity obligations in the event of the gross negligence or willful misconduct. We sometimes contract with customers that are not the end user of our products. It is our practice to seek to obtain an indemnity from our customer for any end-user claims, but this is not always possible. Similarly, government agencies and other third parties including in some cases other contractors of our customers, may make claims in respect of which we are not indemnified and for which responsibility is assessed proportionate to fault. In all cases,We have an established process to review any risk deviations from our standard contracting practices are examined through an established risk deviation process.practices.
The Company maintains a commercial general liability insurance policy program that covers against certain operating hazards, including product liability claims and personal injury claims, as well as certain limited environmental pollution claims for damage to a third party or its property arising out of contact with pollution for which the Company is liable,liable; however, clean up and well control costs are not covered by such program. All of the insurance policies purchased by the Company are subject to deductible and/or self-insured retention amounts for which we are responsible for payment, specific terms, conditions, limitations, and exclusions. There can be no
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assurance that the nature and amount of Company insurance will be sufficient to fully indemnify us against liabilities related to our business.
ORDERS AND REMAINING PERFORMANCE OBLIGATIONS
Remaining performance obligations, a defined term under U.S. generally accepted accounting principles ("GAAP"), are unfilled customer orders for products and product services excluding any purchase order that provides the customer with the ability to cancel or terminate without incurring a substantive penalty, even if the likelihood of cancellation is remote based on historical experience. For product services, an amount is included for the expected life of the contract.
We recognized orders of $21.7 billion, $20.7 billion and $27.0 billion in 2021, 2020 and 2019, respectively. As of December 31, 2021, 2020 and 2019, the remaining performance obligations totaled $23.6 billion, $23.4 billion and $22.9 billion, respectively.
RESEARCH AND DEVELOPMENT
We engage in research and development activities directed primarily toward the development of new products, services, technology, and other solutions, as well as the improvement of existing products, and services and the design of specialized products to meet specific customer needs. For information regarding the total amount of research and development expense in each of the three years in the period ended December 31, 2017, see "Note 1. Summary of Significant Accounting Policies" of the Notes to Consolidated and Combined Financial Statements in Item 8 herein.
In the OFS and OFE product lines, weWe continue to invest across all operating segments in products to enhance safety, develop capability, improve performance, and reduce costs. costs aligned with our operational strategy. Through our Enterprise Technology Centers we also invest heavily in fundamental technologies such as materials, additive manufacturing, artificial intelligence/machine learning and other digital technologies such as computer vision, data science, and edge computing.
In OFS, we investedcontinue to invest in a range of formation evaluation capabilities as well as drilling, completions, and drilling servicesproduction hardware. This included a new and cutting-edge line of drill bits with hydraulic actuators that offer customers improvements in reliability, efficiency and maintainability. In OFE, the recent focus has been to expand capability into deeper water, longer offsets and at higher pressures. Additionally,pressures as well as modular designs that allow for simpler and more digitally integrated subsea power and processing is also an area in which we are investing, covering both pumping and compression.systems. In the TPS, product line, we continue to invest in continuous product improvementthe energy transition with our latest generation of reciprocatinggas turbines for energy efficiency and centrifugal compressors, using advanced fluid dynamic simulationreduced carbon footprint such as our LM9000TM and advanced aeromechanicsNova LTTM products, as well as CCUS, and hydrogen
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technologies. TPS also invests in its process and safety valve business bringing new digital applications including analytics to improve capability, operability and efficiency of its centrifugal compressors family.our customers. DS continues to invest in advanced digital solutions designed to improve the efficiency, reliability, and safety of oil and gas, aerospace, energy, and broader industrial production and operations. TheseThis includes our new Orbit 60 Bently Nevada product for critical asset monitoring in turbine systems, integrate operational data from producing oilincluding wind, hydro, and gas facilitiesturbines. DS also invests in technologies to deliver notificationsmeasure, monitor, and analytical reports to engineers so they can identify operational performance issues before they become significant, thus helping to prevent unplanned downtime and improve facility reliability.minimize carbon emissions.
INTELLECTUAL PROPERTY
Our technology, brands and other intellectual property ("IP") rights are important elements of our business. We rely on patent, trademark, copyright, and trade secret laws, as well as non-disclosure and employee invention assignment agreements to protect our intellectual property rights. Many of the patents and patent applications in ourcomprise the Baker Hughes portfolio and are owned by us, while otherus. Other patents and patent applications inapplicable to our portfolioproducts and services are licensed to us by GE and, in some cases, third parties. We do not consider any individual patent or trademark to be material to our business operations.
In connection with the Transactions,BHH LLC and GE entered intohave an IP cross-license agreement (the("the IP Cross-License Agreement) with us.Agreement") where GE agreed to perpetually license to usBHH LLC the right to use certain intellectual property owned or controlled by GE (other than GE Digital) pursuant to the terms of the IP Cross-License Agreement. WeBHH LLC in return, also agreed to perpetually license to GE the right to use certain intellectual property rights owned or controlled by BHH LLC pursuant to the terms of the IP Cross-License Agreement. This licenseIP Cross-License Agreement allows usboth parties to have continued and permanent rights to use some of GE’scommercially utilize certain intellectual property so that they can be leveragedof the other pursuant to the terms of the agreement. The IP Cross-License Agreement. Any improvements to such intellectual property made or developed by us will be owned by us and licensed back to GE pursuant to the termscross-licenses remain in place irrespective of the IP Cross-License Agreement and any improvements to such intellectual property made or developed by GE will be owned by GE and licensed to us. If we were to cease being a majority-owned subsidiary of GE, the licenses under the IP Cross-License Agreement are intended to survive.GE's ownership level in BHH LLC.
We have followedfollow a policy of seeking patent and trademark protection in numerous countries and regions throughout the world for products and methods that appear to have commercial significance. We believe that maintenance, protection and enforcement of our patents, trademarks, and related intellectual property rights is central to the conduct of our business, and aggressively pursue protection of our intellectual property rights against infringement, misappropriation, or other violation worldwide as we deem appropriatemay be necessary to protect our business. Additionally, we consider the quality and timely delivery of our products, the service we provide to our customers, and the technical knowledge and skills of our personnel to be other important components of the portfolio of capabilities and assets supporting our ability to compete.
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SEASONALITY
Our operations can be affected by seasonal weather,events, which can temporarily affect the delivery and performance of our products and services, and our customers' budgetary cycles. Examples of seasonal events that can impact our business are set forth below:
•Adverse weather conditions, such as hurricanes in the Gulf of Mexico, may interrupt or curtail our coastal and offshore drilling, or our customers’ operations, cause supply disruptions and result in a loss of revenue and damage to our equipment and facilities, which may or may not be insured. Other adverse weather conditions could include extreme heat in the Middle East during the summer months which may impact our operations or our customers' operations.
•The severity and duration of both the summer and the winter in North America can have a significant impact on activity levels. In Canada, the timing and duration of the spring thaw directly affects activity levels, which reach seasonal lows during the second quarter and build through the third and fourth quarters to a seasonal high in the first quarter.
Adverse weather conditions, such as hurricanes in the Gulf of Mexico, may interrupt or curtail our coastal and offshore drilling, or our customers’ operations, cause supply disruptions and result in a loss of revenue and damage to our equipment and facilities, which may or may not be insured.
•Severe weather during the winter months normally results in reduced activity levels in the North Sea and Russia generally in the first quarter and may interrupt or curtail our operations, or our customers’ operations, in those areas and result in a loss of revenue.
Scheduled repair and maintenance of offshore facilities in the North Sea can reduce activity in the second and third quarters.
•Many of our international oilfield customers may increase ordersactivity for certain products and services in the fourth quarter.quarter as they seek to fully utilize their annual budgets.
•Our process & pipeline business in the DS segment typically experiences lower sales during the first and fourth quarters of the year due to the Northern Hemisphere winter.
•Our broader DS businessand TPS businesses typically experiencesexperience higher customer activity as a result of spending patterns in the second half of the year.
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RAW MATERIALS
We purchase various raw materials and component parts for use in manufacturing our products and delivering our services. The principal raw materials we use include steel alloys, chromium, nickel, titanium, barite, beryllium, copper, lead, tungsten carbide, synthetic and natural diamonds, gels, sand and other proppants, printed circuit boards and other electronic components, and hydrocarbon-based chemical feed stocks. Raw materials that are essential to our business are normally readily available from multiple sources, but may be subject to price volatility. Market conditions can trigger constraintsDue to COVID-19 and other macro-economic factors, the availability of electronic components has resulted in the supply ofadditional expediting activities, fulfillment challenges, and in some cases price increases. We have also seen price increases for ferrous and non-ferrous metals and other raw materials. Our procurement teams utilize advanced planning and may enter into strategic agreements with our global suppliers to minimize price impacts and other availability challenges. We anticipate some pricing and fulfillment volatility for certain raw materials and we are always seeking wayscomponents to ensure the availability and manage the cost of raw materials. Our procurement department uses its size and buying power to enhance its access to key materials at competitive prices.continue through 2022.
In addition to raw materials and component parts, we also use the products and services of metal fabricators, machine shops, foundries, forge shops, assembly operations, contract manufacturers, logistics providers, packagers, indirect material providers, and others in order to produce and deliver products to customers. These materials and services are generally available from multiple sources.
EMPLOYEESHUMAN CAPITAL
At Baker Hughes, our people are central contributors to our purpose of taking energy forward. As an energy technology company with operations around the world, we believe that a diverse workforce is critical to our success, and we aim to attract the best and most diverse talent to support the energy transition. We strive to be an inclusive and safe workplace, with opportunities for our employees to grow and develop in their careers, supported by learning and development opportunities, competitive compensation, benefits, health and wellness programs, and by programs that build connections between our employees and their communities.
As of December 31, 2017,2021, we had over 64,000approximately 54,000 employees. More than 42,000 of our employees of which the majority arework outside the U.S. Approximately 11%in over 85 different countries with more than 150 nationalities represented. This diversity of theseglobal perspectives makes our Company stronger, more resilient, and more responsive to our global customers.
Diversity, Equity, and Inclusion ("DEI")
We believe unique ideas and perspectives fuel innovation and our differences make us stronger. We value difference in gender, race, ethnicity, age, gender identity, sexual orientation, ability, cultural background, religion, veteran status, experience, and thought across the globe. We celebrate the diversity and uniqueness of each employee and believe that everyone has the right to be treated with fairness, dignity, and respect. In addition, we continue to focus on the hiring, retention and advancement of our global talent.
As we continue to prioritize DEI, we focused on diversifying our workforce, with a particular emphasis on increasing gender representation. In 2021, the percentage of people who identify as women in our workforce, senior leadership positions, and the Baker Hughes Board of Directors, is 19%, 18%, and 33%, respectively. Specific to the U.S., 36% of Baker Hughes employees are represented under collective bargaining agreements or similar-type labor arrangements.identify as people of color.
To ensure we have access to and support diverse pipelines of talent across the globe while prioritizing development and retention, we have ongoing DEI annual plan meetings with our executive leadership team. These annual meetings hold leadership accountable for integrating DEI in their respective parts of the business. We have corporate memberships with respected nonprofits, such as Ally Energy, Catalyst, Disability:IN, and the Women's Energy Network, who provide partnership and guidance as we continue our efforts in fostering a diverse, equitable, and inclusive culture. Our talent acquisition efforts as well as our eight global employee resource groups support the engagement and retention of diverse talent.
Talent Acquisition: We have enacted a number of initiatives to support our global goal of increasing the number of diverse employees. We have conducted training on unconscious bias and launched pilot projects on blind resumes and debiasing job descriptions, interview templates, and assessments as well as expanded our talent acquisition focus to include executive search services.
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ENVIRONMENTAL MATTERSEmployee Resource Groups ("ERG"): ERGs consist of employees who have joined together based on shared interests, characteristics, or life experiences. These groups can have a powerful influence on driving change by elevating the conversation and awareness around key issues, and engaging with the communities where we operate. This effort has helped our DEI focus and fostered closer connections between employees in communities around the world.
Inclusive Culture: We have several programs and initiatives that cultivate a culture and environment where everyone feels they belong and can thrive and contribute. The Baker Hughes Global DEI Council is comprised of executives representing our businesses, functions and regions, supports the success of our DEI mission and meets quarterly to review progress and discuss ways in which to continue to advance our efforts. The DEI Community of Practice provides a forum in which leaders and HR professionals come together to collaborate, share best practices, and learn from one another. Our DEI education goals aim to provide our workforce with tools, resources, and learning opportunities focused on raising awareness, fostering inclusive behaviors, and building cultural competence. We also continue to assess and provide programs and policies that support our employees including flexible work arrangements.
Compensation and Benefits
We are committed to paying for performance and supporting our employees’ wellbeing, as well as the wellbeing of their families, by offering flexible and competitive benefits. We regularly assess our total compensation and benefits programs through benchmarking with industry peers and local markets. A majority of our benefits are tailored by location to meet the specific needs of our people, their families, and their communities. Healthcare plans and life insurance are a core benefit of the Company and are provided in most locations. Baker Hughes offers various leaves of absence for certain quality-of-life needs, including family care and personal leaves. To assist and support new parents with balancing work and family matters, in many countries in which Baker Hughes operates, the Company provides paid maternity leaves and parental leaves, inclusive of paternity and adoption of a child.
Learning and Development
At Baker Hughes, allowing our employees to be the architect of their own learning is key to our success. We empower our employees to follow their passion for personal knowledge, job related skills, development, and the domain expertise needed for professional and personal growth. In alignment with this, in 2021, we launched a new pilot for our leader development community, CORE, which is a curated learning space centered around our Baker Hughes Values: Grow, Care, Collaborate & Lead, and the behaviors associated with each value. CORE involves e-learning, virtual workshops, and allows participants to lead their own sessions.
Continuous learning and development is a key priority at Baker Hughes. Our leadership development programs provide learning and growth opportunities for talent to broaden leadership capability with women, new hires, and mid-level employees, and to support our work increasing female representation across the globe. As an example, Aspire is a two-year rotational leadership program for recent graduates and early-career employees to grow functional and leadership skills through challenging assignments, learning plans, and global cross-functional projects.
Health, Safety, and Wellness
Health and safety is at the core of our culture as we are committed to doing the right thing to protect our employees, customers, the communities where we live and work, and the environment. We take a risk-based approach with proactive and preventive programs to deliver safe, secure, and sustainable operations. We have established a stringent set of standards which meet or exceed global regulatory requirements.
Our commitment to HSE starts at the highest levels of our company and is embedded throughout all layers of the organization. We encourage and empower all employees to take an active role in "owning" HSE by stopping work when conditions are unsafe and reporting observations, near misses, and stop-work events through open reporting channels. Our ambition is to make every day a Perfect HSE Day—one without injuries, accidents, or harm to the environment. In 2021, we achieved 204 Perfect HSE Days, up 2% versus 2020.
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Our teams are required to complete recurring training. We offer more than 250 unique HSE courses including foundational training required for all employees, workplace and job-specific training, and human-performance leadership training for managers.
Our commitment to HSE goes beyond safety alone. Occupational health and wellness is a key competency managed within our HSE center of excellence. The importance of physical health, ergonomics, preventative health care, and mental wellness cannot be overstated in promoting a healthy, engaged, and productive workplace. We work with our health benefit providers and internal teams to offer employees health and wellness programs, telemedicine access, health screenings, immunizations, fitness reimbursements, and virtual wellness tools.
In 2021, the mental health and emotional well-being of our employees continued to be a critical priority. We hosted numerous events with Baker Hughes leaders and external experts, further embedded mental well-being into leadership engagements, and provided resources and tools to employees. Our Employee Assistance Program ("EAP") helps employees navigate daily life to manage remote work, cope with major life events or deal with a global pandemic. The EAP gives employees and their family members direct access to professional coaches for in-the-moment counseling or referrals to community experts and extended care providers.
Leading through COVID-19
We continue to monitor and respond to the evolving COVID-19 pandemic and developing vaccine landscape. Since the start of the pandemic, we have taken prudent steps as a company to reduce the risk and spread of the virus. Our top priorities have remained: protecting our employees, maintaining operations, and supporting customers and communities globally.
Since March 2020, our global crisis management structure has been activated to manage a coordinated pandemic response. We continue to evolve our approach in alignment with global health and safety standards and government requirements across our operations. In addition, travel has remained limited, and we continue to enhance our site safety measures, including screenings, social distancing, vaccination requirements, and face coverings. In addition, vaccine access, including onsite clinics, and education for our employees and communities has remained a critical priority. Many of our office-based employees continue to work remotely. As conditions improved in certain places, we started bringing more employees back to offices and worksites and enabled opportunities for more in-person engagements where it was safe to do so. We continue to closely monitor the situation and will adapt our protocols as needed to protect our employees and deliver for our customers, in alignment with all associated requirements.
Community Involvement
Baker Hughes seeks to make a positive impact in the communities where we operate around the world. Consistent with our purpose and values, we work to advance environmental quality, educational opportunities, health, and wellness. We benefit our communities through financial contributions, in-kind donations of goods and services, and volunteer projects. The Baker Hughes Foundation makes strategic philanthropic contributions, matches Baker Hughes employee charitable contributions, and awards volunteer recognition grants for outstanding employee community service.
Board Oversight of Human Capital Management
Baker Hughes' Board of Directors plays an active role in overseeing the Company's human capital management efforts. Our Human Capital and Compensation Committee provides oversight of our policies, programs, and initiatives focusing on DEI as well as pay equity, culture, talent management, succession planning, and executive compensation and benefits. Our Governance & Corporate Responsibility Committee provides oversight of employee safety, health, and wellness matters.
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GOVERNMENTAL REGULATION
Environmental Matters
We are committed to the health and safety of people, protection of the environment and compliance with environmental laws, regulations and our policies. Our past and present operations include activities that are subject to extensive domestic (including U.S. federal, state and local) and international regulations with regard toconcerning, among other things, air land and water quality, waste management, and other environmental matters. Regulationsland protection. Environmental regulations continue to evolve, and changes in standards of enforcement of existing regulations, as well as the enactment of new legislation, may require us and our customers to modify, supplement or replace equipment or facilities or to change or discontinue present methods of operation. Our environmental compliance expenditures and our capital costs for environmental control equipment may change accordingly.
We recognize that climate change warrants meaningful action. In 2019, we announced our commitment to reduce our carbon equivalent emissions 50% by 2030 and achieve carbon equivalent net zero emissions by 2050. This goal encompasses emissions from our direct operations ("Scope 1 and 2 emissions") in alignment with the Paris Accord and the specific recommendations of the United Nations ("UN") Intergovernmental Panel on Climate Change’s Special Report on Global Warming of 1.5oC. In 2020, we reset our carbon emissions reduction base year for this goal from 2012 to 2019 to account for corporate changes, new acquisitions, divestitures, and to reflect changes in methodology in accordance with the Greenhouse Gas Protocol. We have proactively worked to reduce our Scope 1 and 2 greenhouse gas emissions over the last decade through the implementation of energy-efficiency programs, operational improvements, and increased usage of renewable energy. We also continue efforts to reduce our overall environmental footprint by using materials wisely and preserving land, water, and air quality. Our sustainability commitments include our formal participation in the UN Global Compact and our commitment to the Ten Principles human rights, labor, environment, and anti-corruption. The environmental principles include a precautionary approach to environmental challenges, initiatives to promote a greater sense of environmental responsibility and the development of environmentally friendly technologies. We have annually renewed our commitment to the UN Global Compact since joining in 2019.
While we seek to embed and verify sound environmental practices throughout our business, we are, and may in the future be, involved in voluntary remediation projects at current and former properties.properties, typically related to historical operations. On rare occasions, our remediation activities are conducted as specified by a government agency-issued consent decree or agreed order. Remediation costs at these properties are accrued using currently available facts, existing environmental permits, technology and presently enacted laws and regulations. For sites where we are primarily responsible for the remediation, our cost estimates are developed based on internal evaluations and are not discounted. We record accruals when it is probable that we will be obligated to pay amounts for environmental site evaluation, remediation or related activities, and such amounts can be reasonably estimated. Accruals are recorded even if significant uncertainties exist over the ultimate cost of the remediation. Ongoing environmental compliance costs, such as obtaining environmental permits, installation and maintenance of pollution control equipment and waste disposal, are expensed as incurred.
The U.S. Comprehensive Environmental Response, Compensation and Liability Act (known as "Superfund") imposes liability for the release of a "hazardous substance" into the environment. Superfund liability is imposed without regard to fault, even if the waste disposal was in compliance with laws and regulations. We have been identified as a potentially responsible party (PRP)("PRP") at various Superfund sites, and we accrue our share, if known, of the estimated remediation costs for the site. PRPs in Superfund actions have joint and several liability and may be required to pay more than their proportional share of such costs.
In some cases, it is not possible to quantify our ultimate exposure because the projects are either in the investigative or early remediation stage, or superfund allocation information is not yet available. Based upon current information, we believe that our overall compliance with environmental regulations, including remediation obligations, environmental compliance costs and capital expenditures for environmental control equipment, will not have a material adverse effect on our capital expenditures, earnings or competitive position because we have either established adequate reserves or our compliance cost, based on available information, is not expected to be material to our consolidated and combined financial statements. Our total accrual for environmental remediation was $82$67 million and $28$78 million at December 31, 20172021 and 2016,2020, respectively. We continue to focus on reducing future environmental liabilities by maintaining appropriate Company standards and by improving our environmental assurance programs.
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Other Regulatory Matters
We are subject to regulation by various U.S. federal regulatory agencies and by the applicable regulatory authorities in countries in which our products are manufactured or sold. Such regulations principally relate to the ingredients, classification, labeling, manufacturing, packaging, transportation, advertising and marketing of our products. Additionally, as a U.S. entity operating through subsidiaries in non-U.S. jurisdictions, we are subject to foreign exchange control, transfer pricing and customs laws that regulate the import and export of goods as well as the flow of funds between us and our subsidiaries. In particular, the shipment of goods, services and technology across international borders subjects us to extensive trade laws and regulations. Our import activities are governed by the unique customs laws and regulations in each of the countries where we operate. Pursuant to their laws and regulations, governments may impose economic sanctions against certain countries, persons and entities that may restrict or prohibit transactions involving such countries, persons and entities, which may limit or prevent our conduct of business in certain jurisdictions. We are also required to be in compliance with transfer pricing, securities laws and other statutes and regulations, such as the U.S. Foreign Corrupt Practices Act (the "FCPA") and other countries’ anti-corruption and anti-bribery regimes.
In addition, we are subject to laws relating to data privacy and security and consumer credit, protection and fraud. An increasing number of governments worldwide have established laws and regulations, and industry groups also have promoted various standards, regarding data privacy and security, including with respect to the protection and processing of personal data. The legal and regulatory environment related to data privacy and security is increasingly rigorous, with new and constantly changing requirements applicable to our business, and enforcement practices are likely to remain uncertain for the foreseeable future. We are also subject to labor and employment laws, including regulations established by the U.S. Department of Labor and other local regulatory agencies, which sets laws governing working conditions, paid leave, workplace safety, wage and hour standards, and hiring and employment practices.
While there are no current regulatory matters that we expect to be material to our results of operations, financial position, or cash flows, there can be no assurances that existing or future environmental laws and other laws, regulations and standards applicable to our operations or products will not lead to a material adverse impact on our results of operations, financial position or cash flows.
AVAILABILITY OF INFORMATION FOR MEMBERSSECURITY HOLDERS
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act)("Exchange Act"), are made available free of charge on our Internetinternet website at www.bhge.comwww.bakerhughes.com as soon as reasonably practicable after these reports have been electronically filed with, or furnished to, the SEC. The public may read and copy any materials we have filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. InformationIn addition, our Corporate Responsibility reports are available on the operationCompany section of the Public Reference Room may be obtained by calling the SECour website at 1-800-SEC-0330. www.bakerhughes.com. Information contained on or connected to our website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this annual report or any other filing we make with the SEC.
We have a Code of Conduct to provide guidance to our officers and employees on matters of business conduct and ethics, including compliance standards and procedures. We have also required our principal executive officer, principal financial officer and principal accounting officer to sign a Code of Ethical Conduct Certification.
Our Code of Conduct and Code of Ethical Conduct Certifications are available on the Investor section of our website at www.bhge.com. We will disclose on a current report on Form 8-K or on our website information about any amendment or waiver of these codes for our executive officers and directors. Waiver information disclosed on
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our website will remain on the website for at least 12 months after the initial disclosure of a waiver. In addition, a copy of our Code of Conduct and Code of Ethical Conduct Certifications are available in print at no cost.
EXECUTIVE OFFICERS OF BAKER HUGHES A GE COMPANY,HOLDINGS LLC
The following table shows, as of February 23, 2018,11, 2022, the name of each of our executive officers, together with his or her age and office presently or previously held. There are no family relationships among our executive officers.
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| | | | | | | | | | | | | |
| Name | | Age | | Position and Background |
| Lorenzo Simonelli | | 4448 | | President and Chief Executive Officer Lorenzo Simonelli has been the President and Chief Executive Officer of the Company since July 2017. BeforePrior to joining the Company in July 2017, Mr. Simonelli was Senior Vice President, GE and President and Chief Executive Officer, GE Oil & Gas from October 2013 to July 2017. Before joining GE Oil & Gas, he was the President and Chief Executive Officer of GE Transportation from July 2008 to October 2013. Mr. Simonelli joined GE in 1994 and held various finance and leadership roles from 1994 to 2008. |
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| Name | | Age | | Position and Background |
| Brian Worrell | | 4851 | | Chief Financial Officer Brian Worrell is the Chief Financial Officer of the Company. Prior to joining the Company in July 2017, he served as Vice President and Chief Financial Officer of GE Oil & Gas from January 2014 to July 2017. He previously held the position of Vice President, Financial Planning & Analysis for GE from 2010 to January 2014 and Vice President Corporate Audit Staff for GE from 2006 to 2010. |
Maria Claudia Borras
| | 4953 | | Executive Vice President, Oilfield Services Maria Claudia Borras is the President and Chief Executive Officer,Vice President, Oilfield Services of the Company. BeforePrior to joining the Company in July 2017, she served as the Chief Commercial Officer of GE Oil & Gas from December 2014January 2015 to July 2017. Prior to joining GE Oil & Gas, she held various leadership positions at Baker Hughes Incorporated including President, Latin America from October 2013 to January 2015,December 2014, President, Europe Region from August 2011 to October 2013, Vice President, Global Marketing from May 2009 to July 2011 and other leadership roles at Baker Hughes Incorporated from 1994 to April 2009. |
Kurt Camilleri
| | 4347 | | Senior Vice President, Controller and Chief Accounting Officer Kurt Camilleri is the Senior Vice President, Controller and Chief Accounting Officer of the Company. Prior to joining the Company in July 2017, he served as the Global Controller for GE Oil & Gas from July 2013 to July 2017. Mr. Camilleri served as the Global Controller for GE Transportation from January 2013 to June 2013 and the Controller for Europe and Eastern and African Growth Markets for GE Healthcare from 2010 to January 2013. He began his career in 1996 with Pricewaterhouse in London, which subsequently became PricewaterhouseCoopers. |
Roderick Christie
| | 5559 | | Executive Vice President, Turbomachinery and Process Solutions Rod Christie is the President and Chief Executive Officer ofVice President, Turbomachinery & Process Solutions of the Company. Prior to joining the Company in July 2017, he served as the Chief Executive Officer of Turbomachinery & Process Solutions at GE Oil & Gas from January 2016 to July 2017. He served as the Chief Executive Officer of GE Oil & Gas’ Subsea Systems & Drilling Business from August 2011 to 2016 and held various other leadership positions within GE between 1999 to 2011. |
Matthias HeilmannMichele Fiorentino | | 4954 | | Executive Vice President, Digital SolutionsStrategy & Business Development Matthias HeilmannMichele Fiorentino is the Executive Vice President, and Chief Executive Officer of Digital SolutionsStrategy & Business Development of the Company. Prior to joining the Company, in July 2017, he served as the Chief DigitalInvestment Officer President & Chief Executive Officer of Digital Solutions within GE Oil & Gasand Strategy Leader at ADNOC from 2016 through July 2017.April 2017 to May 2020. Prior to joining GE Oil & Gas,that, he led ABB’s Global Product Group Enterprise Software businessheld senior corporate strategy, finance, and sales roles at BP from June 2014September 1996 to January 2016. He served as the Chief Operating Officer of Ryerson Holding Corporation from March 2010 until January 2012 and served as Executive Vice President and Chief Operating Officer of Ryerson Inc. from January 2009 to January 2012.2017.
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Regina Jones
| | 51 | | |
William D. Marsh
| | 55 | | Chief Legal Officer William D. MarshRegina Jones is the Chief Legal Officer of the Company. Prior to joining the Company, in July 2017, heshe served as theExecutive Vice President, and General Counsel of Baker Hughes Incorporated from February 2013 to July 2017. He previously served as the Vice President-Legaland Corporate Secretary for Western Hemisphere at Baker Hughes IncorporatedDelek U.S. Holdings, Inc and Delek Logistics Partners LP from May 20092018 to February 2013April 2020. Prior to that, she worked at Schlumberger as General Counsel for the Land Rigs product line from June 2016 to May 2018 and heldin various executive,international legal roles in France, Malaysia and corporate roles within Baker Hughes Incorporatedthe United States from 19982005 to 2009.2018.
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Derek MathiesonRami Qasem | | 4754 | | Chief Marketing and Technology OfficerExecutive Vice President, Digital Solutions
Derek MathiesonRami Qasem is the Chief Marketing and Technology OfficerExecutive Vice President, Digital Solutions of the Company. Prior to this role, he served as President of the Middle East, North Africa, Turkey and India ("MENATI") region for the Company from July 2017 through January 2019. Prior to joining the Company, in July 2017, he served inas President of the MENATI region for GE Oil & Gas from 2011 to 2017 and various other leadership roles at Baker Hughes Incorporated including Chief Integration Officerwithin GE from October 20161997 to July 2017; Chief Commercial Officer from May 2016 to October 2016; Chief Technology and Marketing Officer from September 2015 to May 2016; Chief Strategy Officer from October 2013 to September 2015; President Western Hemisphere Operations from 2012 to 2013; President, Products and Technology from May 2009 to January 2012; and Chief Technology and Marketing Officer from December 2008 to May 2009.2011.
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Neil Saunders
| | 4852 | | Executive Vice President, Oilfield Equipment Neil Saunders is the President and Chief Executive Officer ofVice President, Oilfield Equipment of the Company. Prior to joining the Company in July 2017, he served as the President and Chief Executive Officer of the Subsea Systems & Drilling business at GE Oil & Gas from July 2016 to July 2017 and the Senior Vice President for Subsea Production Systems from August 2011 to July 2016. He served in various leadership roles within GE Oil & Gas from 2007 to August 2011. |
Uwem Ukpong
| | 46 | | Chief Global Operations Officer
Uwem Ukpong is the Chief Global Operations Officer of the Company. Prior to this role, he served as the Chief Integration Officer of the Company from July 2017 to January 2018. He served as Vice President, Baker Hughes Integration for GE Oil & Gas from October 2016 to July 2017 and President and CEO of the GE Oil & Gas Surface Business from January 2016 to October 2016. He held various technical and leadership roles at Schlumberger from 1993 to 2015.
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ITEM 1A. RISK FACTORS
The following risk factors should be considered carefully in addition to the other information contained in this Annual Report on Form 10-K.
annual report. There may be additional risks, uncertainties and matters not listed below, that we are unaware of, or that we currently consider immaterial. Any of these may adversely affect our business, financial condition, results of operations and cash flows and, thus, the value of an investment in the Company.
Risk Factors Related to Our BusinessOPERATIONAL RISKS
We operate in a highly competitive environment, which may adversely affect our ability to succeed.
We operate in a highly competitive environment for marketing oilfield products and services and securing equipment and trained personnel.equipment. Our ability to continually provide competitive products and services can impact our ability to defend, maintain or increase prices for our products and services, maintain market share, and negotiate acceptable contract terms with our customers. In order to be competitive, we must provide new and differentiating technologies, reliable products and services that perform as expected and that create value for our customers, and successfully recruit, train and retain competent personnel.customers.
In addition, our investments in new technologies, equipment, and properties, plants and equipmentfacilities may not provide competitive returns. Our ability to defend, maintain or increase prices for our products and services is in part dependent on the industry’s capacity relative to customer demand, and on our ability to differentiate the value delivered by our products and services from our competitors’ products and services. Managing development of competitive technology and new product introductions on a forecasted schedule and at a forecasted cost can impact our financial results. If we are unable to continue to develop and produce competitive technology or deliver it to our clients in a timely and cost-competitive manner in various markets in which we operate, or if competing technology accelerates the obsolescence of any of our products or services, any competitive advantage that we
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may hold, and in turn, our business, financial condition and results of operations could be materially and adversely affected.
Our business could be adversely affected by the widespread outbreak of a disease or virus. The current global spread of the COVID-19 virus has and may continue to materially and adversely affect our results of operations, cash flows, and financial condition for an indeterminate amount of time.
The markets have experienced volatility in oil demand due to the economic impacts of the COVID-19 pandemic. If demand for our products and services declines, the utilization of our assets and the prices we are able to charge our customers for our products and services could decline. The continued spread of COVID-19 or a similar pandemic could result in further instability in the markets and decreases in commodity prices resulting in further adverse impacts on our results of operations, cash flows, and financial condition.
In addition, the continued spread of the COVID-19 virus, or similar pandemics, and the continuation of the measures to try to contain the virus or similar viruses, such as vaccine mandates, travel bans and restrictions, quarantines, shelter in place orders, and shutdowns, may further impact our workforce and operations, the operations of our customers, and those of our vendors and suppliers. Also, if a significant number of our employees were to contract the virus or be quarantined, we may not be able to complete key or critical tasks, not limited to, but including key financial, reporting, and operational controls. There is considerable uncertainty regarding such measures and potential future measures which may result in labor disruptions, employee attrition, and could negatively impact our ability to attract and retain qualified employees, all of which could have a material adverse effect on our results of operations, cash flows, and financial condition.
Failure to effectively and timely execute our energy transition strategy could have an adverse effect on the demand for our technologies and services.
Our future success may depend upon our ability to effectively execute on our energy transition strategy. Our strategy depends on our ability to develop additional technologies and work with our customers and partners to advance new energy solutions such as carbon capture utilization and storage, hydrogen energy, geothermal, and other integrated solutions. If the energy transition landscape changes faster than anticipated or faster than we can transition or if we fail to execute our energy transition strategy as planned, demand for our technologies and services could be adversely affected.
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Disruptions in our supply chain, the high cost or unavailability of infrastructure,raw materials, equipment, and supplies and personnel, particularly in periods of rapid growth,essential to our business could adversely affect our ability to execute our operations on a timely basis.
Our manufacturing operations are dependent on having sufficient raw materials, component parts and manufacturing capacity, including labor, available to meet our manufacturing plans on a timely basis, at a reasonable cost while minimizing inventories. Our abilityDisruptions within our supply chain has had and may continue to effectively manage our manufacturing operations and meet these goals can have an impact on our business and reputation, including our ability to meet our manufacturing plans and revenue goals, control costs, and avoid shortages or over-supply of raw materials and component parts. Raw materials
If we are unable to attract and components of particular concern include steel alloys (including chromiumretain qualified personnel, we may not be able to execute our business strategy effectively and nickel), titanium, barite, beryllium, copper, lead, tungsten carbide, syntheticour operations could be adversely affected.
Our operations and natural diamonds, gels, sand and other proppants, printed circuit boards and other electronic components and hydrocarbon-based chemical feed stocks. Our ability to repair or replace equipment damaged or lost in the well can also impactfuture success depend on our ability to service our customers. A lack of manufacturing capacity could result in increased backlog, which may limit our ability to respond to orders with short lead times.
recruit, train, and retain qualified personnel. People are a key resource to developing, manufacturing, and delivering our products and providing technical services to our customers around the world. Our ability to manage the recruiting, training, retention and efficient usage of theA competent, well-trained, highly skilled, workforce required by our plansmotivated, and to manage the associated costs could impact our business. A well-trained, motivateddiverse workforce has a positive impact on our ability to attract and retain business. Periods of rapid growth present a challenge to us and our industry to recruit, train, and retain our employees, while also managing the impact of wage inflation and the limited available qualified labor in the markets where we operate.
Likewise, if the economy or markets decline or other changes occur, we may have to reduce utilization of our assets or adjust our workforce to control costs, which may cause us to lose some of our skilled employees. Labor-related actions, including strikes, slowdowns and facility occupations can also have a negative impact on our business.
Our business could be impacted by both geopolitical and terrorism threats in countries where we or our customers do business and our business operations may be impacted by civil unrest government expropriations and/or epidemic outbreaks.government expropriations.
Geopolitical and terrorism risksthreats continue to grow in a number of key countries where we currently or may in the future do business. Geopolitical and terrorism risksthreats, including armed conflict among countries, could lead to, among other things, a loss of our investment in the country, impairment of the safety ofadverse impact to our employees, and impairment of our or our customers’ ability to conduct operations.
In addition to other geopolitical and terrorism risks, civil unrest continues to grow in a number of keyseveral countries where we do business. Our ability to conduct business operations may be impacted by that civil unrest and our assets in these countries may also be subject to expropriation by governments or other parties involved in civil unrest. Epidemic outbreaks
Control of oil and natural gas reserves by national oil companies may alsoimpact the demand for our services and products and create additional risks in our operations.
Much of the world’s oil and natural gas reserves are controlled by national oil companies. National oil companies may require their contractors to meet local content requirements or other local standards, such as conducting our operations through joint ventures with local partners that could be difficult or undesirable for us to meet. The failure to meet the local content requirements and other local standards may adversely impact our business operations by, among other things, restricting travel to protect the health and welfare of our employees and decisions by our customers to curtail or stop operations in impacted areas.
Compliance with and changes in laws could be costly and could affect operating results.those countries. In addition, government disruptions could negatively impact our ability to conduct our business.
We have operations in the United States and in more than 120 countries that can be impacted by expected and unexpected changes in the legal and business environments in which we operate. Compliance-related issues could also limitwork with national oil companies is subject to our ability to do business in certain countriesnegotiate and impact our earnings. Changes that could impact the legal environment include new legislation, new regulations, new policies, investigations and legal proceedings and new interpretations of existing legal rules and regulations, in particular, changes in export control laws or exchange control laws, additional restrictions on doing business in countries subject to sanctions, and changes in laws in countries where we operate. In addition, changes and uncertainty in the political environments in which our businesses operate can have a material effect on the laws, rules, and regulations that affect our operations. Government disruptions may also delay or halt the granting and renewal of permits, licenses and other items required by us and our customers to conduct our business. The continued success of our global business and
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operations depends, in part, on our ability to continue to anticipate and effectively manage these and other political, legal and regulatory risks.
Increased cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted computer crime could pose risks to our systems, networks, products, solutions, services and data.
Increased global cybersecurity vulnerabilities, threats and more sophisticated and targeted cyber-related attacks pose risks to our systems, networks, products, solutions, services and data. Cybersecurity attacks also pose risks to our customers’, partners’, suppliers’ and third-party service providers’ products, systems and networks and the confidentiality, availability and integrity of our and our customers’ data. While we attempt to mitigate these risks, we remain vulnerable to additional known or unknown threats. Given our global footprint, the large number of customers with which we do business, and the increasing sophistication of cyber attacks, a cyber attack could occur and persist for an extended period of time without detection. We expect that any investigation of a cyber attack would be inherently unpredictable and that it would take time before the completion of any investigation and before there is availability of full and reliable information. During such time we would not necessarily know the extent of the harm or how best to remediate it, and certain errors or actions could be repeated or compounded before they are discovered and remediated, all or any of which would further increase the costs and consequences of a cyber attack.
We also may have access to sensitive, confidential or personal data or information in certain of our businesses that is subject to privacy and security laws, regulations and customer-imposed controls. Despite our efforts to protect sensitive, confidential or personal data or information, we may be vulnerable to material security breaches, theft, misplaced or lost data, programming errors, employee errors and/or malfeasance that could potentially lead to the compromising of sensitive, confidential or personal data or information, improper use of our systems, software solutions or networks, unauthorized access, use, disclosure, modification or destruction of information, defective products, production downtimes and operational disruptions. In addition, a cyber-related attack could adversely impact our operating results and result in other negative consequences, including damage to our reputation or competitiveness, remediation or increased protection costs, litigation or regulatory action.
Our failure to comply with the Foreign Corrupt Practices Act (FCPA) and other similar laws could have a negative impact on our ongoing operations.
Our ability to comply with the FCPA, the U.K. Bribery Act and various other anti-bribery and anti-corruption laws depends on the success of our ongoing compliance program, including our ability to successfully manage our agents and business partners, and supervise, train and retain competent employees. Our compliance program depends on the efforts of our employees to comply with applicable law and our internal policies. We could be subject to sanctions and civil and criminal prosecution, as well as fines and penalties, in the event of a finding of a violation of any of these laws by us or any of our employees.
Anti-money laundering and anti-terrorism financing laws could have significant adverse consequences for us.
We maintain an enterprise-wide program designed to enable us to comply with all applicable anti-money laundering and anti-terrorism financing laws and regulations, including the Bank Secrecy Act and the Patriot Act. This program includes policies, procedures, processes and other internal controls designed to identify, monitor, manage and mitigate the risk of money laundering or terrorist financing posed by our products, services, customers and geographic locale. These controls establish procedures and processes to detect and report suspicious transactions, perform customer due diligence, respond to requests from law enforcement, and meet all recordkeeping and reporting requirements related to particular transactions involving currency or monetary instruments. We cannot be sure our programs and controls are or will remain effective to ensure our compliance with all applicable anti-money laundering and anti-terrorism financing laws and regulations, and our failure to comply could subject us to significant sanctions, fines, penalties and reputational harm, all of which could have a material adverse effect on our business, results of operations and financial condition.
Changes in tax laws or tax rates, adverse positions taken by taxing authorities and tax audits could impact operating results.
Changes in tax laws or tax rates, changes in interpretation of tax laws, the resolution of tax assessments or audits by various tax authorities, and the ability to fully utilize tax loss carryforwards and tax credits could impact our operating results, including additional valuation allowances for deferred tax assets. In addition, we may periodically
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restructure our legal entity organization. If taxing authorities were to disagree with our tax positions in connection with any such restructurings, our effective tax rate could be materially impacted. Our tax filings for various periods will be subject to audit by the tax authorities in most jurisdictions where we conduct business. For example, tax assessments have been received from various taxing authorities and are currently at varying stages of appeals and/or litigation regarding these matters. These audits may result in assessment of additional taxes that are resolved with the authorities or through the courts. We believe these assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax law. Resolution of any tax matter involves uncertainties and there are no assurances that the outcomes will be favorable.agree upon acceptable contract terms.
Our operations involve a variety of operating hazards and risks that could cause losses.
The products that we manufacture and the services that we provide are complex, and the failure of our equipment to operate properly or to meet specifications may greatly increase our customers’ costs. In addition, many of these products are used in inherently hazardous industries, such as the offshore oilfield business. These hazards include blowouts, explosions, nuclear-related events, fires, collisions, capsizings, and severe weather conditions. These hazards could result in personal injury and loss of life, severe damage to or destruction of property and equipment, pollution or environmental damage and suspension of operations, as well as adversely affect our brand and reputation which is a key asset to our business. We may incur substantial liabilities or losses as a result of these hazards. While we maintain insurance protection against some of these risks, and seek to obtain indemnity agreements from our customers requiring the customers to hold us harmless from some of these risks, ourOur insurance and contractual indemnity protection may not be sufficient or effective to protect us under all circumstances or against all risks. The occurrence of a significant event, against which we were not fully insured or indemnified or the failure of a customer to meet its indemnification obligations to us, could materially and adversely affect our results of operations and financial condition.
Compliance with,Seasonal and rulings and litigation in connection with, environmental regulations and the environmental impacts of our or our customers’ operations may adversely affect our business and operating results.
We and our business are impacted by material changes in environmental laws, regulations, rulings and litigation. Our expectations regarding our compliance with environmental laws and regulations and our expenditures to comply with environmental laws and regulations, including (without limitation) our capital expenditures for environmental control equipment, are only our forecasts regarding these matters. These forecasts may be substantially different from actual results, which may be affected by factors such as: changes in law that impose restrictions on air emissions, wastewater management, waste disposal, hydraulic fracturing, or wetland and land use practices; more stringent enforcement of existing environmental laws and regulations; a change in our share of any remediation costs or other unexpected, adverse outcomes with respect to sites where we have been named as a potentially responsible party, including (without limitation) Superfund sites; the discovery of other sites where additional expenditures may be required to comply with environmental legal obligations; and the accidental discharge of hazardous materials.
International, national, and state governments and agencies continue to evaluate and promulgate legislation and regulations that are focused on restricting emissions commonly referred to as greenhouse gas (GHG) emissions. In the United States, the U.S. Environmental Protection Agency (EPA) has taken steps to regulate GHG emissions as air pollutants under the U.S. Clean Air Act of 1970, as amended. The EPA’s Greenhouse Gas Reporting Rule requires monitoring and reporting of GHG emissions from, among others, certain mobile and stationary GHG emission sources in the oil and natural gas industry, which in turn may include data from certain of our wellsite equipment and operations. In addition, the U.S. government has proposed rules in the past setting GHG emission standards for, or otherwise aimed at reducing GHG emissions from, the oil and natural gas industry. Caps on carbon emissions, including in the United States, have been and may continue to be established and the cost of such caps could disproportionately affect the fossil-fuel energy sector. We are unable to predict whether the proposed changes in laws or regulations ultimately will occur or what they ultimately will require, and accordingly, we are unable to assess the potential financial or operational impact they may have on our business.
Other developments focused on restricting GHG emissions include the United Nations Framework Convention on Climate Change, which includes the Paris Agreement and the Kyoto Protocol; the European Union Emission Trading System; the United Kingdom’s CRC Energy Efficiency and ESOS schemes; and, in the United States, the Regional Greenhouse Gas Initiative, the Western Climate Action Initiative, and various state programs implementing the California Global Warming Solutions Act of 2006 (known as Assembly Bill 32).
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Current or future legislation, regulations and developments, including those related to climate change, may curtail production and demand for hydrocarbons such as oil and natural gas in areas of the world where our customers operate, by shifting demand towards relatively lower carbon energy sources such as wind, solar and other renewables. Many governments are providing tax advantages and other subsidies and promoting technological research to support renewable energy sources, or are mandating the use of renewable fuels or technologies. These governmental initiatives, as well as increased societal awareness of climate change impacts, have also resulted in increased investor and consumer demand for renewable energy. Any resulting reduction in demand for oil and natural gasweather conditions could adversely affect future demand for our services and products, which may in turn adversely affect future results of operations.
Uninsured claimsVariation from normal weather patterns, such as cooler or warmer summers and litigation against us could adverselywinters, can have a significant impact our operating results.
We could be impacted by the outcome of pending litigation, as well as unexpected litigation or proceedings. While we have insurance coverage against operating hazards, including product liability claims and personal injury claims related to our products, to the extent deemed prudent by our management and to the extent insurance is available; no assurance can be given that the nature and amount of that insurance will be sufficient to fully indemnify us against liabilities arising out of pending and future claims and litigation. This insurance has deductibles or self-insured retentions and contains certain coverage exclusions. The insurance does not cover damages from breach of contract by us or based on alleged fraud or deceptive trade practices. In addition, the following risks apply with respect to our insurance coverage:
we may not be able to continue to obtain insurance on commercially reasonable terms;
we may be faced with types of liabilities that will not be covered by our insurance;
our insurance carriers may not be able to meet their obligations under the policies; or
the dollar amount of any liabilities may exceed our policy limits.
Control of oil and natural gas reserves by state-owned oil companies may impact the demand for our services and products and create additional risks in our operations.
Much of the world’s oil and natural gas reserves are controlled by state-owned oil companies. State-owned oil companies may require their contractors to meet local content requirements or other local standards, Adverse weather conditions, such as conductinghurricanes in the Gulf of
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Mexico, may interrupt or curtail our operations, through joint ventures with local partners that couldor our customers’ operations, cause supply disruptions and result in a loss of revenue and damage to our equipment and facilities, which may or may not be difficultinsured. For example, extreme winter conditions in Canada, Russia, or undesirable for us to meet. The failure to meet the local content requirements and other local standardsNorth Sea may adversely impactinterrupt or curtail our operations, or our customers’ operations, in those countries. In addition, our ability to work with state-owned oil companies isareas and result in a loss of revenue.
We are subject to risks related to our abilityrelationship with GE.
We are partially dependent on GE through, among other things, our reliance on the long-term agreements between the Company and GE. We are also a party to negotiate and agree upon acceptable contract terms.a number of licenses with GE that give us rights to intellectual property that is necessary or useful to our business. Failure of GE to comply with these agreements could have an adverse impact on our business operations.
CREDIT AND CUSTOMER CONTRACTING RISKS
Providing services on an integrated, turnkey, or turnkeyfixed price basis could require us to assume additional risks.
Many state-owned oil companies and other operatorsWe may requirechoose to enter into integrated contracts or turnkey contracts and we may choosewith our customers that require us to provide services and equipment outside of our core business. Providing services on an integrated or turnkey basis may also subject us to additional risks, such as costs associated with unexpected delays or difficulties in drilling or completion operations, project management interface risk, and risks associated with subcontracting and consortium arrangements. These integrated or turnkey contracts may be fixed price contracts that do not allow us to recover for cost over-runs unless they are directly caused by the customer.
SomeWe may not be able to satisfy technical requirements, testing requirements or other specifications required under our service contracts and equipment purchase agreements.
Our products are used in deepwater, and other harsh environments, and severe service applications. Our contracts with customers and customer requests for bids typically set forth detailed specifications or technical requirements for our products and services, which may also include extensive testing requirements. In addition, scrutiny of the offshore drilling industry has resulted in more stringent technical specifications for our products and more comprehensive testing requirements for our products to ensure compliance with such specifications. We cannot provide assurance that our products, including products supplied through joint ventures, will be able to satisfy the specifications or that we will be able to perform the full-scale testing necessary to prove that the product specifications are satisfied in future contract bids or under existing contracts, or that the costs of modifications to our products to satisfy the specifications and testing will not adversely affect our results of operations.
We sometimes enter into consortium or similar arrangements for certain projects, which could impose additional costs and obligations on us.
We sometimes enter into consortium or similar arrangements for certain projects. Under such arrangements, each party is responsible for performing a certain scope of work within the total scope of the contracted work, and the obligations expire when all contractual obligations are completed. The failure or inability, financially or otherwise, of any of the parties to perform their obligations could impose additional costs and obligations on us. These factors could result in unanticipated costs to complete the project, liquidated damages or contract disputes.
Our contracts may be terminated early in certain circumstances.
Our contracts with customers generally may be terminated by the customer for convenience, default, or extended force majeure (which could include inability to perform due to COVID-19). Termination for convenience may require the payment of an early termination fee by the customer, but the early termination fee may not fully compensate us for the loss of the contract. Termination by the customer for default or extended force majeure due to events outside of our control generally will not require the customer to pay an early termination fee.
Our financial position, results of operations, or cash flows could be materially adversely affected if our customers require bids in the form of long-term, fixed pricing contracts.
Someterminate some of our customers require bidscontracts and we are unable to secure new contracts on a timely basis and on substantially similar terms, if payments due under our contracts are suspended for an extended period of time, or if a number of our contracts in the formare renegotiated. Our remaining performance obligation ("RPO") is comprised of long-term, fixed pricing contracts that may require us to provide integrated project management services outside our normal discrete business and to act as project managers, as well as service providers, and may require us to assume additional risks associated with cost over-runs. These customers may provide us with inaccurate information in relation to their reserves. The estimation of reserves is a process that involves subjective judgment about likely location and volume, and estimates that prove inaccurate may result in cost over-runs, delays, and project losses for us or our customers, which may adversely impact our business.
Providing services on an integrated basis may also require us to assume additional risks associated with operating cost inflation, labor availability and productivity, supplier pricing and performance, and potential claims for liquidated damages. We typically rely on third-party subcontractors and equipment providers to assist us with the
unfilled
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completioncustomer orders for products and product services (expected life of these typescontract sales for product services). The actual amount and timing of contracts. To the extent that we cannot engage subcontractors or acquire equipment or materials in a timely manner and on reasonable terms, our ability to complete a project in accordance with stated deadlines or at a profitrevenues earned may be impaired. Ifsubstantially different than the reported RPO. The total dollar amount we are required to pay for these goods and services exceedsof the amount we have estimated in bidding for fixed-price work, we could experience losses in the performanceCompany’s RPO as of these contracts. These delays and additional costs may be substantial and we may be required to compensate our customers for these delays. This may reduce the profit to be realized or result in a loss on a project or harm to our relationships with our customers.December 31, 2021 was $23.6 billion.
The credit risks of having a concentrated customer base in the energy industry could result in losses.
Having a concentration of customers in the energy industry may impact our overall exposure to credit risk as our customers may be similarly affected by prolonged changes in economic and industry conditions. Some of our customers may experience extreme financial distress as a result of falling commodity prices and may be forced to seek protection under applicable bankruptcy laws, which may affect our ability to recover any amounts due from such customers. Furthermore, countries that rely heavily upon income from hydrocarbon exports have been and may in the future be negatively and significantly affected by a drop in oil prices, which could affect our ability to collect from our customers in these countries, particularly national oil companies. Laws in some jurisdictions in which we will operate could make collection difficult or time consuming. We will perform ongoing credit evaluations of our customers and do not expect to require collateral in support of our trade receivables. While we maintain reserves for potential credit losses, we cannot assure such reserves will be sufficient to meet write-offs of uncollectible receivables or that our losses from such receivables will be consistent with our expectations. Additionally, in the event of a bankruptcy of any of our customers, we may be treated as an unsecured creditor and may collect substantially less, or none, of the amounts owed to us by such customer.
Our backlog is subject to modification, termination or reduction of orders, which could negatively impact our sales.
Our backlog is comprised of unfilled customer orders for products and product services (expected life of contract sales for product services). Our backlog can be significantly affected by the timing of orders for large projects. Although modifications and terminations of orders may be partially offset by cancellation fees, customers can, and sometimes do, terminate or modify orders. Our failure to replace canceled orders could negatively impact our sales and results of operations. The total dollar amount of the Company’s backlog as of December 31, 2017 was $21,022 million.
We may not be able to satisfy technical requirements, testing requirements or other specifications required under our service contracts and equipment purchase agreements.
Our products are used in deepwater and other harsh environments and severe service applications. Our contracts with customers and customer requests for bids typically set forth detailed specifications or technical requirements for our products and services, which may also include extensive testing requirements. We anticipate that such testing requirements will become more common in our contracts. In addition, recent scrutiny of the offshore drilling industry has resulted in more stringent technical specifications for our products and more comprehensive testing requirements for our products to ensure compliance with such specifications. We cannot provide assurance that our products will be able to satisfy the specifications or that we will be able to perform the full-scale testing necessary to prove that the product specifications are satisfied in future contract bids or under existing contracts, or that the costs of modifications to our products to satisfy the specifications and testing will not adversely affect our results of operations. If our products are unable to satisfy such requirements, or we are unable to perform any required full-scale testing, our customers may cancel their contracts and/or seek new suppliers, and our business, results of operations, cash flows or financial position may be adversely affected.
Currency fluctuations or devaluations may impact our operating results.
Fluctuations or devaluations in foreign currencies relative to the U.S. dollar can impact our revenue and our costs of doing business, as well as the costs of doing business of our customers. Most of our products and services are sold through contracts denominated in U.S. dollars or local currency indexed to U.S. dollars, however, some of our revenue, local expenses and manufacturing costs are incurred in local currencies and therefore changes in the exchange rates between the U.S. dollar and foreign currencies can increase or decrease our revenue and expenses reported in U.S. dollars or revenue and expenses of our customers and, consequently, may impact the ability of our customers to satisfy their payment obligations and our results of operations.
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Changes in economic and/or market conditions may impact our ability to borrow and/or cost of borrowing.
The condition of the capital markets and equity markets in general can affect the price of BHGE common stock and our ability to obtain financing, if necessary. If our credit rating is ever downgraded, it could increase borrowing costs under credit facilities and commercial paper programs, as well as increase the cost of renewing or obtaining, or make it more difficult to renew, obtain or issue new debt financing.
An inability to protect our intellectual property rights could adversely affect our business.
There can be no assurance that the steps we take to obtain, maintain and protect our intellectual property rights will be completely adequate. Our intellectual property rights may fail to provide us with significant competitive advantages, particularly in foreign jurisdictions where we have not invested in an intellectual property portfolio or that do not have, or do not enforce, strong intellectual property rights. The weakening of protection of our trademarks, patents and other intellectual property rights could also adversely affect our business.
We are a party to a number of licenses that give us rights to intellectual property that is necessary or useful to our business, including from GE following the Transactions. Our success depends in part on the ability of our licensors to obtain, maintain and sufficiently enforce the licensed intellectual property rights we have commercialized. Without protection for the intellectual property rights we license, other companies might be able to offer substantially identical products for sale, which could adversely affect our competitive business position and harm our business products. Also, there can be no assurances that we will be able to obtain or renew from third parties the licenses to use intellectual property rights we need in the future, and there is no assurance that such licenses can be obtained on reasonable terms. Specifically we are a party to several agreements with GE which provide for intellectual property rights to use and access. Access and use of intellectual property created solely or collaboratively with GE is an important part of our operations. We would be adversely affected in the event these agreements were terminated without the right to continue such access as we might continue to improve current products and services or develop new ones.
We may be subject to litigation if another party claims that we have infringed upon its intellectual property rights.
The tools, techniques, methodologies, programs and components we use to provide our products and services may infringe upon the intellectual property rights of others or be challenged on that basis. Regardless of the merits, infringement claims may result in significant legal and other costs and may distract management from running our core business. Resolving such claims could increase our costs, including through royalty payments to acquire licenses, if available, from third parties and through the development of non-infringing technologies. If a license to resolve a claim were not available, we might not be able to continue providing a particular service or product, which could adversely affect our financial condition, results of operations and cash flows.
Risk Factors Related to the Worldwide Oil and Natural Gas Industry
Volatility of oil and natural gas prices can adversely affect demand for our products and services.
Prices of oil and gas products are set on a commodity basis. As a result, the volatility in oil and natural gas prices can impact our customers’ activity levels and spending for our products and services. Current energy prices are important contributors to cash flow for our customers and their ability to fund exploration and development activities. Although oil prices have risen over the past year, this increase follows a decline through most of 2016, and uncertainty remains about the trajectory of oil prices going forward. Expectations about future prices and price volatility are important for determining future spending levels.
Lower oil and natural gas prices generally lead to decreased spending by our customers. While higher oil and natural gas prices generally lead to increased spending by our customers, sustained high energy prices can be an impediment to economic growth, and can therefore negatively impact spending by our customers. Our customers also take into account the volatility of energy prices and other risk factors by requiring higher returns for individual projects if there is higher perceived risk. Any of these factors could affect the demand for oil and natural gas and could have a material effect on our results of operations.
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Demand for oil and natural gas is subject to factors beyond our control, which may adversely affect our operating results. Changes in the global economy could impact our customers’ spending levels and our revenue and operating results.
Demand for oil and natural gas, as well as the demand for our services and products, is highly correlated with global economic growth, and in particular by the economic growth of countries such as the U.S., India, China, and developing countries in Asia and the Middle East, which are either significant users of oil and natural gas or whose economies are experiencing the most rapid economic growth compared to the global average. Weakness or deterioration of the global economy or credit markets could reduce our customers’ spending levels and reduce our revenue and operating results. Incremental weakness in global economic activity, particularly in China, India, Europe, the Middle East and developing countries in Asia, could reduce demand for oil and natural gas and result in lower oil and natural gas prices. Incremental strength in global economic activity in such areas will create more demand for oil and natural gas and support higher oil and natural gas prices. A prolonged reduction in oil and natural gas prices may require us to record additional asset impairments. Such a potential impairment charge could have a material adverse impact on our operating results.
Requirements and voluntary initiatives to reduce emissions, as well as increased climate change awareness, are likely to result in increased costs for the oil and gas industry to curb emissions and could have an adverse impact on demand for oil and natural gas.
International, national, and state governments, agencies and bodies continue to evaluate and promulgate regulations and voluntary initiatives that are focused on restricting GHG emissions. These requirements and initiatives are likely to become more stringent over time and to result in increased costs for the oil and gas industry to curb GHG emissions. In addition, these developments may curtail production and demand for hydrocarbons such as oil and natural gas by shifting demand towards and investment in relatively lower carbon energy sources such as wind, solar and other renewables. The renewable energy industry is developing enhanced technologies and becoming more competitive with fossil-fuel energy. If renewable energy becomes more competitive than fossil-fuel energy, particularly during periods of higher oil and natural gas prices, it could have a material effect on our results of operations. Please see the section entitled "Risk Factors Related to Our Business-Compliance with, and rulings and litigation in connection with, environmental regulations and the environmental impacts of our or our customers’ operations may adversely affect our business and operating results."
Supply of oil and natural gas is subject to factors beyond our control, which may adversely affect our operating results.
Productive capacity for oil and natural gas is dependent on our customers’ decisions to develop and produce oil and natural gas reserves and on the regulatory environment in which our customers and we operate. The ability to produce oil and natural gas can be affected by the number and productivity of new wells drilled and completed, as well as the rate of production and resulting depletion of existing wells. Advanced technologies, such as horizontal drilling and hydraulic fracturing, improve total recovery but also result in a more rapid production decline and may become subject to more stringent regulation, particularly on the state or local level, in the future.
Productive capacity in excess of demand (“spare productive capacity”) is also an important factor influencing energy prices and spending by oil and natural gas exploration companies. Spare productive capacity and oil and natural gas storage inventory levels are an indicator of the relative balance between supply and demand. High or increasing storage, inventories, or spare productive capacity generally indicate that supply is exceeding demand and that energy prices are likely to soften. Low or decreasing storage, inventories, or spare productive capacity are generally an indicator that demand is growing faster than supply and that energy prices are likely to rise.
Access to prospects is also important to our customers, but such access may be limited because host governments do not allow access to the reserves. Government regulations and the costs incurred by oil and natural gas exploration companies to conform to and comply with government regulations may also limit the quantity of oil and natural gas that may be economically produced.
Supply can also be impacted by the degree to which individual OPEC nations and other large oil and natural gas producing countries, including, but not limited to, Norway and Russia, are willing and able to control production and exports of oil, to decrease or increase supply and to support their targeted oil price while meeting their market share objectives. Any of these factors could affect the supply of oil and natural gas and could have a material effect on our results of operations.
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Our customers’ activity levels and spending for our products and services and ability to pay amounts owed us could be impacted by the reduction of their cash flow and the ability of our customers to access equity or credit markets.
Our customers’ access to capital is dependent on their ability to access the funds necessary to develop economically attractive projects based upon their expectations of future energy prices, required investments and resulting returns. Limited access to external sources of funding has caused and may continue to cause customers to reduce their capital spending plans to levels supported by internally generated cash flow. In addition, a reduction of cash flow resulting from declines in commodity prices, a reduction in borrowing bases under reserve-based credit facilities or the lack of available debt or equity financing may impact the ability of our customers to pay amounts owed to us and could cause us to increase our reserve for doubtful accounts.credit losses.
SeasonalLEGAL AND REGULATORY RISKS
Compliance with and weather conditionschanges in laws could be costly and could affect operating results. In addition, government disruptions could negatively impact our ability to conduct our business.
We conduct business in more than 120 countries that can be impacted by expected and unexpected changes in the legal and business environments in which we operate. In particular, the shipment of goods, services and technology across international borders subjects us to extensive trade laws and regulations. Our import activities are governed by the unique customs laws and regulations in each of the countries where we operate. Pursuant to their laws and regulations, governments may impose economic sanctions against certain countries, persons and entities that may restrict or prohibit transactions involving such countries, persons and entities, which may limit or prevent our conduct of business in certain jurisdictions.
Compliance-related issues could limit our ability to do business in certain countries and impact our earnings or result in investigations leading to fines, penalties or other remedial measures. Changes that could impact the legal environment include new legislation, new regulations, new policies, investigations, and legal proceedings and new interpretations of existing legal rules and regulations, in particular, changes in export control laws or exchange control laws, additional restrictions on doing business in countries subject to sanctions, and changes in laws in countries where we operate. In addition, changes and uncertainty in the political environments in which our businesses operate can have a material effect on the laws, rules, and regulations that affect our operations. Government disruptions may also delay or halt the granting and renewal of permits, licenses and other items required by us and our customers to conduct our business. The continued success of our global business and operations depends, in part, on our ability to continue to anticipate and effectively manage these and other political, legal and regulatory risks.
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Our failure to comply with the Foreign Corrupt Practices Act ("FCPA") and other similar laws could have a negative impact on our ongoing operations.
Our ability to comply with the FCPA, the U.K. Bribery Act, and various other anti-bribery and anti-corruption laws depends on the success of our ongoing compliance program, including our ability to successfully manage our agents, distributors and other business partners, and supervise, train, and retain competent employees. We could be subject to sanctions and civil and criminal prosecution, fines and penalties, as well as legal expenses and reputational harm in the event of a finding of a violation of any of these laws by us or any of our employees.
Anti-money laundering and anti-terrorism financing laws could have adverse consequences for us.
Non-compliance with anti-money laundering, anti-terrorism financing and various other financial laws may subject us to sanctions, civil and criminal prosecution, fines and penalties, as well as legal expenses and potential reputational harm. We cannot be sure our programs and controls are or will remain effective to ensure our compliance with all applicable anti-money laundering and anti-terrorism financing laws and regulations.
Changes in tax laws, tax rates, tariffs, adverse positions taken by taxing authorities, and tax audits could impact operating results.
Changes in tax laws, tax rates, tariffs, changes in interpretation of tax laws, the resolution of tax assessments or audits by various tax authorities, and the ability to fully utilize tax loss carryforwards and tax credits could impact our operating results, including additional valuation allowances for deferred tax assets.
Uninsured claims and litigation against us could adversely impact our operating results.
We could be impacted by the outcome of pending litigation, as well as unexpected litigation or proceedings. While we have insurance coverage against operating hazards, including product liability claims and personal injury claims related to our products, to the extent deemed prudent by our management and to the extent insurance is available; no assurance can be given that the nature and amount of that insurance will be sufficient to fully indemnify us against liabilities arising out of pending and future claims and litigation.
We may be subject to litigation if another party claims that we have infringed upon, misappropriated or otherwise violated its intellectual property rights.
The tools, techniques, methodologies, programs and components we use to provide our products and services may infringe upon, misappropriate or otherwise violate the intellectual property rights of others or be challenged on that basis. Regardless of the merits, any such claims may result in significant legal and other costs and may distract management from running our core business. Resolving such claims could increase our costs, including through royalty payments to acquire licenses, if available, from third parties and through the development of replacement technologies. If a license to resolve a claim were not available, we might not be able to continue providing a particular service or product, which could adversely affect demand for our servicesfinancial condition, results of operations and operations.cash flows.
Variation from normal weather patterns, such as cooler or warmer summersCompliance with, and winters, can have a significant impact on demand for our servicesrulings and operations. Adverse weather conditions, such as hurricaneslitigation in connection with, environmental regulations and the Gulfenvironmental impacts of Mexico, may interrupt or curtail our operations may adversely affect our business and operating results.
We and our business are subject to extensive domestic and international environmental and safety regulations. In addition to environmental and safety regulatory compliance obligations, we may face liability arising out of the normal course of business, including alleged personal injury or property damage due to exposure of hazardous substances at our customers’ operations, cause supply disruptionscurrent or former facilities. Our expectations regarding our compliance with environmental laws and resultregulations and our expenditures to comply with environmental laws and regulations, including (without limitation) our capital expenditures for environmental control equipment, are only our forecasts regarding these matters. We may be impacted by material changes in a loss of revenueenvironmental and damagesafety regulations or subject to our equipment and facilities,substantial liability for environmental impacts. Our compliance cost forecasts may be substantially different from actual results, which may be affected by factors such as: changes in law that impose restrictions on air or may not be insured. For example, extreme winter conditionsother emissions, wastewater management, waste disposal, hydraulic fracturing, or wetland and land use practices; more stringent enforcement of existing environmental laws and regulations; a change in Canada, Russiaour share of any remediation costs or the North Sea may interrupt or curtail our operations, or our customers’ operations, in those areas and result inother unexpected, adverse outcomes with respect to sites where we have been named as a loss of revenue.potentially responsible
Risk Factors Related to the Transactions
We may experience challenges relating to the ongoing integration of Baker Hughes Incorporated and GE O&G thatHoldings LLC 2021 Form 10-K | 18
party, including (without limitation) Superfund sites; the discovery of other sites, or discovery of additional issues at existing sites, where additional expenditures may result in a decline in the anticipated benefits of the Transactions.
The Transactions involved the combination of two businesses that previously operated as independent businesses. The Company has been and will continue to be required to devote management attentioncomply with environmental legal obligations; and resourcesthe accidental discharge of hazardous materials.
Investor and public perception related to integrating itsthe company’s environment, social, and governance ("ESG") performance as well as current and future ESG reporting requirements may affect our business practices and operations.our operating results.
If we experience difficultiesIncreasing focus on ESG factors has led to enhanced interest in, and review of performance results by investors and other stakeholders, and the potential for litigation and reputational risk. Regulatory requirements related to ESG or sustainability reporting have been issued in the European Union that apply to financial market participants, with implementation and enforcement having started in 2021. In the integration process,U.S., such regulations have been issued related to pension investments in California, and for the anticipated benefitsresponsible investment of public funds in Illinois. Additional regulation is pending in other states. We may be affected by our ability to meet evolving and expanding emissions reporting requirements and by investor and public perception of our reporting and performance related to voluntary climate standards. We expect regulatory requirements related to ESG matters to continue to expand globally. We are committed to transparent and comprehensive reporting of our sustainability performance and report under standards such as the Transactions may not be realized fully or at all, may take longer to realize than expected, or be offsetGlobal Reporting Initiative’s G4 guidelines, the Sustainability Accounting Standards Board’s documentation, and recommendations issued by the decrease in business from certain customers. These integration matters could have an adverse effect on our business, results of operations, financial condition or other prospects on an ongoing basis.
We have incurred and will continue to incur transaction-related and restructuring costs in connection with the Transactions and the integration of the two businesses.
We have incurred transaction-related and restructuring costs in connection with the Transactions and will continue to incur such costs in connection with the integration of the businesses of Baker Hughes Incorporated and GE O&G. There are many systems that must be successfully integrated, including information management, purchasing, accounting and finance, sales, billing, payroll and benefits, fixed asset and lease administration systems and regulatory compliance. We are still assessing the magnitude of these costs and, therefore,Financial Stability Board's Task Force for Climate-related Financial Disclosures. If we are not able to provide estimatesmeet future sustainability reporting requirements of these costs. The costs relatedregulators or current and future expectations of investors, customers or other stakeholders, our business and ability to restructuring have been included as a liability in the purchase price allocationraise capital may be adversely affected.
International, national, and state governments and agencies continue to evaluate and promulgate legislation and regulations that are focused on reducing greenhouse gas ("GHG") emissions. Compliance with GHG emission regulations applicable to our or expensed as incurred, depending on the nature of the restructuring activity. Moreover, many of the expenses that will be incurred, by their nature, are difficult to estimate accurately. These expenses could, particularly in the near term, reduce the cost synergies that we achieve from the elimination of duplicative expenses and the realization of economies of scale and cost synergies related to the integration of the businesses following the completion of the Transactions, and accordingly, any net synergies may not be achieved in the near term or at all. These integration expenses may result in us taking significant charges against earnings following the completion of the Transactions.
The interests of GE as a controlling owner may differ from the interests of other owners of the Company.
GE has control over certain matters submitted to BHGE stockholders for approval, including changes in capital structure, transactions requiring BHGE stockholder approval under Delaware law and corporate governance, subject to the terms of the Stockholders Agreement relating to GE’s agreement to vote in favor of director nominees not designated by GE and to proposals by GE to acquire all of the shares of common stock of BHGE held by non-GE stockholders. GEour customers' operations may have different interests than other holders of BHGE common stock.
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Among other things, GE’s control could delay, defer, or prevent a sale of the Companysignificant implications that the Company’s other stockholders support, or, conversely, this control could result in the consummation of such a transaction that other stockholders do not support.
Given GE’s ownership in the Company and the interactions that have and will take place between the Company and GE through the GE Store and otherwise, the success of the Company depends in part on the reputation and success of GE.
If we were to cease being a majority-owned subsidiary of GE in the future, such a separation could adversely affect our business and profitability. Uncertainty aboutoperating results in the likelihoodfossil-fuel sectors, and boosting demand for technologies contributing to the reduction of GHG emissions.
In the United States, the U.S. Environmental Protection Agency ("EPA") has taken steps to regulate GHG emissions as air pollutants under the U.S. Clean Air Act of 1970, as amended. The EPA’s Greenhouse Gas Reporting Rule requires monitoring and reporting of GHG emissions from, among others, certain mobile and stationary GHG emission sources in the oil and natural gas industry, which in turn may include data from our equipment or operations. In addition, the U.S. government has proposed rules in the past setting GHG emission standards for, or otherwise aimed at reducing GHG emissions from, the oil and natural gas industry.
Caps or fees on carbon emissions, including in the U.S., have been and may continue to be established and the cost of such caps or fees could disproportionately affect the fossil-fuel sectors. We are unable to predict whether and when the proposed changes in laws or regulations ultimately will occur or what they ultimately will require, and accordingly, we are unable to assess the potential financial or operational impact they may have on our business.
Other developments focused on restricting GHG emissions include the United Nations Framework Convention on Climate Change, which includes implementation of the Paris Agreement and the Kyoto Protocol by the signatories; the Glasgow Climate Pact; the European Union Emission Trading System; Article 8 of the European Union Energy Efficiency Directive and the United Kingdom’s Streamlined Energy and Carbon Reporting ("SECR"); the European Commission’s proposed carbon border adjustment mechanism ("CBAM"); and, in the U.S., the Regional Greenhouse Gas Initiative, the Western Climate Action Initiative, and various state programs implementing the California Global Warming Solutions Act of 2006 (known as "Assembly Bill 32").
Requirements and voluntary initiatives to reduce greenhouse gas emissions, as well as increased climate change awareness, may result in increased costs for the oil and gas industry to curb greenhouse gas emissions and could have an adverse impact on demand for oil and natural gas.
International, national, and state governments, agencies and bodies continue to evaluate and promulgate regulations and voluntary initiatives that are focused on reducing GHG emissions. These requirements and initiatives are likely to become more stringent over time and to result in increased costs for the oil and gas industry to reduce GHG emissions. In addition, these developments, and public perception relating to climate change, may curtail production and demand for hydrocarbons such as oil and natural gas by shifting demand towards an
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investment in relatively lower carbon emitting energy sources and alternative energy solutions. If, for example, renewable energy becomes more competitive than fossil-fuel energy globally, it could have a material effect on our results of operations.
The potential for physical effects of climate change may pose future risks to our operations and those of our customers.
Physical climate change effects can include extreme variability in weather patterns such as increased frequency and severity of significant weather events (e.g. flooding, hurricanes and tropical storms), natural hazards (e.g., increased wildfire risk), rising mean temperature and sea levels, and long-term changes in precipitation patterns (e.g. drought, desertification, or poor water quality). Such effects have the potential to affect business continuity and operating results, particularly at facilities in coastal areas or areas prone to chronic water scarcity.
Changes in laws or regulations relating to data privacy and security, or any actual or perceived failure by us to comply with such separationlaws or regulations, or contractual or other obligations relating to data privacy or security, may adversely affect our business and operating results.
We may have access to sensitive, confidential, proprietary or personal data or information in certain of our businesses that is or may become subject to various data privacy and security laws, regulations, standards, contractual obligations or customer-imposed controls in the jurisdictions in which we operate. The legal and regulatory environment related to data privacy and security is increasingly rigorous, with new and constantly changing requirements applicable to our business, and enforcement practices are likely to remain uncertain for the foreseeable future. These laws and regulations may be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible that they will be interpreted and applied in ways that may adversely affect our business and operating results.
In the U.S., various federal and state regulators, including governmental agencies like the Federal Trade Commission, have adopted, or are considering adopting, laws, regulations and standards concerning personal information and data security. Internationally, laws, regulations and standards in many jurisdictions apply broadly to the collection, use, retention, security, disclosure, transfer and other processing of personal information or other data. These various and evolving federal, state and international laws, regulations and standards can differ significantly from one another and, given our global footprint, this may significantly complicate our compliance efforts and impose considerable costs, such as costs related to organizational changes and implementing additional protection technologies, which are likely to increase over time. In addition, compliance with applicable requirements may require us to modify our data processing practices and policies, distract management or divert resources from other initiatives and projects, all of which could adversely affect our business and operating results. Any failure or perceived failure by us to comply with any applicable federal, state or international laws, regulations, standards, or contractual or other obligations, relating to data privacy and security could result in damage to our reputation and our relationship with our customers, as well as proceedings or litigation by governmental agencies, customers or individuals, which could subject us to significant fines, sanctions, awards, penalties or judgments, all of which could adversely affect our business and operating results.
TECHNOLOGY RISKS
An inability to obtain, maintain, protect or enforce our intellectual property rights could adversely affect our business.
There can be no assurance that the steps we take to obtain, maintain, protect and enforce our intellectual property rights will be completely adequate. Our intellectual property rights may fail to provide us with significant competitive advantages, particularly in foreign jurisdictions where we have not invested in an intellectual property portfolio or that do not have, or do not enforce, strong intellectual property rights. The weakening of protection of our trademarks, patents and other intellectual property rights could also adversely affect our business, financial condition and resultsbusiness.
We are a party to a number of operations.
As a subsidiary of GE, we market manylicenses that give us rights to intellectual property that is necessary or useful to our business. Our success depends in part on the ability of our licensors to obtain, maintain, protect and sufficiently enforce the licensed intellectual property rights we have commercialized. Without protection for the intellectual property rights we license, other companies might be able to offer substantially identical products and services using the “GE” brand name and logo. We believe that the association with GE provides many benefits, including: a strong brand, broad research and development capabilities, elevated status with suppliers and customers, and established relationships with regulators.
Although GE has licensed to us the right to use certain “GE” marks in its corporate name and in the products and services of our business in connection with certain oil and gas activities and other discrete oil and gas segments, that right to use these marks would be lost if the license were to expire or otherwise terminate.
In addition, if we were to cease being a majority-owned subsidiary of GE, or there were otherwise a meaningful change in the relationships between GE and the Company, such an event(s)for sale, which could adversely affect amongour competitive business position and harm our business products. Also, there can be no
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assurances that we will be able to obtain or renew from third parties the licenses to use intellectual property rights we need in the future, and there is no assurance that such licenses can be obtained on reasonable terms. We would be adversely affected in the event that any such license agreement was terminated without the right for us to continue using the licensed intellectual property.
Increased cybersecurity vulnerabilities and threats, and more sophisticated and targeted cyber attacks and other things,security incidents, pose risks to our abilitysystems, data and business, and our relationships with customers and other third parties.
In the course of conducting our business, we may hold or have access to attractsensitive, confidential, proprietary or personal data or information belonging to us, our employees or third parties, including customers, partners or suppliers. Increased cybersecurity vulnerabilities and retain customers. Amongthreats, and more sophisticated and targeted cyber attacks and other things,security incidents, pose risks to our and our customers’, partners’, suppliers’ and third-party service providers’ systems, data, and business, and the confidentiality, availability and integrity of our and our employees’ and customers’ data. While we attempt to mitigate these risks, we remain vulnerable to cyber attacks and other security incidents, including ransomware incidences. Given our global footprint, the large number of customers, partners, suppliers and service providers with which we do business, and the increasing sophistication and complexity of cyber attacks, a cyber attack could occur and persist for an extended period without detection. Any investigation of a cyber attack or other security incident would be inherently unpredictable and it would take time before the completion of any investigation and before there is availability of full and reliable information. During such time we would not necessarily know the extent of the harm or how best to remediate it, and certain errors or actions could be repeated or compounded before they are discovered and remediated, all or any of which would further increase the costs and consequences of a cyber attack or other security incident. We may be required to expend significant resources to protect against, respond to, and recover from any cyber attacks and other security incidents. As cyber attacks continue to evolve, we may be required to provide more favorable pricingexpend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. In addition, our remediation efforts may not be successful. The inability to implement, maintain and upgrade adequate safeguards could materially and adversely affect our results of operations, cash flows, and financial condition.
In addition to our own systems, we use third-party service providers, who in turn may also use third-party providers, to process certain data or information on our behalf. Due to applicable laws and regulations or contractual obligations, we may be held responsible for cybersecurity incidents attributed to our service providers to the extent affecting information we share with them. Although we contractually require these service providers to implement and maintain reasonable security measures, we cannot control third parties and cannot guarantee that a security breach will not occur in their systems.
Despite our and our service providers’ efforts to protect our data and information, we and our service providers have been and may in the future be vulnerable to security breaches, ransomware attacks, theft, misplaced or lost data, programming errors, phishing attacks, denial of service attacks, acts of vandalism, computer viruses, malware, employee errors and/or malfeasance or similar events, including those perpetrated by criminals or nation-state actors, that could potentially lead to the compromise, unauthorized access, use, disclosure, modification or destruction of data or information, improper use of our systems, defective products, loss of access to our data, production downtimes and operational disruptions. In addition, a cyber attack or any other significant compromise or breach of our data security, media reports about such an incident, whether accurate or not, or, under certain circumstances, our failure to make adequate or timely disclosures to the public, law enforcement agencies or affected individuals following any such event, whether due to delayed discovery or a failure to follow existing protocols, could adversely impact our operating results and result in other negative consequences, including damage to our reputation or competitiveness, harm to our relationships with customers, partners, suppliers and other third parties, distraction to our management, remediation or increased protection costs, significant litigation or regulatory action, fines and penalties. Given the increased prevalence of customer-imposed cybersecurity controls and other related contractual obligations towards customers or other third parties, a cyber attack or other security incident also could result in breach of contract or indemnity claims against us by customers or other counterparties.
While we currently maintain cybersecurity insurance, such insurance may not be sufficient in type or amount to cover us against claims related to cybersecurity breaches or attacks, failures or other data security-related incidents, and we cannot be certain that cyber insurance will continue to be available to us on economically reasonable terms, or at all, or that an insurer will not deny coverage as to any future claim. The successful
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assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could materially and adversely affect our results of operations, cash flows, and financial condition.
INDUSTRY AND MARKET RISKS
Volatility of oil and natural gas prices can adversely affect demand for our products and services.
Prices of oil and gas products are set on a commodity basis. As a result, the volatility in oil and natural gas prices can impact our customers’ activity levels and spending for our products and services. Current energy prices are important contributors to cash flow for our customers and take other actiontheir ability to maintainfund exploration and development activities. Expectations about future prices and price volatility are important for determining future spending levels.
Demand for oil and natural gas is subject to factors beyond our relationshipcontrol, which may adversely affect our operating results. Changes in the global economy could impact our customers’ spending levels and our revenue and operating results.
Demand for oil and natural gas, as well as the demand for our services and products, is highly correlated with existing,global economic growth. A prolonged reduction in oil and attract new, customers, all of whichnatural gas prices may require us to record additional asset impairments. Such a potential impairment charge could have a material adverse effectimpact on our business, financial conditionoperating results.
Supply of oil and results of operations. For example, although GE would benatural gas is subject to certain non-compete restrictionsfactors beyond our control, which may adversely affect our operating results.
Productive capacity for a periodoil and natural gas is dependent on our customers’ decisions to develop and produce oil and natural gas reserves and on the regulatory environment in which our customers and we operate. The ability to produce oil and natural gas can be affected by the number and productivity of time followingnew wells drilled and completed, as well as the Company no longer being a majority-owned subsidiaryrate of GE,production and resulting depletion of existing wells.
Currency fluctuations or devaluations may impact our operating results.
Fluctuations or devaluations in foreign currencies relative to the absenceU.S. dollar can impact our revenue and our costs of an agreement regulatingdoing business, as well as the go-to-market strategy and the reciprocal commercial and technical support between GE and the Company, GEcosts of doing business of our customers.
Changes in economic and/or market conditions may attemptimpact our ability to compete with us with respect to certain technologies and customer projects where we have adjacent borrow and/or overlapping presence (e.g., steam turbines and gas turbines). Furthermore, we may lose cost synergies, joint investment and R&D opportunities, and access to customers, in fields where we and GE currently collaborate as per the termsof borrowing.
The condition of the Channel Agreement (e.g. additive manufacturing; digital).capital markets and equity markets in general may affect our ability to obtain financing, if necessary. If our credit rating is downgraded, it could increase borrowing costs under credit facilities and commercial paper programs, as well as increase the cost of renewing or obtaining, or make it more difficult to renew, obtain, or issue new debt financing.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 2022
ITEM 2. PROPERTIES
We own or lease numerous properties throughout the world. We consider our manufacturing plants, equipment assembly, maintenance and overhaul facilities, grinding plants, drilling fluids and chemical processing centers, and primary research and technology centers to be our principal properties. The following sets forth the location of our principal owned or leased facilities for our business segments as of December 31, 2017:
|
| | | | | | | |
| Oilfield Services: | | Houston, Pasadena, and The Woodlands, Texas; Broken Arrow and Claremore, Oklahoma - all located in the United States; Leduc, Canada; Celle, Germany; Tananger, Norway; Aberdeen, Scotland; Liverpool, England; Macae, Brazil; Singapore, Singapore; Kakinada, India; Nimr, Oman; Abu Dhabi and Dubai, United Arab Emirates; Dhahran, Saudi Arabia; Luanda, Angola; Port Harcourt, Nigeria |
| | |
| Oilfield Equipment: | | Houston and Humble, Texas - located in the United States; Montrose, Scotland; Nailsea and Newcastle, England; Niteroi, Brazil; Singapore, Singapore; Suzhou, China; Dammam, Saudi Arabia |
| | |
| Turbomachinery & Process Solutions: | | Deer Park, Texas and Jacksonville, Florida - located in the United States; Florence, Massa, Bari, and Massa,Talamona, Italy; Le Creusot, France; Coimbatore, India |
| | |
| Digital Solutions: | | Billerica, Massachusetts andMassachusetts; Minden, NevadaNevada; Longmont, Colorado; Twinsburg, Ohio - all located in the United States; Groby,Leicester and Cramlington, England; Shannon, Ireland; Hurth Germany
and Wunstorf, Germany; Shanghai, China |
We own or lease numerous other facilities such as service centers, blend plants, workshops and sales and administrative offices throughout the geographic regions in which we operate. We also have a significant investment in service vehicles, tools and manufacturing and other equipment. All of our owned properties are unencumbered. We believe that our facilities are well maintained and suitable for their intended purposes.
ITEM 3. LEGAL PROCEEDINGS
The information with respect to Item 3. Legal Proceedings is contained in "Note 15. Commitment17. Commitments and Contingencies" of the Notes to Consolidated Financial Statements in Item 8 herein.
The Company is reporting the following matter in compliance with SEC requirements to disclose environmental proceedings where the government is a party and that potentially involve monetary sanctions of $100,000 or greater. In January 2018, Kern County California issued an administrative enforcement order with a proposed penalty of $130,000 for alleged violations of process safety management regulations at a manufacturing facility in Taft, California that is indirectly owned by the Company.
ITEM 4. MINE SAFETY DISCLOSURES
Our barite mining operations, in support of our drilling fluids products and services business, are subject to regulation by the federal Mine Safety and Health Administration under the Federal Mine Safety and Health Act of 1977. We have no mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K to report for 2017.
the fiscal year ended December 31, 2021.
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 2123
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
None of our common unitsUnits are traded on any exchange.
ITEM 6. SELECTED FINANCIAL DATA[RESERVED]
The Selected Financial Data should be read in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data, both contained herein.
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| (In millions, except per unit amounts) | 2017 (1) | 2016 | 2015 | 2014 |
| Revenue | $ | 17,259 |
| $ | 13,269 |
| $ | 16,688 |
| $ | 19,191 |
|
| | | | | |
| Cost of revenue | 14,046 |
| 10,123 |
| 12,193 |
| 14,256 |
|
| Selling, general and administrative | 2,535 |
| 1,938 |
| 2,115 |
| 2,288 |
|
Restructuring, impairment and other (2) | 412 |
| 516 |
| 411 |
| 189 |
|
Goodwill impairment (3) | — |
| — |
| 2,080 |
| — |
|
Merger and related costs (4) | 373 |
| 33 |
| 27 |
| 67 |
|
| Operating income (loss) | (107 | ) | 659 |
| (138 | ) | 2,391 |
|
| Other non operating income, net | 78 |
| 27 |
| 100 |
| 124 |
|
Interest expense, net
| (131 | ) | (102 | ) | (120 | ) | (179 | ) |
| Income (loss) before income taxes and equity in loss of affiliate | (160 | ) | 584 |
| (158 | ) | 2,336 |
|
| Equity in loss of affiliate | (11 | ) | — |
| — |
| — |
|
| Income tax provision | (172 | ) | (250 | ) | (473 | ) | (484 | ) |
| Net income (loss) | (343 | ) | 334 |
| (631 | ) | 1,852 |
|
| Less: Net income (loss) attributable to noncontrolling interests | 7 |
| (69 | ) | (25 | ) | 12 |
|
| Net income (loss) attributable to Baker Hughes, a GE company LLC | $ | (350 | ) | $ | 403 |
| $ | (606 | ) | $ | 1,840 |
|
| | | | | |
| Cash distribution per common unit | $ | 0.35 |
| | | |
| | | | | |
| Balance Sheet Data: | | | | |
Cash and equivalents (5) | $ | 7,019 |
| $ | 981 |
| $ | 1,432 |
| $ | 1,390 |
|
| Total assets | 56,886 |
| 21,721 |
| 23,133 |
| 26,496 |
|
| Long-term debt | 6,312 |
| 38 |
| 13 |
| 14 |
|
| Total equity | 39,158 |
| 14,855 |
| 14,545 |
| 16,386 |
|
Notes to Selected Financial Data
| |
(1)
| The current year results are not comparable to prior years as they include the results of Baker Hughes from July 3, 2017. |
| |
(2)
| See "Note 16. Restructuring, Impairment and Other" of the Notes to Consolidated and Combined Financial Statements in Item 8 herein for further discussion. |
| |
(3)
| Goodwill impairment recognized in our OFS operating segment. See "Note 6. Goodwill and Intangible Assets" of the Notes to Consolidated and Combined Financial Statements in Item 8 herein for further discussion. |
| |
(4)
| See "Note 2. Business Acquisition" of the Notes to Consolidated and Combined Financial Statements in Item 8 herein for further discussion. |
| |
(5)
| Cash and equivalents includes $997 million of cash held on behalf of GE at December 31, 2017. |
BHGE LLC 2017 FORM 10-K | 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the condensed consolidatedand combined financial statements included in Item 8. Financial Statements and Supplementary Data contained herein.
EXECUTIVE SUMMARY
On July 3, 2017, we closed the Transactions to combine GE O&GFor management's discussion and Baker Hughes, creating a fullstream oilfield technology provider that has a unique mix of integrated oilfield products, services and digital solutions. As a result of the Transactions, BHGE became the holding company of the combined businesses. The Transactions were executed using a partnership structure, pursuant to which GE O&G and Baker Hughes each contributed their operating assets to the Company. GE holds an approximate 62.5% controlling interest in us and former Baker Hughes shareholders hold an approximate 37.5% interest through the ownership of 100% of the Class A common stock of BHGE. GE's interest is held through a voting interest of Class B Common Stock in BHGE and its economic interest through a corresponding numberanalysis of our common units. Thefinancial condition and results of operations for the Company include thefiscal year 2020 as compared to fiscal year 2019 please refer to Part II, Item 7. "Management's discussion and analysis of financial condition and results of Baker Hughes from July 3, 2017, the date of acquisition, throughoperations" on Form 10-K for our fiscal year ended December 31, 2017. The majority2020, filed with the Securities and Exchange Commission ("SEC") on February 25, 2021.
EXECUTIVE SUMMARY
We are an energy technology company with a broad and diversified portfolio of technologies and services that span the Baker Hughes business operations are included in the Oilfield Services segment. The Transactions were treated as a “reverse acquisition” for accounting purposesenergy and as such, the historical financial statements of the accounting acquirer, GE O&G, are the historical financial statements of the Company. The current year results, and balances, may not be comparable to prior years as the current year includes the results of Baker Hughes from July 3, 2017.industrial value chain. We operate through our four business segments: Oilfield Services (OFS)("OFS"), Oilfield Equipment (OFE)("OFE"), Turbomachinery & ProcessingProcess Solutions (TPS)("TPS"), and Digital Solutions (DS)("DS"). We sell products and services primarily in the global oil and gas markets, within the upstream, midstream and downstream segments.
As we reflect on the macro environment in 2021, the global economy continued to recover from the impact of December 31, 2017, BHGEthe COVID-19 global pandemic. The oil markets experienced increasing levels of demand and continued restraints on supply translating into a strong oil price recovery. For natural gas, a combination of demand and supply factors converged, pushing natural gas and LNG prices to record levels in both Europe and in Asia. The natural gas price spikes also highlighted the fragility of the global energy system as the world transitions to net zero emissions. The effects from variant strains of the COVID-19 virus continued to impact operations in the form of global chip shortages, supply chain challenges, and inflationary pressures in multiple parts of the world.
As we look ahead to 2022, we expect global economic growth to remain strong; however, growth rates are likely to moderate from 2021 levels as central banks are expected to begin tightening monetary policy in order to quell growing inflationary pressures. Despite the expected slowdown in the pace of growth, we believe the expected continuing broader macro recovery will translate into rising energy demand in 2022, with oil demand likely recovering to pre-pandemic levels by the end of the year. We expect continued momentum in the global natural gas markets in 2022, building on a strong 2021. Our positive long-term view on gas is also supported by the recent improvements in policy sentiment in certain parts of the world towards natural gas’ broader role within the energy transition.
Outside of the oil and gas industry, the focus on cleaner energy sources and technology to lower carbon emissions from resource-intensive industries continues to accelerate. In the U.S., Europe, and Asia, various renewables, and green and blue hydrogen projects are moving forward, as well as a number of CCUS projects. On the new energy front, we were active this year in pursuing early-stage technologies in CCUS and in hydrogen. In CCUS, we acquired a position in Electrochaea, a bio-methanation company, and also entered into an exclusive license with SRI International for mixed-salt process technology. In hydrogen, we made an investment in Ekona, a growth stage company developing novel turquoise hydrogen production technology, as well as Nemesys, a technology company focused on a range of early-stage hydrogen technologies.
Baker Hughes Holdings LLC employs over 64,000 employees2021 Form 10-K | 24
On the industrial front, we completed the acquisition of ARMS Reliability and operatesan investment in more than 120 countries.Augury, which will help Baker Hughes continue to build out its industrial asset management platform and deliver an expanded set of asset performance capabilities.
Baker Hughes was successful on many fronts in 2021, with key commercial successes and developments in the LNG and new energy markets, solid margin improvements, as well as strong cash flows from operating activities and free cash flow (a non-GAAP measure defined as cash flows from operating activities less expenditures for capital assets plus the proceeds from disposal of assets). Our strong cash flow performance provides our Company ample flexibility and optionality for our broader capital allocation strategy. As evidence of this, we returned almost $1.2 billion back to Members through distributions and buybacks in 2021, while also making multiple acquisitions and investments across the industrial and new energy spaces.
In 2017,2021, we generated revenue of $17,259 million,$20.5 billion, compared to $13,269 million$20.7 billion in 2016.2020. The increasedecrease in revenue was primarily driven primarily by lower volume in OFS as a result of the acquisition of Baker Hughes, and to a lesser extent, by DSOFE, partially offset by declineshigher volume in TPS and OFE.DS. Income before income taxes was $428 million in 2021, and included restructuring, impairment and other charges of $209 million, separation related costs of $60 million, a loss of $1,085 million related to our investment in C3 AI, partially offset by a gain of $241 million related to our investment in ADNOC Drilling, both recorded in other non-operating income/(loss). Loss before income taxes and equitywas $15.1 billion in loss of affiliate was $160 million in 2017,2020, and included restructuring andgoodwill impairment charges of $412$14.7 billion, restructuring, impairment and other charges of $1.9 billion, inventory impairment charges of $246 million, and merger andseparation related costs of $373 million. These restructuring and impairment charges were recorded as a result of our continued actions to adjust our operations and cost structure to reflect reduced activity levels. In 2016, income before income taxes and equity in loss of affiliate was $584 million, which also included restructuring and impairment charges of $516$134 million, and merger anda gain of $1.4 billion related costs of $33 million.to our investment in C3 AI recorded in other non-operating income.
OUTLOOK
Our business is exposed to a number of different macro factors, which influence our outlook and expectations and outlook.given the current volatile conditions in the industry. All of our outlook expectations are purely based on the market as we see it today, and are subject to change given volatilechanging conditions in the industry.
•North America onshore activity: We expect North American onshore to experience strong growth in 2017, we experienced an acceleration in rig count growth,2022, as compared to 2016.2021 should commodity prices remain at current levels.
•International onshore activity: We expect the increased activity inonshore spending outside of North America to continue to improve in 2022 as compared to 2021 should commodity prices remain at current levels.
•Offshore projects: We expect a modest recovery in offshore activity and the number of subsea tree awards to grow in 2018, however, at a slower pace than seen in 2017.2022 as compared to 2021.
•LNG projects: We remain optimistic abouton the outlook.
International onshore activity: we have seenLNG market long term and view natural gas as both a moderate increase in rig count activity in 2017transition and expect growth to continue into 2018, at a moderate rate.destination fuel. We have seen signs of improvement with the increase in commodity prices, but due to continued volatility, we remain cautious as to growth expectations.
Offshore projects: although commodity prices increased in 2017, we have yet to see a change in customer spending behavior, as a result of continued oil price volatility. We expect final investment decisions to continue to remain fluid. We have seen an increase in subsea tree awards in 2017, and expect tree awards to increase in 2018, but still at levels significantly below prior 2012 & 2013 peaks, as customers continue to remain cautious with regards to major capital expenditures for the near term.
Liquefied Natural Gas (LNG) projects: we believe the market continues to be oversupplied, and will remain in its current state for the next few years. We expect some final investment decisions to move forward in
BHGE LLC 2017 FORM 10-K | 23
the short term. We do, however, view the long termlong-term economics of the LNG industry as positive given our outlook for supply and demand.
Refinery, petrochemical and industrial projects: in refining, we believe large, complex refineries should gain advantage in a more competitive, oversupplied landscape in 2018 as the industry globalizes and refiners position to meet local demand and secure export potential. In petrochemicals, we continue to see healthy demand and cost-advantaged supply driving projects forward in 2018. The industrial market continues to grow as outdated infrastructure is replaced, policy changes come into effect and power is decentralized. We continue to see growing demand across these markets in 2018.positive.
We have other segments in our portfolio that are more correlated with differentvarious industrial metrics, including global GDP growth, such as our Digital Solutions business. segment.
We also have businesses within our portfolio that are exposed to new energy solutions, specifically focused around reducing carbon emissions of energy and broader industry, including hydrogen, geothermal, CCUS, and energy storage. We expect to see continued growth in these businesses as new energy solutions become a more prevalent part of the broader energy mix.
Overall, we believe our portfolio is uniquelywell positioned to compete across the energy value chain and deliver uniquecomprehensive solutions for our customers. We remain optimistic about the long-term economics of the oil and gas industry, but we are continuing to operate with flexibility given our expectations for volatility and changing assumptions in the near term.
In 2016, solar and wind net additions exceeded coal and gas for the firstflexibility. Over time, and it continued throughout 2017. Governments may change or may not continue incentives for renewable energy additions. In the long term, renewables' cost decline may accelerate to compete with new-built fossil capacity, however, we do not anticipate any significant impacts to our business in the foreseeable future.
Despite the near-term volatility, the long-term outlook for our industry remains strong. We believe the world’s demand for energy will continue to rise, and that hydrocarbons will play a major role in meeting the supply ofworld's energy will continue to increase in complexity, requiring greater service intensity and more advanced technology from oilfield service companies.needs for the foreseeable future. As such, we remain focused on delivering innovative, cost-efficientlow-emission, and cost-effective solutions that deliver step changes in operating and economic performance for our customers.
Baker Hughes Holdings LLC 2021 Form 10-K | 25
BUSINESS ENVIRONMENT
The following discussion and analysis summarizes the significant factors affecting our results of operations, financial condition and liquidity position as of and for the year ended December 31, 2017, 20162021 and 2015,2020, and should be read in conjunction with the consolidated and combined financial statements and related notes of the Company. Amounts reported in millions in graphs within this report are computed based on the amounts in hundreds. As a result, the sum of the components reported in millions may not equal the total amount reported in millions due to rounding.
We operate in more than 120 countries helping customers find, evaluate, drill, produce, transport and process hydrocarbon resources. Our revenue is predominately generated from the sale of products and services to major, national, and independent oil and natural gas companies worldwide, and is dependent on spending by our customers for oil and natural gas exploration, field development and production. This spending is driven by a number of factors, including our customers' forecasts of future energy demand and supply, their access to resources to develop and produce oil and natural gas, their ability to fund their capital programs, the impact of new government regulations and most importantly, their expectations for oil and natural gas prices as a key driver of their cash flows.
Oil and Natural Gas Prices
Oil and natural gas prices are summarized in the table below as averages of the daily closing prices during each of the periods indicated.
| | | | | | | | | | |
| 2021 | 2020 | | |
Brent oil prices ($/Bbl) (1) | $ | 70.86 | | $ | 41.96 | | | |
WTI oil prices ($/Bbl) (2) | 68.14 | | 39.16 | | | |
Natural gas prices ($/mmBtu) (3) | 3.89 | | 2.03 | | | |
(1)Energy Information Administration ("EIA") Europe Brent Spot Price per Barrel |
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Brent oil prices ($/Bbl) (1) | $ | 54.12 |
| | $ | 43.64 |
| | $ | 52.32 |
|
WTI oil prices ($/Bbl) (2) | 50.80 |
| | 43.29 |
| | 48.66 |
|
Natural gas prices ($/mmBtu) (3) | 2.99 |
| | 2.52 |
| | 2.62 |
|
| |
(1)
| Energy Information Administration (EIA) Europe Brent Spot Price per Barrel |
(2)EIA Cushing, OK WTI ("West Texas Intermediate") spot price
(3)EIA Henry Hub Natural Gas Spot Price per million British Thermal Unit
BHGE LLC 2017 FORM 10-K | 24After a volatile year in 2020, when oil prices dropped due to lower demand, the combination of demand and supply in 2021 resulted in higher oil prices and raised natural gas and LNG prices to record breaking levels.
| |
(2)
| EIA Cushing, OK WTI (West Texas Intermediate) spot price |
| |
(3)
| EIA Henry Hub Natural Gas Spot Price per million British Thermal Unit |
Outside North America, customer spending is most heavily influenced by Brent oil prices. The average Brent oil prices which fluctuated significantly throughout the year, rangingincreased to $70.86/Bbl in 2021 from $41.96/Bbl in 2020 and ranged from a low of $43.98/$50.37/Bbl in June 2017January 2021, to a high of $68.80/$85.76/Bbl in December 2017. Oil prices bottomed early in 2016 due to the impending production increases in Iran after economic sanctions were lifted. During 2017, OPEC considered production cuts, and in the fourth quarter they announced extensions to agreed-upon production cuts. As a result, in the fourth quarter of 2017, Brent oil prices shifted meaningfully higher. In addition, demand for oil was higher than expected due to robust consumption in North America and revisions to Chinese, Russian, and European demand growth expectations.October 2021.
In North America, customer spending is highly driven by WTI oil prices, which similarsimilarly to Brent oil prices, fluctuated significantly throughout the year, with the highest prices being recorded towards the end of the year. Overall, WTI oil priceson average increased to $68.14/Bbl in 2021 from $39.16/Bbl in 2020, and ranged from a low of $42.48/$47.47/Bbl in June 2017January 2021, to a high of $60.46/$85.64/Bbl in December 2017.
Although oil prices have rebounded more than 100% from the previous year's twelve-year low of $26/Bbl reached in February 2016 to near $60/Bbl at the end of 2017, there has yet to be any material change in customer behavior, other than in certain U.S. basins, to suggest a near-term broader recovery in activity levels.October 2021.
In North America, natural gas prices, as measured by the Henry Hub Natural Gas Spot Price, averaged $2.99 /mmBtu$3.89/mmBtu in 2017,2021, representing a 19%92% increase over the prior year. Throughout the year, Henry Hub Natural Gas Spot Prices ranged from a high of $3.71 /mmBtu$23.86/mmBtu in January 2017February 2021, to a low of $2.44 /mmBtu$2.43/mmBtu in February 2017.April 2021. According to the U.S. Department of Energy, ("DOE"), working natural gas in storage at the end of 20172021 was 3,1263,226 billion cubic feet ("Bcf"), which was 5.6%6.8%, or 185234 Bcf, below the corresponding week in 2016.2020.
Baker Hughes Rig Count
The Baker Hughes rig counts are an important business barometer for the drilling industry and its suppliers. When drilling rigs are active they consume products and services produced by the oil service industry. Rig count trends are driven by the exploration and development spending by oil and natural gas companies, which in turn is influenced by current and future price expectations for oil and natural gas. The counts may reflect the relative strength and stability of energy prices and overall market activity, however, these counts should not be solely relied on as other specific and pervasive conditions may exist that affect overall energy prices and market activity.
We have been providing rig counts to the public since 1944. We gather all relevant data through our field service personnel, who obtain the necessary data from routine visits to the various rigs, customers, contractors and
Baker Hughes Holdings LLC 2021 Form 10-K | 26
other outside sources as necessary. We base the classification of a well as either oil or natural gas primarily upon filings made by operators in the relevant jurisdiction. This data is then compiled and distributed to various wire services and trade associations and is published on our website. We believe the counting process and resulting data is reliable, however, it is subject to our ability to obtain accurate and timely information. Rig counts are compiled weekly for the U.S. and Canada and monthly for all international rigs. Published international rig counts do not include rigs drilling in certain locations, such as Russia, the Caspian region Iran and onshore China because this information is not readily available.
Rigs in the U.S. and Canada are counted as active if, on the day the count is taken, the well being drilled has been started but drilling has not been completed and the well is anticipated to be of sufficient depth to be a potential consumer of our drill bits. In international areas, rigs are counted on a weekly basis and deemed active if drilling activities occurred during the majority of the week. The weekly results are then averaged for the month and published accordingly. The rig count does not include rigs that are in transit from one location to another, rigging up, being used in non-drilling activities including production testing, completion and workover, and are not expected to be significant consumers of drill bits.
BHGE LLC 2017 FORM 10-K | 25
The rig counts are summarized in the table below as averages for each of the periods indicated.
| | | | | | | | | | |
| 2021 | 2020 | | |
| North America | 610 | | 522 | | | |
| International | 756 | | 827 | | | |
| Worldwide | 1,366 | | 1,349 | | | |
|
| | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| North America | 1,082 |
| | 642 |
| | 1,178 |
|
| International | 948 |
| | 956 |
| | 1,168 |
|
| Worldwide | 2,030 |
| | 1,598 |
| | 2,346 |
|
20172021 Compared to 20162020
Overall the rig count was 2,0301,366 in 2017,2021, an increase of 27%1% as compared to 20162020 due primarily to an increase in activity in North American activity.America partially offset by declines internationally. The rig count in North America increased 69% in 2017 compared to 2016. Internationally,17% and the international rig count decreased 1%9% in 2017 as2021 compared to the same period last year.2020.
Within North America, the increase was primarily driven by the landCanadian rig count, which was up 72%, partially offset by a48% on average when compared to the same period last year, and an increase in the U.S. rig count, which was up 10% on average. Internationally, the decrease in the offshore rig count of 16%. Internationally, the rig count decrease was driven primarily by decreases in Latin America of 7%, the Middle East region, Africa region and Europe region and Africa region, which were down by 4% and 2%of 21%, respectively, partially offset by the Asia-Pacific region, which was up 8%.
2016 Compared to 2015
Overall the rig count was 1,598 in 2016, a decrease of 32% as compared to 2015 due primarily to North American activity. The rig count in North America decreased 46% in 2016 compared to 2015. Internationally, the rig count decreased 18% in 2016 compared to 2015.
Within North America, the decrease was primarily driven by a 44% decline in oil-directed rigs. The natural gas-directed rig count in North America declined 50% in 2016 as natural gas well productivity improved. Internationally, the rig count decrease was driven primarily by decreases in Latin America which was down 38%, the Africa region, which was down 20%10%, and the Europe region and Asia-Pacific region, which were down 18% and 15%10%, respectively.
Key Performance Indicators (millions)
Product services and backlog of product services
Our consolidated and combined statement of income (loss) displays sales and costs of sales in accordance with SEC regulations under which "goods" is required to include all sales of tangible products and "services" must include all other sales, including other service activities. For the amounts shown below, we distinguish between "equipment" and "product services", where product services refer to sales under product services agreements, including sales of both goods (such as spare parts and equipment upgrades) and related services (such as monitoring, maintenance and repairs), which is an important part of its operations. We refer to "product services" simply as "services" within the Business Environment section of Management's Discussion and Analysis.
Backlog is defined as unfilled customer orders for products and services believed to be firm. For product services, an amount is included for the expected life of the contract.
BHGE LLC 2017 FORM 10-K | 26
Orders and Backlog as of December 31, 2017, 2016 and 2015 (millions)
Orders: In 2017, we recognized orders of $17,376 million, an increase of $6,103 million, or 54%, from 2016. The increase in orders was driven primarily by the acquisition of Baker Hughes. Service orders were up 38% and equipment orders were up 87%.
In 2016, we recognized orders of $11,273 million, a decrease of $4,112 million from 2015. Driven by broader market conditions, we continued to see delays in final investment decisions on projects and pricing pressure.
Backlog: As of December 31, 2017, backlog was $21,022 million, a decrease of $675 million, or 3%, from 2016. Equipment backlog decreased from 2016 primarily driven by a lower intake of large equipment orders. Service backlog increased from 2016 as a result of order intake.
As of December 31, 2016, backlog was $21,697 million, a decrease of $2,244 million from 2015 primarily driven by the decrease in equipment backlog of 32% as well as the strengthening of the U.S. dollar, which accounted for a decrease of $309 million. Services backlog increased by 5% to $15,223 million. Backlog remains strong and provides an indication of long-term revenue within the Company.
RESULTS OF OPERATIONS
The discussions below relating to significant line items from our consolidated and combined statements of income (loss) are based on available information and represent our analysis of significant changes or events that impact the comparability of reported amounts. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where reasonably practicable, have quantified the impact of such items. In addition, the discussions below for revenue and cost of revenue are on a total basis as the business drivers for product sales and services are similar. All dollar amounts in tabulations in this section are in millions of dollars, unless otherwise stated. Certain columns and rows may not add due to the use of rounded numbers.
The results of operations for the Company include the results of Baker Hughes from July 3, 2017, the date of acquisition, through the end of the year ended December 31, 2017. Our results of operations are evaluated by the Chief Executive Officer on a combined and consolidated basis as well as at the segment level.
BHGE LLC 2017 FORM 10-K | 27
The performance of our operating segments is evaluated based on segment operating income (loss), which is defined as income (loss) before income taxes and equity in loss of affiliate and before the following: net interest expense, net other non operatingnon-operating income (loss), corporate expenses, restructuring, impairment and other charges, goodwill and inventory impairment, merger and relatedimpairments, separation-related costs, goodwill impairment and certain gains and losses not allocated to the operating segments.
In evaluating the segment performance, the Company uses the following:
Volume & Price:Volume: Volume is the increase or decrease in products and/or services sold period-over-period excluding the impact of foreign exchange and price. The volume impact on profit is calculated by multiplying the prior period profit rate by the change in revenue volume between the current and prior period. Price isIt also includes price, defined as the
Baker Hughes Holdings LLC 2021 Form 10-K | 27
change in sales price for a comparable product or service period-over-period and is calculated as the period-over-period change in sales prices of comparable products and services.
Foreign Exchange (FX)("FX"):FX measures the translational foreign exchange impact, or the translation impact of the period-over-period change on sales and costs directly attributable to change in the foreign exchange rate compared to the USU.S. dollar. FX impact is calculated by multiplying the functional currency amounts (revenue or profit) with the period-over-period FX rate variance, using the average exchange rate for the respective period.
(Inflation)/Deflation: (Inflation)/deflation is defined as the increase or decrease in direct and indirect costs of the same type for an equal amount of volume. It is calculated as the year-over-year change in cost (i.e. price paid) of direct material, compensation &and benefits, and overhead costs.
Productivity: Productivity is measured by the remaining variance in profit, after adjusting for the period-over-period impact of volume &and price, foreign exchange and (inflation)/deflation as defined above. Improved or lower period-over-period cost productivity is the result of cost efficiencies or inefficiencies, such as cost decreasing or increasing more than volume, or cost increasing or decreasing less than volume, or changes in sales mix among segments. This also includes the period-over-period variance of transactional foreign exchange, aside from those foreign currency devaluations that are reported separately for business evaluation purposes.
Orders and Remaining Performance Obligations
Our statement of income (loss) displays sales and costs of sales in accordance with SEC regulations under which “goods” is required to include all sales of tangible products and “services” must include all other sales, including other services activities. For the amounts shown below, we distinguish between “equipment” and “product services,” where product services refers to sales under product services agreements, including sales of both goods (such as spare parts and equipment upgrades) and related services (such as monitoring, maintenance and repairs), which is an important part of our operations. We refer to “product services” simply as “services” within Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Orders: We recognized orders of $21.7 billion and $20.7 billion in 2021 and 2020, respectively. In 2021, equipment orders were up 3% and service orders were up 6%, compared to 2020.
Remaining Performance Obligations ("RPO"): As of December 31, 2021 and 2020, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $23.6 billion and $23.4 billion, respectively.
Revenue and Segment Operating Income (Loss) Before Tax
Revenue and segment operating income (loss) for each of our four operating segments is provided below. | | | | | | | | | | | | | |
| Year Ended December 31, | | | $ Change |
| 2021 | 2020 | From 2020 to 2021 |
| Revenue: | | | | | |
| Oilfield Services | $ | 9,542 | | $ | 10,140 | | | | $ | (598) | |
| Oilfield Equipment | 2,486 | | 2,844 | | | | (358) | |
| Turbomachinery & Process Solutions | 6,417 | | 5,705 | | | | 712 | |
| Digital Solutions | 2,057 | | 2,015 | | | | 42 | |
| Total | $ | 20,502 | | $ | 20,705 | | | | $ | (203) | |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | $ Change |
| | 2017 | 2016 | 2015 | From 2016 to 2017 | From 2015 to 2016 |
| Revenue: | | | | | |
| Oilfield Services | $ | 5,851 |
| $ | 799 |
| $ | 1,411 |
| $ | 5,052 |
| $ | (612 | ) |
| Oilfield Equipment | 2,637 |
| 3,547 |
| 5,060 |
| (910 | ) | (1,513 | ) |
| Turbomachinery & Process Solutions | 6,463 |
| 6,837 |
| 7,985 |
| (374 | ) | (1,148 | ) |
| Digital Solutions | 2,309 |
| 2,086 |
| 2,232 |
| 223 |
| (146 | ) |
| Total | $ | 17,259 |
| $ | 13,269 |
| $ | 16,688 |
| $ | 3,990 |
| $ | (3,419 | ) |
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 28
| | | | | | | | | | | | | | Year Ended December 31, | | $ Change | |
| | Year Ended December 31, | $ Change | | 2021 | 2020 | | From 2020 to 2021 | |
| | 2017 | 2016 | 2015 | From 2016 to 2017 | From 2015 to 2016 | |
| Segment operating income (loss): | | | |
| Segment operating income: | | Segment operating income: | | | | |
| Oilfield Services | $ | 71 |
| $ | (204 | ) | $ | (79 | ) | $ | 275 |
| $ | (125 | ) | Oilfield Services | $ | 761 | | $ | 487 | | | $ | 274 | | |
| Oilfield Equipment | 38 |
| 320 |
| 677 |
| (282 | ) | (357 | ) | Oilfield Equipment | 69 | | 19 | | | 50 | | |
| Turbomachinery & Process Solutions | 853 |
| 1,255 |
| 1,684 |
| (402 | ) | (429 | ) | Turbomachinery & Process Solutions | 1,050 | | 805 | | | 245 | | |
| Digital Solutions | 333 |
| 355 |
| 409 |
| (22 | ) | (54 | ) | Digital Solutions | 126 | | 193 | | | (67) | | |
| Total segment operating income (loss) | 1,295 |
| 1,726 |
| 2,691 |
| (431 | ) | (965 | ) | |
| Total segment operating income | | Total segment operating income | 2,006 | | 1,504 | | | 502 | | |
| Corporate | (373 | ) | (380 | ) | (260 | ) | 7 |
| (120 | ) | Corporate | (429) | | (464) | | | 35 | | |
Inventory impairment and related charges (1) | (244 | ) | (138 | ) | (51 | ) | (106 | ) | (87 | ) | |
Inventory impairment (1) | | Inventory impairment (1) | — | | (246) | | | 246 | | |
| Goodwill impairment | | Goodwill impairment | — | | (14,717) | | | 14,717 | | |
| Restructuring, impairment and other | (412 | ) | (516 | ) | (411 | ) | 104 |
| (105 | ) | Restructuring, impairment and other | (209) | | (1,866) | | | 1,657 | | |
| Goodwill impairment | — |
| — |
| (2,080 | ) | — |
| 2,080 |
| |
| Merger and related costs | (373 | ) | (33 | ) | (27 | ) | (340 | ) | (6 | ) | |
| Separation related | | Separation related | (60) | | (134) | | | 74 | | |
| Operating income (loss) | (107 | ) | 659 |
| (138 | ) | (766 | ) | 797 |
| Operating income (loss) | 1,310 | | (15,922) | | | 17,232 | | |
| Other non operating income, net | 78 |
| 27 |
| 100 |
| 51 |
| (73 | ) | |
| Other non-operating income (loss), net | | Other non-operating income (loss), net | (583) | | 1,040 | | | (1,623) | | |
| Interest expense, net | (131 | ) | (102 | ) | (120 | ) | (29 | ) | 18 |
| Interest expense, net | (299) | | (264) | | | (35) | | |
| Income (loss) before income taxes and equity in loss of affiliate | (160 | ) | 584 |
| (158 | ) | (744 | ) | 742 |
| |
| Equity in loss of affiliate | (11 | ) | — |
| — |
| (11 | ) | — |
| |
| Income (loss) before income taxes | | Income (loss) before income taxes | 428 | | (15,146) | | | 15,574 | | |
| | Provision for income taxes | (172 | ) | (250 | ) | (473 | ) | 78 |
| 223 |
| Provision for income taxes | (772) | | (650) | | | (122) | | |
| Net income (loss) | $ | (343 | ) | $ | 334 |
| $ | (631 | ) | $ | (677 | ) | $ | 965 |
| |
| Net loss | | Net loss | $ | (344) | | $ | (15,796) | | | $ | 15,452 | | |
| |
(1)(1)Inventory impairments are reported in "Cost of goods sold" of the consolidated statements of income (loss). | Inventory impairments and related charges are reported in the "Cost of goods sold" caption of the consolidated and combined statements of income (loss). 2017 includes $87 million of adjustments to write-up the acquired inventory to its estimated fair value on acquisition of Baker Hughes as this inventory was used or sold in the six months ended December 31, 2017. |
Fiscal Year 20172021 to Fiscal Year 20162020
Revenue in 20172021 was $17,259$20,502 million, a decrease of $203 million, or 1%, from 2020. This decrease in revenue was largely a result of decreased activity in OFS and OFE, partially offset by an increase of $3,990 million, or 30%, from 2016. This increase was primarily driven by the acquisition of Baker Hughes.in TPS and DS. OFS increased $5,052 million, DS increased $223decreased $598 million, OFE decreased $910$358 million, TPS increased $712 million, and TPS decreased $374DS increased $42 million.
Total segment operating income in 20172021 was $1,295$2,006 million, a decreasean increase of $431$502 million, or 25%33%, from 2016.2020. The acquisition of Baker Hughes added $309increase was primarily driven by OFS, which increased $274 million, of segment operating income, but was more thanTPS, which increased $245 million, and OFE, which increased $50 million, partially offset by the organic impact of lower productivity and pricing pressure. OFS increased $275 million, TPSDS, which decreased $402 million, OFE decreased $282 million and DS decreased $22$67 million.
Oilfield Services
OFS 20172021 revenue was $5,851$9,542 million, an increasea decrease of $5,052$598 million, or 6%, from 2016,2020, primarily as a result of the acquisition of Baker Hughes on July 3, 2017.
OFS 2017 segment operating income was $71 million,decreased international activity in 2021 compared to 2020, as evidenced by a loss of $204 milliondecline in 2016. The acquisition of Baker Hughes added $315 million of segment operating income, which includes increased depreciation & amortization expense driven by purchase accounting, partially offset by pricing pressure.
Oilfield Equipment
OFE 2017 revenue was $2,637 million, a decrease of $910 million, or 26%, from 2016. The revenue decline was primarily due to continued volume pressuresthe corresponding rig count, and, to a lesser extent, to negative pricing,decreased activity in North America and supply chain constraints in the second half of 2021. North America revenue was $2,773 million in 2021, a decrease of $28 million from 2020. International revenue was $6,769 million in 2021, a decrease of $569 million from 2020, primarily driven by declines in the delaysMiddle East, partially offset by growth in final investment decisionsLatin America.
OFS 2021 segment operating income was $761 million, compared to $487 million in 2020. The increase was primarily driven by our customershigher cost productivity as a result of cost efficiencies and restructuring actions, and price in prior years.certain product lines, partially offset by lower volume and commodity costs inflation.
Oilfield Equipment
OFE 2021 revenue was $2,486 million, a decrease of $358 million, or 13%, from 2020. The decrease was primarily driven by lower volume in the subsea production systems business, the disposition of the surface pressure control flow business in the fourth quarter of 2020, and the removal of subsea drilling systems from consolidated OFE operations in the fourth quarter of 2021 due to the formation of a joint venture, partially offset by higher volume in the services and flexible pipe businesses.
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 29
OFE 20172021 segment operating income was $38$69 million, compared to $320$19 million in 2016. This decline in profitability2020. The increase was the result of negativeprimarily driven by higher cost productivity from our cost out programs and volume, while strong deflation savings more than offset pricing pressures.favorable business mix.
Turbomachinery & Process Solutions
TPS 20172021 revenue was $6,463$6,417 million, a decreasean increase of $374$712 million, or 5%12%, from 2016.2020. The declineincrease was primarily attributable to negative pricing and to a lesser extent to volume decreases, driven by lowerhigher equipment contracts being awarded in prior years and continued softness in theprojects revenue, as well as higher services market.volume. In 2021, equipment revenue represented 45% and services revenue represented 55% of total revenue. Equipment revenue was up 15% year-over-year, and services revenue was up 10% year-over-year.
TPS 20172021 segment operating income was $853$1,050 million, compared to $1,255$805 million in 2016. This decline2020. The increase in profitability was driven primarily due toby higher volume and increased cost productivity, partially offset by unfavorable cost productivity. Other factors were lower margin equipment backlog throughput and the impact of negative pricing.business mix.
Digital Solutions
DS 20172021 revenue was $2,309$2,057 million, an increase of $223$42 million, or 11%2%, from 2016,2020, mainly driven by higher volume across the acquisition of Baker Hughes which added $211 million ofProcess & Pipeline Services and Waygate Technologies businesses, partially offset by declines in the Nexus Controls business. DS revenue versus the prior year.growth was affected by supply chain constraints that impacted product deliveries.
DS 20172021 segment operating income was $333$126 million, compared to $355$193 million in 2016. This decline2020. The decrease in profitability was primarily driven by pricing pressurelower cost productivity and to a lesser extent by the Baker Hughes acquisition contributing a $5 million segment operating loss.unfavorable business mix.
Corporate
In 2017,2021, corporate expenses were $373$429 million, a decrease of $7$35 million compared to 2016. This was 2020, primarily duedriven by lower expenses as a result of cost efficiencies and restructuring actions.
Inventory Impairment
There were no inventory impairments during 2021. In 2020, we recorded inventory impairments of $246 million primarily related to selective decreasesour Oilfield Services segment as a result of certain restructuring activities initiated by the Company. Charges for inventory impairments are predominately reported in R&D program investmentsthe "Cost of goods sold" caption of the consolidated statements of income (loss).
Goodwill Impairment
There were no goodwill impairments during 2021. During the first quarter of 2020, Baker Hughes' market capitalization declined significantly driven by current macroeconomic and cost productivity.geopolitical conditions including the decrease in demand caused by the COVID-19 pandemic and collapse of oil prices driven by both surplus production and supply. Based on these events, we concluded that a triggering event occurred and we performed an interim quantitative impairment test as of March 31, 2020. Based upon the results of the impairment test, we recognized a goodwill impairment charge of $14,717 million during the first quarter of 2020. There were no other goodwill impairments during 2020.
Restructuring, Impairment and Other
In 2017,2021, we recognized $412$209 million in restructuring, impairment and other charges. The charges in 2021 primarily relate to the initiatives in our OFS segment that are the continuation of our overall strategy to right-size our structural costs.
In 2020, we recognized $1,866 million in restructuring, impairment and other charges. These charges primarily related to the restructuring plan announced in the first quarter of 2020, which included product line rationalization actions, headcount reductions in certain geographical locations, and other initiatives to right-size operations for anticipated activity levels and market conditions.
Baker Hughes Holdings LLC 2021 Form 10-K | 30
Separation Related
We recorded $60 million of separation related costs in 2021, a decrease of $104 million compared to 2016. This decrease was driven by the absence of any significant currency devaluations in Angola and Nigeria that were experienced in 2016.
Merger and Related Costs
We recorded $373 million of merger and related costs in 2017, an increase of $340$74 million from the prior year,year. Costs relate to the ongoing activities for the separation from GE, primarily related to information technology.
Other Non-Operating Income/(Loss), Net
In 2021, we recorded $583 million of other non-operating loss. Costs in 2021 include losses of $1,085 million from marking our investment in C3 AI to fair value, partially offset by a gain of $241 million from marking our investment in ADNOC Drilling to fair value, by the acquisitionreversal of Baker Hughes.$121 million of current accruals due to the settlement of certain legal matters, and by income of $121 million for liabilities that are recoverable as they are indemnified under the Tax Matters Agreement with GE. This income from indemnified liabilities has an offset in the "Provision for income taxes" caption in our consolidated statements of income (loss).
In 2020, we recorded $1,040 million of other non-operating income. Included in this amount was a gain of $1,417 million related to marking our investment in C3 AI to fair value, partially offset by losses of $353 million for the sale of the rod lift systems business in OFS, and the sale of the surface pressure control flow business in OFE.
Interest Expense, Net
In 2017,2021, we incurred net interest expense of $131$299 million, an increase of $29$35 million from the prior year, primarily driven by higher interest expense, mainly related to $28 million of costs associated with the debt acquired on the acquisitionrefinancing of Baker Hughes.our senior notes due December 2022, and lower interest income.
Income TaxTaxes
In 2017,2021, our income tax expense decreased by $78was $772 million, an increase of $122 million, from $250$650 million in 2016 to $172 million in 2017. This decrease2020. The increase was primarily due to a benefit of $32 milliontax expense related to recent U.S.unrecognized tax reformbenefits and a declinethe geographical mix of earnings. Our 2021 income tax expense includes $121 million that is recoverable as it relates to liabilities indemnified under the Tax Matters Agreement with GE. This tax expense has an offset in profit.the "Other non-operating income (loss), net" caption in our consolidated statements of income (loss). In addition, since we are a partnership for U.S. federal tax purposes, any tax benefits associated with U.S. losses are recognized by our membersMembers and not reflected in our tax expense.
Fiscal Year 2016 to Fiscal Year 2015
Revenue in 2016 was $13,269 million, a decrease of $3,419 million, or 20%, from 2015. This decrease was primarily due to the continued decline in customer activity across all product lines due to the continued weakness in oil prices. OFE decreased $1,513 million, TPS decreased $1,148 million, OFS decreased $612 million, and DS decreased $146 million.
BHGE LLC 2017 FORM 10-K | 30
Total segment operating income in 2016 was $1,726 million, a decrease of $965 million, or 36%, from 2015. This decrease was primarily driven by the combined impact of lower volume and pricing pressure. TPS decreased $429 million, OFE decreased $357 million, OFS decreased $125 million, and DS decreased $54 million.
Oilfield Services
OFS 2016 revenue was $799 million, a decrease of $612 million, or 43%, from 2015. This decline was primarily driven by the impact of lower oil prices on customer purchasing decisions throughout the year.
OFS 2016 segment operating loss was $204 million, compared to a loss of $79 million in 2015. This decline in profitability was mainly due to lower cost productivity, partially offset by cost deflation.
Oilfield Equipment
OFE 2016 revenue was $3,547 million, a decrease of $1,513 million, or 30%, from 2015. This decline was primarily due to customers’ activity reductions, and to a lesser extent to the strengthening of the U.S. dollar.
OFE 2016 segment operating income was $320 million, compared to $677 million in 2015. This decline in profitability was the result of lower revenue and negative pricing, as well as lower cost productivity, partially offset by deflation savings.
Turbomachinery & Process Solutions
TPS 2016 revenue was $6,837 million, a decrease of $1,148 million, or 14%, from 2015. The decline was primarily attributable to decreases in volume and price, driven by uncertainty in the broader market, and delays in equipment contracts.
TPS 2016 segment operating income was $1,255 million, compared to $1,684 million in 2015. This decline in profitability was primarily due to the impact of lower volume and negative pricing.
Digital Solutions
DS 2016 revenue was $2,086 million, a decrease of $146 million, or 7%, from 2015. This decline was due to lower sales volume driven by the delay of capital spending projects in the oil and gas sector.
DS 2016 segment operating income was $355 million, compared to $409 million in 2015. This decline in profitability was driven by lower cost productivity and weaker sales volume.
Corporate
In 2016, corporate expenses were $380 million, an increase of $120 million compared to 2015. This was primarily due to selective increases in R&D program investments and lower cost productivity.
Restructuring, Impairment and Other
In 2016, we recognized $516 million in restructuring, impairment and other charges, an increase of $105 million compared to 2015. This increase was driven by continued focus on cost rationalization to better align our operating structure to the market conditions, and significant currency devaluations in Angola and Nigeria.
Merger and Related Costs
We recorded $33 million of merger and related costs in 2016, an increase of $6 million from the prior year, primarily related to the acquisition of Baker Hughes.
Interest Expense, Net
In 2016, we incurred net interest expense of $102 million, a decrease of $18 million from the prior year, primarily related to the factoring of accounts receivable, mainly with GE Capital.
BHGE LLC 2017 FORM 10-K | 31
Income Tax
In 2016, our income tax expense decreased by $223 million, to $250 million from $473 million in 2015. This decrease was primarily due to a decline in profit excluding the impairment of non-deductible goodwill of $453 million that occurred in 2015, partially offset by a decrease in the benefit from global operations including foreign tax credit benefits of $132 million.
COMPLIANCE
We, in the conduct of all of our activities, are committed to maintaining the core values of our two legacy companies, GE Oil & Gas and Baker Hughes Incorporated,Company, as well as high safety, ethical, and quality standards (Standards) as also reported in our Quality Management System (QMS)("QMS"). We believe such a commitment is integral to running a sound, successful, and sustainable business. To ensure that we live up to our high Standards, weWe devote significant resources to maintain a comprehensive global ethics and compliance program (Compliance Program)("Compliance Program") which is designed to prevent, detect, and appropriately respond in a timely fashion to any potential violations of the law, ourthe Code of Conduct, (The Spirit & The Letter), and other BHGECompany policies and procedures.
Highlights of our Compliance Program include the following:
•Comprehensive internal policies over such areas as anti-bribery; travel, entertainment, gifts and charitable donations connected to government officials;officials and other parties; payments to commercial sales representatives; and, the use of non-U.S. police or military organizations for security purposes. In addition, there are country-specific guidance forpolicies and procedures to address customs standards,requirements, visa processing risks, export and re-export controls, economic sanctions, anti-money laundering and antiboycottanti-boycott laws.
•Global and independent structure of LegalChief Compliance CounselOfficer and Professionalsother compliance professionals providing compliance advice, customized training investigations, and governance, as well as investigating concerns across all regions and countries where we do business.
•Comprehensive employee compliance training program that combines instructor-led and web-based training modules tailored to the key risks that employees face on an ongoing basis.
Baker Hughes Holdings LLC 2021 Form 10-K | 31
•Due diligence and monitoring procedures for third parties who conduct business on our behalf, including channel partners (sales representatives, distributors, resellers), and administrative service providers.
•Due diligence procedures for commercial sales agents, administrative service providers, and professional consultants, and an enhanced risk-based process for classifying channel partners and suppliers.
Due diligence procedures for merger and acquisition activities.
•Specifically tailored compliance risk assessments and audits focused on country and third party risk.
•Compliance Review Board comprised of senior officers of the Company that meets quarterly to monitor effectiveness of the Compliance Program, as well as Product Companyproduct company and regional compliance committees that meet quarterly.
•Technology to monitor and report on compliance matters, including an internal investigations management system, a web-based antiboycottanti-boycott reporting tool, and global trade management systems.systems and comprehensive watch list screening.
•Data privacy compliance policies and procedures to ensure compliance with applicable data privacy requirements.
•A compliance program designed to create an “Open Reporting Environment” where employees are encouraged to report any ethics or compliance matter without fear of retaliation, including a global network of trained employee ombudspersons, and a worldwide, 24-hour business helpline operated by a third party and available in 150approximately 200 languages.
•Centralized finance organization with company-wide policies.
•Anti-corruption audits of high-risk countries, conducted by Legal Compliance and Internal Audit, as well as risk basedrisk-based compliance audits of third parties conducted by Legal Compliance.parties.
A centralized human resources function, including locally compliant•We have region-specific processes and procedures for management of HR related issues, including implementation of locally compliant standards for pre-hire screening of employees; a process to screen existing employees prior to promotion tointo select roles where
BHGE LLC 2017 FORM 10-K | 32
they may be exposed to finance and/or corruption-related risks; and implementation of a global new hire training module which includes compliance training module for all employees.
LIQUIDITY AND CAPITAL RESOURCES
Our objective in financing our business is to maintain sufficient liquidity, adequate financial resources, and financial flexibility in order to fund the requirements of our business. Despite the challenging dynamics that began in 2020 as a result of the COVID-19 pandemic, we continue to maintain solid financial strength and liquidity. At December 31, 2017,2021, we had cash and cash equivalents of $7.0$3.8 billion compared to $981 million of cash and equivalents$4.1 billion at December 31, 2016. Cash2020. Our liquidity is further supported by a revolving credit facility of $3 billion, and equivalents includes $997 millionaccess to both commercial paper and uncommitted lines of cash held on behalf of GE atcredit. At December 31, 2017.2021, we had no borrowings outstanding under the revolving credit facility, our commercial paper program or our uncommitted lines of credit. Our next debt maturity is December 2023.
At December31, 2017, approximately $3.2 billion of ourWe held cash and cash equivalents was held by foreign subsidiaries compared toin the U.S. of approximately $878 million at$1.6 billion and $1.0 billion and outside the U.S. of approximately $2.2 billion and $3.1 billion as of December 31, 2016.2021 and 2020, respectively. A substantial portion of the cash held by foreign subsidiariesoutside the U.S. at December 31, 20172021 has been reinvested in active non-U.S. business operations. At December 31, 2017, our intent is, among other things, to use this cash to fund the operations of our foreign subsidiaries, and we have not changed our indefinite reinvestment decision as a result of U.S. tax reform but will reassess this during the course of 2018. If we decide at a later date to repatriate those funds to the U.S., we may incur other additional taxes that would not be required to provide taxes on certain of those funds, however, duesignificant to the enactment of U.S.total tax reform, repatriations of foreign earnings will generally be free of U.S. federal tax but may incur other taxes such as withholding or state taxes.provision.
On July 3, 2017, in connection with the Transactions, we entered intoWe have a new five-year $3 billion committed unsecured revolving credit facility (2017("the Credit Agreement)Agreement") with commercial banks maturing in July 2022. As of December 31, 2017, there were no borrowings under the 2017 Credit Agreement.
On November 3, 2017, we entered into a commercial paper program under which we may issue from time to time up to $3 billion in commercial paper with maturities of no more than 397 days. At December 31, 2017, there were no borrowings outstanding under the commercial paper program.2024. The maximum combined borrowing at any time under both the 2017 Credit Agreement and the commercial paper program is $3 billion.
On November 6, 2017, BHGE announced that its board of directors authorized us to repurchase up to $3 billion of our common units from GE and BHGE. As of December 31, 2017, we repurchased 16,173,202 of our common units for total consideration of $501 million.
On December 15, 2017, we filed a shelf registration statement on Form S-3 with the SEC to give us the ability to sell up to $3 billion in debt securities in amounts to be determined at the time of an offering. Any such offering, if it does occur, may happen in one or more transactions. The specific terms of any securities to be sold will be described in supplemental filings with the SEC. The registration statement will expire in 2020.
During the year ended December 31, 2017, we used cash to fund a variety of activities including certain working capital needs and restructuring costs, capital expenditures, business acquisitions, repurchases of our common units and distributions to members. We believe that cash on hand, cash flows generated from operations and the available credit facility will provide sufficient liquidity to manage our global cash needs.
Cash Flows
Cash flows provided by (used in) each type of activity were as follows for the years ended December 31:
|
| | | | | | | | | |
| (In millions) | 2017 | 2016 | 2015 |
| Operating activities | $ | (799 | ) | $ | 262 |
| $ | 1,277 |
|
| Investing activities | (4,130 | ) | (472 | ) | (466 | ) |
| Financing activities | 10,915 |
| (102 | ) | (515 | ) |
BHGE LLC 2017 FORM 10-K | 33
Operating Activities
Our largest source of operating cash is payments from customers, of which the largest component is collecting cash related to product or services sales including advance payments or progress collections for work to be performed. The primary use of operating cash is to pay our suppliers, employees, tax authorities and others for a wide range of material and services.
Cash flows from operating activities used cash of $799 million and generated cash of $262 million for the years ended December 31, 2017 and 2016, respectively. Cash flows from operating activities decreased $1,061 million in 2017 primarily driven by a $1,201 million negative impact from ending our receivables monetization program in the fourth quarter, and restructuring related payments throughout the year. These cash outflows were partially offset by strong working capital cash flows, especially in the fourth quarter of 2017. Included in our cash flows from operating activities for 2017 and 2016 are payments of $612 million and $177 million, respectively, made for employee severance and contract termination costs as a result of our restructuring activities initiated during the year.
Cash flows from operating activities generated $262 million and $1,277 million for the years ended December 31, 2016 and 2015, respectively. Cash flows from operating activities decreased $1,015 million in 2016 primarily due to the decrease in net income, partially offset by improvements in other working capital categories, due to improvements in the collection of past due receivables, improved inventory management and restructuring.
Investing Activities
Cash flows from investing activities used cash of $4,130 million, $472 million and $466 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Our principal recurring investing activity is the funding of capital expenditures to ensure that we have the appropriate levels and types of machinery and equipment in place to generate revenue from operations. Expenditures for capital assets totaled $665 million, $424 million and $607 million for 2017, 2016 and 2015, respectively, partially offset by cash flows from the sale of property, plant and equipment of $172 million, $20 million and $30 million in 2017, 2016 and 2015, respectively. Proceeds from the disposal of assets related primarily to equipment that was lost-in-hole, and to property, machinery and equipment no longer used in operations that was sold throughout the period.
In 2017, cash flows from investing activities also includes $7,498 million of distribution to BHGE to fund the special dividend paid by BHGE to former Baker Hughes stockholders on the acquisition of Baker Hughes, net of $4,133 million of cash received from the acquisition. There were no material business dispositions in 2017.
There were no material acquisitions or dispositions in 2016, however, in 2015 we generated cash of approximately $181 million from business dispositions and utilized cash of $86 million for business acquisitions.
Financing Activities
Cash flows from financing activities generated cash of $10,915 million; and used cash of $102 million and $515 million for the years ended December 31, 2017, 2016 and 2015, respectively.
In 2017, our primary source of financing cash flows was a contribution of $7,400 million from GE to fund substantially all of the distribution made to BHGE for the special dividend paid to former Baker Hughes stockholders. We also generated financing cash flows of $3,950 million from debt issued through a private placement offering on December 11, 2017. We incurred issuance costs of $26 million related to this debt issuance.
We had net repayments of short-term debt of $663 million and $156 million in 2017 and 2016, respectively, and net borrowings of $177 million in 2015.
In December 2017, we purchased $176 million of the aggregate outstanding principal amount associated with our long-term outstanding notes and debentures. Pursuant to a cash tender offer, the purchases resulted in the payment of an early-tender premium, including various fees, of $28 million.
BHGE LLC 2017 FORM 10-K | 34
Additionally, in 2017, we made a distribution of $406 million to our members and used $477 million of cash to repurchase our common units from our members, including GE, on a pro rata basis. The repurchases did not result in a change of GE's approximate 62.5% interest in us.
Cash flows from financing activities in 2017 also included net transfers from GE of $1,498 million primarily driven by the cash pooling activity with GE prior to the Transactions. Other financing items during the year included a payment of $193 million to complete the purchase of the non-controlling interest in the Pipeline Inspection and Integrity business within Digital Solutions.
Available Credit Facility and Commercial Paper Program
On July 3, 2017, in connection with the Transactions, we entered into a new five-year $3 billion committed unsecured revolving credit facility (the 2017 Credit Agreement) with commercial banks maturing in July 2022. The 2017 Credit Agreement contains certain customary representations and warranties, certain customary affirmative covenants and nocertain customary negative covenants. Upon the occurrence of certain events of default, our obligations under the 2017 Credit Agreement may be accelerated. Such events of default include payment defaults to lenders under the 2017 Credit Agreement and other customary defaults. No such events of default have occurred. We were in compliance with all of the credit facility's covenants, and in 2017 there werehave no borrowings under the credit facility.Credit Agreement.
On November 3, 2017,Baker Hughes Holdings LLC 2021 Form 10-K | 32
In addition, we entered intohave a commercial paper program under which we may issue from time to time up to $3 billion in commercial paper with maturities of no more than 397 days. As a result of the repayment of £600 million of our commercial paper on April 30, 2021, originally issued in May of 2020 under the COVID Corporate Financing Facility established by the Bank of England, our authorized commercial paper program was reduced from $3.8 billion to $3 billion.
Certain Senior Notes contain covenants that restrict our ability to take certain actions. See "Note 10. Borrowings" of the Notes to Consolidated Financial Statements in this Annual Report for further details. At December 31, 20172021, we had no borrowings outstanding under the commercial paper program.were in compliance with all debt covenants.
The maximum combined borrowing at any time under both the 2017 Credit AgreementWe continuously review our liquidity and the commercial paper program is $3 billion.
capital resources. If market conditions were to change, for instance due to the uncertainty created by a global pandemic or a significant decline in oil and gas prices, and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be reduced.negatively impacted. Additionally, it could cause the rating agencies to lower our credit rating.ratings. There are no ratings triggers that would accelerate the maturity of any borrowings under our committed credit facility. However,facility; however, a downgrade in our credit ratings could increase the cost of borrowings under the credit facility and could also limit or preclude our ability to issue commercial paper. Should this occur, we could seek alternative sources of funding, including borrowing under the credit facility.
During the year ended December 31, 2021, we dispersed cash to fund a variety of activities including certain working capital needs, restructuring and GE separation related costs, capital expenditures, distributions to Members, repayment of debt, and repurchases of our Units.
Cash Flows
Cash flows provided by (used in) each type of activity were as follows for the years ended December 31:
| | | | | | | | | |
| (In millions) | 2021 | 2020 | |
| Operating activities | $ | 2,370 | | $ | 1,301 | | |
| Investing activities | (463) | | (618) | | |
| Financing activities | (2,142) | | 225 | | |
Fiscal Year 2021 to Fiscal Year 2020
Operating Activities
Our largest source of operating cash is payments from customers, of which the largest component is collecting cash related to our sales of products and services including advance payments or progress collections for work to be performed. The primary use of operating cash is to pay our suppliers, employees, tax authorities and others for a wide range of goods and services.
Cash flows from operating activities generated cash of $2,370 million and $1,301 million for the years ended December 31, 2021 and 2020, respectively. For the year ended December 31, 2021, cash generated from operating activities were primarily driven by net losses adjusted for certain noncash items (including depreciation, amortization and loss on equity securities). In addition, working capital, which includes contract and other deferred assets, generated $515 million of cash in 2021 primarily due to accounts payable, inventories and contract and other deferred assets partially offset by accounts receivable and progress collections, as we continue to make progress on improving our working capital processes. Restructuring and GE separation related payments were $175 million on a net basis in 2021 and include the proceeds from the disposal of certain facilities, which are reflected below in investing activities.
In 2020, working capital generated $212 million of cash primarily due to receivables and positive progress collections partially offset by accounts payable. Restructuring and GE separation related payments were $670 million in 2020.
Baker Hughes Holdings LLC 2021 Form 10-K | 33
Investing Activities
Cash flows from investing activities used cash of $463 million and $618 million for the years ended December 31, 2021 and 2020, respectively.
Our principal recurring investing activity is the funding of capital expenditures to ensure that we have the appropriate levels and types of machinery and equipment in place to generate revenue from operations. Expenditures for capital assets totaled $856 million and $974 million for 2021 and 2020, respectively, partially offset by cash flows from the sale of property, plant and equipment of $315 million and $187 million in 2021 and 2020, respectively. Proceeds from the disposal of assets related to equipment that was lost-in-hole, and to property, machinery and equipment no longer used in operations that was sold throughout the period.
In 2021, we contributed our subsea drilling systems business to create a joint venture and received as consideration 50% of the shares of the joint venture, cash of $70 million, and a promissory note of $80 million. In 2020, we received proceeds of $187 million primarily from the sale of our rod lift systems and our surface pressure control flow businesses.
We invested $179 million during 2021 in adding capabilities to our new energy and industrial asset management offerings through the acquisition of business interests in Augury, Ekona Power and Electrochaea, among others.
In 2021, we sold approximately 2.2 million shares of C3 AI Class A common stock and received proceeds of $145 million, which is reported as other investing activity.
Financing Activities
Cash flows from financing activities used cash of $2,142 million and generated cash of $225 million for the years ended December 31, 2021 and 2020, respectively.
We had net repayments of short-term debt of $41 million and $204 million and long-term debt of $1,313 million and $42 million in 2021 and 2020, respectively. The repayment of long-term debt in 2021 was primarily driven by the early repayment of our 2.773% Senior Notes due December 2022 ("the 2022 Notes") with a principal amount of $1,250 million. In addition, a charge of $28 million related to the early redemption was recorded within "Interest expense, net" in our consolidated statement of income (loss).
In December 2021, we received proceeds from the issuance of $650 million aggregate principal amount of 1.231% Senior Notes due December 2023 and $600 million aggregate principal amount of 2.061% Senior Notes due December 2026. In 2020, we had proceeds from the issuance of $500 million aggregate principal amount of 4.486% Senior Notes due May 2030.
We repaid $832 million (£600 million) of commercial paper in April 2021 originally issued in May 2020 ($737 million at date of issuance) under the COVID Corporate Financing Facility established by the Bank of England.
During 2021 and 2020, we made distributions of $748 million and $744 million to our Members, respectively.
On July 30, 2021, Baker Hughes' Board of Directors authorized us to repurchase up to $2 billion of our Units. During 2021, we repurchased and canceled 17.6 million Units for a total of $434 million.
Cash Requirements
In 2018, weWe believe cash on hand, cash flows from operating activities, the available debtrevolving credit facility, access to both our commercial paper program or our uncommitted lines of credit, and availability under our existing shelf registration, and the 2017 Credit Agreementregistrations of debt will provide us with sufficient capital resources and liquidity in the short-term and long-term to manage our working capital needs, meet contractual obligations, fund capital expenditures and distributions, to members,repay debt, repurchase our common units, and support the development of our short-term and long-term operating strategies. IfWhen necessary, we may issue commercial paper or other short-term debt to fund cash needs in the U.S. in excess of the cash generated in the U.S.
Baker Hughes Holdings LLC 2021 Form 10-K | 34
Our capital expenditures can be adjusted and managed by us to match market demand and activity levels. In light of theBased on current market conditions, capital expenditures in 20182022 will be made as appropriate at a rate that we estimate would equal up to 5% of annual revenue. The expenditures are expected to be used primarily for normal, recurring items necessary to support our business. We also anticipate making income tax payments in the range of $325$525 million to $375$625 million in 2018.
BHGE LLC 2017 FORM 10-K | 35
2022.
Contractual Obligations and Commitments
In the table below, we set forthOur material cash commitments from known contractual and other obligations consist primarily of obligations for long-term debt and related interest, leases for property and equipment, and purchase obligations as part of normal operations. Certain amounts included in our contractual obligations as of December 31, 2017. Certain amounts included in this table2021 are based on our estimates and assumptions about these obligations, including their duration, anticipated actions by third parties and other factors. The contractual
See “Note 10. Borrowings” of the Notes to Consolidated Financial Statements in Item 8 herein for information regarding scheduled maturities of our long-term debt. See “Note 9. Leases” of the Notes to Consolidated Financial Statements in Item 8 herein for information regarding scheduled maturities of our operating leases.
As of December 31, 2021, we had expected cash payments for estimated interest on our long-term debt and finance lease obligations of $242 million payable within the next twelve months and $3,141 million payable thereafter.
As of December 31, 2021, we will actually pay in future periods may vary from those reflected inhad purchase obligations of $1,304 million payable within the table becausenext twelve months and $397 million payable thereafter. Our purchase obligations include expenditures for capital assets for 2022 as well as agreements to purchase goods or services or licenses that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the estimates and assumptions are subjective.approximate timing of the transaction.
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (In millions) | Total | | Less Than 1 Year | | 1 - 3 Years | | 4 - 5 Years | | More Than 5 Years |
Total debt and capital lease obligations (1) | $ | 8,081 |
| | $ | 2,013 |
| | $ | 56 |
| | $ | 1,729 |
| | $ | 4,283 |
|
Estimated interest payments (2) | 4,018 |
| | 274 |
| | 481 |
| | 461 |
| | 2,802 |
|
Operating leases (3) | 688 |
| | 156 |
| | 214 |
| | 130 |
| | 188 |
|
Purchase obligations (4) | 1,121 |
| | 962 |
| | 87 |
| | 59 |
| | 13 |
|
| Total | $ | 13,908 |
| | $ | 3,405 |
| | $ | 838 |
| | $ | 2,379 |
| | $ | 7,286 |
|
| |
(1)
| Amounts represent the expected cash payments for the principal amounts related to our debt, including capital lease obligations. Amounts for debt do not include any deferred issuance costs or unamortized discounts or premiums including step up in the value of the debt on the acquisition of Baker Hughes. Expected cash payments for interest are excluded from these amounts. Total debt and capital lease obligations includes $1,124 million payable to GE and its affiliates. As there is no fixed payment schedule on the amount payable to GE and its affiliates we have classified it as payable in less than one year. |
| |
(2)
| Amounts represent the expected cash payments for interest on our long-term debt and capital lease obligations. |
| |
(3)
| Amounts represent the future minimum payments under noncancelable operating leases with initial or remaining terms of one year or more. We enter into operating leases, some of which include renewal options, however, we have excluded renewal options from the table above unless it is anticipated that we will exercise such renewals. |
| |
(4)
| Purchase obligations include capital improvements for 2018 as well as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. |
Due to the uncertainty with respect to the timing of potential future cash outflows associated with our uncertain tax positions, we are unable to make reasonable estimates of the period of cash settlement, if any, to the respective taxing authorities. Therefore, $543$704 million in uncertain tax positions, including interest and penalties, have been excluded from the contractual obligations tablediscussed above. See "Note 10.12. Income Taxes" of the Notes to Consolidated and Combined Financial Statements in Item 8 herein for further information.
We have certain defined benefit pension and other post-retirement benefit plans covering certain of our U.S. and international employees. During 2017, we made contributions and paid direct benefits of approximately $63 million in connection with those plans, and we anticipate funding approximately $68 million during 2018. Amounts for pension funding obligations are based on assumptions that are subject to change, therefore, we are currently not able to reasonably estimate our contribution figures after 2018. See "Note 9. Employee Benefit Plans" of the Notes to Consolidated and Combined Financial Statements in Item 8 herein for further information.
Off-Balance Sheet Arrangements
In the normal course of business with customers, vendors and others, we have entered into off-balance sheet arrangements, such as surety bonds for performance, letters of credit and other bank issued guarantees, which totaled approximately $3.4 billion at December 31, 2017. It is not practicable to estimate the fair value of these financial instruments. None of the off-balance sheet arrangements either has, or is likely to have, a material effect on our consolidated and combined financial statements.
BHGE LLC 2017 FORM 10-K | 36
As of December 31, 2017, we had no material off-balance sheet financing arrangements other than normal operating leases, as discussed above. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.
Other factors affecting liquidity
Registration Statements: In May 2021, Baker Hughes filed a universal automatic shelf registration statement on Form S-3ASR with the SEC to have the ability to sell various types of securities including debt securities, Class A common stock, preferred stock, guarantees of debt securities, purchase contracts and units. The specific terms of any securities to be sold would be described in supplemental filings with the SEC. The registration statement will expire in May 2024.
In December 2020, BHH LLC, Baker Hughes Netherlands Funding Company B.V., and Baker Hughes Co-Obligor, Inc. filed a shelf registration statement on Form S-3 with the SEC to have the ability to sell up to $3 billion in debt securities in amounts to be determined at the time of an offering. Any such offering, if it does occur, may happen in one or more transactions. The specific terms of any debt securities to be sold would be described in supplemental filings with the SEC. The registration statement will expire in December 2023.
Customer receivables:In line with industry practice, we may bill our customers for services provided in arrears dependent upon contractual terms. In a challenging economic environment, we may experience delays in the payment of our invoices due to customers' lower cash flow from operations or their more limited access to credit markets. While historically there have not been material non-payment events, we attempt to mitigate this risk through working with our customers to restructure their debts. A customer's failure or delay in payment could have a material adverse effect on our short-term liquidity and results from operations. As of December 31, 2017, 20%2021, 13% of our gross tradecustomer receivables were from customers in the United States. Other thanU.S. and 12% were from customers in Mexico. As of December 31, 2020, 16% of our gross customer receivables were from customers in the United States, noU.S. No other country or single customer accounted for more than 10% of our gross tradecustomer receivables at this date. As of December 31, 2016, 13% of our gross trade receivables were from customers in the United States.these dates.
Venezuela: Oil production is considered important to the Venezuelan economy; therefore, we intend to continue to provide services to our primary customer in this country, however, we are required to assess the ability of the customer to make timely payments on amounts owed to us. This assessment is performed on a quarterly basis with the business relying on a variety of data sources to assess the collectability of outstanding receivables and recoverability of other assets supporting this customer. We noted that there are recent market indicators, such as a decline in bond prices and several delayed payments on various bond obligations, that indicate that the customer’s financial condition may have worsened in the last three months. We continue to actively manage our relationship with this customer as they transition through a difficult period, with ongoing dialogue between key executives of both companies, including discussions regarding this customer's ability and intent to ultimately settle our trade receivables.Baker Hughes Holdings LLC 2021 Form 10-K | 35
In performing our analysis of customer-specific assets as of December 31, 2017, we considered that our outstanding receivables do not have the same priority as certain of the customer’s other obligations. We have concluded that it may take an extended period of time to ultimately collect our outstanding receivables; accordingly, we have recorded an increase to our allowance for doubtful accounts of $55 million in the three months ended December 31, 2017 to fully offset our remaining exposure to trade receivables and other assets from this customer. In addition, since future receivables generated as a result of our ongoing contracts will have the same priority as our existing receivables when issued, the business has concluded that an allowance amounting to $32 million to reduce inventory that has been purchased for these contracts (and that is not redeployable to fulfill other customer contracts) to its lower of cost or net realizable value is warranted. We will update our analysis on a quarterly basis; to the extent that our outstanding receivables are settled or the likelihood of settling our outstanding receivables in the near term improves, we will reverse our existing provision for doubtful accounts, which would result in an income during the period of reversal.
International operations:Our cash that is held outside the U.S., is 46%57% of the total cash balance as of December 31, 2017.2021. We may not be able to use this cash quickly and efficiently due to exchange or cash controls that could make it challenging. As a result, our cash balance may not represent our ability to quickly and efficiently use this cash.
Supply chain finance programs: Under supply chain finance programs, administered by a third party, our suppliers are given the opportunity to sell receivables from us to participating financial institutions at their sole discretion at a rate that leverages our credit rating and thus might be more beneficial to our suppliers. Our responsibility is limited to making payment on the terms originally negotiated with our supplier, regardless of whether the supplier sells its receivable to a financial institution. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the program. These liabilities continue to be presented as accounts payable in our consolidated statements of financial position and reflected as cash flow from operating activities when settled. We do not believe that changes in the availability of supply chain financing programs would have a material impact on our liquidity.
BHGE LLC 2017 FORM 10-K | 37
CRITICAL ACCOUNTING ESTIMATES
AccountingAn accounting policy is deemed to be critical if the nature of the estimate or assumption it incorporates is subject to a material level of judgment related to matters that are highly uncertain and changes in those estimates and assumptions discussed in this section are those consideredreasonably likely to be the most critical to an understanding ofmaterially impact our consolidated financial statements because they involve significant judgments and uncertainties. Many of these estimates include determining fair value.statements. These estimates reflect our best judgment about current, and for some estimates, future, economic and market conditions and their potential effects based on information available as of the date of these financial statements. If these conditions change from those expected, it is reasonably possible that the judgments and estimates described below could change, which may result in future impairments of goodwill, intangibles and longlived assets, increases in reserves for contingencies,or the establishment of valuation allowances on deferred tax assets and increased tax liabilities, among other effects. Also, see "Note 1. Summary of Significant Accounting Policies" of the Notes to Consolidated and Combined Financial Statements in Item 8 herein, which discusses our most significant accounting policies.
We have defined a critical accounting estimate as one that is both important to the portrayal of either our financial condition or results of operations and requires us to make difficult, subjective or complex judgments or estimates about matters that are uncertain. The Audit Committee of ourBaker Hughes' Board of Directors has reviewed our critical accounting estimates and the disclosure presented below. During the past three fiscal years, we have not made any material changes in the methodology used to establish the critical accounting estimates, and we believe that the following are the critical accounting estimates used in the preparation of our consolidated and combined financial statements.statements for the year ended December 31, 2021. There are other items within our consolidated and combined financial statements that require estimation and judgment but they are not deemed critical as defined above.
Revenue Recognition on Long-Term Product Services Agreements
We have long-term service agreements with our customers predominately within our TPS segment. These agreements typically require us to maintain assets sold to the customer over a defined contract term. These agreements have average contract terms of 15greater than 10 years. From time to time, these contract terms may be extended through contract modifications or amendments, which may result in revisions to future billing and cost estimates.
We recognize revenue as we incur costs to perform under the arrangements at the estimated margin rate of the contract. Revenue recognition on long-term product services agreements requires estimates of both customer payments and the costs to perform required maintenance services over the contract term.
We recognize revenue on an overtime basis using input method to measure our progress toward completion at the estimated margin rate of the contract.
To develop our billings estimates, we consider the number of billable events that will occur based on estimated utilization of the asset under contract, over the life of the contract term. This estimated utilization will consider both historical and market conditions, asset retirements and new product introductions, if applicable.
To develop our cost estimates, we consider the timing and extent of maintenance and overhaul events, including the amount and cost of labor, spare parts and other resources required to perform the services. In developing our cost estimates, we utilize a combination of our historical cost experience and expected cost improvements. Cost improvements are only included in future cost estimates after savings have been observed in actual results or proven effective through an extensive regulatory or engineering approval process.process.
Baker Hughes Holdings LLC 2021 Form 10-K | 36
We routinely review the estimates used in our product services agreements and regularly revise them to adjust for changes. These revisions are based on objectively verifiable information that is available at the time of the review.
The difference between the timing of our revenue recognition and cash received from our customers results in either a contract asset (revenue in excess of billings) or a contract liability (billings in excess of revenue). AsSee "Note 7. Contract and Other Deferred Assets" and "Note 8. Progress Collections and Deferred Income" of December 31, 2017, and 2016, we recorded a contract asset of $1,410 million and $1,046 million and contract liability of $83 million and $103 million, respectively.
the Notes to Consolidated Financial Statements in Item 8 herein for further information.
We regularly assess customer credit risk inherent in the carrying amounts of receivables and contract assets and estimated earnings, including the risk that contractual penalties may not be sufficient to offset our accumulated investment in the event of customer termination. We gain insight into expected future utilization and cost trends, as well as credit risk, through our knowledge of the equipment installed and the close interaction with our customers through supplying critical services and parts over extended periods. Revisions to cost or billing estimates may
BHGE LLC 2017 FORM 10-K | 38
affect a product services agreement’s total estimated profitability resulting in an adjustment of earnings; such adjustments generated earnings of $344$14 million, $293$17 million and $256$(1) million for each of the three years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively. We provide for probable losses when they become evident.
We continueOn December 31, 2021, our long-term product service agreements, net of related billings in excess of revenues, of $0.3 billion, represent approximately 2.6% of our total estimated life of contract billings of $10.1 billion. Cash billings collected on these contracts were approximately $0.6 billion during the years ended December 31, 2021 and 2020. Our contracts (on average) are approximately 26% complete based on costs incurred to evaluatedate and our estimate of future costs. Revisions to our estimates of future revenue or costs that increase or decrease total estimated contract profitability by 1% would increase or decrease the provisions of ASC No. 606, Revenue from Contracts with Customers, and the assessment of the impact, on our consolidated and combined financial statements and related disclosures. Also, see "Note 1. Summary of Significant Accounting Policies" of the Notes to Consolidated and Combined Financial Statements in Item 8 herein for additional information and disclosure.long-term product service agreements balance by $0.06 billion.
Goodwill and Other Identified Intangible Assets
We perform an annual impairment test of goodwill on a qualitative or quantitative basis for impairment annually using dataeach of our reporting units as of July 1, of that year. Theor more frequently when circumstances indicate an impairment test consists of two different steps: in step one, the carrying value ofmay exist at the reporting unit is compared with its fair value, in step two, which is applied only whenlevel. When performing the carrying valueannual impairment test we have the option of first performing a qualitative assessment to determine the existence of events and circumstances that would lead to a determination that it is more likely than its fair value, the amount of goodwill impairment, if any, is derived by deductingnot that the fair value of a reporting unit is less than its carrying amount. If such a conclusion is reached, we would then be required to perform a quantitative impairment assessment of goodwill. A quantitative assessment for the determination of impairment is made by comparing the carrying amount of each reporting unit’s assets and liabilities fromunit with its fair value. Determining the fair value of its equitya reporting unit is judgmental in nature and comparing that amount withinvolves the carrying amountuse of goodwill. We determine fair valuessignificant estimates and assumptions and typically requires analysis of eachdiscounted cash flows and other market information, such as trading multiples, and comparable transactions. Cash flow analysis requires judgment regarding many factors, such as management’s projections of the reporting units using thefuture cash flows, weighted-average cost of capital, and long-term growth rates. Market information requires judgmental selection of relevant market approach, when available and appropriate, or the income approach, or a combination of both.comparables. We assess the valuation methodology based upon the relevance and availability of the data at the time the valuation is performed.
Pension Assumptions
Pension benefits Our estimates are calculated using significant inputsbased upon assumptions believed to the actuarial models that measure pension benefit obligationsbe reasonable but which are inherently uncertain, and related effects on operations. Two assumptions, discount rate and expected return on assets, are important elements of plan expense and asset/liability measurement. We evaluate these critical assumptions at least annually on a plan and country specific basis. We periodically evaluate other assumptions involving demographic factors such as retirement age, mortality and turnover, and update them to reflect its experience and expectations for the future. Actualactual results in any given year will oftenmay differ from actuarialthose assumed in our analysis. The determination of whether goodwill is impaired involves a significant level of judgment in these assumptions, because ofand changes in our forecasts, business strategy, government regulations, or economic and other factors.
Projected benefit obligations are measured asor market conditions could significantly impact these judgments, potentially decreasing the presentfair value of expected payments discounted using the weighted averageone or more reporting units. Any resulting impairment charges could have a material impact on our results of market observed yields for high quality fixed income securities with maturities that correspond to the payment of benefits, lower discount rates increase present values and subsequent year pension expense and higher discount rates decrease present values and subsequent year pension expense. The discount rates used to determine the benefit obligations for our principal pension plans at December 31, 2017, 2016 and 2015 were 2.99%, 3.41% and 3.83%, respectively, reflecting market interest rates. Our expected return on assets at December 31, 2017, 2016 and 2015 were 6.26%, 6.86% and 6.91%, respectively.operations.
Income Taxes
We operate in more than 120 countries and ourOur effective tax rate is based on our income, statutory tax rates, and differences between tax laws and the U.S. generally accepted accounting principles (GAAP)GAAP in these various jurisdictions. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Our income tax rate is significantly affectedmay be further impacted by the tax rate on our global operations. In addition to local country tax laws and regulations, this rate depends on the extent earnings are indefinitely reinvested outside the U.S. Historically U.S. taxes were due upon repatriation of foreign earnings. Dueearnings that are considered indefinitely reinvested to the enactment of U.S. tax reform, repatriations of foreign earnings will generally be free of U.S. federal tax but may incur otherextent the repatriation would result in additional taxes such as withholding or stateand income taxes. Indefinite reinvestment is determined by management’s judgment about and intentions concerning the future operations of the Company. Most ofIn cases where repatriation would otherwise incur significant withholding or income taxes, these foreign earnings have been indefinitely reinvested in active non-U.S. business
Baker Hughes Holdings LLC 2021 Form 10-K | 37
operations. At December 31, 2017, we have not changed our indefinite reinvestment decision as a result of U.S. tax reform but will reassess this during the course of 2018. At December 31, 2017, approximately $8.0 billion of earnings have been indefinitely reinvested outside the U.S. These additional foreign earnings could become subject to additional tax, if remitted, or deemed remitted, as a dividend. Computation of the potential deferred tax liability associated with these undistributed earnings and any other basis differences is not practicable.
BHGE LLC 2017 FORM 10-K | 39
Deferred income tax assets represent amounts available to reduce income taxes payable in future years. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income rely heavily on estimates. We use our historical experience and short and long range business forecasts to provide insight. We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (U.S. tax reform) that lowers the statutory tax rate on U.S. earnings, taxes historic foreign earnings previously deferred from U.S. taxation at a reduced rate of tax (transition tax), establishes a territorial tax system and enacts new taxes associated with global operations.
The impact of U.S. tax reform has been recorded on a provisional basis as the legislation provides for additional guidance to be issued by the U.S. Department of the Treasury on several provisions including the computation of the transition tax. Guidance in 2018 could impact the information required for and the calculation of the transition tax charge and could affect decisions that affect the tax on various U.S. and foreign items which would further impact the final amounts included in the transition tax charge and impact the revaluation of deferred taxes. In addition, analysis performed and conclusions reached as part of the tax return filing process and additional guidance on accounting for tax reform could affect the provisional amount.
Additionally, as part of U.S. tax reform, the U.S. has enacted a tax on "base eroding" payments from the U.S. and a minimum tax on foreign earnings (global intangible low-taxed income). Because aspects of the new minimum tax and the effect on our operations is uncertain and because aspects of the accounting rules associated with this provision have not been resolved, we have not made a provisional accrual for the deferred tax aspects of this provision and consequently have not made an accounting policy election on the deferred tax treatment of this tax.
Our tax filings routinely are subject to audit by the tax authorities in the jurisdictions where we conduct business. These audits may result in assessments of additional taxes that are resolved with the tax authorities or through the courts. We have provided for the amounts we believe will ultimately result from these proceedings, but settlements of issues raised in these audits may affect our tax rate. We have $395$502 million of gross unrecognized tax benefits, excluding interest and penalties, at December 31, 2017.2021. We are not able to reasonably estimate in which future periods these amounts ultimately will be settled.
Other Loss Contingencies
Other loss contingencies are uncertain and unresolved matters that arise in the ordinary course of business and result from events or actions by others that have the potential to result in a future loss. Such contingencies include, but are not limited to, environmental obligations, litigation, regulatory proceedings, product quality and losses resulting from other events and developments.Allowance for Credit Losses
The preparationestimation of our consolidated and combined financial statements requires us to make estimates and judgmentsanticipated credit losses that affectmay be incurred as we work through the reported amounts of assets, liabilities, revenue and expenses and related disclosures as well as disclosures about any contingent assets and liabilities. We base these estimates and judgments on historical experience and other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions about future events and their effects are subject to uncertainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the business environment in which we operate changes.
Allowance for Doubtful Accounts
The determination of the collectability of amounts due frominvoice collection process with our customers requires us to make judgments and estimates regarding our customers' ability to pay amounts due us in order to determine the amount of valuation allowances required for doubtful accounts.us. We monitor our customers' payment history and current credit worthiness to determine that collectability is reasonably assured. We also consider the overall business climate in which our customers operate. ProvisionsFor accounts receivable, a loss allowance matrix is utilized to measure lifetime expected credit losses. The matrix contemplates historical credit losses by age of receivables, adjusted for doubtful accounts are recorded based on the aging status of the customer accounts or when it becomes evident that the customer will not make the required payments at either contractual due dates or in the future.any forward-looking information and management expectations. At December 31, 20172021 and 2016,2020, the allowance for doubtful accountscredit losses totaled $330$400 million and $186$373 million of total gross accounts receivable, respectively. We believe that our allowance for
BHGE LLC 2017 FORM 10-K | 40
doubtful accounts credit losses is adequate to cover potential bad debtthe anticipated credit losses under current conditions,conditions; however, uncertainties regarding changes in the financial condition of our customers, either adverse or positive, could impact the amount and timing of any additional provisions for doubtful accountscredit losses that may be required.
Inventory Reserves
Inventory is a significant component of current assets and is stated at the lower of cost or net realizable value. This requires us to record provisions and maintain reserves for excess, slow moving, and obsolete inventory. To determine these reserve amounts, we regularly review inventory quantities on hand and compare them to estimates of future product demand, market conditions, production requirements, and technological developments. These estimates and forecasts inherently include uncertainties and require us to make judgments regarding potential future outcomes. At December 31, 20172021 and 2016,2020, inventory reserves totaled $360$374 million and $260$421 million of gross inventory, respectively. We believe that our reserves are adequate to properly value potential excess, slow moving, and obsolete inventory under current conditions. Significant or unanticipated changes to our estimates and forecasts could impact the amount and timing of any additional provisions for excess, slow moving or obsolete inventory that may be required.
Acquisitions Purchase Price Allocation
We allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. We use all available information to estimate fair values, including quoted market prices, the carrying value of acquired assets and widely accepted valuation techniques such as discounted cash flows. We engage third-party appraisal firms to assist in fair value determination of inventories, identifiable intangible assets and any other significant assets or liabilities when appropriate. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.
NEW ACCOUNTING STANDARDS TO BE ADOPTED
See "Note 1. Summary of Significant Accounting Policies" of the Notes to Consolidated and Combined Financial Statements in Item 8 herein for further discussion of accounting standards to be adopted.
RELATED PARTY TRANSACTIONS
See "Note 14.16. Related Party Transactions" of the Notes to Consolidated and Combined Financial Statements in Item 8 herein for further discussion of related party transactions.
OTHER ITEMS
Iran Threat Reduction And Syria Human Rights Act Of 2012
The Company is making the following disclosure pursuant to Section 13(r) of the Securities Exchange Act of 1934. Under Section 13(r) of the Securities Exchange Act of 1934, enacted in 2012, we are required to disclose in our periodic reports if we or any of our affiliates knowingly engaged in business activities relating to Iran, even if those activities are conducted in accordance with authorizations subsequently issued by the U.S. Government. Reportable activities include investments that significantly enhance Iran’s ability to develop petroleum resources valued at $20 million or more in the aggregate during a twelve-month period. Reporting is also required for transactions related to Iran’s domestic production of refined petroleum products or Iran’s ability to import refined petroleum products valued at $5 million or more in the aggregate during a twelve-month period.
In January 2016, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) issued General License H authorizing U.S.-owned or controlled foreign entities to engage in transactions with Iran if these entities meet the requirements of the general license. Pursuant to this authorization, a non-U.S. BHGE affiliate received seven purchase orders during the fourth quarter of 2017 for the sale of goods pursuant to General License H that could potentially enhance Iran’s ability to develop petroleum resources. The purchase orders cover the sale of valves and parts for industrial machinery and equipment used in gas plants, petrochemical plants and gas
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 4138
production projects in Iran. These purchase orders are valued at less than €0.1 million ($0.1 million), less than €0.1 million ($0.1 million), less than €0.1 million ($0.1 million), €0.3 million ($0.3 million), €0.7 million ($0.8 million), €0.1 million ($0.1 million) and €0.8 million ($1 .0 million). This non-US affiliate also received a cancellation of a previously reported contract for the sale of spare parts for gas turbines. This purchase order cancellation reduces previously reported contract values by €12.3 million ($12.9 million). This non-U.S. affiliate attributed €6.8 million ($8.2 million) in gross revenue and €1.4 million ($1.7 million) in net profits against previously reported transactions during the quarter ending December 31, 2017.
A second non-U.S. BHGE affiliate received three purchase orders during the fourth quarter of 2017 for the sale of spares parts to support the development of offshore petroleum resources. The three purchase orders are individually valued at less than €0.1 million ($0.1 million), less than €0.1 million ($0.1 million), and less than €0.1 million ($0.1 million) each. This non-U.S. affiliate did not recognize any revenue or profit during the quarter ending December 31, 2017.
A third non-U.S. BHGE affiliate received a purchase order pursuant to General License H valued at €0.2 million ($0.2 million) during the fourth quarter of 2017. The non-U.S. affiliate also received a purchase order at the very end of the third quarter valued at €0.3 million ($0.3 million). Both purchase orders cover the sale of films to be used in inspection of pipelines in Iran. This non-U.S. affiliate did not recognize any revenue or profit during the quarter ending December 31, 2017.
All of these non-U.S. affiliates intend to continue the activities described above, as permitted by all applicable laws and regulations.
FORWARD-LOOKING STATEMENTS
This Form 10-K, including MD&A and certain statements in the Notes to Consolidated and Combined Financial Statements, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, (each a "forward-looking statement"). Forward-looking statements concern future circumstances and results and other statements that are not historical facts and are sometimes identified by the words "may," "will," "should," "potential," "intend," "expect," "endeavor," "seek," "anticipate," "estimate," "overestimate," "underestimate," "believe," "could," "project," "predict," "continue," "target" or other similar words or expressions. Forward-looking statements are based upon current plans, estimates and expectations that are subject to risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. The inclusion of such statements should not be regarded as a representation that such plans, estimates or expectations will be achieved. Important factors that could cause actual results to differ materially from such plans, estimates or expectations include, among others, the risk factors in the "Risk Factors" section of Part 1 of Item 1A of this Form 10-K and those set forth from time-to-time in other filings by the Company with the SEC. These documents are available through our website or through the SEC's Electronic Data Gathering and Analysis Retrieval (EDGAR)("EDGAR") system at http://www.sec.gov.
In light of such risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. These forward-looking statements speak only as of the date of this annual report, or if earlier, as of the date they were made. We do not intend to, and disclaim any obligation to, update or revise any forward-looking statements unless required by securities law.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks that are inherent in our financial instruments and arise from changes in interest rates and foreign currency exchange rates. We may enter into derivative financial instrument transactions to manage or reduce market risk but do not enter into derivative financial instrument transactions for speculative purposes. A discussion of our primary market risk exposure in financial instruments is presented below.
BHGE LLC 2017 FORM 10-K | 42
INTEREST RATE RISK
The majorityAll of our long-term debt is comprised of fixed rate instruments. We are subject to interest rate risk on our debt and investment portfolio. We may useAs of December 31, 2021, we had interest rate swaps to manage the economic effectwith a notional amount of $500 million that converted a portion of our $1,350 million aggregate principal amount of 3.337% fixed rate obligations associatedSenior Notes due 2027 into a floating rate instrument with certain debt. There were no outstandingan interest rate swap agreementsbased on a LIBOR index as a hedge of December 31, 2017. its exposure to changes in fair value that are attributable to interest rate risk. The interest rate swaps are designated and each qualify as a fair value hedging instrument. The interest rate swaps are considered to be effective at achieving offsetting changes in the fair value of the hedged liability, and no ineffectiveness is recognized. The mark-to-market of this fair value hedge was recorded as gain or loss in interest expense and was equally offset by the gain or loss of the underlying debt instrument, which also was recorded in interest expense.
The following table sets forth our fixed rate long-term debt, excluding capitalfinance leases, and the related weighted average interest rates by expected maturity dates.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total (2) |
| As of December 31, 2021 | | | | | | | | | | | | | |
Long-term debt (1) | $ | — | | | $ | 650 | | | $ | 107 | | | $ | — | | | $ | 600 | | | $ | 5,106 | | | $ | 6,463 | |
| Weighted average interest rates | — | % | | 1.46 | % | | 4.07 | % | | — | % | | 2.20 | % | | 3.84 | % | | 3.46 | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
(1)Fair market value of our fixed rate long-term debt, excluding finance leases, was $7.2 billion at December 31, 2021.
(2)Amounts represent the principal value of our long-term debt outstanding and related weighted average interest rates at the end of the respective period.
Baker Hughes Holdings LLC 2021 Form 10-K | 39
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total (2) |
| As of December 31, 2017 | | | | | | | | | | | | | |
Long-term debt (1) | $ | 615 |
| | $ | — |
| | $ | — |
| | $ | 513 |
| | $ | 1,250 |
| | $ | 4,196 |
| | $ | 6,574 |
|
| Weighted average interest rates | 2.15 | % | | — | % | | — | % | | 2.47 | % | | 2.87 | % | | 3.88 | % | | 3.42 | % |
| |
(1)
| Fair market value of our fixed rate long-term debt, excluding capital leases, was $7.0 billion at December 31, 2017. |
| |
(2)
| Amounts represent the principal value of our long-term debt outstanding and related weighted average interest rates at the end of the respective period. |
FOREIGN CURRENCY EXCHANGE RISK
We conduct our operations around the world in a number of different currencies, and we are exposed to market risks resulting from fluctuations in foreign currency exchange rates. Many of our significant foreign subsidiaries have designated the local currency as their functional currency. As such, future earnings are subject to change due to fluctuations in foreign currency exchange rates when transactions are denominated in currencies other than our functional currencies.
Additionally, we buy, manufacture and sell components and products across global markets. These activities expose us to changes in foreign currency exchange rates, commodity prices and interest rates which can adversely affect revenue earned and costs of our operating businesses. When the currency in which equipment is sold differs from the primary currency of the legal entity and the exchange rate fluctuates, it will affect the revenue earned on the sale. These sales and purchase transactions also create receivables and payables denominated in foreign currencies and exposure to foreign currency gains and losses based on changes in exchange rates. Changes in the price of raw materials used in manufacturing can affect the cost of manufacturing. We use derivatives to mitigate or eliminate these exposures, where appropriate.
We use cash flow hedging primarily to reduce or eliminate the effects of foreign currency exchange rate changes on purchase and sale contracts. Accordingly, most derivative activity in this category consists of currency exchange contracts. We had outstanding foreign currency forward contracts with net notional amounts aggregating $3.3 billion and $0.6$6.8 billion to hedge exposure to currency fluctuations in various foreign currencies at December 31, 20172021 and 2016,2020, respectively. The notional amount of these derivative instruments do not generally represent cash amounts exchanged by us and the counterparties, but rather the nominal amount upon which changes in the value of the derivatives are measured.
As of December 31, 2017,2021, the Company estimates that a 1% appreciation or depreciation in the U.S. dollar would result in an impact of approximatelyless than $10 million to our pre-tax earnings, however, the Company is generally able to mitigate its foreign exchange exposure, where there are liquid financial markets, through use of foreign currency derivative transactions. Also, see "Note 14. Financial Instruments" of the Notes to Consolidated and Combined Financial Statements in Item 8 herein, which has additional details on our strategy.
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 4340
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we assessed the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, our principal executive officer and principal financial officer concluded that our internal control over financial reporting was effective as of December 31, 2017.2021. This conclusion is based on the recognition that there are inherent limitations in all systems of internal control. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
KPMG LLP, the Company's independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company's internal control over financial reporting.
|
| | | | | | | | | | | | | |
/s/ LORENZO SIMONELLI Lorenzo Simonelli President and Chief Executive Officer | | /s/ BRIAN WORRELL Brian Worrell Chief Financial Officer
| | /s/ KURT CAMILLERI Kurt Camilleri Senior Vice President, Controller and Chief Accounting Officer |
Houston, Texas
February 23, 2018
11, 2022
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 4441
REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members
Baker Hughes a GE company,Holdings LLC:
Opinion on the Consolidated and Combined Financial Statements
We have audited the accompanying consolidated and combined statementstatements of financial position of Baker Hughes a GE company,Holdings LLC and subsidiaries (the “Company”)Company) as of December 31, 2017,2021 and 2020, the related consolidated and combined statements of income (loss), comprehensive income (loss), changes in members’members' equity, and cash flows for each of the yearyears in the three-year period ended December 31, 2017,2021, and the related notes (collectively, the “consolidated and combinedconsolidated financial statements”)statements). In our opinion, the consolidated and combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017,2021 and 2020, and the results of its operations and its cash flows for each of the yearyears in the three-year period ended December 31, 2017,2021, in conformity with U.S. generally accepted accounting principles.principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 201811, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated and combined financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated and combined financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated and combined financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated and combined financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
/s/ KPMG LLPThe critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue recognition on certain agreements for sales of goods manufactured to unique customer specifications
As discussed in Note 1 to the consolidated financial statements, the Company enters into agreements for sales of goods manufactured to unique customer specifications on an over time basis. Revenue from these types of contracts is recognized to the extent of progress towards completion measured by actual costs incurred relative to total expected costs. The Company provides for potential losses on these types of contracts when it is probable that a loss will be incurred.
We identified revenue recognition for certain contracts from the sales of goods manufactured to unique customer specifications as a critical audit matter. Complex auditor judgment was required in evaluating the Company's long-term estimates of the expected costs to be incurred in order to complete these contracts.
Baker Hughes Holdings LLC 2021 Form 10-K | 42
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s revenue recognition process for sales of goods manufactured to unique customer specifications. This included controls pertaining to the Company's estimation of costs expected to be incurred to complete contracts for sales of goods manufactured to unique customer specifications. We evaluated the Company's ability to accurately estimate costs expected to be incurred to complete the contracts for sales of goods manufactured to unique customer specifications. We evaluated the estimated costs expected to be incurred to complete the goods manufactured to unique customer specifications for the contracts by:
–questioning the Company's finance and project managers regarding progress to date based on the latest project reports and the costs expected to still be incurred until completion;
–observing project review meetings performed by the Company or inspecting relevant minutes of those meetings to identify changes in the estimated costs expected to be incurred to complete the contract and related contract margins;
–assessing the remaining estimated costs expected to be incurred by expenditure category by comparing to the actual costs incurred during the current year for the selected project; and
–investigating changes to the contract margin when compared to the prior year's estimated contract margin.
We have served as the Company’s auditor since 2017.
/s/ KPMG LLP
Houston, Texas
February 23, 2018
11, 2022
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 4543
REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members
Baker Hughes a GE Company,Holdings LLC:
We have audited the accompanying combined statement of financial position of GE Oil & Gas (a business within General Electric Company) as of December 31, 2016, and the related combined statements of income (loss), comprehensive income (loss), changes in equity, and cash flows for each of the years in the two-year period ended December 31, 2016. These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Company as of December 31, 2016, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG S.p.A.
Florence, Italy
March 16, 2017, except as to Note 13 which is as of December 4, 2017
BHGE LLC 2017 FORM 10-K | 46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members
Baker Hughes, a GE company, LLC:
Opinion on Internal Control Over Financial Reporting
We have audited Baker Hughes a GE company,Holdings LLC and subsidiaries’subsidiaries' (the “Company”)Company) internal control over financial reporting as of December 31, 2017,2021, based on criteria established inInternal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the consolidated and combined statementstatements of financial position of the Company as of December 31, 2017,2021 and 2020, the related consolidated and combined statements of income (loss), comprehensive income (loss), changes in members’members' equity, and cash flows for each of the yearyears in the three-year period ended December 31, 2017,2021, and the related notes (collectively, the “consolidated and combinedconsolidated financial statements”)statements), and our report dated February 23, 201811, 2022 expressed an unqualified opinion on those consolidated and combined financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Becausestatements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.deteriorate.
/s/ KPMG LLP
Houston, Texas
February 23, 2018
11, 2022
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 4744
BAKER HUGHES A GE COMPANY,HOLDINGS LLC
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME (LOSS)
| | | | Year Ended December 31, | | Year Ended December 31, |
| (In millions, except per unit amounts) | 2017 | 2016 | 2015 | (In millions, except per unit amounts) | 2021 | 2020 | 2019 |
| Revenue: | | Revenue: | |
| Sales of goods | $ | 10,898 |
| $ | 9,488 |
| $ | 12,353 |
| Sales of goods | $ | 12,248 | | $ | 12,846 | | $ | 13,689 | |
| Sales of services | 6,361 |
| 3,781 |
| 4,335 |
| Sales of services | 8,254 | | 7,859 | | 10,149 | |
| Total revenue | 17,259 |
| 13,269 |
| 16,688 |
| Total revenue | 20,502 | | 20,705 | | 23,838 | |
| Costs and expenses: | | Costs and expenses: | |
| Cost of goods sold | 9,402 |
| 7,816 |
| 9,271 |
| Cost of goods sold | 10,458 | | 11,383 | | 11,798 | |
| Cost of services sold | 4,644 |
| 2,307 |
| 2,922 |
| Cost of services sold | 5,995 | | 6,123 | | 7,608 | |
| Selling, general and administrative expenses | 2,535 |
| 1,938 |
| 2,115 |
| |
| Selling, general and administrative | | Selling, general and administrative | 2,470 | | 2,404 | | 2,832 | |
| Goodwill impairment | | Goodwill impairment | — | | 14,717 | | — | |
| Restructuring, impairment and other | 412 |
| 516 |
| 411 |
| Restructuring, impairment and other | 209 | | 1,866 | | 342 | |
| Goodwill impairment | — |
| — |
| 2,080 |
| |
| Merger and related costs | 373 |
| 33 |
| 27 |
| |
| Separation related | | Separation related | 60 | | 134 | | 184 | |
| Total costs and expenses | 17,366 |
| 12,610 |
| 16,826 |
| Total costs and expenses | 19,192 | | 36,627 | | 22,764 | |
| Operating income (loss) | (107 | ) | 659 |
| (138 | ) | Operating income (loss) | 1,310 | | (15,922) | | 1,074 | |
| Other non operating income, net | 78 |
| 27 |
| 100 |
| |
| Other non-operating income (loss), net | | Other non-operating income (loss), net | (583) | | 1,040 | | (84) | |
| Interest expense, net | (131 | ) | (102 | ) | (120 | ) | Interest expense, net | (299) | | (264) | | (237) | |
| Income (loss) before income taxes and equity in loss of affiliate | (160 | ) | 584 |
| (158 | ) | |
| Equity in loss of affiliate | (11 | ) | — |
| — |
| |
| Income (loss) before income taxes | | Income (loss) before income taxes | 428 | | (15,146) | | 753 | |
| | Provision for income taxes | (172 | ) | (250 | ) | (473 | ) | Provision for income taxes | (772) | | (650) | | (476) | |
| Net income (loss) | (343 | ) | 334 |
| (631 | ) | Net income (loss) | (344) | | (15,796) | | 277 | |
| Less: Net income (loss) attributable to noncontrolling interests | 7 |
| (69 | ) | (25 | ) | |
| Net income (loss) attributable to Baker Hughes, a GE company, LLC | $ | (350 | ) | $ | 403 |
| $ | (606 | ) | |
| | Less: Net income attributable to noncontrolling interests | | Less: Net income attributable to noncontrolling interests | 28 | | 29 | | 36 | |
| Net income (loss) attributable to Baker Hughes Holdings LLC | | Net income (loss) attributable to Baker Hughes Holdings LLC | $ | (372) | | $ | (15,825) | | $ | 241 | |
| | | | | |
| | | |
| Cash distribution per common unit | $ | 0.35 |
| | Cash distribution per common unit | $ | 0.72 | | $ | 0.72 | | $ | 0.72 | |
|
See accompanying Notes to Consolidated and Combined Financial Statements
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 4845
BAKER HUGHES A GE COMPANY,HOLDINGS LLC
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | |
| | Year Ended December 31, |
| (In millions) | 2017 | 2016 | 2015 |
| Net income (loss) | $ | (343 | ) | $ | 334 |
| $ | (631 | ) |
| Less: Net loss attributable to noncontrolling interests | 7 |
| (69 | ) | (25 | ) |
| Net income (loss) attributable to Baker Hughes, a GE company, LLC | (350 | ) | 403 |
| (606 | ) |
| Other comprehensive (loss) income: | | | |
| Investment securities | 4 |
| — |
| — |
|
| Foreign currency translation adjustments | (3 | ) | (422 | ) | (617 | ) |
| Cash flow hedges | 12 |
| (8 | ) | (2 | ) |
| Benefit plans | 55 |
| 54 |
| 40 |
|
| Other comprehensive income (loss) | 68 |
| (376 | ) | (579 | ) |
| Less: Other comprehensive income (loss) attributable to noncontrolling interests | 3 |
| (14 | ) | (11 | ) |
| Other comprehensive income (loss) attributable Baker Hughes, a GE company, LLC | 65 |
| (362 | ) | (568 | ) |
| Comprehensive loss | (275 | ) | (42 | ) | (1,210 | ) |
| Less: Comprehensive income (loss) attributable to noncontrolling interests | 10 |
| (83 | ) | (36 | ) |
| Comprehensive income (loss) attributable to Baker Hughes, a GE company, LLC | $ | (285 | ) | $ | 41 |
| $ | (1,174 | ) |
| | | | | | | | | | | |
| Year Ended December 31, |
| (In millions) | 2021 | 2020 | 2019 |
| Net income (loss) | $ | (344) | | $ | (15,796) | | $ | 277 | |
| | | |
| Less: Net income attributable to noncontrolling interests | 28 | | 29 | | 36 | |
| Net income (loss) attributable to Baker Hughes Holdings LLC | (372) | | (15,825) | | 241 | |
| Other comprehensive income (loss): | | | |
| Investment securities | — | | (2) | | 2 | |
| Foreign currency translation adjustments | (305) | | 175 | | 53 | |
| Cash flow hedges | (16) | | (5) | | 12 | |
| Benefit plans | 170 | | (124) | | (75) | |
| Other comprehensive income (loss) | (151) | | 44 | | (8) | |
| | | |
| Less: Other comprehensive loss attributable to noncontrolling interests | (2) | | (3) | | — | |
| Other comprehensive income (loss) attributable to Baker Hughes Holdings LLC | (149) | | 47 | | (8) | |
| Comprehensive income (loss) | (495) | | (15,752) | | 269 | |
| | | |
| Less: Comprehensive income attributable to noncontrolling interests | 26 | | 26 | | 36 | |
| Comprehensive income (loss) attributable to Baker Hughes Holdings LLC | $ | (521) | | $ | (15,778) | | $ | 233 | |
See accompanying Notes to Consolidated and Combined Financial Statements
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 4946
BAKER HUGHES A GE COMPANY,HOLDINGS LLC
CONSOLIDATED AND COMBINED STATEMENTS OF FINANCIAL POSITION
| |
| | | December 31, | | December 31, |
| (In millions) | 2017 | 2016 | (In millions) | 2021 | 2020 |
| ASSETS | ASSETS | ASSETS | |
| Current Assets: | | Current Assets: | |
Cash and equivalents (1) | $ | 7,019 |
| $ | 981 |
| |
| Cash and cash equivalents | | Cash and cash equivalents | $ | 3,843 | | $ | 4,125 | |
| Current receivables, net | 6,127 |
| 2,563 |
| Current receivables, net | 5,718 | | 5,700 | |
| Inventories, net | 4,590 |
| 3,224 |
| Inventories, net | 3,979 | | 4,421 | |
| All other current assets | 872 |
| 633 |
| All other current assets | 1,582 | | 2,280 | |
| Total current assets | 18,608 |
| 7,401 |
| Total current assets | 15,122 | | 16,526 | |
| Property, plant and equipment, less accumulated depreciation | 6,959 |
| 2,325 |
| Property, plant and equipment, less accumulated depreciation | 4,877 | | 5,358 | |
| Goodwill | 19,654 |
| 6,680 |
| Goodwill | 5,721 | | 5,739 | |
| Other intangible assets, net | 6,358 |
| 2,449 |
| Other intangible assets, net | 4,131 | | 4,397 | |
| Contract assets | 2,745 |
| 1,967 |
| |
| Contract and other deferred assets | | Contract and other deferred assets | 1,598 | | 2,001 | |
| All other assets | 2,080 |
| 573 |
| All other assets | 3,102 | | 2,955 | |
| Deferred income taxes | 482 |
| 326 |
| Deferred income taxes | 735 | | 953 | |
| Total assets | $ | 56,886 |
| $ | 21,721 |
| Total assets | $ | 35,286 | | $ | 37,929 | |
| LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | LIABILITIES AND EQUITY |
| Current Liabilities: | | Current Liabilities: | |
| Accounts payable | $ | 3,377 |
| $ | 1,898 |
| Accounts payable | $ | 3,745 | | $ | 3,532 | |
Short-term debt and current portion of long-term debt (1) | 2,037 |
| 239 |
| |
| Progress collections | 1,381 |
| 1,596 |
| |
| Short-term debt and current portion of long-term debt | | Short-term debt and current portion of long-term debt | 40 | | 889 | |
| Progress collections and deferred income | | Progress collections and deferred income | 3,232 | | 3,454 | |
| All other current liabilities | 2,110 |
| 1,201 |
| All other current liabilities | 2,163 | | 2,431 | |
| Total current liabilities | 8,905 |
| 4,934 |
| Total current liabilities | 9,180 | | 10,306 | |
| Long-term debt | 6,312 |
| 38 |
| Long-term debt | 6,687 | | 6,744 | |
| Deferred income taxes | 367 |
| 880 |
| Deferred income taxes | 73 | | 108 | |
| Liabilities for pensions and other employee benefits | 1,172 |
| 519 |
| |
| Liabilities for pensions and other postretirement benefits | | Liabilities for pensions and other postretirement benefits | 1,110 | | 1,217 | |
| All other liabilities | 972 |
| 495 |
| All other liabilities | 1,510 | | 1,391 | |
| Members' equity: | | |
| Members' capital (common units 1,129 & Nil, issued and outstanding as of December 31, 2017 and 2016, respectively) | 41,351 |
| — |
| |
| Parent's net investment | — |
| 16,582 |
| |
| Members' Equity: | | Members' Equity: | |
| Members' capital (common units 1,026 and 1,035 issued and outstanding as of December 31, 2021 and 2020, respectively | | Members' capital (common units 1,026 and 1,035 issued and outstanding as of December 31, 2021 and 2020, respectively | 35,589 | | 36,512 | |
| | Retained loss | (459 | ) | — |
| Retained loss | (16,311) | | (15,939) | |
| Accumulated other comprehensive loss | (1,874 | ) | (1,894 | ) | Accumulated other comprehensive loss | (2,691) | | (2,542) | |
| Baker Hughes, a GE company, LLC members' equity | 39,018 |
| 14,688 |
| |
| Baker Hughes Holdings LLC equity | | Baker Hughes Holdings LLC equity | 16,587 | | 18,031 | |
| Noncontrolling interests | 140 |
| 167 |
| Noncontrolling interests | 139 | | 132 | |
| Total equity | 39,158 |
| 14,855 |
| Total equity | 16,726 | | 18,163 | |
| Total liabilities and equity | $ | 56,886 |
| $ | 21,721 |
| Total liabilities and equity | $ | 35,286 | | $ | 37,929 | |
| |
(1)
| Total assets include $1,124 million of assets held on behalf of GE, of which $997 million is cash and equivalents and $127 million is investment securities at December 31, 2017 and a corresponding amount of liability is reported in short-term borrowings. See "Note 14. Related Party Transactions" for further details. |
See accompanying Notes to Consolidated and Combined Financial Statements
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 5047
BAKER HUGHES A GE COMPANYHOLDINGS LLC
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | Number of Common Units | Common Unitholders | Parent's Net Investment | Retained Loss | Accumulated Other Comprehensive Loss | Non-controlling Interests | Total |
| Balance at December 31, 2014 | — |
| $ | — |
| $ | 17,169 |
| $ | — |
| $ | (964 | ) | $ | 181 |
| $ | 16,386 |
|
| Comprehensive income: |
|
|
|
|
|
|
|
|
| Net loss |
|
|
| (606 | ) |
|
| (25 | ) | (631 | ) |
| Other comprehensive loss |
|
|
|
|
|
| (568 | ) | (11 | ) | (579 | ) |
| Changes in Parent's net investment |
|
|
| (643 | ) |
|
|
|
| (643 | ) |
| Net activity related to noncontrolling interests |
|
|
|
|
|
| 12 |
| 12 |
|
| Balance at December 31, 2015 | — |
| $ | — |
| $ | 15,920 |
| $ | — |
| $ | (1,532 | ) | $ | 157 |
| $ | 14,545 |
|
| Comprehensive income: |
|
|
|
|
|
|
|
|
| Net income (loss) |
|
|
| 403 |
|
|
| (69 | ) | 334 |
|
| Other comprehensive loss |
|
|
|
|
|
| (362 | ) | (14 | ) | (376 | ) |
Changes in Parent's net investment
|
|
|
| 259 |
|
|
|
|
|
| 259 |
|
| Net activity related to noncontrolling interests |
|
|
|
|
|
|
| 93 |
| 93 |
|
| Balance at December 31, 2016 | — |
| $ | — |
| $ | 16,582 |
| $ | — |
| $ | (1,894 | ) | $ | 167 |
| $ | 14,855 |
|
| Comprehensive income: |
|
|
|
|
|
|
|
|
| Net income |
|
|
| 109 |
|
|
| 4 |
| 113 |
|
| Other comprehensive income (loss) |
|
|
|
|
| (62 | ) | 4 |
| (58 | ) |
| Changes in Parent's net investment |
|
|
| 886 |
|
| (13 | ) |
| 873 |
|
| Net activity related to noncontrolling interests |
|
|
|
|
|
| 4 |
| 4 |
|
| Cash contribution received from General Electric Company (GE) |
|
|
| 7,400 |
|
|
|
| 7,400 |
|
| Issuance of common units to GE on business combination | 717 |
| 24,977 |
| (24,977 | ) |
|
|
| — |
|
| Issuance of common units to Baker Hughes, a GE company (BHGE) on business combination | 428 |
| 24,798 |
|
|
|
| 76 |
| 24,874 |
|
| Distribution to BHGE |
|
| (7,498 | ) |
|
|
|
| (7,498 | ) |
| Activity after business combination of July 3, 2017: | | | | | | | |
| Net loss |
|
|
|
| (459 | ) |
| 3 |
| (456 | ) |
| Other comprehensive income |
|
|
|
|
| 127 |
| (1 | ) | 126 |
|
| Cash distribution to members ($0.35 per unit) |
|
| (406 | ) |
|
|
|
|
| (406 | ) |
| Net activity related to noncontrolling interests |
|
| (56 | ) |
|
| (32 | ) | (117 | ) | (208 | ) |
| Repurchase of common units | (16 | ) | (501 | ) | | | | | (501 | ) |
| Other |
|
| 37 |
|
|
|
|
| 37 |
|
| Balance at December 31, 2017 | 1,129 |
| $ | 41,351 |
| $ | — |
| $ | (459 | ) | $ | (1,874 | ) | $ | 140 |
| $ | 39,158 |
|
| | | | | | | | | | | | | | | | | | | |
| | | | |
| (In millions, except per unit amounts) | | Members' Capital | | Retained Earnings (Loss) | Accumulated Other Comprehensive Loss | Non-controlling Interests | Total |
| Balance at December 31, 2018 | | $ | 37,582 | | | $ | (354) | | $ | (2,462) | | $ | 110 | | $ | 34,876 | |
| | | | | | | |
| Comprehensive income (loss): | | | | | | | |
| Net income | | | | 241 | | | 36 | | 277 | |
| Other comprehensive loss | | | | | (8) | | | (8) | |
| Regular cash distribution to Members ($0.72 per unit) | | (745) | | | | | | (745) | |
| | | | | | | |
| | | | | | | |
| Repurchase and cancellation of common units | | (250) | | | | | | (250) | |
| Baker Hughes stock-based compensation cost | | 187 | | | | | | 187 | |
| Other | | 224 | | | 3 | | (119) | | (31) | | 77 | |
| Balance at December 31, 2019 | | 36,998 | | | (110) | | (2,589) | | 115 | | 34,414 | |
| Comprehensive income (loss): | | | | | | | |
| Net loss | | | | (15,825) | | | 29 | | (15,796) | |
| Other comprehensive income (loss) | | | | | 47 | | (3) | | 44 | |
| Regular cash distribution to Members ($0.72 per unit) | | (744) | | | | | | (744) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Baker Hughes stock-based compensation cost | | 210 | | | | | | 210 | |
| Other | | 48 | | | (4) | | | (9) | | 35 | |
| Balance at December 31, 2020 | | 36,512 | | | (15,939) | | (2,542) | | 132 | | 18,163 | |
| Comprehensive income (loss): | | | | | | | |
| Net loss | | | | (372) | | | 28 | | (344) | |
| Other comprehensive loss | | | | | (149) | | (2) | | (151) | |
| Regular cash distribution to Members ($0.72 per unit) | | (748) | | | | | | (748) | |
| | | | | | | |
| | | | | | | |
| Repurchase and cancellation of common units | | (434) | | | | | | (434) | |
| Baker Hughes stock-based compensation cost | | 205 | | | | | | 205 | |
| Other | | 54 | | | | | (19) | | 35 | |
| Balance at December 31, 2021 | | $ | 35,589 | | | $ | (16,311) | | $ | (2,691) | | $ | 139 | | $ | 16,726 | |
See accompanying Notes to Consolidated and Combined Financial Statements
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 5148
BAKER HUGHES A GE COMPANY,HOLDINGS LLC
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
| | | | Year Ended December 31, | | Year Ended December 31, |
| (In millions) | 2017 | 2016 | 2015 | (In millions) | 2021 | 2020 | 2019 |
| Cash flows from operating activities: | | Cash flows from operating activities: | |
| Net income (loss) | $ | (343 | ) | $ | 334 |
| $ | (631 | ) | Net income (loss) | $ | (344) | | $ | (15,796) | | $ | 277 | |
| Adjustments to reconcile net income (loss) to net cash flows from operating activities: |
| Adjustments to reconcile net income (loss) to net cash flows from operating activities: | |
| Depreciation and amortization | 1,103 |
| 550 |
| 530 |
| Depreciation and amortization | 1,105 | | 1,317 | | 1,418 | |
| Loss (gain) on equity securities | | Loss (gain) on equity securities | 845 | | (1,417) | | — | |
| Provision for deferred income taxes | | Provision for deferred income taxes | 157 | | 143 | | 51 | |
| Property, plant and equipment impairment | | Property, plant and equipment impairment | 7 | | 461 | | 107 | |
| Goodwill impairment | — |
| — |
| 2,080 |
| Goodwill impairment | — | | 14,717 | | — | |
| Provision for deferred income taxes | (203 | ) | 39 |
| (96 | ) | |
| Intangible assets impairment | | Intangible assets impairment | — | | 729 | | — | |
| Loss on business dispositions | | Loss on business dispositions | — | | 353 | | 138 | |
| Inventory impairment | | Inventory impairment | — | | 246 | | — | |
| | Changes in operating assets and liabilities: |
| Changes in operating assets and liabilities: | |
| Current receivables | (1,296 | ) | 278 |
| 469 |
| Current receivables | (91) | | 676 | | (521) | |
| Inventories | 392 |
| 345 |
| 442 |
| Inventories | 170 | | (80) | | (200) | |
| Accounts payable | 283 |
| (256 | ) | (450 | ) | Accounts payable | 246 | | (711) | | 261 | |
| Progress collections | (232 | ) | (714 | ) | (867 | ) | |
| Deferred charges | (570 | ) | (292 | ) | (87 | ) | |
| Progress collections and deferred income | | Progress collections and deferred income | (72) | | 396 | | 1,147 | |
| Contract and other deferred assets | | Contract and other deferred assets | 262 | | (69) | | (60) | |
| Other operating items, net | 67 |
| (22 | ) | (113 | ) | Other operating items, net | 85 | | 336 | | (450) | |
| Net cash flows from (used in) operating activities | (799 | ) | 262 |
| 1,277 |
| |
| Net cash flows from operating activities | | Net cash flows from operating activities | 2,370 | | 1,301 | | 2,168 | |
| | | |
| Cash flows from investing activities: |
| Cash flows from investing activities: | |
| Expenditures for capital assets | (665 | ) | (424 | ) | (607 | ) | Expenditures for capital assets | (856) | | (974) | | (1,240) | |
| Proceeds from disposal of assets | 172 |
| 20 |
| 30 |
| Proceeds from disposal of assets | 315 | | 187 | | 264 | |
| Proceeds from business dispositions | 20 |
| — |
| 181 |
| Proceeds from business dispositions | 70 | | 187 | | 77 | |
| Net cash paid for acquisitions | (3,365 | ) | (1 | ) | (86 | ) | |
| | Net cash paid for business interests | | Net cash paid for business interests | (179) | | (26) | | (176) | |
| Other investing items, net | (292 | ) | (67 | ) | 16 |
| Other investing items, net | 187 | | 8 | | 30 | |
| Net cash flows used in investing activities | (4,130 | ) | (472 | ) | (466 | ) | Net cash flows used in investing activities | (463) | | (618) | | (1,045) | |
| | | |
| Cash flows from financing activities: |
| Cash flows from financing activities: | |
| Net borrowings (repayments) of short-term borrowings | (663 | ) | (156 | ) | 177 |
| |
| Net repayments of short-term debt | | Net repayments of short-term debt | (41) | | (204) | | (542) | |
| Proceeds from the issuance of long-term debt | 3,928 |
| — |
| — |
| Proceeds from the issuance of long-term debt | 1,250 | | 500 | | 525 | |
| Proceeds from (repayment of) commercial paper | | Proceeds from (repayment of) commercial paper | (832) | | 737 | | — | |
| Repayments of long-term debt | (177 | ) | — |
| — |
| Repayments of long-term debt | (1,313) | | (42) | | (570) | |
| Net transfer from Parent | 1,498 |
| 191 |
| (708 | ) | |
| Contribution received from GE | 7,400 |
| — |
| — |
| |
| Distributions to members | (406 | ) | — |
| — |
| |
| Distributions to Members | | Distributions to Members | (748) | | (744) | | (745) | |
| | Repurchase of common units | (477 | ) | — |
| — |
| Repurchase of common units | (434) | | — | | (250) | |
| | Other financing items, net | (188 | ) | (137 | ) | 16 |
| Other financing items, net | (24) | | (22) | | 48 | |
| Net cash flows from (used in) financing activities | 10,915 |
| (102 | ) | (515 | ) | Net cash flows from (used in) financing activities | (2,142) | | 225 | | (1,534) | |
| Effect of currency exchange rate changes on cash and equivalents | 52 |
| (139 | ) | (254 | ) | |
| Increase (decrease) in cash and equivalents | 6,038 |
| (451 | ) | 42 |
| |
| Cash and equivalents, beginning of period | 981 |
| 1,432 |
| 1,390 |
| |
| Cash and equivalents, end of period | $ | 7,019 |
| $ | 981 |
| $ | 1,432 |
| |
| | | |
| Supplemental cash flows disclosures: | | |
| Income taxes paid, net of refunds | $ | 230 |
| $ | 317 |
| $ | 264 |
| |
| Interest paid | $ | 109 |
| $ | 55 |
| $ | 52 |
| |
| Effect of currency exchange rate changes on cash and cash equivalents | | Effect of currency exchange rate changes on cash and cash equivalents | (47) | | (28) | | (21) | |
| Increase (decrease) in cash and cash equivalents | | Increase (decrease) in cash and cash equivalents | (282) | | 880 | | (432) | |
| Cash and cash equivalents, beginning of period | | Cash and cash equivalents, beginning of period | 4,125 | | 3,245 | | 3,677 | |
| Cash and cash equivalents, end of period | | Cash and cash equivalents, end of period | $ | 3,843 | | $ | 4,125 | | $ | 3,245 | |
See "Note 20. Supplementary Information" for additional cash flow disclosures
See accompanying Notes to Consolidated and Combined Financial Statements
BHGE LLC 2017 FORM 10-K | 52
Baker Hughes a GE company,Holdings LLC 2021 Form 10-K | 49
Baker Hughes Holdings LLC
Notes to Consolidated and Combined Financial Statements
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
Baker Hughes a GE company,Holdings LLC, a Delaware limited liability company (the Company, BHGE LLC, we, us,("the Company", "BHH LLC", "we", "us", or
our "our") and the successor to Baker Hughes Incorporated ("BHI"), is an energy technology company with a Delaware corporation (Baker Hughes) is a fullstream oilfield technology providerdiversified portfolio of technologies and services that has a unique mixspan the energy and industrial value chain. As of equipment and service capabilities. We conduct business in more than 120 countries and employ over 64,000 employees.
BASIS OF PRESENTATION
On July 3, 2017, we closed our previously announced business combination (the Transactions) to combine the oil and gas business (GE O&G) ofDecember 31, 2021, General Electric Company (GE) and Baker Hughes (refer to "Note 2. Business Acquisition" for further details on the Transactions). In connection with the Transactions, we entered into and are
governed by an Amended & Restated Limited Liability Company Agreement, dated as of July 3, 2017 (the BHGE LLC Agreement). Under the BHGE LLC Agreement, EHHC Newco, LLC (EHHC), a wholly owned subsidiary of Baker Hughes, a GE company (BHGE), is our sole managing member and BHGE is the sole managing member of EHHC. As our managing member, EHHC conducts, directs and exercises full control over all our activities, including our day-to-day business affairs and decision-making, without the approval of any other member. As such, EHHC is responsible for all our operational and administrative decisions and the day-to-day management of our business. GE("GE") owns approximately 62.5%11.4% of our common units and BHGEBaker Hughes Company ("Baker Hughes") owns approximately 37.5%directly or indirectly 88.6% of our common units indirectly through two wholly owned subsidiaries. The current year results, and balances, may not be comparable to prior years as they include the results of Baker Hughes from July 3, 2017.(collectively, "the Members").
The Transactions were treated as a "reverse acquisition" for accounting purposes and, as such, the historical
financial statements of the accounting acquirer, GE O&G, are the historical financial statements of the Company.BASIS OF PRESENTATION
The accompanying consolidated and combined financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.("U.S." and such principles, U.S. GAAP)"U.S. GAAP") and pursuant to the rules and regulations of the SEC for annual financial information. The consolidated financial statements include the accounts of Baker Hughes and all of its subsidiaries and affiliates which it controls or variable interest entities for which we have determined that we are the primary beneficiary. All intercompany accounts and transactions have been eliminated.
TheIn the Company's consolidated financial statements and notes, certain amounts have been prepared on a consolidated basis, effective July 3, 2017. Under this basis of presentation, our financial statements consolidate all of our subsidiaries (entities in which we have a controlling financial interest, most often because we hold a majority voting interest). All subsequent periods will also be presented on a consolidated basis. For all periods priorreclassified to July 3, 2017, the Company's financial statements were prepared on a combined basis. The combined financial statements combine certain accounts of GE and its subsidiaries that were historically managed as part of its oil & gas business and contributed to BHGE LLC as part of the Transactions. Additionally, it also includes certain assets, liabilities and results of operations of other businesses of GE that were also contributed to BHGE LLC as part of the Transactions on a fully retrospective basis (in accordanceconform with the guidance applicable to transactions between entities under common control) based on their carrying values, as reflected in the accounting records of GE. The consolidated and combined statements of income reflect intercompany expense allocations made to us by GE for certain corporate functions and for shared services provided by GE. Where possible, these allocations were made on a specific identification basis, and in other cases, these expenses were allocated by GE based on relative percentages of net operating costs or some other basis depending on the nature of the allocated cost. See "Note 16. Related Party Transactions" for further information on expenses allocated by GE. The historical financial results in the consolidated and combined financial statements presented may not be indicative of the results that would have been achieved had GE O&G operated as a separate, stand-alone entity during those periods.
The GE O&G numbers in the consolidated and combined statements of income (loss) have been reclassed to conform to the current year presentation. We believe that the current presentation is a more appropriate presentation of the combined businesses. Merger and related costs includes all costs associated with the Transactions described in Note 2. Refer to "Note 2. Business Acquisition" for further details.
BHGE LLC 2017 FORM 10-K | 53
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
In the notes to the consolidated and combined financial statements, all dollar and members' unitscommon unit amounts in tabulations are in millions of dollars and members' units, respectively, unless otherwise indicated. Certain columns and rows in our financial statements and notes thereto may not add due to the use of rounded numbers.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of any contingent assets or liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates and judgments on historical experience and on various other assumptions and information that we believe to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be perceived with certainty, and accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. While we believe that the estimates and assumptions used in the preparation of the consolidated and combined financial statements are appropriate, actual results could differ from those estimates. Estimates are used for, but are not limited to, determining the following: allowance for doubtful accountscredit losses and inventory valuation reserves; recoverability of long-lived assets, including revenue recognition on long term contracts,long-term contracts; valuation of goodwill; useful lives used in depreciation and amortization; income taxes and related valuation allowances; accruals for contingencies; actuarial assumptions to determine costs and liabilities related to employee benefit plans; stock-based compensation expense; valuation of derivativesderivatives; and the fair value of assets acquired and liabilities assumed in acquisitions; and expense allocations for certain corporate functions and shared services provided by GE.acquisitions.
Foreign Currency
Assets and liabilities of non-U.S. operations with a functional currency other than the U.S. dollar have been translated into U.S. dollars at the quarterlyusing our period end exchange rates, and revenue, expenses, and cash flows have been translated at average rates for the respective periods. Any resulting translation gains and losses are included in other comprehensive income (loss).
Gains and losses from foreign currency transactions, such as those resulting from the settlement of receivables or payables in the non-functional currency and those resulting from remeasurements of monetary items of non-U.S. operations where the functional currency is the U.S. dollar, are included in the consolidated and combined statementstatements of income (loss).
Cost and Equity Method InvestmentBaker Hughes Holdings LLC 2021 Form 10-K | 50
Baker Hughes Holdings LLC
Investments in privately held companies in which we do not have the abilityNotes to exercise significant influence, most often because we hold a voting interestConsolidated Financial Statements
Revenue from Sale of 0% to 20% are accounted for using the cost method.Equipment
Associated companies are entities in which we do not have a controlling financial interest, but over which we have significant influence, most often because we hold a voting interest of 20% to 50%. Associated companies are accounted for as equity method investments. Results of associated companies are presented on a one-line basis in the caption "Equity in loss of affiliate" in our consolidated and combined statements of income (loss). Investments in, and advances to, associated companies are presented on a one-line basis in the caption "All other assets" in our consolidated and combined statement of financial position.
Sales of Goods and ServicesPerformance Obligations Satisfied Over Time
We record allrecognize revenue on agreements for sales of goods manufactured to unique customer specifications including long-term construction projects, on an over time basis utilizing cost inputs as the measurement criteria in assessing the progress toward completion. Our estimate of costs to be incurred to fulfill our promise to a customer is based on our history of manufacturing similar assets for customers and services only when a firm sales agreement is updated routinely to reflect changes in place, delivery has occurredquantity or services have been rendered and collectabilitypricing of the fixedinputs. We begin to recognize revenue on these contracts when the contract specific inventory becomes customized for a customer, which is reflective of our initial transfer of control of the incurred costs. We provide for potential losses on any of these agreements when it is probable that we will incur the loss.
Our billing terms for these over time contracts vary, but are generally based on achieving specified milestones. The differences between the timing of our revenue recognized (based on costs incurred) and customer billings (based on contractual terms) results in changes to our contract asset or determinable sales price is reasonably assured.contract liability positions.
ExceptPerformance Obligations Satisfied at a Point In Time
We recognize revenue for goods sold under long-term construction type contracts and service agreements,non-customized equipment at the point in time that the customer obtains control of the good. Equipment for which we recognize salesrevenue at a point in time include goods we manufacture on a standardized basis for sale to the market. We use proof of goods underdelivery for certain large equipment with more complex logistics associated with the provisionsshipment, whereas the delivery of SEC Staff Accounting Bulletin (SAB) 104, Revenue Recognition.other equipment is generally determined based on historical data of transit times between regions.
On occasion we sell products with a right of return. We use our accumulated experience to estimate and provide for such returns when we record the sale. In situations where arrangements include customer acceptance provisions based on seller or customer-specified objective
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Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
criteria, we recognize revenue when we have reliably demonstratedconcluded that all specifiedthe customer has control of the goods and that acceptance criteria have been met or when formal acceptance occurs, respectively. We do not provideis likely to occur.
Our billing terms for anticipated losses before we record sales.
We recognize revenue on larger construction andthese point in time equipment contracts using long-term construction accounting. We estimate total long-term contract revenue net of price concessions as well as total contract costs. For larger construction and equipment contracts, we recognize salesvary, but are generally based on our progress toward contract completion measured by actual costs incurred in relationshipment of the goods to our estimatethe customer.
Revenue from Sale of total expected costs. We routinely update our estimates of future costs for agreements in process and report any cumulative effects of such adjustments in current operations. We provide for any loss that we expect to incur on these agreements when that loss is probable.Services
Performance Obligations Satisfied Over Time
We sell product services under long-term product maintenance or extended warranty agreements wherein our Turbomachinery & Process Solutions and Oilfield Equipment segments. These agreements require us to maintain the customers' assets over the service agreement contract terms, which generally range from 10 to 20 years. In general, these are contractual arrangements to provide services, repairs, and maintenance of a covered unit (gas turbines for mechanical drive or power generation, primarily on LNG applications, drilling rigs). These services are performed at various times during the life of the contract, thus the costs of performing services are incurred on an other than a straight-line basis. We recognize related sales based on the extent of our progress toward completion measured by actual costs incurred in relation to our estimate of total expected costs. We routinely update ourprovide for any loss that we expect to incur on any of these agreements when that loss is probable. The Company utilizes historical customer data, prior product performance data, statistical analysis, third-party data, and internal management estimates of future costs for agreements in process and report any cumulative effects of such adjustments in current operations.
For our long-term product maintenance agreements, we regularly assessto calculate contract-specific margins. In certain contracts, the total transaction price is variable based on customer credit risk inherentutilization, which is excluded from the contract margin until the period that the customer has utilized to appropriately reflect the revenue activity in the carrying amountsperiod earned. In addition, revenue for certain oilfield services is recognized on an over time basis as performed.
Our billing terms for these contracts are generally based on asset utilization (i.e. usage per hour) or the occurrence of receivablesa major maintenance event within the contract. The differences between the timing of our revenue recognized (based on costs incurred) and customer billings (based on contractual terms) results in changes to our contract costs and estimated earnings, including the risk that contractual penalties may not be sufficientasset or contract liability positions.
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Baker Hughes Holdings LLC
Notes to offset our accumulated costs in the event of customer termination. Consolidated Financial Statements
Performance Obligations Satisfied at a Point In Time
We gain insight into expected future utilization and cost trends, as well as credit risk,sell certain tangible products, largely spare equipment, through our knowledgeservices business. We recognize revenue for this equipment at the point in time that the customer obtains control of the installed base of equipment andgood, which is at the close interaction with our customers that comes with supplying critical services and parts over extended periods. Revisions, after applyingpoint in time we deliver the cumulative catch up basis of accounting, may affect a product services agreement's total estimated profitability resultingspare part to the customer. Our billing terms for these point in an adjustment of earnings. We provide for probable losses when they become evident.
Arrangements for the sale of goods and services sometimes include multiple components. Our arrangements with multiple components usually involve an upfront deliverable of equipment and futuretime service deliverables such as installation, commissioning, training or the future delivery of ancillary products. In most cases, the relative valuescontracts vary, but are generally based on shipment of the undelivered components are not significantgoods to the overall arrangement and are typically delivered within three to six months after the core product has been delivered. In such agreements, selling price is determined for each component and any difference between the total of the separate selling prices and total contract consideration (i.e., discount) is allocated pro rata across each of the components in the arrangement. The value assigned to each component is objectively determined and obtained primarily from sources such as the separate selling price for that or a similar item or from competitor prices for similar items. If such evidence is not available, we use our best estimate of selling price, which is established consistent with the pricing strategy of the business and considers product configuration, geography, customer type, and other market specific factors.customer.
Research and Development
Research and development costs are expensed as incurred and relate to the research and development of new products and services. These costs amounted to $501$492 million, $352$595 million and $408$687 million for the years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively. Research and development expenses were reported in cost of goods sold and cost of services sold.
Separation Related
Separation related costs relate to the ongoing activities for the separation from GE including costs for the build-out of certain information technology infrastructures as a result of the separation.
Cash and Cash Equivalents
Short-term investments with original maturities of three months or less are included in cash equivalents unless designated as available-for-sale and classified as investment securities.
As of December 31, 20172021 and December 31, 2016, $1,1902020, we had $601 million and $752$687 million, respectively, of cash and equivalents were considered restricted as they were held in bank accounts andthat cannot be released, transferred or otherwise converted into a currency that is regularly transacted internationally, due to lack of market liquidity, capital controls or similar monetary or exchange limitations limiting the flow of capital out of the jurisdiction. CashThese funds are available to fund operations and equivalents includes $997 million of cash at December 31, 2017 held on behalf of GE, of which $764 million is
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Baker Hughes,growth in these jurisdictions and we do not currently anticipate a GE company, LLC
Notesneed to Consolidated and Combined Financial Statements
restricted, and a corresponding liability is reported in short-term borrowings. See "Note 16. Related Party Transactions" for further details.transfer these funds to the U.S.
Allowance for Doubtful AccountsCredit Losses
We establish an allowance for doubtful accounts based on various factors including themonitor our customers' payment history and financial condition of our debtors and the economic environment. Provisions for doubtful accounts are recorded based on the aging statuscurrent credit worthiness to determine that collectability of the debtorrelated financial assets are reasonably assured. We also consider the overall business climate in which our customers operate. For accounts or when it becomes evident that the debtor will not make the required payments at either contractual due dates or in the future.receivable, a loss allowance matrix is utilized to measure lifetime expected credit losses. The matrix contemplates historical credit losses by age of receivables, adjusted for any forward-looking information and management expectations.
Concentration of Credit Risk
We grant credit to our customers who primarily operate in the oil and natural gas industry. Although this concentration affects our overall exposure to credit risk, our current receivables are spread over a diverse group of customers across many countries, which mitigates this risk. We perform periodic credit evaluations of our customers' financial conditions, including monitoring our customers' payment history and current credit worthiness to manage this risk. We do not generally require collateral in support of our current receivables, but we may require payment in advance or security in the form of a letter of credit or a bank guarantee.
Inventories
All inventories are stated at the lower of cost or net realizable values and they are measured on a first-in, first-out (FIFO)("FIFO") basis or average cost basis. As necessary, we record provisions and maintain reserves for excess, slow moving and obsolete inventory. To determine these reserve amounts, we regularly review inventory quantities on hand and compare them to estimates of future product demand, market conditions, production requirements and technological developments.
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Notes to Consolidated Financial Statements
Property, Plant and Equipment (PP&E)("PP&E")
Property, plant and equipment is initially stated at cost and is depreciated over its estimated economic life. Subsequently, property, plant and equipment is measured at cost less accumulated depreciation, which is generally provided by using the straight-line method over the estimated economic lives of the individual assets, and impairment losses. We manufacture a substantial portion of our tools and equipment in our OFS segment and the cost of these items, which includes direct and indirect manufacturing costs, is capitalized and carried in inventory until it is completed.and subsequently moved to PP&E.
Other Intangible Assets
We amortize the cost of other intangible assets over their estimated useful lives unless such lives are deemed indefinite. The cost of intangible assets is generally amortized on a straight-line basis over the asset's estimated economic life. Amortizable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. In these circumstances, they are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested annually for impairment and written down to fair value as required. Refer to the Impairment of Goodwill and Other Long-Lived Assets accountingpolicy.
Impairment of Goodwill and Other Long-lived Assets
We perform an annual impairment test of goodwill on a qualitative or quantitative basis for each of our reporting units as of July 1, or more frequently when circumstances indicate an impairment may exist at the reporting unit level. When performing the annual impairment test we have the option of first performing a qualitative assessment to determine the existence of events and circumstances that would lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If such a conclusion is reached, we would then be required to perform a quantitative impairment assessment of goodwill. However, if the assessment leads to a determination that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then no further assessments are required. A quantitative assessment for the determination of impairment is made by comparing the carrying amount of each reporting unit with its fair value, which is generally calculated using a
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Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
combination of market, comparable transaction and discounted cash flow approaches. See "Note 6. Goodwill and Other Intangible Assets" for further information on valuation methodology and impairment of goodwill.
We review PP&E, intangible assets and certain other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable and at least annually for indefinite-lived intangible assets. When testing for impairment, we group our long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (or asset group). The determination of recoverability is made based upon the estimated undiscounted future net cash flows. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value of the related assets.
Financial Instruments
Our financial instruments include cash and equivalents, current receivables, investments, accounts payables, short and long-term debt, and derivative financial instruments.
We monitor our exposure to various business risks including commodity prices and foreign currency exchange rates and we regularly use derivative financial instruments to manage these risks. At the inception of a new derivative, we designate the derivative as a hedge or we determine the derivative to be undesignated as a hedging instrument. We document the relationships between the hedging instruments and the hedged items, as well as our risk management objectives and strategy for undertaking various hedge transactions. We assess whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged item at both the inception of the hedge and on an ongoing basis.
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Baker Hughes Holdings LLC
Notes to Consolidated Financial Statements
We have a program that utilizes foreign currency forward contracts to reduce the risks associated with the effects of certain foreign currency exposures. Under this program, our strategy is to have gains or losses on the foreign currency forward contracts mitigate the foreign currency transaction and translation gains or losses to the extent practical. These foreign currency exposures typically arise from changes in the value of assets (for example, current receivables) and liabilities (for example, current payables) which are denominated in currencies other than the functional currency of the respective entity. We record all derivatives as of the end of our reporting period in our consolidated and combined statement of financial position at fair value. For the forward contracts held as undesignated hedging instruments, we record the changes in fair value of the forward contracts in our consolidated and combined statements of income (loss) along with the change in the fair value, related to foreign exchange movements, of the hedged item. Changes in the fair value of forward contracts designated as cash flow hedging instruments are recognized in other comprehensive income until the hedged item is recognized in earnings. If derivatives designated as a cash flow hedge are determined to be ineffective, the ineffective portion of that derivative's change in fair value is recognized in earnings.
Fair Value Measurements
For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
•Level 1 - Quoted prices for identical instruments in active markets.
•Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
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Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
•Level 3 - Significant inputs to the valuation model are unobservable.
We maintain policies and procedures to value instruments using the best and most relevant data available. In addition, we perform reviews to assess the reasonableness of the valuations. With regard to Level 3 valuations (including instruments valued by third parties), we perform a variety of procedures to assess the reasonableness of the valuations. Such reviews include an evaluation of instruments whose fair value change exceeds predefined thresholds (and/or does not change) and consider the current interest rate, currency and credit environment, as well as other published data, such as rating agency market reports and current appraisals.
Recurring Fair Value Measurements
Derivatives
When we have Level 1 derivatives, which are traded either on exchanges or liquid over-the-counter markets, we use closing prices for valuation. The majority of our derivatives are valued using internal models and are included in Level 2. These internal models maximize the use of market observable inputs including interest rate curves and both forward and spot prices for currencies and commodities. Derivative assets and liabilities included in Level 2 primarily represent foreign currency and commodity forward contracts for the Company.
Investments in Debt and Equity Securities
When available, we use quoted market prices to determine the fair value of investment securities, and they are included in Level 1. Level 1 securities primarily include publicly traded equity securities.
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Baker Hughes Holdings LLC
Notes to Consolidated Financial Statements
For investment securities for which market prices are observable for identical or similar investment securities but not readily accessible for each of those investments individually (that is, it is difficult to obtain pricing information for each individual investment security at the measurement date), we use pricing models that are consistent with what other market participants would use. The inputs and assumptions to the models are derived from market observable sources including: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market-related data. Thus, certain securities may not be priced using quoted prices, but rather determined from market observable information. These investments are included in Level 2. When we use valuations that are based on significant unobservable inputs we classify the investment securities in Level 3.
Non-Recurring Fair Value Measurements
Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments only in certain circumstances. These assets can include long-lived assets that have been reduced to fair value when they are held for sale, costequity securities without readily determinable fair value and equity method investments and long-lived assets that are written down to fair value when they are impaired and the remeasurement of retained investments in formerly consolidated subsidiaries upon a change in control that results in a deconsolidation of a subsidiary, if we sell a controlling interest and retain a noncontrolling stake in the entity. Assets that are written down to fair value when impaired and retained investments are not subsequently adjusted to fair value unless further impairment occurs.
Cost andInvestments in Equity Method InvestmentsSecurities
Cost andInvestments in equity method investments are valued using market observable data such as quoted prices when available. When market observable data is unavailable, investments are valued using a discounted cash flow model, comparative market multiples or a combination of both approaches as appropriate and other third-party pricing sources.
Long-lived Assets
Fair values of long-lived assets, including real estate, are primarily derived internally and are based on observed sales transactions for similar assets. In other instances, for example, collateral types forsecurities (of entities in which
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Notes to Consolidated and Combined Financial Statements
we do not have comparable observed sales transaction data, collateraleither a controlling financial interest or significant influence, most often because we hold a voting interest of 0% to 20%) with readily determinable fair values are developed internallymeasured at fair value with changes in fair value recognized in earnings and corroborated by external appraisal information. Adjustments to third-party valuations may be performedreported in circumstances where market comparables"other non- operating income (loss), net" in the consolidated statements of income (loss). Equity securities that do not have readily determinable fair values are not specific to the attributesrecorded at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar equity securities of the specific collateral or appraisal information maysame issuer. These changes are recorded in "other non-operating income (loss), net" in the consolidated statements of income (loss).
Associated companies are entities in which we do not be reflectivehave a controlling financial interest, but over which we have significant influence, most often because we hold a voting interest of current market conditions due20% to 50%. Associated companies are accounted for as equity method investments. The results of associated companies are presented in the passageconsolidated statements of timeincome (loss) as follows: (i) if the associated company is integral to our operations, their results are included in "Selling, general and administrative," and (ii) if the occurrenceassociated company is not integral to our operations, their results are included in "Other non-operating income (loss), net." Investments in, and advances to, associated companies are presented on a one-line basis in the caption "All other assets" in our consolidated statement of market events since receipt of the information.financial position.
Income Taxes
We are treated as a partnership for U.S. federal income tax purposes. As such, except for certain U.S. corporations owned by the Company, we are not subject to U.S. federal income tax under current U.S. tax laws.
Our membersMembers will each be required to take into account for U.S. federal income tax purposes their distributive share of our items of income, gain, loss and deduction, which generally will include the U.S. operations of both Baker HughesBHH LLC and GE O&G. BHGE and GEits subsidiaries. Our Members will each be taxed on their distributive share of income and gain, whether or not a corresponding amount of cash or other property is distributed to them. For assets held indirectly by us through subsidiaries, including both foreign and U.S., the taxes attributable to those subsidiaries will be reflected in our consolidated and combined financial statements.
We account for taxes under the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial statement and tax return bases of assets and liabilities as well as from net operating losses and tax credit carryforwards, based on enacted tax rates expected to be in effect when taxes are actually are paid or recovered, as well as for net operating losses and other provisions of the tax law.credit carryforwards. The effect of a change in tax laws or rates on deferred tax assets
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Baker Hughes Holdings LLC
Notes to Consolidated Financial Statements
and liabilities is recognized in income in the period in which such change is enacted. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not, and a valuation allowance is established for any portion of a deferred tax asset that management believes mayis not more likely than not to be realized.
Due to the enactment of U.S. tax reform, repatriations of foreign earnings will generally be free of U.S. federal tax but may incur other taxes, such as withholding or state taxes. Indefinite reinvestment is determined by management’s judgment about and intentions concerning the future operations of the Company. Most ofIn cases where repatriation would incur significant withholding or income taxes, these foreign earnings have been indefinitely reinvested in the Company’s active non-U.S. business operations. At December 31, 2017, we have not changed our indefinite reinvestment decision as a resultComputation of U.S.the potential deferred tax reform but will reassess this during the course of 2018, accordingly, we have not provided income tax on such earnings. Itliability associated with these undistributed earnings and any other basis difference is not practicable to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.practicable.
Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. We operate in more than 120 countries and ourOur tax filings are subject to audit by the tax authorities in the jurisdictions where we conduct business. These audits may result in assessments of additional taxes that are resolved with the tax authorities or through the courts. We have provided for the amounts that we believe will ultimately result from these proceedings. We recognize uncertain tax positions that are “more likely than not” to be sustained if the relevant tax authority were to audit the position with full knowledge of all the relevant facts and other information. For those tax positions that meet this threshold, we measure the amount of tax benefit based on the largest amount of tax benefit that has a greater than 50% chance of being realized in a final settlement with the relevant authority. We classify interest and penalties associated with uncertain tax positions as income tax expense. The effects of tax adjustments and settlements from taxing authorities are presented in the combined financial statements in the period they are recorded.
Additionally, as part of U.S. tax reform, the U.S. has enacted a tax on "base eroding" payments from the U.S. and a minimum tax on foreign earnings (global intangible low-taxed income). Because aspects of the new minimum tax and the effect on our operations is uncertain and because aspects of the accounting rules associated with this provision have not been resolved, we have not made a provisional accrual for the deferred tax aspects of this provision and consequently have not made an accounting policy election on the deferred tax treatment of this tax.finalized.
Environmental Liabilities
We are involved in numerous remediation actions to clean up hazardous waste as required by federal and state laws. Liabilities for remediation costs exclude possible insurance recoveries and, when dates and amounts of such
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Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
costs are not known, are not discounted. When there appears to be a range of possible costs with equal likelihood, liabilities are based on the low end of such range. It is reasonably possible that our environmental remediation exposure will exceed amounts accrued. However, due to uncertainties about the status of laws, regulations, technology and information related to individual sites, such amounts are not reasonably estimable. The determination of the required accruals for remediation costs is subject to uncertainty, including the evolving nature of environmental regulations and the difficulty in estimating the extent and type of remediation activity that is necessary.
NEW ACCOUNTING STANDARDS TO BE ADOPTED
ASU No. 2014-09, Revenue from Contracts with Customers
Background
In May 2014, the Financial Accounting Standards Board (FASB) issued a new comprehensive set of revenue recognition principles, Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, that supersedes most existing U.S. GAAP revenue recognition guidance (including ASC 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts). The new standard will become effective for annual reporting periods beginning after December 15, 2017. We adopted the standard on January 1, 2018 and will apply it retrospectively to all periods presented and will elect the practical expedient for contract modifications. Since the issuance of the new standard by the FASB, we have engaged in a collaborative process with our industry peers and worked with standard setters on important interpretive matters with the objective of ensuring consistency in the application of the standard.
Change in Timing and Presentation, No Impact to Cash or Economics
The new standard requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time based on when control of goods and services transfer to a customer. As a result, we expect changes in the presentation of our financial statements, including: (1) timing of revenue recognition, and (2) changes in classification between revenue and costs. The new standard will have no cash impact and, as such, does not affect the economics of our underlying customer contracts. The effect of applying the new guidance to our existing book of contracts will result in lower reported earnings in 2018 (and comparative periods previously reported) and in the early years after adoption. However, we expect to experience an increase in reported earnings, on that existing book of contracts, as they mature.
Current Estimate of Financial Statement Effect
We adopted the new standard on January 1, 2018. When we report our 2018 results, the comparative results for 2017 and 2016 will be updated to reflect the application of the requirements of the new standard to these periods. Based on our assessment and best estimates to date, we expect an after-tax reduction to our January 1, 2016 retained earnings balance of approximately $0.4 billion, with an estimated after-tax reduction of $0.1 billion and $0.1 billion on our 2016 and 2017 earnings, respectively. These adjustments primarily relate to the timing of revenue recognition on our long-term product service agreements. Beyond those effects, we expect application of the new guidance will result in increases and decreases in revenue within our segments, which will largely offset and will be immaterial at a total Company level. Following adoption in 2018, our books and records will only reflect the results as required under the new standard limiting our ability to estimate the effect of the standard on our earnings. Given the inherent difficulty in this ongoing estimation of the effect of the standard on any future periods, we do not plan to continue to assess the effect on 2018.
As discussed above, we anticipate a dilutive effect of the new standard in the year of adoption consistent with the effect to the restated 2016 and 2017 results and the effect will be less dilutive for years after initial adoption. However, this expectation is based on many variables, including underlying business performance, which are subject to change, making the effect of the standard on future periods difficult to estimate. Importantly, application of the new guidance has no effect on the cash we expect to receive nor the economics of these contracts.
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Notes to Consolidated and Combined Financial Statements
ASU No. 2016-02, Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. Similarly, lessors will be required to classify leases as sales-type, finance or operating, with classification affecting the pattern of income recognition. Classification for both lessees and lessors will be based on an assessment of whether risks and rewards as well as substantive control have been transferred through a lease contract. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While we continue to evaluate the effect of the standard on our ongoing financial reporting, we anticipate that the adoption of the ASU may materially affect our consolidated and combined financial statements.
ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory
In October 2016, the FASB issued ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. The ASU eliminates the deferral of tax effects of intra-entity asset transfers other than inventory. As a result, the tax expense from the intercompany sale of assets, other than inventory, and associated changes to deferred taxes will be recognized when the sale occurs even though the pre-tax effects of the transaction have not been recognized. The new standard is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The effect of the adoption of the standard will depend on the nature and amount of future transactions but is currently expected as an increase to retained earnings of approximately $0.3 billion. Future earnings will be reduced in total by this amount. The effect of the change on future transactions will depend on the nature and amount of future transactions as it will affect the timing of recognition of both tax expenses and tax benefits, with no change in the associated cash flows.
ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which changes the income statement presentation of net periodic benefit cost by requiring separation between the service cost component and all other components. The service cost component is required to be presented as an operating expense with other similar compensation costs arising for services rendered by the pertinent employees during the period. The non-operating components must be presented outside of income from operations. This pronouncement is effective for annual reporting periods beginning after December 15, 2017, and the presentation disclosure should be applied using a retrospective approach. Early adoption is permitted. We adopted this standard on January 1, 2018. The effect of the adoption of this standard will not have a material impact on our consolidated and combined financial statement.
All other newNew accounting pronouncements that have been issued but not yet effective are currently being evaluated and at this time are not expected to have a material impact on our financial position or results of operations.
NOTE 2. BUSINESS ACQUISITIONREVENUE RELATED TO CONTRACTS WITH CUSTOMERS
On July 3, 2017, we closed the Transactions to combine GE O&G and DISAGGREGATED REVENUE
We disaggregate our revenue from contracts with customers by primary geographic markets.
| | | | | | | | | | | |
| Total Revenue | 2021 | 2020 | 2019 |
| U.S. | $ | 4,497 | | $ | 4,638 | | $ | 6,188 | |
| Non-U.S. | 16,005 | | 16,067 | | 17,650 | |
| Total | $ | 20,502 | | $ | 20,705 | | $ | 23,838 | |
Baker Hughes creating a world leading, fullstream oilfield technology provider that has a unique mix of equipment and service capabilities. The Transactions were executed using a partnership structure, pursuant to which GE O&G and Baker Hughes each contributed their operating assets to the Company. As a partnership, we will not be subject to U.S. federal income tax under current U.S. tax laws. Our foreign subsidiaries, however, are expected to incur current and deferred foreign income taxes. GE holds an approximate 62.5% controlling interest in us and former Baker Hughes shareholders hold an approximate 37.5% interest through the ownership of 100% of Class A common stock of BHGE. GE holds its voting interest through Class B common stock in BHGE and its economic interest through a corresponding number of common units of BHGE LLC. Former Baker Hughes shareholders
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Baker Hughes a GE company,Holdings LLC
Notes to Consolidated and Combined Financial Statements
REMAINING PERFORMANCE OBLIGATIONS
immediately afterAs of December 31, 2021 and 2020, the completionaggregate amount of the Transactions also received a special dividend of $17.50 per share paid by BHGE to holders of record of the Company's Class A common stock. GE contributed $7.4 billion to us to fund substantially all of the special dividend.
Priortransaction price allocated to the Transactions, sharesunsatisfied (or partially unsatisfied) performance obligations was $23.6 billion and $23.4 billion, respectively. As of Baker Hughes common stock were registered pursuantDecember 31, 2021, we expect to Section 12(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act) and listed on the New York Stock Exchange and the SIX Swiss Exchange. Shares of Baker Hughes common stock were suspended from trading on the New York Stock Exchange and the SIX Swiss Exchange prior to the open of trading on July 5, 2017. The New York Stock Exchange filed a Form 25 on Baker Hughes' behalf to provide notice to the SEC regarding the withdrawal of shares of Baker Hughes common stock from listing and to terminate the registration of such shares under Section 12(b) of the Exchange Act.
As a result of the Transactions, on July 3, 2017, the Company issued 428 million common units to BHGE and 717 million common units to GE.
Based on the relative voting rights of former Baker Hughes shareholders and GE immediately following completion of the Transactions, and after taking into consideration all relevant facts, GE O&G is considered to be the "acquirer" for accounting purposes. As a result, the Transactions are reported as a business combination using the acquisition method of accounting with GE O&G treated as the "acquirer" and Baker Hughes treated as the "acquired" company.
The tables below present the fair value of the consideration exchanged and the preliminary estimates of the fair value of assets acquired and liabilities assumed and the associated fair value of the noncontrolling interest related to the acquired net assets of Baker Hughes. The final determination of fair value for certain assets and liabilities will be completed as soon as the information necessary to complete the analysis is obtained. These amounts, which may differ materially from these preliminary estimates, will continue to be refined and will be finalized as soon as possible, but no later than one year from the acquisition date. The primary areas of the preliminary estimates that are not yet finalized relate to inventory, property, plant and equipment, identifiable intangible assets, equity-method investments, deferred income taxes, uncertain tax positions and contingencies.
|
| | | |
| Purchase consideration | |
| (In millions, except share and per share amounts) | July 3, 2017 |
| Baker Hughes shares outstanding | 426,097,407 |
|
| Restricted stock units vested upon closing | 1,611,566 |
|
| Total Baker Hughes shares outstanding for purchase consideration | 427,708,973 |
|
| Baker Hughes share price on July 3, 2017 per share | $ | 57.68 |
|
| Purchase consideration | $ | 24,670 |
|
| Rollover of outstanding options into options to purchase Class A shares of BHGE (fair value) | $ | 114 |
|
| Precombination service of restricted stock units (fair value) | $ | 14 |
|
| Total purchase consideration | $ | 24,798 |
|
BHGE LLC 2017 FORM 10-K | 62
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
|
| | | |
| Preliminary identifiable assets acquired and liabilities assumed | Estimated fair value at July 3, 2017 |
| Assets | |
| Cash and equivalents | $ | 4,133 |
|
| Current receivables | 2,383 |
|
Inventories (1) | 1,695 |
|
| Property, plant and equipment | 4,868 |
|
Intangible assets (2) | 4,123 |
|
| All other assets | 1,544 |
|
| Liabilities | |
| Accounts payable | $ | (1,106 | ) |
| Borrowings | (3,370 | ) |
Deferred income taxes (3) | (43 | ) |
| Liabilities for pension and other postretirement benefits | (655 | ) |
| All other liabilities | (1,476 | ) |
| Total identifiable net assets | $ | 12,096 |
|
| Noncontrolling interest associated with net assets acquired | (76 | ) |
Goodwill (4) | 12,778 |
|
| Total purchase consideration | $ | 24,798 |
|
| |
(1)
| Includes $87 million of adjustments to write-up the acquired inventory to its estimated fair value. Cost of goods sold in 2017 reflects this increased valuation as this inventory was used or sold in the period from July 3, 2017 to December 31, 2017. |
| |
(2)
| Intangible assets, as provided in the table below, are recorded at estimated fair value, as determined by management based on available information which includes a preliminary valuation. The estimated useful lives for intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows. We consider the Baker Hughes trade name to be an indefinite life intangible asset, which will not be amortized and will be subject to an annual impairment test. |
|
| | | | |
| | Estimated Fair Value | Estimated Weighted
Average Life (Years) |
| Trademarks - Baker Hughes | $ | 2,100 |
| Indefinite life |
| Customer-related | 1,260 |
| 15 |
| Patents and technology | 550 |
| 10 |
| Trademarks - Other | 70 |
| 10 |
| Capitalized software | 90 |
| 3-7 |
| In-process research and development | 45 |
| Indefinite life |
| Favorable lease contracts | 8 |
| 10 |
| Total | $ | 4,123 |
| |
| |
(3)
| Includes approximately $160 million of net deferred tax liabilities related to the estimated fair value of intangible assets included in the preliminary purchase consideration and approximately $117 million of other net deferred tax assets, including non-U.S. loss carryforwards net of valuation allowances and offsetting liabilities for unrecognized benefits. |
| |
(4)
| Goodwill represents the excess of the total purchase consideration over fair value of the net assets recognized and represents the future economic benefits that we believe will result from combining the operations of GE O&G and Baker Hughes, including expected future synergies and operating efficiencies. Goodwill resulting from the Transactions has been preliminarily allocated to the Oilfield Services segment, of which $67 million is deductible for tax purposes. |
During the fourth quarter of 2017, the Company made measurement period adjustments to reflect facts and circumstances in existence as of the acquisition date. These adjustments resulted in a decrease in goodwill of approximately $366 million mostly due to the step-up to fair value of property, plant and equipment of $682 million partially offset by a reduction in intangible assets of $367 million. As a result of the increase in property, plant and equipment and the reduction of intangible assets during the fourth quarter of 2017, we recorded a net increase to
BHGE LLC 2017 FORM 10-K | 63
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
depreciation and amortization expense of $63 million, which adjusts the depreciation and amortization expense to the amount that would have been recorded in previous interim reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. In addition, we reclassified certain balances to conform to our current presentation. The acquisition of Baker Hughes contributedrecognize revenue of approximately $5,184 million53%, 68% and pretax segment operating income of approximately $256 million for the period from July 3, 2017 through December 31, 2017.
INCOME TAXES
We are treated as a partnership for U.S. federal income tax purposes. As such, we will not be subject to U.S. federal income tax under current U.S. tax laws. Our members will each be required to take into account for U.S. federal income tax purposes their distributive share of our items of income, gain, loss and deduction, which generally will include the U.S. operations of both Baker Hughes and GE O&G. BHGE and GE will each be taxed on their distributive share of income and gain, whether or not a corresponding amount of cash or other property is distributed to them. For assets held indirectly by us through subsidiaries, the taxes attributable to those subsidiaries will be reflected in our consolidated and combined financial statements.
MERGER AND RELATED COSTS
During 2017, 2016 and 2015, acquisition costs of $373 million, $33 million and $27 million, respectively, were expensed as incurred and were reported as merger and related costs. Costs in 2017 include severance and other separation payments made to certain executive officers of Baker Hughes related to change-in-control with double trigger provisions in their existing employment agreements, professional fees of advisors, and integration and synergy costs related to the combination of Baker Hughes and GE O&G. The double-trigger provisions resulted in payments to executives of Baker Hughes following two events: a change-in-control and termination or reduction in the responsibilities89% of the executives. We terminated the employment of certain executives following the business combination.
UNAUDITED ACTUAL AND PRO FORMA INFORMATION
The following unaudited pro forma information has been presented as if the Transactions occurred on January 1, 2016. This information has been prepared by combining the historical results of GE O&Gtotal remaining performance obligations within 2, 5, and historical results of Baker Hughes. The unaudited pro forma combined financial data for all periods presented were adjusted to give effect to pro forma events that 1) are directly attributable to the aforementioned Transactions, 2) factually supportable, and 3) expected to have a continuing impact on the consolidated results of operations. The adjustments are based on information available to the Company at this time. Accordingly, the adjustments are subject to change15 years, respectively, and the impact of such changes mayremaining thereafter. Contract modifications could affect both the timing to complete as well as the amount to be material. The unaudited pro forma results do not include any incremental cost savings that may result fromreceived as we fulfill the integration.related remaining performance obligations.
The unaudited combined pro forma information is for informational purposes only and is not necessarily indicative of what the combined company's results actually would have been had the acquisition been completed as of the beginning of the periods as indicated. In addition, the unaudited pro forma information does not purport to project the future results of the combined company.
Significant adjustments to the pro forma information below include recognition of non-recurring direct incremental acquisition costs in 2016 and exclusion of those costs from all other years presented; amortization associated with an estimate of the acquired intangible assets; depreciation associated with an estimate of the fair value step-up of property, plant and equipment; and reduction of interest expense for fair value adjustments to debt. A non-recurring contractually obligated termination fee of $3,500 million ($3,301 million net of related costs incurred) received by Baker Hughes due to an inability to obtain antitrust related approvals from a prior merger agreement is recognized in 2016.
BHGE LLC 2017 FORM 10-K | 64
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
|
| | | | | | |
| | 2017 | 2016 |
| Revenue | $ | 21,921 |
| $ | 23,102 |
|
| Net loss | (436 | ) | (2,734 | ) |
| Net loss attributable to the Company | (442 | ) | (2,667 | ) |
NOTE 3. CURRENT RECEIVABLES
Current receivables are comprised of the following at December 31:
| | | | 2017 | 2016 | | 2021 | 2020 |
| Customer receivables | $ | 4,699 |
| $ | 1,699 |
| Customer receivables | $ | 4,724 | | $ | 4,676 | |
| Related parties | 914 |
| 392 |
| Related parties | 548 | | 507 | |
| Other | 844 |
| 658 |
| Other | 846 | | 890 | |
| Total current receivables | 6,457 |
| 2,749 |
| Total current receivables | 6,118 | | 6,073 | |
| Less: Allowance for doubtful accounts | (330 | ) | (186 | ) | |
| Less: Allowance for credit losses | | Less: Allowance for credit losses | (400) | | (373) | |
| Total current receivables, net | $ | 6,127 |
| $ | 2,563 |
| Total current receivables, net | $ | 5,718 | | $ | 5,700 | |
Customer receivables are recorded at the invoiced amount. Related parties consists primarily of amounts owed to us by GE. The "Other" category consists primarily consists of indirect taxes, advance payments to suppliers, indirect taxes and other tax receivables.receivables and customer retentions.
NOTE 4. INVENTORIES
Inventories, net of reserves of $360$374 million and $260$421 million in 20172021 and 2016,2020, respectively, are comprised of the following at December 31:
| | | | | | | | |
| 2021 | 2020 |
| Finished goods | $ | 2,228 | | $ | 2,337 | |
| Work in process and raw materials | 1,751 | | 2,084 | |
| Total inventories, net | $ | 3,979 | | $ | 4,421 | |
|
| | | | | | |
| | 2017 | 2016 |
| Finished goods | $ | 2,597 |
| $ | 1,585 |
|
| Work in process and raw materials | 1,993 |
| 1,639 |
|
| Total inventories, net | $ | 4,590 |
| $ | 3,224 |
|
During 2017 and 2016There were no inventory impairments during 2021. For the year ended December 31, 2020, we recorded $157 million and $138 millioninventory impairments of inventory$246 million. Inventory impairments in 2020 are predominantly in our Oilfield Services segment as a result of certain restructuring activities initiated by the Company. Charges for inventory impairments are predominantly reported in the "Cost of goods sold" caption of the consolidated and combined statements of income (loss).
BHGE LLC 2017 FORM 10-K | 65
Baker Hughes a GE company,Holdings LLC 2021 Form 10-K | 57
Baker Hughes Holdings LLC
Notes to Consolidated and Combined Financial Statements
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following at December 31:
| | | | | | | | | | | |
| Useful Life | 2021 | 2020 |
Land and improvements (1) | 8 - 20 years (1) | $ | 350 | | $ | 404 | |
| Buildings, structures and related equipment | 5 - 40 years | 2,271 | | 2,618 | |
| Machinery, equipment and other | 2 - 20 years | 7,259 | | 7,451 | |
| Total cost | | 9,880 | | 10,473 | |
| Less: Accumulated depreciation | | (5,003) | | (5,115) | |
| Property, plant and equipment, less accumulated depreciation | | $ | 4,877 | | $ | 5,358 | |
(1)Useful life excludes land. |
| | | | | | | |
| | Useful Life | 2017 | 2016 |
Land and improvements (1) | 8 - 20 years (1) | $ | 413 |
| $ | 130 |
|
| Buildings, structures and related equipment | 5 - 40 years | 3,168 |
| 1,344 |
|
| Machinery, equipment and other | 2 - 20 years | 6,195 |
| 2,916 |
|
| Total cost | | 9,776 |
| 4,390 |
|
| Less: Accumulated depreciation | | 2,817 |
| 2,065 |
|
| Property, plant and equipment, less accumulated depreciation | | $ | 6,959 |
| $ | 2,325 |
|
| |
(1)
| Useful life excludes land. |
Depreciation expense relating to property, plant and equipment was $716$852 million,, $311 $1,009 million and $351$1,053 million in 2017, 2016 for the years ended December 31, 2021, 2020 and 2015,2019, respectively. See "Note 16.18. Restructuring, impairmentImpairment and other"Other" for additional information on property, plant and equipment impairments.
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
GOODWILL
The changes in the carrying value of goodwill are detailed below by segment:
| | | | | | | | | | | | | | | | | |
| Oilfield Services | Oilfield Equipment | Turbo-machinery & Process Solutions | Digital Solutions | Total |
| Balance at December 31, 2019, gross | $ | 15,382 | | $ | 4,186 | | $ | 2,171 | | $ | 2,411 | | $ | 24,150 | |
| Accumulated impairment at December 31, 2019 | (2,633) | | (867) | | — | | (254) | | (3,754) | |
| Balance at December 31, 2019 | 12,749 | | 3,319 | | 2,171 | | 2,157 | | 20,396 | |
| | | | | |
| Impairment | (11,428) | | (3,289) | | — | | — | | (14,717) | |
| Currency exchange and others | (20) | | (24) | | 63 | | 41 | | 60 | |
| Balance at December 31, 2020 | 1,301 | | 6 | | 2,234 | | 2,198 | | 5,739 | |
| | | | | |
| Currency exchange and others | 10 | | (3) | | (62) | | 37 | | (18) | |
| Balance at December 31, 2021 | $ | 1,311 | | $ | 3 | | $ | 2,172 | | $ | 2,235 | | $ | 5,721 | |
|
| | | | | | | | | | | | | | | |
| | Oilfield Services | Oilfield Equipment | Turbo-machinery & Process Solutions | Digital Solutions | Total |
| Balance at December 31, 2015, gross | $ | 2,885 |
| $ | 3,840 |
| $ | 1,853 |
| $ | 2,043 |
| $ | 10,621 |
|
| Accumulated impairment at December 31, 2015 | (2,633 | ) | (867 | ) | — |
| (254 | ) | (3,754 | ) |
| Balance at December 31, 2015 | 252 |
| 2,973 |
| 1,853 |
| 1,789 |
| 6,867 |
|
| Acquisitions and purchase accounting adjustments |
| 19 |
| (1 | ) |
| 18 |
|
| Currency exchange and others | (106 | ) | (7 | ) | (38 | ) | (54 | ) | (205 | ) |
| Balance at December 31, 2016 | 146 |
| 2,985 |
| 1,814 |
| 1,735 |
| 6,680 |
|
Acquisition (1) | 12,778 |
| — |
| — |
| — |
| 12,778 |
|
| Currency exchange and others | 8 |
| 49 |
| 92 |
| 47 |
| 196 |
|
| Balance at December 31, 2017 | $ | 12,932 |
| $ | 3,034 |
| $ | 1,906 |
| $ | 1,782 |
| $ | 19,654 |
|
| |
(1)
| Includes goodwill associated with the acquisitionWe perform our annual goodwill impairment test for each of Baker Hughes. This amount and its allocations to segments are preliminary. |
Subsequent to the close of the acquisition of Baker Hughes, we realigned our reporting units to Oilfield Services (OFS), Oilfield Equipment (OFE), Turbomachinery & Process Solutions (TPS) and Digital Solutions (DS) (refer to "Note 13. Segment Information") and reallocated the goodwill that existed as of June 30, 2017 to the new reportable segments for all historical periods presented. The majorityJuly 1 of Baker Hughes business was combinedeach fiscal year, in conjunction with the GE O&G Surface business to create the new Oilfield Services reporting segment.our annual strategic planning process. Our reporting units are the same as our four4 reportable segments.
We test goodwill for impairment annually in the third quarter of each year using data as of July 1 of that year, which would include consideration of any segment realignment. The impairment test consists of two steps: in step
BHGE LLC 2017 FORM 10-K | 66
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
one, the carrying value of the reporting unit is compared with its fair value; in step two, which is applied only when the carrying value is more than its fair value, the amount of goodwill impairment, if any, is derived by deducting the fair value of the reporting unit's assets and liabilities from the fair value of its equity, and comparing that amount with the carrying amount of goodwill. We determined fair values for each of the reporting units using a combination of the market approach and the income approach. We assessed the valuation methodologies based upon the relevance and available data and have weighted the results appropriately.
Valuations using the market approach were derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses was based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services. A market approach is limited to reporting units for which there are publicly traded companies that have the characteristics similar to our businesses.
Under the income approach, fair value was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We used our internal forecasts to estimate future cash flows and included an estimate of long-term future growth rates based on our most recent views of the long-term outlook for each business. Actual results may differ from those assumed in our forecasts. We derived our discount rates using a capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the cost of equity financing. We used discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. Discount rates used in our reporting unit valuations ranged from 10% to 11%. Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. It is reasonably possible that the judgments and estimates described above could change in future periods.
In performing the annual impairment test for goodwill in the third quarter of 2015 using data as of July 1 of that year, we determined that a step two test was required for a reporting unit within our OFS operating segment. As a consequence of the continued pressure on oil prices, the revised expected cash flows for this reporting unit resulted in a goodwill impairment charge of $2,080 million. The impairment charge has been included as part of “Impairment of goodwill” in the consolidated and combined statement of income (loss).
We performed our annual impairment test of goodwill as of July 1, 2017 and July 1, 2016 for all of our reporting units. Based on the results of our step one testing, the fair values of each of the reporting units exceeded their carrying values; therefore, the second step of the impairment test was not required to be performed for any of our reporting units and no goodwill impairment was recognized.
In addition to our annual impairment testing, we also test goodwill for impairment between annual impairment testing dates whenever events or circumstances occur that,which, in our judgment, could more likely than not reduce the fair value of one or more reporting units below its carrying amount. In assessing the possibility that a reporting unit’s fair value has been reduced below its carrying amount due to the occurrence of events or circumstances between annualvalue. Potential impairment testing dates, we consider all available evidence, including (butindicators include, but are not limited to)to, (i) the results of our most recent annual or interim impairment testing, at the prior annual impairment testing date (inin particular the magnitude of the excess of fair value over carrying value observed),observed, (ii) downward revisions to internal forecasts, (andand the magnitude thereof),thereof, if any, and (iii) declines in ourBaker Hughes' market capitalization below ourits book value, (andand the magnitude and duration of those declines),declines, if any. Between
During the third quarter of 2021, we completed our annual impairment test as of July 1 2017and determined that the fair value was substantially in excess of the carrying value for each reporting unit resulting in no goodwill impairment. Between our annual test date of July 1, 2021 and December 31, 2017,2021, we havedid not identifiedidentify any events or circumstancesindicators that couldwould lead to a determination that it is more likely than not reduce the fair value of one or more of ourany reporting units belowunit is less than its carrying amount. However, therevalue. There can be no assurances that furtherfuture sustained declines in macroeconomic or business conditions affecting our industry and businesses (i) will not occur, and, (ii) were they to occur, that those further sustained declines will notwhich could result in additional impairmentsgoodwill impairment charges in future periods.
As of December 31, 2017, we believe that the goodwill is recoverable for all the reporting units, however, there can be no assurances that the goodwill will not be impaired in future periods.
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 6758
Baker Hughes a GE company,Holdings LLC
Notes to Consolidated and Combined Financial Statements
During the first quarter of 2020, Baker Hughes' market capitalization declined significantly. Baker Hughes' closing stock price fell to a historic low of $9.33 on March 23, 2020. Over the same period, the equity value of our peer group companies and the overall U.S. stock market also declined significantly amid market volatility. In addition, the Oilfield Services Index ("OSX"), an indicator of investors’ view of the earnings prospects and cost of capital of the oil and gas services industry, traded at prices that were the lowest in its history. These declines were driven by the uncertainty surrounding the outbreak of the coronavirus ("COVID-19") and other macroeconomic events such as the geopolitical tensions between the Organization of Petroleum Exporting Countries ("OPEC") and Russia, which also resulted in a significant drop in oil prices. Based on these factors, we concluded that a triggering event occurred and, accordingly, an interim quantitative impairment test was performed as of March 31, 2020. Based upon the results of our interim quantitative impairment test, we concluded that the carrying value of the Oilfield Services and Oilfield Equipment reporting units exceeded their estimated fair value as of March 31, 2020, which resulted in goodwill impairment charges of $11,428 million and $3,289 million, respectively. The goodwill impairment was calculated as the amount that the carrying value of the reporting unit, including any goodwill, exceeded its fair value.
OTHER INTANGIBLE ASSETS
Intangible assets are comprised of the following at December 31:
| | | | | | | | | | | | | | | | | | | | |
| 2021 | 2020 |
| Gross
Carrying
Amount | Accumulated
Amortization | Net | Gross
Carrying
Amount | Accumulated
Amortization | Net |
| Customer relationships | $ | 1,922 | | $ | (752) | | $ | 1,170 | | $ | 2,261 | | $ | (916) | | $ | 1,345 | |
| Technology | 1,090 | | (747) | | 343 | | 1,127 | | (696) | | $ | 431 | |
| Trade names and trademarks | 292 | | (169) | | 123 | | 326 | | (181) | | 145 | |
| Capitalized software | 1,311 | | (1,057) | | 254 | | 1,294 | | (1,041) | | 253 | |
| | | | | | |
| | | | | | |
| | | | | | |
Finite-lived intangible assets (1) | 4,615 | | (2,725) | | 1,890 | | 5,008 | | (2,834) | | 2,174 | |
| Indefinite-lived intangible assets | 2,241 | | — | | 2,241 | | 2,223 | | — | | 2,223 | |
| Total intangible assets | $ | 6,856 | | $ | (2,725) | | $ | 4,131 | | $ | 7,231 | | $ | (2,834) | | $ | 4,397 | |
|
| | | | | | | | | | | | | | | | | | |
| | 2017 | 2016 |
| | Gross
Carrying
Amount | Accumulated
Amortization | Net | Gross
Carrying
Amount | Accumulated
Amortization | Net |
| Technology | $ | 1,177 |
| $ | (440 | ) | $ | 737 |
| $ | 596 |
| $ | (371 | ) | $ | 225 |
|
| Customer relationships | 3,202 |
| (819 | ) | 2,383 |
| 1,920 |
| (660 | ) | 1,260 |
|
| Capitalized software | 1,130 |
| (697 | ) | 433 |
| 896 |
| (535 | ) | 361 |
|
| Trade names and trademarks | 757 |
| (159 | ) | 598 |
| 681 |
| (130 | ) | 551 |
|
| Other | 10 |
| — |
| 10 |
| 1 |
| (1 | ) | — |
|
| Finite-lived intangible assets | 6,276 |
| (2,115 | ) | 4,161 |
| 4,094 |
| (1,697 | ) | 2,397 |
|
Indefinite-lived intangible assets (1) | 2,197 |
| — |
| 2,197 |
| 52 |
| — |
| 52 |
|
| Total intangible assets | $ | 8,473 |
| $ | (2,115 | ) | $ | 6,358 |
| $ | 4,146 |
| $ | (1,697 | ) | $ | 2,449 |
|
| |
(1)
| Indefinite-lived intangible assets principally comprise trade names and trademarks acquired in business combinations. |
Finite-lived intangible assets increased by $1,764 million for(1)For the year ended December 31, 2017, primarily as a result2020, we recorded intangible asset impairments to customer relationships of the acquired Baker Hughes intangible assets offset by amortization during the periods (refer to "Note 2. Business Acquisition").
Indefinite-lived intangible assets increased during the year ended December 31, 2017 as a result$481 million, technology of the acquisition of the Baker Hughes trade name which was preliminarily valued at $2,100 million using the relief-from-royalty method. Indefinite-lived intangible assets as of December 31, 2016 comprise trademarks acquired in previous years (Vetco and Bently Nevada trademarks for $42$8 million, and $10 million, respectively).trade names and trademarks of $237 million. See "Note 18. Restructuring, Impairment and Other" for further discussion.
Intangible assets are generally amortized on a straight-line basis with estimated useful lives ranging from one1 to 3035 years. Amortization expense was $253 million, $308 million and $365 million for the years ended December 31, 2017, 20162021, 2020 and 2015 was $387 million, $239 million and $179 million,2019, respectively. We incurred additional amortization expense of $75 million during the year ended December 31, 2017 due to the acquisition of Baker Hughes.
Estimated amortization expense for each of the subsequent five fiscal years is expected to be as follows:
| | | | | |
| Year | Estimated Amortization Expense |
| 2022 | $ | 216 | |
| 2023 | 204 | |
| 2024 | 187 | |
| 2025 | 142 | |
| 2026 | 95 | |
|
| | | |
| Year | Estimated Amortization Expense |
| 2018 | $ | 432 |
|
| 2019 | 398 |
|
| 2020 | 372 |
|
| 2021 | 326 |
|
| 2022 | 293 |
|
BHGE LLC 2017 FORM 10-K | 68
Baker Hughes a GE company,Holdings LLC 2021 Form 10-K | 59
Baker Hughes Holdings LLC
Notes to Consolidated and Combined Financial Statements
NOTE 7. CONTRACT AND OTHER DEFERRED ASSETS
AThe majority of our long-term product service agreements relate to our Turbomachinery & Process Solutions segment. Contract assets reflect revenue earned in excess of billings on our long-term contracts to construct technically complex equipment, long-term product maintenance or extended warranty arrangements and other deferred contract related costs. Contract assets are comprised of the following at December 31:
| | | | | | | | |
| 2021 | 2020 |
| Long-term product service agreements | $ | 589 | | $ | 660 | |
Long-term equipment contracts (1) | 825 | | 1,160 | |
| Contract assets (total revenue in excess of billings) | 1,414 | | 1,820 | |
| Deferred inventory costs | 156 | | 138 | |
| Non-recurring engineering costs | 28 | | 43 | |
| Contract and other deferred assets | $ | 1,598 | | $ | 2,001 | |
|
| | | | | | |
| | 2017 | 2016 |
Long-term product service agreements (1) | $ | 1,410 |
| $ | 1,046 |
|
Long-term equipment contract revenue (2) | 997 |
| 703 |
|
| Total revenue in excess of billings | 2,407 |
| 1,749 |
|
Deferred inventory costs (3) | 338 |
| 218 |
|
| Contract assets | $ | 2,745 |
| $ | 1,967 |
|
| |
Revenue recognized during the year ended December 31, 2021 and 2020 from performance obligations satisfied (or partially satisfied) in previous years related to our long-term service agreements was $14 million and $17 million, respectively. This includes revenue recognized from revisions to cost or billing estimates that may affect a contract’s total estimated profitability resulting in an adjustment of earnings. (1)
| Reflects revenue earned in excess of billings on our long-term product service agreements. |
| |
(2)
| Reflects revenue earned in excess of billings on our long-term contracts to construct technically complex equipment. |
| |
(3)
| Represents cost deferral for shipped goods and other costs for which the criteria for revenue recognition has not yet been met. |
NOTE 8. PROGRESS COLLECTIONS AND DEFERRED INCOME
Contract liabilities include progress collections, which reflects billings in excess of revenue, and deferred income on our long-term contracts to construct technically complex equipment, long-term product maintenance or extended warranty arrangements. Contract liabilities are comprised of the following at December 31:
| | | | | | | | |
| 2021 | 2020 |
| Progress collections | $ | 3,108 | | $ | 3,352 | |
| Deferred income | 124 | | 102 | |
| Progress collections and deferred income (contract liabilities) | $ | 3,232 | | $ | 3,454 | |
Revenue recognized during the year ended December 31, 2021 and 2020 that was included in the contract liabilities at the beginning of the year was $2,398 million and $1,962 million, respectively.
Baker Hughes Holdings LLC 2021 Form 10-K | 60
Baker Hughes Holdings LLC
Notes to Consolidated Financial Statements
NOTE 9. LEASES
Our leasing activities primarily consist of operating leases for administrative offices, manufacturing facilities, research centers, service centers, sales offices and certain equipment.
The following table presents operating lease expense:
| | | | | | | | | | | |
| Operating Lease Expense | 2021 | 2020 | 2019 |
| Long-term fixed lease | $ | 255 | | $ | 288 | | $ | 233 | |
| Long-term variable lease | 32 | | 25 | | 48 | |
Short-term lease (1) | 440 | | 477 | | 706 | |
| Total operating lease expense | $ | 727 | | $ | 790 | | $ | 987 | |
(1)Leases with a term of one year or less, including leases with a term of one month or less.
Cash flows used in operating activities for operating leases approximates our expense for the years ended December 31, 2021, 2020 and 2019.
As of December 31, 2021, maturities of our operating lease liabilities are as follows: | | | | | | |
| Year | Operating Leases | |
| 2022 | $ | 216 | | |
| 2023 | 156 | | |
| 2024 | 117 | | |
| 2025 | 94 | | |
| 2026 | 81 | | |
| Thereafter | 315 | | |
| Total lease payments | 979 | | |
| Less: imputed interest | 159 | | |
| Total | $ | 820 | | |
| | |
|
| | |
| | |
| | |
| | |
| | |
| | |
Amounts recognized in the consolidated statement of financial position for operating leases are as follows: | | | | | | | | |
| 2021 | 2020 |
| All other current liabilities | $ | 196 | | $ | 218 | |
| All other liabilities | 624 | | 591 | |
| | |
| | |
| Total | $ | 820 | | $ | 809 | |
Right-of-use assets of $822 million and $802 million as of December 31, 2021 and 2020, respectively, were included in "All other assets" in our consolidated statements of financial position. The weighted-average remaining lease term for our operating leases was approximately 9 years and 8 years for the years ended December 31, 2021 and 2020, respectively. The weighted-average discount rate used to determine the operating lease liability as of December 31, 2021 and 2020 was 3.3% and 3.7%, respectively.
Baker Hughes Holdings LLC 2021 Form 10-K | 61
Baker Hughes Holdings LLC
Notes to Consolidated Financial Statements
NOTE 10. BORROWINGS
Short-term and long-term borrowings are comprised of the following at December 31:
| | | | | | | | | | | | | | |
| 2021 | 2020 |
| Amount | Effective Interest Rate (1) | Amount | Effective Interest Rate (1) |
| Short-term borrowings | | | | |
| | | | |
| Commercial paper | $ | — | | n/a | $ | 801 | | 0.5 | % |
| Short-term borrowings from GE | — | | n/a | 45 | | n/a |
| Other borrowings | 40 | | 4.5 | % | 43 | | 4.2 | % |
| Total short-term borrowings | 40 | | | 889 | | |
| | | | |
| Long-term borrowings | | | | |
| | | | |
| 2.773% Senior Notes due December 2022 | — | | — | % | 1,247 | | 2.9 | % |
| 1.231% Senior Notes due December 2023 | 647 | | 1.5 | % | — | | — | |
8.55% Debentures due June 2024 (2) | 118 | | 4.1 | % | 123 | | 4.1 | % |
| 2.061% Senior Notes due December 2026 | 597 | | 2.2 | % | — | | — | |
| 3.337% Senior Notes due December 2027 | 1,335 | | 3.2 | % | 1,344 | | 3.4 | % |
6.875% Notes due January 2029 (2) | 279 | | 4.0 | % | 284 | | 3.9 | % |
| 3.138% Senior Notes due November 2029 | 522 | | 3.2 | % | 522 | | 3.2 | % |
| 4.486% Senior Notes due May 2030 | 497 | | 4.6 | % | 497 | | 4.6 | % |
5.125% Senior Notes due September 2040 (2) | 1,292 | | 4.2 | % | 1,297 | | 4.2 | % |
| 4.080% Senior Notes due December 2047 | 1,337 | | 4.1 | % | 1,337 | | 4.1 | % |
| Other long-term borrowings | 63 | | 2.9 | % | 93 | | 3.0 | % |
| | | | |
| Total long-term borrowings | 6,687 | | | 6,744 | | |
| Total borrowings | $ | 6,727 | | | $ | 7,633 | | |
|
| | | | | | | | | | |
| | 2017 | 2016 |
| | Amount | Weighted average rate(1) | Amount | Weighted average rate(1) |
| Short-term borrowings | | | | |
| Short-term bank borrowings | $ | 171 |
| 12.6 | % | $ | 79 |
| 9.1 | % |
| Current portion of long-term borrowings | 639 |
| 2.1 | % | 34 |
| 1.3 | % |
| Short-term borrowings from GE | 1,124 |
|
|
| 121 |
|
|
|
| Other short-term borrowings | 103 |
| 7.6 | % | 5 |
| 1.3 | % |
| Total short-term borrowings | 2,037 |
|
|
| 239 |
| |
| | | | |
| Long-term borrowings | | | | |
3.2% Senior Notes due August 2021 (2) | 526 |
| 2.5 | % | — |
| — |
|
| 2.773% Senior Notes due December 2022 | 1,244 |
| 2.9 | % | — |
| — |
|
8.55% Debentures due June 2024 (2) | 135 |
| 3.9 | % | — |
| — |
|
| 3.337% Senior Notes due December 2027 | 1,342 |
| 3.4 | % | — |
| — |
|
6.875% Notes due January 2029 (2) | 308 |
| 3.9 | % | — |
| — |
|
5.125% Notes due September 2040 (2) | 1,311 |
| 4.1 | % | — |
| — |
|
| 4.080% Senior Notes due December 2047 | 1,337 |
| 4.1 | % | — |
| — |
|
| Capital leases | 87 |
| 7.0 | % | 1 |
| 4.5 | % |
| Other long-term borrowings | 22 |
| 1.9 | % | 37 |
| 1.2 | % |
| Total long-term borrowings | 6,312 |
| | 38 |
| |
| Total borrowings | $ | 8,349 |
|
|
| $ | 277 |
|
|
|
| |
(1)
| Weighted average effective interest rate is based on carrying value including step-up adjustment recorded upon the acquisition of Baker Hughes. |
| |
(2)
| Represents long-term fixed rate debt obligations(1)Effective interest rate is based on the carrying value including issuance costs and step-up adjustments, as applicable, recorded for certain Senior Notes and Debentures assumed in connection with the acquisition of Baker Hughes, net of amounts repurchased subsequent to the closing of the Transactions. |
BHGE LLC 2017 FORM 10-K | 69
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
On July 3, 2017, in connection with the Transactions, we entered into a new five-year $3 billion committed unsecured revolving credit facility (the 2017 Credit Agreement)acquisition of BHI.
(2)Represents long-term fixed rate debt obligations assumed in connection with commercial banks maturing in July 2022. The 2017 Credit Agreement contains certain customary representations and warranties, certain affirmative covenants and no negative covenants. Upon the occurrenceacquisition of certain events of default, our obligations under the 2017 Credit Agreement may be accelerated. Such events of default include payment defaults to lenders under the 2017 Credit Agreement, and other customary defaults. No such events of default have occurred. During the year endedBHI.
In December 31, 2017, there were no borrowings under the 2017 Credit Agreement.
On November 3, 2017 we entered into a commercial paper program under which we may issue from time to time up to $3 billion in commercial paper with maturities of no more than 397 days. At December 31, 2017 we had no borrowings outstanding under the commercial paper program.
The maximum combined borrowing at any time under both the 2017 Credit Agreement and the commercial paper program is $3 billion.
On December 11, 2017, we completed a private placement offering $3,9502021, BHH LLC issued $1,250 million aggregate principal amount of Senior Notes, consisting of $1,250$650 million aggregate principal amount of 2.773%1.231% Senior Notes due 2022, $1,350December 2023 and $600 million aggregate principal amount of 3.337%2.061% Senior Notes due 2027 and $1,350 million aggregate principal amount of 4.080% Senior Notes due 2047. These Senior Notes are presented net of issuance costs of $26 million in our consolidated and combined statement of financial position. WeDecember 2026 (collectively, "the Notes"). BHH LLC will pay interest on each series of Exchange Notes semi-annually on June 15 and December 15 of each year, beginning on June 15, 2018. The2022. These Notes are senior unsecured obligations and rank equalpresented net of issuance costs in rightour consolidated statements of paymentfinancial position.
On December 9, 2021, BHH LLC issued a notice to all of our existing and future senior indebtedness; senior in right of payment to any future subordinated indebtedness; and effectively junior to our future secured indebtedness, if any, and to all existing and future indebtednessredeem the entire principal amount outstanding of its subsidiaries. We may redeem, at its option, all or part of the Notes at any time, at the applicable make-whole redemption prices plus accrued and unpaid interest to the date of redemption. The2.773% Senior Notes contain covenants that restrict our ability to take certain actions, including, but not limited to, due December 2022 ("the creation of certain liens securing debt,2022 Notes") using the entry into certain sale-leaseback transactions and engaging in certain merger, consolidation and asset sale transactions in excess of specified limits.
We used a portion of the net proceeds from the private placement of the Senior Notes to fund the purchase of $82 million of 7.5% senior notes due 2018, $25 million of 6.0% senior notes due 2018, $6 million of 8.55% debentures due 2024 and $62 million of 6.875% notes due 2029 that were validly tendered in connection with the cash tender offers commenced by BHGE LLC on December 4, 2017. Under the cash tender offer BHGE LLC purchased a further $3 million of 6.875% notes due 2029 in January 2018. BHGE LLC also redeemed in January 2018 all remaining aggregate principal amount of the 2018 Senior Notes of $615 million that were not tendered for purchase in accordance with the relevant indentures. The above transactions resulted in total repurchase of our Senior Notes of $793 million.
We intend to use the remaining net proceeds from the offering of the SeniorNotes. As a result, as of December 31, 2021, we incurred a $28 million charge related to the early redemption, which was recorded within "Interest expense, net" in our consolidated statement of income (loss). On January 10, 2022, the 2022 Notes for general corporate purposes, which may include purchases of our common units from BHGE and GEwere redeemed using funds irrevocably deposited in connectiontrust with the share repurchase authorization announced by BHGE on November 6, 2017.
On January 2, 2018, we commenced an offering to exchange $3,950 million of all the outstanding, unregistered senior notes that were issued in a private offeringtrustee on December 11, 2017, for identical, registered 2.773%16, 2021.
In May 2020, BHH LLC issued $500 million aggregate principal amount of 4.486% Senior Notes due 2022, 3.337%May 2030. BHH LLC pays interest on these Senior Notes due 2027semi-annually on May 15 and 4.080%November 15 of each year, which began on November 15, 2020. These Senior Notes due 2047. The exchange offer was completed on January 31, 2018.are presented net of issuance costs in our consolidated statements of financial position.
Concurrent with the Transactions associated with the acquisition of Baker Hughes on July 3, 2017, Baker Hughes Co-Obligor, Inc. became a co-obligor, jointly and severally with us, on our registered debt securities. This co-obligor is our 100%-owned finance subsidiary that was incorporated for the sole purpose of serving as a co-obligor of debt securities and has no assets or operations other than those related to its sole purpose. Baker Hughes Co-Obligor, Inc. is also a co-obligor of the $3,950 million senior notes issued on December 11, 2017 by us in a private placement.
BHGEHoldings LLC 2017 FORM2021 Form 10-K | 7062
Baker Hughes a GE company,Holdings LLC
Notes to Consolidated and Combined Financial Statements
In connection with our acquisition of Baker Hughes we assumed all the outstanding borrowings including all notes, senior notes, and debentures of Baker Hughes. A step-up adjustment of $364 million was recorded upon the acquisition of Baker Hughes to present these borrowings at fair value.
The estimated fair value of total borrowings at December 31, 20172021 and December 31, 20162020 was $8,466$7,328 million and $303$8,502 million, respectively. For a majority of our borrowings the fair value was determined using quoted period-end market prices. Where market prices are not available, we estimate fair values based on valuation methodologies using current market interest rate data adjusted for our non-performance risk.
Maturities of debt for each of the five years in the period endedending December 31, 2022,2026, and in the aggregate thereafter, are listed in the table below: | | | | | | | | | | | | | | | | | | | | |
| 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter |
| Total debt | $ | 40 | | $ | 649 | | $ | 151 | | $ | 14 | | $ | 597 | | $ | 5,276 | |
|
| | | | | | | | | | | | | | | | | | |
| | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter |
| Total debt | $ | 2,037 |
| $ | 43 |
| $ | 13 |
| $ | 540 |
| $ | 1,255 |
| $ | 4,461 |
|
We have a commercial paper program under which we may issue from time to time commercial paper with maturities of no more than 397 days. As a result of the repayment of our commercial paper that matured on April 30, 2021, our authorized commercial paper program was reduced from $3.8 billion to $3 billion.
Baker Hughes Co-Obligor, Inc. is a co-obligor, jointly and severally with BHH LLC on our long-term debt securities. This co-obligor is a 100%-owned finance subsidiary of BHH LLC that was incorporated for the sole purpose of serving as a corporate co-obligor of long-term debt securities and has no assets or operations other than those related to its sole purpose. As of December 31, 2021, Baker Hughes Co-Obligor, Inc. is a co-obligor of our long-term debt securities totaling $6,624 million.
Certain Senior Notes contain covenants that restrict BHH LLC's ability to take certain actions, including, but not limited to, the creation of certain liens securing debt, the entry into certain sale-leaseback transactions and engaging in certain merger, consolidation and asset sale transactions in excess of specified limits. At December 31, 2021, we were in compliance with all debt covenants.
See "Note 14.16. Related Party Transactions" for additional information on the short-term borrowings from GE, and see "Note 12. Financial Instruments" for additional information about borrowings and associated swaps.with GE.
NOTE 9.11. EMPLOYEE BENEFIT PLANS
GE MULTI-EMPLOYER PLANS
Certain of our U.S. employees are covered under various U.S. GE employee benefit plans, including GE's retirement plans (pension, retiree health and life insurance, and savings benefit plans). In addition, certain United Kingdom (UK) employees participate in the GE UK Pension Plan. We are allocated relevant participation costs for these GE employee benefit plans as part of multi-employer plans. As such, we have not recorded any liabilities associated with our participation in these plans. Expenses associated with our participation in these plans was $132 million, $140 million and $148 million in the years ended December 31, 2017, 2016 and 2015, respectively.
During 2016, two UK pension plans sponsored by us, the 1987 Vetco Gray Hughes Pension Plan and the UK Dresser Pension Scheme, were merged into the GE UK Pension Plan. We agreed to pay deficit contributions for the next 10 years. The estimated present value of these payments is approximately $15 million and is recorded in the consolidated and combined Statement of Financial Position in “All other liabilities.” Subsequent to that merger, plan participants in these respective plans participate in the GE UK Pension Plan.
DEFINED BENEFIT PLANS
In addition to these GE plans, certainCertain of our employees are also covered by company sponsored pension plans. Our primary pension plans in 20172021 included seven4 U.S. plans and six7 non-U.S. pension plans, primarily in the UK, Germany, and Canada, all with pension assets or obligations greater than $20 million. We use a December 31 measurement date for these plans. These defined benefit plans generally provide benefits to employees based on formulas recognizing length of service and earnings.earnings; however, the majority of these plans are either frozen or closed to new entrants. We also provide certain postretirement health care benefits, ("Other Postretirement Benefits"), through an unfunded plan,plans, to a closed group of U.S. employees who retire and have metmeet certain age and service requirements. The accumulated postretirement benefit obligation related to these plans was $50 million and $62 million at December 31, 2021 and 2020, respectively.
Funded Status
The funded status position represents the difference between the benefit obligation and the plan assets. The projected benefit obligation (PBO)("PBO") for pension benefits represents the actuarial present value of benefits attributed to employee services and compensation and includes an assumption about future compensation levels. The accumulated benefit obligation (ABO)("ABO") is the actuarial present value of pension benefits attributed to employee
Baker Hughes Holdings LLC 2021 Form 10-K | 63
Baker Hughes Holdings LLC
Notes to Consolidated Financial Statements
service to date andat present compensation levels. The ABO differs from the PBO in that the ABO does not include any assumptions about future compensation levels.
BHGE LLC 2017 FORM 10-K | 71
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
Below is the reconciliation of the beginning and ending balances of benefit obligations, fair value of plan assets and the funded status of our pension plans.
| | | | | | | | | | |
| | Pension Benefits | |
| | 2021 | 2020 | | |
| Change in benefit obligation: | | | | |
| Benefit obligation at beginning of year | $ | 3,806 | | $ | 3,451 | | | |
| Service cost | 27 | | 27 | | | |
| Interest cost | 64 | | 77 | | | |
| | | | |
Actuarial (gain) loss (1) | (154) | | 393 | | | |
| Benefits paid | (111) | | (101) | | | |
| Curtailments | (9) | | (3) | | | |
| Settlements | (33) | | (79) | | | |
| | | | |
| Other | 2 | | 1 | | | |
| Foreign currency translation adjustments | (42) | | 40 | | | |
| Benefit obligation at end of year | 3,550 | | 3,806 | | | |
| | | | |
| Change in plan assets: | | | | |
| Fair value of plan assets at beginning of year | 3,202 | | 3,004 | | | |
| Actual return on plan assets | 83 | | 347 | | | |
| Employer contributions | 28 | | 20 | | | |
| Benefits paid | (111) | | (101) | | | |
| Settlements | (33) | | (79) | | | |
| | | | |
| | | | |
| Foreign currency translation adjustments | (22) | | 11 | | | |
| Fair value of plan assets at end of year | 3,147 | | 3,202 | | | |
| | | | |
| Funded status - underfunded at end of year | $ | (403) | | $ | (604) | | | |
| | | | |
| Accumulated benefit obligation | $ | 3,497 | | $ | 3,755 | | | |
|
| | | | | | | | | | | | |
| | Pension Benefits | Other Postretirement Benefits |
| | 2017 | 2016 | 2017 | 2016 |
| Change in benefit obligation: | | | | |
| Benefit obligation at beginning of year | $ | 820 |
| $ | 1,290 |
| $ | 117 |
| $ | 136 |
|
| Service cost | 37 |
| 18 |
| 2 |
| 2 |
|
| Interest cost | 51 |
| 34 |
| 6 |
| 5 |
|
| Plan amendment | — |
| — |
| (23 | ) | (5 | ) |
| Actuarial loss (gain) | 41 |
| 39 |
| — |
| (14 | ) |
| Benefits paid | (65 | ) | (39 | ) | (13 | ) | (6 | ) |
| Curtailments | (45 | ) | — |
| 5 |
| (1 | ) |
| Settlements | (10 | ) | — |
| — |
| — |
|
Business acquisition (1) | 1,546 |
| — |
| 93 |
| — |
|
Other (2) | (2 | ) | (460 | ) | — |
| — |
|
| Foreign currency translation adjustments | 45 |
| (62 | ) | — |
| — |
|
| Benefit obligation at end of year | 2,418 |
| 820 |
| 187 |
| 117 |
|
| | | | | |
| Change in plan assets: | | | | |
| Fair value of plan assets at beginning of year | 567 |
| 915 |
| — |
| — |
|
| Actual return on plan assets | 152 |
| 43 |
| — |
| — |
|
| Employer contributions | 50 |
| 50 |
| 13 |
| 6 |
|
| Benefits paid | (65 | ) | (39 | ) | (13 | ) | (6 | ) |
| Settlements | (10 | ) | — |
| — |
| — |
|
Business acquisition (1) | 1,342 |
| — |
| — |
| — |
|
Other (2) | (2 | ) | (358 | ) | — |
| — |
|
| Foreign currency translation adjustments | 25 |
| (44 | ) | — |
| — |
|
| Fair value of plan assets at end of year | 2,059 |
| 567 |
| — |
| — |
|
| | | | | |
| Funded status - underfunded at end of year | $ | (359 | ) | $ | (253 | ) | $ | (187 | ) | $ | (117 | ) |
| | | | | |
| Accumulated benefit obligation | $ | 2,373 |
| $ | 803 |
| $ | 187 |
| $ | 117 |
|
| |
(1)
| Relates to the acquisition of Baker Hughes on July 3, 2017. |
| |
(2)
| Two UK pension plans merged into the GE UK pension plan in 2016. |
The amounts recognized in the consolidated and combined statements of financial position consist of the following at December 31:
| | | | | | | | | | |
| | Pension Benefits | |
| | 2021 | 2020 | | |
| Noncurrent assets | $ | 109 | | $ | 14 | | | |
| Current liabilities | (17) | | (18) | | | |
| Noncurrent liabilities | (495) | | (600) | | | |
| Net amount recognized | $ | (403) | | $ | (604) | | | |
|
| | | | | | | | | | | | |
| | Pension Benefits | Other Postretirement Benefits |
| | 2017 | 2016 | 2017 | 2016 |
| Noncurrent assets | $ | 46 |
| $ | — |
| $ | — |
| $ | — |
|
| Current liabilities | (10 | ) | (4 | ) | (24 | ) | (6 | ) |
| Noncurrent liabilities | (395 | ) | (249 | ) | (163 | ) | (111 | ) |
| Net amount recognized | $ | (359 | ) | $ | (253 | ) | $ | (187 | ) | $ | (117 | ) |
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 7264
Baker Hughes a GE company,Holdings LLC
Notes to Consolidated and Combined Financial Statements
Information for the plans with ABOs and PBOs in excess of plan assets is as follows at December 31:
| | | | | | | | | | |
| | Pension Benefits | |
| | 2021 | 2020 | | |
| Projected benefit obligation | $ | 1,476 | | $ | 3,390 | | | |
| Accumulated benefit obligation | $ | 1,423 | | $ | 3,340 | | | |
| Fair value of plan assets | $ | 964 | | $ | 2,772 | | | |
|
| | | | | | | | | | | | |
| | Pension Benefits | Other Postretirement Benefits |
| | 2017 | 2016 | 2017 | 2016 |
| Projected benefit obligation | $ | 1,692 |
| $ | 820 |
| n/a |
| n/a |
|
| Accumulated benefit obligation | $ | 1,647 |
| $ | 803 |
| $ | 187 |
| $ | 117 |
|
| Fair value of plan assets | $ | 1,286 |
| $ | 567 |
| n/a |
| n/a |
|
Net Periodic Cost
The components of net periodic cost are as follows forfollows:
| | | | | | | | | | | | | | | | | |
| Pension Benefits | |
| 2021 | 2020 | 2019 | | | | | | |
| Service cost | $ | 27 | | $ | 27 | | $ | 21 | | | | | | | |
| Interest cost | 64 | | 77 | | 90 | | | | | | | |
| Expected return on plan assets | (130) | | (121) | | (122) | | | | | | | |
| Amortization of prior service credit | 1 | | 1 | | 1 | | | | | | | |
| Amortization of net actuarial loss | 40 | | 34 | | 17 | | | | | | | |
| Curtailment / settlement loss | 2 | | 10 | | 9 | | | | | | | |
| | | | | | | | | |
| Net periodic cost | $ | 4 | | $ | 28 | | $ | 16 | | | | | | | |
The service cost component of the years ended December 31:net periodic cost is included in "operating income (loss)" and all other components are included in "Other non-operating income (loss), net" caption of the consolidated statements of income (loss).
|
| | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | Other Postretirement Benefits |
| | 2017 | | 2016 | | 2015 | 2017 | 2016 | 2015 |
| Service cost | $ | 37 |
| | $ | 18 |
| | $ | 24 |
| $ | 2 |
| $ | 2 |
| $ | 3 |
|
| Interest cost | 51 |
| | 34 |
| | 49 |
| 6 |
| 5 |
| 6 |
|
| Expected return on plan assets | (81 | ) | | (46 | ) | | (65 | ) | — |
| — |
| — |
|
| Amortization of prior service credit | — |
| | — |
| | — |
| (3 | ) | (2 | ) | (1 | ) |
| Amortization of net actuarial loss (gain) | 12 |
| | 14 |
| | 21 |
| (2 | ) | — |
| 1 |
|
| Curtailment / settlement loss (gain) | (45 | ) | (2) | (26 | ) | (1) | 4 |
| 2 |
| (2 | ) | (11 | ) |
| Net periodic cost | $ | (26 | ) | | $ | (6 | ) | | $ | 33 |
| $ | 5 |
| $ | 3 |
| $ | (2 | ) |
| |
(1)
| Primarily associated with two UK plans merging into the GE UK Pension Plan. |
| |
(2)
| As a result of the acquisition of Baker Hughes, we obtained a non-contributory pension plan (the Baker Hughes Incorporated Pension Plan or BHIPP). During the fourth quarter of 2017, the Compensation Committee of the Board of Directors approved amendments to the BHIPP to close the plan to new participants and freeze accruals of future service-related benefits effective as of December 31, 2017. As a result of these actions, the Company recorded a curtailment gain of $45 million. The curtailment was recorded by the Company during the fourth quarter of 2017 and included in “Other non-operating income (loss), net” in our consolidated and combined statement of income (loss). |
Assumptions Used in Benefit Calculations
Accounting requirements necessitate the use of assumptions to reflect the uncertainties and the length of time over which the pension obligations will be paid. The actual amount of future benefit payments will depend upon when participants retire, the amount of their benefit at retirement and how long they live. To reflect the obligation in today’s dollars, we discount the future payments using a rate that matches the time frame over which the payments willare expected to be made. We also need to assume a long-term rate of return that will be earned on investments used to fund these payments.
Another assumption used is the interest crediting rate for our U.S. qualified cash balance plan. Under the provisions of this pension plan, a hypothetical cash balance account has been established for each participant. Such accounts receive quarterly interest credits based on a prescribed formula.
Weighted average assumptions used to determine benefit obligations for these plans are as follows for the years ended December 31: |
| | | | | | | | |
| | Pension Benefits | Other Postretirement Benefits |
| | 2017 | 2016 | 2017 | 2016 |
| Discount rate | 2.99 | % | 3.41 | % | 3.32 | % | 4.00 | % |
| Rate of compensation increase | 3.82 | % | 4.09 | % | n/a |
| n/a |
|
follows: | | | | | | | | | | |
| | Pension Benefits | |
| | 2021 | 2020 | | |
| Discount rate | 2.15 | % | 1.66 | % | | |
| Rate of compensation increase | 3.21 | % | 3.25 | % | | |
| Interest crediting rate | 2.60 | % | 2.60 | % | | |
| | | | |
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 7365
Baker Hughes a GE company,Holdings LLC
Notes to Consolidated and Combined Financial Statements
Weighted average assumptions used to determine net periodic cost for these plans are as follows for the years ended December 31:follows:
| | | | Pension Benefits | Other Postretirement Benefits | | Pension Benefits | |
| | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | | 2021 | 2020 | 2019 | |
| Discount rate | 3.24 | % | 3.83 | % | 3.69 | % | 3.72 | % | 4.25 | % | 4.00 | % | Discount rate | 1.66 | % | 2.34 | % | 3.43 | % | |
| Expected long-term return on plan assets | 6.26 | % | 6.86 | % | 6.91 | % | n/a |
| n/a |
| n/a |
| Expected long-term return on plan assets | 4.07 | % | 4.20 | % | 5.48 | % | |
| Interest crediting rate | | Interest crediting rate | 2.60 | % | 2.60 | % | 3.15 | % | |
We determine the discount rate using a bond matching model, whereby the weighted average yields on high-quality fixed-income securities have maturities consistent with the timing of benefit payments. Lower discount rates increase the size of the benefit obligations and pension expense in the following year; higher discount rates reduce the size of the benefit obligation and subsequent-year pension expense. The compensation assumption is used in our active plans to estimate the annual rate at which the pay for plan participants will grow. If the rate of growth assumed increases, the size of the pension obligations will increase.
The expected return on plan assets is the estimated long-term rate of return that will be earned on the investments used to fund the pension obligations. To determine this rate, we consider the current and target composition of plan investments, our historical returns earned, and our expectations about the future.
The compensation assumption is used to estimate the annual rate at which pay of plan participants will grow. If the rate of growth assumed increases, the size of the pension obligations will increase, as will the amount recorded in equity attributable to parent and amortized to income in subsequent periods.
Assumed health care cost trend rates can have a significant effect on the amounts reported for Other Postretirement Benefits. As of December 31, 2017, the health care cost trend rate was 6.81%, declining gradually each successive year until it reaches 4.81%. A one percentage point change in assumed health care cost trend rates would have had the following effects on 2017:
|
| | | | | | |
| | One Percentage Point Increase | One Percentage Point Decrease |
| Effect on total of service and interest cost components (in thousands) | $ | 854 |
| $ | (685 | ) |
| Effect on postretirement welfare benefit obligation (in thousands) | $ | 15,460 |
| $ | (12,817 | ) |
Accumulated Other Comprehensive Loss
The amount recorded before-tax in accumulated other comprehensive loss related to employee benefitour pension plans consists of the following at December 31: |
| | | | | | | | | | | | |
| | Pension Benefits | Other Postretirement Benefits |
| | 2017 | 2016 | 2017 | 2016 |
| Net actuarial loss (gain) | $ | 117 |
| $ | 14 |
| $ | (16 | ) | $ | (14 | ) |
| Net prior service credit | — |
| — |
| (25 | ) | (3 | ) |
| Total | $ | 117 |
| $ | 14 |
| $ | (41 | ) | $ | (17 | ) |
The estimated net actuarial loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss and included in net periodic benefit cost in 2018 is $9 million. The estimated net actuarial gain and prior service credit for the other postretirement benefits that will be amortized from accumulated other comprehensive loss and included in net periodic benefit cost in 2018 is $2 million and $5 million, respectively. | | | | | | | | | | |
| | Pension Benefits | |
| | 2021 | 2020 | | |
| Net actuarial loss | $ | 365 | | $ | 527 | | | |
| Net prior service cost | 17 | | 18 | | | |
| Total | $ | 382 | | $ | 545 | | | |
Plan Assets
We have investment committees that meet regularly to review the portfolio returns and to determine asset-mix targets based on asset/liability studies. Third-party investment consultants assist suchthese committees in developing asset allocation strategies to determine our expected rates of return and expected risk for various investment
BHGE LLC 2017 FORM 10-K | 74
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
portfolios. The investment committees considered these strategies in the formal establishment of the current asset-mix targets based on the projected risk and return levels for all major asset classes.
Baker Hughes Holdings LLC 2021 Form 10-K | 66
Baker Hughes Holdings LLC
Notes to Consolidated Financial Statements
The table below presents the fair value of the pension assets by asset category at December 31:31: | | | | | | | | |
| 2021 | 2020 |
| Debt securities | | |
| Fixed income and cash investment funds | $ | 1,890 | | $ | 1,807 | |
| | |
| Equity securities | | |
Global equity securities (1) | 250 | | 346 | |
U.S. equity securities (1) | 222 | | 299 | |
| Insurance contracts | 112 | | 120 | |
| Real estate | 59 | | 85 | |
| Private equities | 48 | | 52 | |
Other investments (2) | 566 | | 493 | |
| Total plan assets | $ | 3,147 | | $ | 3,202 | |
(1)Include direct investments and investment funds. |
| | | | | | |
| | 2017 | 2016 |
| Equity securities |
|
|
U.S. equity securities (1) | $ | 207 |
| $ | 122 |
|
Global equity securities (1) | 551 |
| 149 |
|
| Debt securities |
|
|
| Fixed income and cash investment funds | 658 |
| 49 |
|
| U.S. corporate | 70 |
| 53 |
|
| Other debt securities | 55 |
| 99 |
|
| Private equities | 107 |
| 45 |
|
| Real estate | 44 |
| 32 |
|
Other investments (2) | 367 |
| 18 |
|
| Total plan assets | $ | 2,059 |
| $ | 567 |
|
| |
(1)
| Include direct investments and investment funds. |
| |
(2)
| Substantially all represented hedge fund and asset allocation fund investments. |
Plan assets valued using Net Asset Value (NAV)("NAV") as a practical expedient amounted to $1,684$3,028 million and $228$3,072 million as of December 31, 20172021 and 2016,2020, respectively. The percentages of plan assets valued using NAV by investment fund type for equity securities, fixed income and cash, and alternative investments were 30%16%, 28%62%, and 24%22% as of December 31, 2017,2021, respectively, and 20%21%, 7%59%, and 13%20% as of December 31, 2016,2020, respectively. Those investments that were measured at fair value using NAV as a practical expedient were excluded from the fair value hierarchy. The practical expedient was not applied for investments with a fair value of $86$119 million and $25$130 million in 2017as of December 31, 2021 and 2016, respectively, and those2020, respectively. There were investments were classified within Level 3. The remaining investments were considered Level 13 of $112 million and 2.$120 million for non U.S. insurance contracts as of December 31, 2021 and 2020, respectively.
Funding Policy
The funding policy for our Pension Benefits is to contribute amounts sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws plus such additional amounts as we may determine to be appropriate. In 2017,2021, we contributed approximately $50$28 million. We expectanticipate we will contribute between approximately $30 million to contribute approximately $44$35 million to our pension plans in 2018.
We fund our Other Postretirement Benefits on a pay-as-you-go basis. In 2017, we contributed $13 million to these plans. In 2018, we expect to contribute approximately $24 million to fund such benefits.
BHGE LLC 2017 FORM 10-K | 75
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
2022.
The following table presents the expected benefit payments for Pension Benefits over the next 10 years. The U.S. and non-U.S.For company sponsored pension plans, the benefit payments are made by the respective pension trust funds.
| | | | | | | | | | |
| Year | | Pension Benefits | | |
| 2022 | | $ | 161 | | | | | |
| 2023 | | 132 | | | | | |
| 2024 | | 135 | | | | | |
| 2025 | | 137 | | | | | |
| 2026 | | 142 | | | | | |
| 2027-2031 | | 744 | | | | | |
DEFINED CONTRIBUTION PLANS |
| | | | | | | | | | |
| Year | Pension Benefits | Other Postretirement Benefits |
| 2018 | | $ | 105 |
| | | $ | 24 |
| |
| 2019 | | 109 |
| | | 22 |
| |
| 2020 | | 107 |
| | | 17 |
| |
| 2021 | | 111 |
| | | 12 |
| |
| 2022 | | 112 |
| | | 10 |
| |
| 2023-2027 | | 593 |
| | | 47 |
| |
Other
As partOur primary defined contribution plan during 2021 was the Company-sponsored U.S. 401(k) plan ("401(k) Plan"). The 401(k) Plan allows eligible employees to contribute portions of their eligible compensation to an investment trust. The Company matches employee contributions at the rate of $1.00 per $1.00 employee contribution for the first 5% of the employee's eligible compensation, and such contributions vest immediately. In addition, we make cash contributions for all eligible employees of 4% of their eligible compensation and such
Baker Hughes acquisition, we obtained twoHoldings LLC 2021 Form 10-K | 67
Baker Hughes Holdings LLC
Notes to Consolidated Financial Statements
contributions are fully vested after three years of employment. The 401(k) Plan provides several investment options, for which the employee has sole investment discretion; however, the 401(k) Plan does not offer Baker Hughes' common stock as an investment option. Our costs for the 401(k) Plan and several other U.S. and non-U.S. defined contribution plans amounted to $194 million and $236 million, in 2021 and 2020, respectively.
We have 2 non-qualified defined contribution plans that are invested through trusts. The assets and corresponding liabilities were $278$322 million and $314 million at December 31, 20172021 and 2020, respectively, and are included in the captions "All other assets" and "Liabilities for pensions and other postretirement benefits," respectively, in our consolidated and combined statementstatements of financial position.
NOTE 10.12. INCOME TAXES
We are treated as a partnership for U.S. federal income tax purposes. As such, except for certain U.S. corporations owned by the Company, we are not subject to U.S. federal income tax under current U.S. tax laws. Our members will each be required to take into account for U.S. federal income tax purposes their distributive share of our items of income, gain, loss and deduction, which generally will include the U.S. operations of both Baker Hughes and GE O&G. BHGE and GE will each be taxed on their distributive share of income and gain, whether or not a corresponding amount of cash or other property is distributed to them. For assets held indirectly by us through subsidiaries, including both foreign and U.S., the taxes attributable to those subsidiaries will be reflected in our consolidated and combined financial statements.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (U.S. tax reform) that lowers the statutory tax rate on U.S. earnings, taxes historic foreign earnings previously deferred from U.S. taxation at a reduced rate of tax (transition tax), establishes a territorial tax system and enacts new taxes associated with global operations. The transition tax associated with our non-U.S. operations will be borne by our members.
The impact of U.S. tax reform has been recorded on a provisional basis as the legislation provides for additional guidance to be issued by the U.S. Department of the Treasury on several provisions including the computation of the transition tax. Guidance in 2018 could impact the information required for and the calculation of the transition tax charge and could affect decisions that affect the tax on various U.S. and foreign items which would further impact the final amounts included in the transition tax charge and impact the revaluation of deferred taxes. In addition, analysis performed and conclusions reached as part of the tax return filing process and additional guidance on accounting for tax reform could affect the provisional amount. As part of purchase accounting for the Baker Hughes acquisition, we have made preliminary estimates of the fair value of assets acquired and liabilities assumed. Accordingly, changes to these estimates resulting from the finalization of the fair values may also require us to adjust the provisional impact of U.S. tax reform.
Additionally, as part of U.S. tax reform, the U.S. has enacted a tax on "base eroding" payments from the U.S. and a minimum tax on foreign earnings (global intangible low-taxed income) that would be borne by our members. Because aspects of the new law and the effect on our operations is uncertain and because aspects of the accounting rules associated with this provision have not been resolved, our members have not made a provisional accrual for the deferred tax aspects of this provision and consequently have not made an accounting policy election on the deferred tax treatment of this tax.
BHGE LLC 2017 FORM 10-K | 76
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
As a result of enactment of U.S. tax reform, we have recorded a net tax benefit of $32 million in 2017 to reflect our provisional estimate of the revaluation of deferred taxes related to our U.S. subsidiaries that file separate returns.
The provision or benefit for income taxes is comprised of the following for the years ended December 31:
|
| | | | | | | | | |
| | 2017 | 2016 | 2015 |
| Current: | | | |
| U.S. | $ | (33 | ) | $ | (114 | ) | $ | 158 |
|
| Foreign | 408 |
| 325 |
| 411 |
|
| Total current | 375 |
| 211 |
| 569 |
|
| Deferred: | | | |
| U.S. | (156 | ) | 13 |
| (21 | ) |
| Foreign | (47 | ) | 26 |
| (75 | ) |
| Total deferred | (203 | ) | 39 |
| (96 | ) |
| Provision for income taxes | $ | 172 |
| $ | 250 |
| $ | 473 |
|
| | | | | | | | | | | |
| 2021 | 2020 | 2019 |
| Current: | | | |
| U.S. | $ | 1 | | $ | 49 | | $ | (18) | |
| Foreign | 614 | | 458 | | 443 | |
| Total current | 615 | | 507 | | 425 | |
| Deferred: | | | |
| U.S. | — | | (6) | | (12) | |
| Foreign | 157 | | 149 | | 63 | |
| Total deferred | 157 | | 143 | | 51 | |
| Provision for income taxes | $ | 772 | | $ | 650 | | $ | 476 | |
The geographic sources of Incomeincome (loss) before income taxes inclusive of equity in loss of affiliate are as follows for the years ended December 31:follows:
| | | | 2017 | 2016 | 2015 | | 2021 | 2020 | 2019 |
| U.S. | $ | (1,153 | ) | $ | (440 | ) | $ | (2,006 | ) | U.S. | $ | (724) | | $ | (14,232) | | $ | (693) | |
| Foreign | 982 |
| 1,024 |
| 1,848 |
| Foreign | 1,152 | | (914) | | 1,446 | |
Income (loss) before income taxes, inclusive of equity in loss of affiliate
| $ | (171 | ) | $ | 584 |
| $ | (158 | ) | |
| Income (loss) before income taxes | | Income (loss) before income taxes | $ | 428 | | $ | (15,146) | | $ | 753 | |
The benefit or provision for income taxes differs from the amount computed by applying the U.S. statutory income tax rate to the loss or income before income taxes for the reasons set forth below for the years ended December 31:
| | | | | | | | | | | |
| 2021 | 2020 | 2019 |
| Income (loss) before income taxes | $ | 428 | | $ | (15,146) | | $ | 753 | |
| | | |
| Taxes at the U.S. federal statutory income tax rate | 90 | | (3,181) | | 158 | |
| Impact of goodwill impairment | — | | 3,090 | | — | |
| Effect of foreign operations | 216 | | 148 | | 84 | |
Tax expense (benefit) due to unrecognized tax benefits (1) | 201 | | 35 | | (24) | |
| Tax impact of partnership structure | 159 | | 38 | | 124 | |
| | | |
| | | |
| Change in valuation allowances | 47 | | 423 | | 135 | |
| CARES Act | — | | — | | — | |
| | | |
| Other - net | 59 | | 97 | | (1) | |
| Provision for income taxes | $ | 772 | | $ | 650 | | $ | 476 | |
| Actual income tax rate | 180.4 | % | (4.3) | % | 63.2 | % |
(1)For December 31, 2021, $119 million of this amount is indemnified under the Tax Matters Agreement with GE.
Baker Hughes Holdings LLC 2021 Form 10-K | 68
|
| | | | | | | | | |
| | 2017 | 2016 | 2015 |
| Income (loss) before income taxes, inclusive of equity in loss of affiliate | $ | (171 | ) | $ | 584 |
| $ | (158 | ) |
| Taxes at the U.S. federal statutory income tax rate | (60 | ) | 205 |
| (55 | ) |
| Effect of foreign operations | (50 | ) | (5 | ) | (137 | ) |
| Tax impact of partnership structure | 267 |
| — |
| — |
|
| Tax impact of dispositions | — |
| 1 |
| (26 | ) |
| Nondeductible goodwill | — |
| — |
| 713 |
|
| Change in valuation allowances | 69 |
| 28 |
| 9 |
|
| Tax Cuts and Jobs Act enactment | (32 | ) | — |
| — |
|
| Other - net | (22 | ) | 21 |
| (31 | ) |
| Provision for income taxes | $ | 172 |
| $ | 250 |
| $ | 473 |
|
| Actual income tax rate | (100.6 | )% | 42.8 | % | (299.4 | )% |
Baker Hughes Holdings LLC
Notes to Consolidated Financial Statements
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss and tax credit carryforwards.
BHGE LLC 2017 FORM 10-K | 77
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
The tax effects of our temporary differences and carryforwards are as follows at December 31:
| | | | 2017 | 2016 | | 2021 | 2020 |
| Deferred tax assets: | | Deferred tax assets: | |
| Operating loss carryforwards | | Operating loss carryforwards | $ | 2,052 | | $ | 2,006 | |
| Tax credit carryforwards | | Tax credit carryforwards | 419 | | 437 | |
| | Property | | Property | 156 | | 127 | |
| Employee benefits | | Employee benefits | 116 | | 138 | |
| Goodwill and other intangibles | | Goodwill and other intangibles | 97 | | 143 | |
| Receivables | $ | 98 |
| $ | — |
| Receivables | 72 | | 53 | |
| Inventory | 41 |
| 71 |
| Inventory | 61 | | 51 | |
| Property | 143 |
| — |
| |
| Employee benefits | 64 |
| 154 |
| |
| Other accrued expenses | 91 |
| 121 |
| |
| Operating loss carryforwards | 1,376 |
| 142 |
| |
| Tax credit carryforwards | 147 |
| 5 |
| |
| Other | 230 |
| — |
| Other | 125 | | 233 | |
| Total deferred income tax asset | 2,190 |
| 493 |
| Total deferred income tax asset | 3,098 | | 3,188 | |
| Valuation allowances | (1,822 | ) | (87 | ) | Valuation allowances | (2,432) | | (2,342) | |
| Total deferred income tax asset after valuation allowance | 368 |
| 406 |
| Total deferred income tax asset after valuation allowance | 666 | | 846 | |
| Deferred tax liabilities: | | Deferred tax liabilities: | |
| Goodwill and other intangibles | (202 | ) | (845 | ) | |
| Property | — |
| (62 | ) | |
| Undistributed earnings of foreign subsidiaries | — |
| (46 | ) | |
| Other | (51 | ) | (9 | ) | Other | (4) | | (1) | |
| Total deferred income tax liability | (253 | ) | (962 | ) | Total deferred income tax liability | (4) | | (1) | |
| Net deferred tax asset (liability) | $ | 115 |
| $ | (556 | ) | |
| Net deferred tax asset | | Net deferred tax asset | $ | 662 | | $ | 845 | |
At December 31, 2017,2021, we had approximately $129$419 million of foreignnon-U.S. tax credits which may be carried forward indefinitely under applicable foreign law, and $18 million of other credits, the majority of which will expire after tax year 2027 under U.S. tax law. The increase in tax credit carryforwards of approximately $142 million is primarily related to the business acquisition referred to in Note 2. Additionally, we had $1,376$2,052 million of net operating loss carryforwards ("NOLs"), of which approximately $319$321 million will expire within five years, $293$479 million will expire between six6 years and 20 years, and the remainder can be carried forward indefinitely.
We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. At December 31, 2017, $1,8222021, $2,432 million of valuation allowances are recorded against various deferred tax assets, including foreign net operating losses (NOL)NOLs of $1,125$1,687 million, U.S. federal and foreignNOLs of $17 million, non-U.S. tax credit carryforwards of $129 million, other U.S. NOL's and tax credit carryforwards of $44$416 million, and certain other U.S. and foreign deferred tax assets of $524$312 million. The increase of $1,736 million in valuation allowances are primarily related to the business acquisition.
There are $192$348 million of deferred tax assets related primarily to foreign net operating loss carryforwardsNOLs without a valuation allowance as we expect that the deferred tax assets will be realized within the carryforward period.
Substantially all of our undistributed earnings of our foreign subsidiaries are indefinitely reinvested. Due to the enactment of U.S. tax reform, repatriations of foreign earnings will generally be free of U.S. federal tax but may incur other taxes such as withholding or state taxes. Indefinite reinvestment is determined by management’s intentions concerning the future operations of the Company. Most ofIn cases where repatriation would otherwise incur significant withholding or income taxes, these earnings have been indefinitely reinvested in the Company's active non-U.S. business operations. However, as a result of U.S. tax reform, substantially all of our prior unrepatriated foreign earnings were subject to U.S. tax and accordingly we expect to have the ability to repatriate those earnings without incremental U.S. federal tax cost. We expect that any foreign withholding taxes on such a repatriation would generate a U.S. foreign tax credit.We will update our analysis of investment of foreign earnings in 2018 as we consider the impact of U.S. tax reform. As of December 31, 2017,2021, the cumulative amount of indefinitely reinvestedundistributed foreign earnings is approximately $8.0$4.4 billion. Computation of the potential deferred tax liability associated with these undistributed earnings and any other basis differences is not practicable.
BHGE LLC 2017 FORM 10-K | 78
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
At December 31, 2017,2021, we had $395$502 million of tax liabilities for total gross unrecognized tax benefits related to uncertain tax positions. In addition to these uncertain tax positions, we had $95$153 million and $53$49 million related to interest and penalties, respectively, for total liabilities of $543$704 million for uncertain positions. If we were to prevail on all uncertain positions, the net effect would result in an income tax benefit of approximately $522$646 million. The remaining $21$58 million is offset bycomprised of $34 million for deferred tax assets that represent tax benefits that would be received in different taxing jurisdictions or in a different character and $24 million increased valuation allowances. As of December 31, 2021 and 2020, the event that we did not prevail on allCompany had $170 million and $53 million, respectively, of current
Baker Hughes Holdings LLC 2021 Form 10-K | 69
Baker Hughes Holdings LLC
Notes to Consolidated Financial Statements
receivables related to uncertain tax positions.
We have not provided for any unrecognized tax benefits relatedpositions, including interest and penalties of $87 million and $25 million, respectively, that are indemnified pursuant to U.S. tax reform in our provisional estimate. The analysis performed and conclusions reached as part of the tax return filing process and additional guidance on accounting for U.S. tax reform could affect the provisional estimate.Tax Matters Agreement with GE.
The following table presents the changes in our gross unrecognized tax benefits included in the consolidated and combined statements of financial position.
| | | Asset / (Liability) | 2017 | 2016 | Asset / (Liability) | 2021 | 2020 |
| Balance at January 1 | $ | (94 | ) | $ | (100 | ) | |
| Balance acquired from Baker Hughes | (326 | ) | — |
| |
| Balance at beginning of year | | Balance at beginning of year | $ | (454) | | $ | (451) | |
| Additions for tax positions of the current year | (13 | ) | (4 | ) | Additions for tax positions of the current year | (32) | | (42) | |
| Additions for tax positions of prior years | (19 | ) | — |
| Additions for tax positions of prior years | (166) | | (31) | |
| Reductions for tax positions of prior years | 32 |
| 5 |
| Reductions for tax positions of prior years | 42 | | 35 | |
| Settlements with tax authorities | 14 |
| — |
| Settlements with tax authorities | 95 | | 12 | |
| Lapse of statute of limitations | 11 |
| 5 |
| Lapse of statute of limitations | 13 | | 23 | |
| Balance at December 31 | $ | (395 | ) | $ | (94 | ) | |
| Balance at end of year | | Balance at end of year | $ | (502) | | $ | (454) | |
It is expected that the amount of unrecognized tax benefits will change in the next twelve months due to expiring statutes, audit activity, tax payments, and competent authority proceedings related to transfer pricing or final decisions in matters that are the subject of litigation in various taxing jurisdictions in which we operate. At December 31, 2017,2021, we had approximately $105$63 million of tax liabilities net of $2 million of tax assets, related to uncertain tax positions, each of which are individually insignificant, and each of which are reasonably possible of being settled within the next twelve months.
At December 31, 2017, approximately $288 million of tax liabilities for total gross unrecognized tax benefits were included in the noncurrent portion of our income tax liabilities, for which the settlement period cannot be determined, however, it is not expected to be within the next twelve months.
We conduct business in more than 120 countries and are subject to income taxes in most taxing jurisdictions in which we operate.operate, each of which may have multiple open years subject to examination. All Internal Revenue Service examinations have been completed and closed through 2016 for the most significant U.S. returns. We believe there are no jurisdictions in which the outcome of unresolved issues or claims is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties.
NOTE 11. MEMEBERS'13. MEMBERS' EQUITY
COMMON UNITS
The BHGEBHH LLC Agreement provides that initially there is one class of common units ("Units"), which are currently held by BHGE, indirectly through EHHC and CFC Holdings, LLC (CFC Holdings), and by GE and certain indirectly wholly-owned subsidiaries of GE.the Members. If BHGEBaker Hughes issues a share of Class A common stock, including in connection with an equity incentive or similar plan, BHGE LLCwe will also issue a corresponding common unitUnit to BHGEBaker Hughes or one of its direct subsidiaries. For the year ended December 31, 2017,2021 and 2020, we issued 5467,886 thousand common unitsand 7,939 thousand Units, respectively, to BHGEBaker Hughes or one of its direct subsidiaries in connection with the issuance of its Class A common stock. The Members are entitled through their Units to receive distributions on an equal amount of any dividend paid by Baker Hughes to its Class A shareholders.
As of December 31, 2021, GE’s economic interest in us was reduced to approximately 11.4% primarily as a result of the exchange of 194.9 million shares of Class B common stock, and associated Units. When shares of Class B common stock, together with associated Units, are exchanged for shares of Class A common stock by BHGE.pursuant to the Exchange Agreement, such shares of Class B common stock, together with associated Units, are canceled.
In 2021, Baker Hughes' Board of Directors authorized us to repurchase up to $2 billion of our Units. We expect to fund the repurchase program from cash generated from operations, and we expect to make Unit repurchases from time to time subject to the Company's capital plan, market conditions, and other factors, including regulatory restrictions. The repurchase program may be suspended or discontinued at any time and does not have a specified expiration date. In 2021, we repurchased and canceled 17.6 million Units for a total of $434 million. As of December 31, 2017, GE owns2021, we had authorization remaining to repurchase up to approximately 62.5%$1.6 billion of our common units and BHGE owns approximately 37.5% of the common units.
Units.
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 7970
Baker Hughes a GE company,Holdings LLC
Notes to Consolidated and Combined Financial Statements
The following table presents the changes in the number of common unitsUnits outstanding (in thousands): | | | | | | | | | | | | | | |
| 2021 | 2020 |
| Units Held by Baker Hughes | Units Held by GE | Units Held by Baker Hughes | Units Held by GE |
| Balance at beginning of year | 723,999 | | 311,433 | | 650,065 | | 377,428 | |
| Issue of Units to Baker Hughes under equity incentive plan | 7,886 | | — | | 7,939 | | — | |
| | | | |
| | | | |
| Exchange of Units | 194,885 | | (194,885) | | 65,995 | | (65,995) | |
| Repurchase and cancellation of Units | (17,628) | | — | | — | | — | |
| Balance at end of year | 909,142 | | 116,548 | | 723,999 | | 311,433 | |
|
| | | | |
| | Common Units Held by BHGE | Common Units Held by GE |
| Balance at December 31, 2016 | — |
| — |
|
| Issue of units on business combination at July 3, 2017 | 427,709 |
| 717,111 |
|
| Issue of units to BHGE under equity incentive plan | 546 |
| — |
|
Repurchase of common units (1) | (6,047 | ) | (10,126 | ) |
| Balance at December 31, 2017 | 422,208 |
| 706,985 |
|
| |
(1)
| On November 6, 2017, BHGE announced that its board of directors authorized us to repurchase up to $3 billion of our common units from BHGE and GE. During the three months ended December 31, 2017, we repurchased 16,173,202 units for total consideration of $501 million. |
ACCUMULATED OTHER COMPREHENSIVE LOSS (AOCL)("AOCL")
The following table presents the changes in accumulated other comprehensive loss, net of tax: |
| | | | | | | | | | | | | | | |
| | Investment Securities | Foreign Currency Translation Adjustments | Cash Flow Hedges | Benefit Plans | Accumulated Other Comprehensive Loss |
| Balance at December 31, 2015 | $ | — |
| $ | (1,384 | ) | $ | (2 | ) | $ | (146 | ) | $ | (1,532 | ) |
| Other comprehensive loss before reclassifications | — |
| (423 | ) | (38 | ) | (12 | ) | (473 | ) |
| Amounts reclassified from accumulated other comprehensive loss | — |
| 1 |
| 37 |
| 88 |
| 126 |
|
| Deferred taxes | — |
|
| (7 | ) | (22 | ) | (29 | ) |
| Other comprehensive income (loss) | — |
| (422 | ) | (8 | ) | 54 |
| (376 | ) |
| Less: Other comprehensive income (loss) attributable to noncontrolling interests | — |
| (5 | ) | — |
| (9 | ) | (14 | ) |
| Balance at December 31, 2016 | — |
| (1,801 | ) | (10 | ) | (83 | ) | (1,894 | ) |
| Other comprehensive income before reclassifications | 41 |
| 7 |
| 8 |
| 45 |
| 101 |
|
| Amounts reclassified from accumulated other comprehensive loss | (39 | ) | — |
| 7 |
| 1 |
| (31 | ) |
| Deferred taxes | 2 |
| (10 | ) | (3 | ) | 9 |
| (2 | ) |
| Other comprehensive income (loss) | 4 |
| (3 | ) | 12 |
| 55 |
| 68 |
|
| Less: Other comprehensive income attributable to noncontrolling interests | 1 |
| — |
| — |
| 2 |
| 3 |
|
| Less: Other adjustments | — |
| — |
| — |
| 13 |
| 13 |
|
| Less: Activity related to noncontrolling interest | — |
| 15 |
| — |
| 17 |
| $ | 32 |
|
| Balance at December 31, 2017 | $ | 3 |
| $ | (1,819 | ) | $ | 2 |
| $ | (60 | ) | $ | (1,874 | ) |
| | | | | | | | | | | | | | | | | |
| Investment Securities | Foreign Currency Translation Adjustments | Cash Flow Hedges | Benefit Plans | Accumulated Other Comprehensive Loss |
| Balance at December 31, 2019 | $ | 2 | | $ | (2,274) | | $ | 10 | | $ | (327) | | $ | (2,589) | |
| Other comprehensive income (loss) before reclassifications | (2) | | 175 | | (2) | | (181) | | (10) | |
| Amounts reclassified from accumulated other comprehensive loss | — | | — | | (4) | | 52 | | 48 | |
| Deferred taxes | — | | — | | 1 | | 5 | | 6 | |
| Other comprehensive income (loss) | (2) | | 175 | | (5) | | (124) | | 44 | |
| Less: Other comprehensive loss attributable to noncontrolling interests | — | | (3) | | — | | — | | (3) | |
| | | | | |
| | | | | |
| Balance at December 31, 2020 | — | | (2,096) | | 5 | | (451) | | (2,542) | |
| Other comprehensive income (loss) before reclassifications | — | | (344) | | (11) | | 135 | | (220) | |
| Amounts reclassified from accumulated other comprehensive loss | — | | 39 | | (7) | | 38 | | 70 | |
| Deferred taxes | — | | — | | 2 | | (3) | | (1) | |
| Other comprehensive income (loss) | — | | (305) | | (16) | | 170 | | (151) | |
| Less: Other comprehensive loss attributable to noncontrolling interests | — | | (2) | | — | | — | | (2) | |
| | | | | |
| | | | | |
| Balance at December 31, 2021 | $ | — | | $ | (2,398) | | $ | (12) | | $ | (281) | | $ | (2,691) | |
The amounts reclassified from accumulated other comprehensive loss during the years ended December 31, 20172021 and 20162020 represent (i) realized gains (losses) on investment securities recorded in other non operating income (loss) (ii) gains (losses) reclassified on cash flow hedges when the hedged transaction occurs, and (iii)(ii) the amortization of net actuarial loss andgain (loss), prior service credit, and curtailments which are included in the computation of net periodic pension cost (see "Note 9.11. Employee Benefit Plans" for additional details). Net periodic pension cost is recorded across, and (iii) the various costrelease of foreign currency translation adjustments for certain restructured product lines (see "Note 18. Restructuring, Impairment and expense line items within the consolidated and combined statement of income (loss)Other" for additional details).
BHGE LLC 2017 FORM 10-K | 80
Baker Hughes a GE company,Holdings LLC 2021 Form 10-K | 71
Baker Hughes Holdings LLC
Notes to Consolidated and Combined Financial Statements
NOTE 12.14. FINANCIAL INSTRUMENTS
RECURRING FAIR VALUE MEASUREMENTS
Our assets and liabilities measured at fair value on a recurring basis consists of derivative instruments and investment securities.
| | | | 2017 | 2016 | | 2021 | 2020 |
| | Level 1 | Level 2 | Level 3 | Net Balance | Level 1 | Level 2 | Level 3 | Net Balance | | Level 1 | Level 2 | Level 3 | Net Balance | Level 1 | Level 2 | Level 3 | Net Balance |
| Assets | |
| |
| |
| | Assets | | |
| Derivatives | $ | — |
| $ | 150 |
| $ | — |
| $ | 150 |
| $ | — |
| $ | 318 |
| $ | — |
| $ | 318 |
| Derivatives | $ | — | | $ | 29 | | $ | — | | $ | 29 | | $ | — | | $ | 118 | | $ | — | | $ | 118 | |
| Investment securities | 81 |
| 8 |
| 304 |
| 393 |
| — |
| — |
| — |
| — |
| Investment securities | 1,033 | | — | | 8 | | 1,041 | | 1,502 | | — | | 30 | | 1,532 | |
| Total assets | 81 |
| 158 |
| 304 |
| 543 |
| — |
| 318 |
| — |
| 318 |
| Total assets | 1,033 | | 29 | | 8 | | 1,070 | | 1,502 | | 118 | | 30 | | 1,650 | |
| | | |
| Liabilities | |
| |
| |
| | Liabilities | | |
| Derivatives | — |
| (95 | ) | — |
| (95 | ) | — |
| (375 | ) | — |
| (375 | ) | Derivatives | — | | (49) | | — | | (49) | | — | | (52) | | — | | (52) | |
| Total liabilities | $ | — |
| $ | (95 | ) | $ | — |
| $ | (95 | ) | $ | — |
| $ | (375 | ) | $ | — |
| $ | (375 | ) | Total liabilities | $ | — | | $ | (49) | | $ | — | | $ | (49) | | $ | — | | $ | (52) | | $ | — | | $ | (52) | |
There were no transfers between Level 1, 2 and 3 during 2017.2021.
The following table provides a reconciliation of recurring Level 3 fair value measurements for investment securities: |
| | | |
| Balance at December 31, 2016 | $ | — |
|
| Additions as a result of business combination | 179 |
|
| Purchases | 186 |
|
| Proceeds at maturity | (62 | ) |
| Unrealized gains recognized in accumulated other comprehensive income (loss) | 1 |
|
| Balance at December 31, 2017 | $ | 304 |
|
| | | | | | | | |
| 2021 | 2020 |
| Balance at beginning of year | $ | 30 | | $ | 259 | |
| Purchases | — | | 12 | |
| Proceeds at maturity | (22) | | (239) | |
| Unrealized gains (losses) recognized in other comprehensive loss | — | | (2) | |
| Balance at end of year | $ | 8 | | $ | 30 | |
The most significant unobservable input used in the valuation of our Level 3 instruments is the discount rate. Discount rates are determined based on inputs that market participants would use when pricing investments, including credit and liquidity risk. An increase in the discount rate would result in a decrease in the fair value of our investment securities. There are no unrealized gains or losses recognized in the consolidated and combined statement of income (loss) on account of any Level 3 instrument still held at the reporting date. We hold $127 million of these investment securities on behalf of GE.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | 2020 |
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value |
| Investment securities | | | | | | | | |
Non-U.S. debt securities (1) | $ | 8 | | $ | — | | $ | — | | $ | 8 | | $ | 30 | | $ | — | | $ | — | | $ | 30 | |
Equity securities (2) | 579 | | 455 | | (1) | | 1,033 | | 76 | | 1,431 | | (5) | | 1,502 | |
| Total | $ | 587 | | $ | 455 | | $ | (1) | | $ | 1,041 | | $ | 106 | | $ | 1,431 | | $ | (5) | | $ | 1,532 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | 2016 |
| | Amortized cost | Gross unrealized gains | Gross unrealized losses | Estimated fair value | Amortized cost | Gross unrealized gains | Gross unrealized losses | Estimated fair value |
| Investment securities | |
| |
| |
| | | | | |
| Non-U.S. debt securities | $ | 310 |
| $ | 2 |
| $ | — |
| $ | 312 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Equity securities | 81 |
| — |
| — |
| 81 |
| 1 |
| — |
| — |
| 1 |
|
| Total | $ | 391 |
| $ | 2 |
| $ | — |
| $ | 393 |
| $ | 1 |
| $ | — |
| $ | — |
| $ | 1 |
|
(1)All of our investment securities are classified as available for sale instruments. Non-U.S. debt securities mature within one year.
(2)Gains (losses) recorded to earnings related to these securities were $(843) million, $1.4 billion and $2 million for the years ended December 31, 2021, 2020, and 2019, respectively.
Baker Hughes Holdings LLC 2021 Form 10-K | 72
Baker Hughes Holdings LLC
Notes to Consolidated Financial Statements
As of December 31, 2021, our equity securities with readily determinable fair values are comprised primarily of our investment in three years.C3.ai, Inc. ("C3 AI") of $270 million and ADNOC Drilling of $741 million. As of December 31, 2020, our equity securities with readily determinable fair values are comprised primarily of our investment in C3 AI of $1,500 million. We measured our investments to fair value based on quoted prices in active markets.
During 2021, we sold approximately 2.2 million of our C3 AI shares and received proceeds of $145 million. At December 31, 2021, our investment in C3 AI consists of 8,650,476 shares. For the year ended December 31, 2021 and 2020, we recorded a loss of $1,085 million and a gain of $1,417 million, respectively, from the net change in fair value of our investment in C3 AI, which is reported in “Other non-operating income (loss), net” in our consolidated statements of income (loss). See “Note 16. Related Party Transactions” for further details on our agreements with C3 AI.
Our original investment in ADNOC Drilling from 2018 consists of a 5 percent investment, or $500 million, and did not have a recurring readily determinable fair value until October 4, 2021 when ADNOC Drilling became publicly traded, at which point the investment was transferred to investment securities with a readily determinable fair value. At December 31, 2021, our investment in ADNOC Drilling consists of 800,000,000 shares. For the year ended December 31, 2021, we recorded a gain of $241 million from the net change in fair value of our investment in ADNOC Drilling, which is reported in “Other non-operating income (loss), net” in our consolidated statements of income (loss).
As of December 31, 2021 and 2020, $1,041 million and $1,514 million of total investment securities are recorded in "All other current assets" and nil and $18 million are recorded in "All other assets" of the consolidated statements of financial position, respectively.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Our financial instruments include cash and equivalents, current receivables, investments, accounts payable, short and long-term debt, and derivative financial instruments. Except for long-term debt, the estimated fair value of
BHGE LLC 2017 FORM 10-K | 81
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
these financial instruments at December 31, 20172021 and December 31, 20162020 approximates their carrying value as reflected in our consolidated and combined financial statements. For further information on the fair value of our debt, see "Note 8.10. Borrowings."
DERIVATIVES AND HEDGING
We use derivatives to manage our risks and do not use derivatives for speculation.
The table below summarizes the fair value of all derivatives, including hedging instruments and embedded derivatives.
| | | | 2017 | 2016 | | 2021 | 2020 |
| | Assets | (Liabilities) | Assets | (Liabilities) | | Assets | (Liabilities) | Assets | (Liabilities) |
| Derivatives accounted for as hedges | | Derivatives accounted for as hedges | |
| Currency exchange contracts | $ | 6 |
| $ | — |
| $ | 2 |
| $ | (9 | ) | Currency exchange contracts | $ | — | | $ | (3) | | $ | 5 | | $ | — | |
| Interest rate swap contracts | | Interest rate swap contracts | — | | (10) | | — | | — | |
| | | |
| Derivatives not accounted for as hedges | | Derivatives not accounted for as hedges | |
| Currency exchange contracts | 144 |
| (95 | ) | 316 |
| (366 | ) | |
| Currency exchange contracts and other | | Currency exchange contracts and other | 29 | | (36) | | 113 | | (52) | |
| Total derivatives | $ | 150 |
| $ | (95 | ) | $ | 318 |
| $ | (375 | ) | Total derivatives | $ | 29 | | $ | (49) | | $ | 118 | | $ | (52) | |
Derivatives are classified in the captions "All other current assets," "All other assets," "All other current liabilities," and "All other liabilities"consolidated statements of financial position depending on their respective maturity date. As of December 31, 2021 and 2020, $28 million and $115 million of derivative assets are recorded in "All other current assets" and $1 million and $3 million are recorded in "All other assets" of the consolidated statements of financial position, respectively. As of December 31, 2021 and 2020, $39 million and $48 million of derivative liabilities are recorded in "All other current liabilities" and $10 million and $4 million are recorded in "All other liabilities" of the consolidated statements of financial position, respectively.
RISK MANAGEMENT STRATEGYBaker Hughes Holdings LLC 2021 Form 10-K | 73
Baker Hughes Holdings LLC
We buy, manufacture and sell components and products as well as provide services across global markets. These activities expose usNotes to changes in foreign currency exchange rates and commodity prices, which can adversely affect revenue earned and costs of operating our business. When the currency in which we sell equipment differs from the primary currency (known as its functional currency) and the exchange rate fluctuates, it will affect the revenue we earn on the sale. These sales and purchase transactions also create receivables and payables denominated in foreign currencies, along with other monetary assets and liabilities, which expose us to foreign currency gains and losses based on changes in exchange rates. Changes in the price of a raw material that we use in manufacturing can affect the cost of manufacturing. We use derivatives to mitigate or eliminate these exposures.Consolidated Financial Statements
FORMS OF HEDGING
Cash flow hedges
We use cash flow hedging primarily to reduce or eliminate the effects of foreign exchange rate changes on purchase and sale contracts. Accordingly, the vast majority of our derivative activity in this category consists of currency exchange contracts. We also use commodity derivatives to reduce or eliminate price risk on raw materials purchased for useChanges in manufacturing.
Under hedge accounting, the derivative carrying amount is measured at fair value each period and any resulting gain or loss isof cash flow hedges are recorded in a separate component of equity. Differences between the derivative and the hedged item may cause changes in their fair values to not offset completely, which is referredequity (referred to as ineffectiveness. When"Accumulated Other Comprehensive Income", or "AOCI") and are recorded in earnings in the period in which the hedged transaction occurs,occurs. See "Note 13. Members' Equity" for further information on activity in AOCI for cash flow hedges. The maximum term of cash flow hedges that hedge forecasted transactions was one year at December 31, 2021 and 2020.
Fair Value Hedges
All of our long-term debt is comprised of fixed rate instruments. We are subject to interest rate risk on our debt portfolio and may use interest rate swaps to manage the economic effect of fixed rate obligations associated with certain debt. Under these arrangements, we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount.
As of December 31, 2021, we had interest rate swaps with a notional amount of $500 million that converted a portion of our $1,350 million aggregate principal amount of 3.337% fixed rate Senior Notes due 2027 into a floating rate instrument with an interest rate based on a LIBOR index as a hedge of its exposure to changes in fair value that are released from equity, in orderattributable to interest rate risk. We concluded that the transaction will be reflectedinterest rate swap met the criteria necessary to qualify for the short-cut method of hedge accounting, and as such, an assumption is made that the change in earnings at the rate locked in by the derivative. The effect of the hedge is reported in the same financial statement line item as the earnings effects of the hedged transaction.
BHGE LLC 2017 FORM 10-K | 82
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
The following table explains the effect of changes in market rates on the fair value of derivatives we use most commonlythe hedged debt, due to changes in cash flow hedging arrangements.
|
| | | | |
Currency forwards/swaps | | U.S. dollar strengthens | | U.S. dollar weakens |
Pay U.S. dollars/receive foreign currency | | Fair value decreases | | Fair value increases |
the benchmark rate, exactly offsets the change in the fair value of the interest rate swaps. Therefore, the derivative is considered to be effective at achieving offsetting changes in the fair value of the hedged liability, and no ineffectiveness is recognized. The mark-to-market of this fair value hedge is recorded as gains or losses in interest expense and is equally offset by the gain or loss of the underlying debt instrument, which also is recorded in interest expense.Economic Hedges
These derivatives are not designated as hedges from an accounting standpoint (and therefore we do not apply hedge accounting to the relationship) but otherwise serve the same economic purpose as other hedging arrangements. Some economicEconomic hedges are used when changes in the carrying amount of the hedged item are already recorded in earnings in the same period as the derivative, making hedge accounting unnecessary. For some other types of economic hedges, changes in the fair value of the derivative are recorded in earnings currently but changes in the value of the forecasted foreign currency cash flows are only recognized in earnings when they occur. As a result, even though the derivative is an effective economic hedge, there is a net effect on earnings in each period due to differences in the timing of earnings recognition between the derivative and the hedged item.
These derivatives are marked to fair value through earnings each period.
The effects are reported in "Selling, general and administrative expenses"following table summarizes the gains (losses) from derivatives not designated as hedges in the consolidated and combined statementstatements of income (loss). In general,:
| | | | | | | | | | | | | | |
| Derivatives not designated as hedging instruments | Consolidated statement of income caption | 2021 | 2020 | 2019 |
Currency exchange contracts (1) | Cost of goods sold | $ | (9) | | $ | 59 | | $ | (13) | |
| Currency exchange contracts | Cost of services sold | 5 | | 62 | | (15) | |
| Commodity derivatives | Cost of goods sold | 1 | | 2 | | 2 | |
| Other derivatives | Other non-operating income (loss), net | — | | 8 | | 2 | |
Total (2) | | $ | (3) | | $ | 131 | | $ | (24) | |
(1)Excludes gains of $7 million and losses of $14 million and $7 million on embedded derivatives for the income (loss) effectsyears ended December 31, 2021, 2020 and 2019, respectively, as embedded derivatives are not considered to be hedging instruments in our economic hedges.
(2)The effect on earnings of the hedged item are recorded in the same consolidated and combined financial statement linederivatives not designated as the derivative. The income (loss) effect of economic hedges after considering offsets related to income (loss) effects of hedged assets and liabilities, is substantially offset by changesthe change in the fair value of forecasted transactions that have not yet affected income (loss).
The table below explains the effects of market rate changes oneconomically hedged items in the fair value of derivatives we use most commonly as economic hedges.current and future periods.
Baker Hughes Holdings LLC 2021 Form 10-K | 74
|
| | | | |
Currency forwards/swaps | | U.S. dollar strengthens | | U.S. dollar weakens |
Pay U.S. dollars/receive foreign currency | | Fair value decreases | | Fair value increases |
Receive U.S. dollars/pay foreign currency | | Fair value increases | | Fair value decreases |
| | | | |
Commodity derivatives | | Price increases | | Price decreases |
Receive commodity/ pay fixed price | | Fair value increases | | Fair value decreases |
Baker Hughes Holdings LLC
Notes to Consolidated Financial Statements
NOTIONAL AMOUNT OF DERIVATIVES
The notional amount of a derivative is the number of units of the underlying (for example, the notional principal amount of the debt in an interest rate swap).underlying. A substantial majority of the outstanding notional amount of $10.2$3.9 billion and $7.1$7.0 billion at December 31, 20172021 and December 31, 2016,2020, respectively, is related to hedges of anticipated sales and purchases in foreign currency, commodity purchases, changes in interest rates, and contractual terms in contracts that are considered embedded derivatives and for intercompany borrowings in foreign currencies. We generally disclose derivative notional amounts on a gross basis to indicate the total counterparty risk. Where we have gross purchase and sale derivative contracts for a particular currency, we look to execute these contracts with the same counterparty to reduce our exposure. The corresponding net notional amount of these derivative instruments do not generally represent cash amounts were $3.3 billion at December 31, 2017exchanged by us and $0.6 billion at December 31, 2016.
BHGE LLC 2017 FORM 10-K | 83
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
The table below provides additional information about how derivatives are reflected in our consolidated and combined financial statements.
|
| | | | | | |
| Carrying amount related to derivatives | 2017 | 2016 |
| Derivative assets | $ | 150 |
| $ | 318 |
|
| Derivative liabilities | (95 | ) | (375 | ) |
| Net derivatives | $ | 55 |
| $ | (57 | ) |
EFFECTS OF DERIVATIVES ON EARNINGS
All derivatives are marked to fair value on our consolidated and combined statement of financial position, whether they are designated in a hedging relationship for accounting purposes or are used as economic hedges. As discussedthe counterparties, but rather the nominal amount upon which changes in the previous sections, each type of hedge affects the financial statements differently. In some economic hedges, both the hedged item and the hedging derivative offset in earnings in the same period. In other economic hedges, the hedged item and the hedging derivative offset in earnings in different periods. In cash flow, the effective portion of the hedging derivative is offset in separate components of equity and ineffectiveness is recognized in earnings. The table below summarizes these offsets and the net effect on pre-tax earnings. |
| | | | | | | | | | | | |
| | 2017 | 2016 |
| | Cash flow hedges | Economic hedges | Cash flow hedges | Economic hedges |
| Effect on hedging instrument | $ | 8 |
| $ | 121 |
| $ | 38 |
| $ | (272 | ) |
| Effect on underlying | (8 | ) | (152 | ) | (38 | ) | 102 |
|
Effect on earnings (1) | — |
| (31 | ) | — |
| (170 | ) |
| |
(1)
| For cash flow hedges, the effect on earnings, if any, is primarily related to ineffectiveness. For economic hedges on forecasted transactions, effect on earnings is substantially offset by future earnings on economically hedged items. |
Changes in the fair value of cash flow hedges are recorded in a separate component of equity (referred to below as Accumulated Other Comprehensive Income, or AOCI) and are recorded in earnings in the period in which the hedged transaction occurs. The table below summarizes this activity by hedging instrument. |
| | | | | | | | | | | | |
| | Gain (loss) recognized in AOCI | Gain (loss) reclassified from AOCI to earnings |
| | 2017 | 2016 | 2017 | 2016 |
| Currency exchange contracts | $ | 8 |
| $ | (38 | ) | $ | (7 | ) | $ | (37 | ) |
We expect to transfer an insignificant amount to earnings as an expense in the next 12 months contemporaneously with the earnings effects of the related forecast transactions. At December 31, 2017 and 2016, the maximum term of derivative instruments that hedge forecast transactions was three-years and two-years, respectively. See "Note 11. Members' Equity" for additional information about reclassification out of accumulated other comprehensive income.
For cash flow hedges, the amount of ineffectiveness in the hedging relationship and amount of the changes in fair value of the derivatives that are not included in the measurement of ineffectiveness were insignificant for each reporting period.measured.
COUNTERPARTY CREDIT RISK
Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our agreements) on an individual counterparty basis.
OTHER EQUITY INVESTMENTS
As of December 31, 2021 and 2020, the carrying amount of equity securities without readily determinable fair values was $56 million and $554 million, respectively. These investments are recorded in "All other assets" of the consolidated statements of financial position. Our balance as of December 31, 2020 included $500 million related to our 5 percent investment in ADNOC Drilling.
BHGE LLC 2017 FORM 10-K | 84
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
NOTE 13.15. SEGMENT INFORMATION
Our reportable segments, which are the same as our operating segments, are organized based on the nature of markets and customers. Following the Transactions, we revised our segment structure and began to manage andWe report our operating results through fourour 4 operating segments as defined below. We have reflected this revised structure for all historical periods presented.that consist of similar products and services within each segment. Our operating results are reviewed regularly by the chief operating decision maker, who is our Chief Executive Officer, in deciding how to allocate resources and assess performance. These products and services operate across upstream oil and gas and broader energy and industrial markets.
OILFIELD SERVICES
Oilfield Services provides discrete products and services, as well as integrated well services for onshore and offshore operations across the lifecycle of a well, ranging from drilling, evaluation, completion, production and intervention. Products and services include diamond and tri-cone drill bits, drilling services, including directional drilling, technology, measurement while drilling & logging while drilling, diamond and tri-cone drill bits, drilling and completions fluids, wireline services, downhole completion tools and systems, wellbore intervention tools and services, wireline services, drilling and completions fluids,pressure pumping, oilfield and industrial chemicals pressure pumping, and artificial lift technologies, including electrical submersible pumps.pumps and surface pumping systems.
OILFIELD EQUIPMENT
Oilfield Equipment provides a broad portfolio of products and services required to facilitate the safe and reliable control and flow of hydrocarbons from the subsea wellhead to the surface.production facilities. The Oilfield Equipment portfolio has solutions for the subsea, offshore surface, and onshore operating environments. Products and services include subsea and surface wellheads, pressure control equipment and services, subsea production systems and services, drilling equipment,flexible pipe systems for offshore and flexible pipeline systems. Oilfield Equipment designsonshore applications, and manufactures onshorelife-of-field solutions including well intervention and offshore drilling and production systems and equipment for floating production platforms and providesdecommissioning solutions, covering the entire life cycle of a full range of services relatedfield.
Baker Hughes Holdings LLC 2021 Form 10-K | 75
Baker Hughes Holdings LLC
Notes to onshore and offshore drilling activities.Consolidated Financial Statements
TURBOMACHINERY & PROCESS SOLUTIONS
Turbomachinery & Process Solutions provides equipmenttechnology solutions and related services for mechanical-drive, compression and power-generation applications across the energy industry, including oil and gas, industryliquefied natural gas ("LNG") operations, downstream refining and petrochemical segments, as well as productslower carbon solutions to broader energy and services to serve the downstream segments of the industry including refining, petrochemical, distributed gas, flow and process control and other industrial applications.sectors. The Turbomachinery & Process Solutions portfolio includes drivers (aero-derivative gas turbines, heavy-duty gas turbines and synchronous and induction electric motors), compressors (centrifugal and axial, direct drive high speed, integrated, subsea compressors, turbo expanders and reciprocating), turn-keyturnkey solutions (industrial modules and waste heat recovery), pumps, valves, and compressed natural gas (CNG)("CNG") and small-scale liquefied natural gas (LNG) solutions used primarily for shale oil and gas field development.LNG solutions.
DIGITAL SOLUTIONS
Digital Solutions provides equipment, software, and services for a wide range of industries, including oil &and gas, power generation, aerospace, metals, and transportation. The offerings include a number of products and solutions that provide industrial asset management capabilities, including sensor-based process measurement, machine health and condition monitoring, asset strategy and management, control systems, as well as non-destructive testing and inspection, turbine, generator and plant controls and condition monitoring, as well as pipeline integrity solutions.
SEGMENT RESULTS
Segment revenue and profit are determined based on the internal performance measures used by the Company to assess the performance of each segment in a financial period. Summarized financial information is shown in the following tables. Consistent accounting policies have been applied by all segments within the Company, for all reporting periods. The current year results, and balances, may not be comparable to prior years as the current year includes the results of Baker Hughes from July 3, 2017.
| | | | | | | | | | | |
| Segment revenue | 2021 | 2020 | 2019 |
| Oilfield Services | $ | 9,542 | | $ | 10,140 | | $ | 12,889 | |
| Oilfield Equipment | 2,486 | | 2,844 | | 2,921 | |
| Turbomachinery & Process Solutions | 6,417 | | 5,705 | | 5,536 | |
| Digital Solutions | 2,057 | | 2,015 | | 2,492 | |
| Total | $ | 20,502 | | $ | 20,705 | | $ | 23,838 | |
BHGE LLC 2017 FORM 10-K | 85
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Notes to Consolidated and Combined Financial Statements
|
| | | | | | | | | |
| Segment revenue | 2017 | 2016 | 2015 |
| Oilfield Services | $ | 5,851 |
| $ | 799 |
| $ | 1,411 |
|
| Oilfield Equipment | 2,637 |
| 3,547 |
| 5,060 |
|
| Turbomachinery & Process Solutions | 6,463 |
| 6,837 |
| 7,985 |
|
| Digital Solutions | 2,309 |
| 2,086 |
| 2,232 |
|
| Total | $ | 17,259 |
| $ | 13,269 |
| $ | 16,688 |
|
The performance of our operating segments is evaluated based on segment operating income (loss), which is defined as income (loss) before income taxes and equity in loss of affiliate and before the following: net interest expense, net other non operatingnon-operating income (loss), corporate expenses, restructuring, impairment and other charges, inventory impairments, merger andseparation related costs, goodwill impairmentsimpairment and certain gains and losses not allocated to the operating segments.
Baker Hughes Holdings LLC 2021 Form 10-K | 76
Baker Hughes Holdings LLC
Notes to Consolidated Financial Statements
|
| | | | | | | | | |
| Segment income (loss) before income taxes | 2017 | 2016 | 2015 |
| Oilfield Services | $ | 71 |
| $ | (204 | ) | $ | (79 | ) |
| Oilfield Equipment | 38 |
| 320 |
| 677 |
|
| Turbomachinery & Process Solutions | 853 |
| 1,255 |
| 1,684 |
|
| Digital Solutions | 333 |
| 355 |
| 409 |
|
| Total segment | 1,295 |
| 1,726 |
| 2,691 |
|
| Corporate | (373 | ) | (380 | ) | (260 | ) |
Inventory impairment and related charges (1) | (244 | ) | (138 | ) | (51 | ) |
| Restructuring, impairment and other | (412 | ) | (516 | ) | (411 | ) |
| Goodwill impairment | — |
| — |
| (2,080 | ) |
| Merger and related costs | (373 | ) | (33 | ) | (27 | ) |
| Other non operating income (loss), net | 78 |
| 27 |
| 100 |
|
| Interest expense, net | (131 | ) | (102 | ) | (120 | ) |
| Total | $ | (160 | ) | $ | 584 |
| $ | (158 | ) |
| |
| | | | | | | | | | | | | Segment income (loss) before income taxes | 2021 | 2020 | 2019 | | Oilfield Services | $ | 761 | | $ | 487 | | $ | 917 | | | Oilfield Equipment | 69 | | 19 | | 55 | | | Turbomachinery & Process Solutions | 1,050 | | 805 | | 719 | | | Digital Solutions | 126 | | 193 | | 343 | | | Total segment | 2,006 | | 1,504 | | 2,035 | | | Corporate | (429) | | (464) | | (433) | | Inventory impairment (1) | — | | (246) | | — | | | Goodwill impairment | — | | (14,717) | | — | | | Restructuring, impairment and other | (209) | | (1,866) | | (342) | | | Separation related | (60) | | (134) | | (184) | | | Other non-operating income (loss), net | (583) | | 1,040 | | (84) | | | Interest expense, net | (299) | | (264) | | (237) | | | Income (loss) before income taxes | $ | 428 | | $ | (15,146) | | $ | 753 | |
(1)Charges for inventory impairments are predominantly reported in the "Cost of goods sold" caption of the consolidated statements of income (loss). (1)
| Inventory impairments and related charges are reported in the "Cost of goods sold" caption of the consolidated and combined statements of income (loss). 2017 includes $87 million of adjustments to write-up the acquired inventory to its estimated fair value on acquisition of Baker Hughes as this inventory was used or sold in the six months ended December 31, 2017. |
The following table presents total assets by segment at December 31: | | | Segments assets | 2017 | 2016 | |
Oilfield Services (1) | $ | 32,488 |
| $ | 4,046 |
| |
| Segment assets | | Segment assets | 2021 | 2020 |
| Oilfield Services | | Oilfield Services | $ | 15,215 | | $ | 15,244 | |
| Oilfield Equipment | 7,682 |
| 8,744 |
| Oilfield Equipment | 2,616 | | 3,344 | |
| Turbomachinery & Process Solutions | 9,712 |
| 8,565 |
| Turbomachinery & Process Solutions | 7,692 | | 8,951 | |
| Digital Solutions | 3,831 |
| 3,113 |
| Digital Solutions | 3,897 | | 3,948 | |
| Total segment | 53,713 |
| 24,468 |
| Total segment | 29,420 | | 31,487 | |
Corporate and eliminations (2) | 3,173 |
| (2,747 | ) | |
Corporate and eliminations (1) | | Corporate and eliminations (1) | 5,866 | | 6,442 | |
| Total | $ | 56,886 |
| $ | 21,721 |
| Total | $ | 35,286 | | $ | 37,929 | |
| |
(1)
| Goodwill acquired as a result(1)The assets in Corporate and eliminations consist primarily of cash, the Baker Hughes acquisition has been preliminarily allocated to Oilfield Services. See "Note 6. Goodwill and Other Intangible Assets" for further details. |
| |
(2)
| Corporate and eliminations in total segment assets includes adjustments of intercompany investments and receivables that are reflected within the total assets of the four reportable segments. |
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Notestrade name, our investment in C3 AI, certain facilities, and certain other noncurrent assets. It also includes adjustments to Consolidatedeliminate intercompany investments and Combined Financial Statements
receivables reflected within the total assets of each of our reportable segments.
The following table presents depreciation and amortization by segment for the years ended December 31:segment:
| | | | | | | | | | | |
| Segment depreciation and amortization | 2021 | 2020 | 2019 |
| Oilfield Services | $ | 771 | | $ | 926 | | $ | 985 | |
| Oilfield Equipment | 103 | | 146 | | 175 | |
| Turbomachinery & Process Solutions | 120 | | 118 | | 116 | |
| Digital Solutions | 88 | | 98 | | 103 | |
| Total Segment | 1,082 | | 1,288 | | 1,379 | |
| Corporate | 23 | | 29 | | 39 | |
| Total | $ | 1,105 | | $ | 1,317 | | $ | 1,418 | |
Baker Hughes Holdings LLC 2021 Form 10-K | 77
|
| | | | | | | | | |
| Segment depreciation and amortization | 2017 | 2016 | 2015 |
| Oilfield Services | $ | 613 |
| $ | 132 |
| $ | 164 |
|
| Oilfield Equipment | 187 |
| 154 |
| 178 |
|
| Turbomachinery & Process Solutions | 174 |
| 186 |
| 138 |
|
| Digital Solutions | 119 |
| 78 |
| 50 |
|
| Total Segment | 1,093 |
| 550 |
| 530 |
|
| Corporate | 10 |
| — |
| — |
|
| Total | $ | 1,103 |
| $ | 550 |
| $ | 530 |
|
Baker Hughes Holdings LLC
Notes to Consolidated Financial Statements
The following tables present consolidated revenue based on the location to where the product is shipped or the services are performed for the years ended December 31, andtable presents capital expenditures by segment:
| | | | | | | | | | | |
| Segment capital expenditures | 2021 | 2020 | 2019 |
| Oilfield Services | $ | 590 | | $ | 669 | | $ | 926 | |
| Oilfield Equipment | 69 | | 74 | | 120 | |
| Turbomachinery & Process Solutions | 126 | | 137 | | 118 | |
| Digital Solutions | 56 | | 59 | | 56 | |
| Total Segment | 841 | | 939 | | 1,220 | |
| Corporate | 15 | | 35 | | 20 | |
| Total | $ | 856 | | $ | 974 | | $ | 1,240 | |
The following table presents net property, plant and equipment by its geographic location at December 31.31:
| | | Revenue | 2017 | 2016 | 2015 | |
| Property, plant and equipment - net | | Property, plant and equipment - net | 2021 | 2020 | 2019 |
| U.S. | $ | 4,350 |
| $ | 3,164 |
| $ | 4,334 |
| U.S. | $ | 1,651 | | $ | 2,007 | | $ | 2,594 | |
| Non-U.S. | 12,909 |
| 10,105 |
| 12,354 |
| Non-U.S. | 3,226 | | 3,351 | | 3,646 | |
| Total | $ | 17,259 |
| $ | 13,269 |
| $ | 16,688 |
| Total | $ | 4,877 | | $ | 5,358 | | $ | 6,240 | |
|
| | | | | | | | | |
| Property, plant and equipment - net | 2017 | 2016 | 2015 |
| U.S. | $ | 4,054 |
| $ | 833 |
| $ | 954 |
|
| Non-U.S. | 2,905 |
| 1,492 |
| 1,600 |
|
| Total | $ | 6,959 |
| $ | 2,325 |
| $ | 2,554 |
|
NOTE 14.16. RELATED PARTY TRANSACTIONS
RELATED PARTY TRANSACTIONS WITH GE
Our most significant related party transactions are transactions that we have entered into with our membersMembers and their affiliates. We have continuing involvement with GE primarily through their remaining interest in us, ongoing purchases and its affiliates have providedsales of products and continue toservices, transition services that they provide, a variety of services to us.as well as an aeroderivative joint venture ("Aero JV") we formed with GE in 2019. We also enter into certain transactions with BHGEBaker Hughes as provided in the BHGEBHH LLC Agreement. During the fourth quarter of 2021, GE’s voting power of Baker Hughes' outstanding common stock, which includes both Class A and B common stock, fell below 20%, which terminated GE’s right to designate 1 person for nomination to Baker Hughes' Board of Directors. The Conflicts Committee waived the obligation of the GE designee serving on Baker Hughes' Board of Directors to deliver his resignation and such designee will therefore continue as a member of the Board of Directors but not as a designee of GE. At December 31, 2021, GE's economic interest in us through their ownership of Class B common stock and associated LLC Units was 11.4%.
In connection withThe Aero JV is jointly controlled by GE and us, and therefore, we do not consolidate the Transactions on July 3, 2017, we entered into various agreementsJV. We had purchases with GE and its affiliates, that govern our relationship with GE followingincluding the Transactions including an Intercompany Services Agreement pursuantAero JV, of $1,319 million, $1,446 million and $1,498 million during the years ended December 31, 2021, 2020 and 2019, respectively. In addition, we sold products and services to which GE and its affiliates for $191 million, $216 million and $337 million during the Company will provide certain services to each other. GE will provide certain administrative services, GE proprietary technology and use of certain GE trademarks in consideration for a payment of $55 million per year. GE may also provide us with certain additional administrative services under the Intercompany Services Agreement, not included as consideration for the $55 million per year payment, and the fees for such services are based on actual usage of such services and historical GE intercompany pricing. In addition, we will provide GE and its affiliates with confidential access to certain of our proprietary technology and related developments and enhancements thereto related to GE's operations, products or service offerings. We recognized a cost of $28 million for the yearyears ended December 31, 20172021, 2020 and 2019, respectively.
The Company has $278 million and $356 million of accounts payable and $481 million and $429 million of current receivables at December 31, 2021 and 2020, respectively, for goods and services provided by, or to, GE in the ordinary course of business, and its affiliates subsequentincludes amounts owed to, or from, GE for certain tax matters indemnified pursuant to the close ofTax Matters Agreement. Additionally, the Transactions.
Prior to the Transactions, GE and its affiliates provided a variety of services and funding to us. The cost of these services was either (a) recognized through our allocated portion of GE's corporate overhead; or (b) billed directly to us. Costs of $103 million, $210Company has $67 million and $180$78 million for the year endedof current receivables at December 31, 2017, 20162021 and 2015,2020, respectively, were recorded in our consolidated and combined statement of income (loss) in respect of services provided by GE and its affiliates prior to the close of the Transactions.from Baker Hughes.
We sold $639 million, $374 million and $329 million of products and services to varioushad a promissory note with GE and its affiliates during the year ended December 31, 2017, 2016 and 2015, respectively. Purchases from GE and its affiliates were
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Notes to Consolidated and Combined Financial Statements
$1,512 million, $978 million and $1,225 million during the year ended December 31, 2017, 2016 and 2015, respectively.
EMPLOYEE BENEFITS
Certain of our employees are covered under various GE sponsored employee benefit plans, including GE's retirement plans (pension, retiree health and life insurance, and savings benefit plans) and active health and life insurance benefit plans. Further details are provided in "Note 9. Employee Benefit Plans."
RELATED PARTY BALANCES
In connection with the Transactions, as of July 3, 2017,that represented certain cash that we were required to repay any cash in excess of $100 million, net of any third-party debt in GE O&G, to GE. Dueholding on GE's behalf due to the restricted nature of the majority of this excess cash, we continue to hold this cash on behalf of GE until such cash is unrestricted and available for repayment to GE. The restriction arises as the majority of the cash cannot be released, transferred or otherwise converted into a non-restricted market currency due to the lack of market liquidity, capital controls or similar monetary or exchange limitations by a Government entity of the jurisdiction in which such cash is situated. Accordingly, on July 3, 2017, we executed a promissory note with GE. There is no maturity date oncash. During 2021, the promissory note but we remain obligated to repay GE such excess cash together with any income or loss we may incur on it, therefore, this obligation is reflected as short-term borrowings.was repaid in full. As of December 31, 2017,2020, of the amount$45 million due to GE, of $1,124 million, $997$44 million was held in the form of cash and $127$1 million was held in the form of investment securities. A corresponding liability iswas reported in short-term borrowingsdebt in the consolidated and combined statements of financial position.
RECEIVABLES MONETIZATION
We monetized a portion of our current receivables through programs established for GE and various GE subsidiaries. During the three months ended December 31, 2017, we ceased to participate in the GE receivables monetization program.
Under the receivable monetization program, we factored U.S. and non-U.S. receivables to GE Capital on a recourse and nonrecourse basis pursuant to various factoring and services agreements, purchased directly by Working Capital Solutions (WCS), an operating unit of GE Capital or sold to external investors through WCS agent arranger or buy/sell structures. Under the factoring programs, GE Capital performed a risk analysis and allocated a nonrecourse credit limit for each customer. If the portfolio exceeded this credit limit, then the receivable was factored with recourse. The evaluation of whether recourse transactions qualify for accounting derecognition is based, in part, upon the legal jurisdiction of the sales, as such, the majority of recourse transactions outside the U.S. qualify for sale treatment. The Company has $116 million and $198 million at December 31, 2017 and December 31, 2016, respectively, of accounts payable to GE that relate to cash collected on current receivables under this monetization program. In addition, prior to the Transactions, we participated in the GE Accounts Receivable (GEAR) program, in which we transferred our receivables into a securitization structure administered by GE Capital through the GE Receivables and Sale Contribution Agreement.
The outstanding balances of receivables that were transferred to GE under WCS administered programs and are accounted for as sales were $225 million and $2,168 million as of December 31, 2017 and 2016, respectively.
Under the programs, we retain the responsibility for servicing the receivables and remitting collections to the owner and the lenders for a fee equal to the prevailing market rate for such services. We have outsourced our servicing responsibilities to GE Capital for a market-based fee and accordingly, no servicing asset or liability has been recorded on the consolidated and combined statements of financial position as of December 31, 2017 and December 31, 2016. Under the programs, we incurred interest expense and finance charges of $59 million, $91 million and $93 million for the years ended December 31, 2017, 2016 and 2015, respectively, which is reflected in the consolidated and combined statements of income (loss).
TRADE PAYABLES ACCELERATED PAYMENT PROGRAM
Our North American operations participate in accounts payable programs with GE Capital. Invoices are settled with vendors per our payment terms to obtain cash discounts. GE Capital provides funding for invoices eligible for a
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 8878
Baker Hughes a GE company,Holdings LLC
Notes to Consolidated and Combined Financial Statements
cash discount. Our liability associated with the funded participation in the accounts payable programs, which is presented as accounts payable within the consolidated and combined statements of financial position, was $293 million and $104 million as of December 31, 2017 and December 31, 2016, respectively.
PARENT'S NET INVESTMENT
At December 31, 2016, the remainder of GE's total investment, in excess of our debt from GE, is reflected as equity under the caption "Parent's net investment" in our consolidated and combined statements of financial position. At December 31, 2017, GE's equity ownership is reflected in noncontrolling interest in our consolidated and combined statements of financial position.
OTHERRELATED PARTY TRANSACTIONS WITH C3 AI
The Company has $575 millionagreements with C3 AI under which, among other things, we received a subscription (which we refer to below as "direct subscription fees") to use certain C3 AI offerings for internal use and $228 millionthe development of accounts payable at December 31, 2017 and 2016, respectively, for services provided by GEapplications on the C3 AI Suite, as well as the right to resell C3 AI offerings worldwide on an exclusive basis in the ordinary course of business.oil and gas market and, with C3 AI's prior consent, non-exclusively in other markets, in each case subject to certain exceptions and conditions. The Company has $801 million and $392 millionC3 AI revised these agreements in October 2021. As part of current receivables at December 31, 2017 and 2016, respectively, for services provided to GE in the ordinary course of business. Additionally,these revisions, the Company has $113and C3 AI agreed to extend the term by an additional year with an expiration date of April 30, 2025, and to modify the amount of the Company's revenue commitments to $85 million of current receivables at December 31, 2017 from BHGE.
Prior toin 2023, $110 million in 2024, and $125 million in 2025, which includes the Transactions, GE provided guarantees, letters of credit, and other support arrangements on our behalf. We provide guarantees to GE Capital on behalf of some customers who have entered into financing arrangements with GE Capital.
Prior to the Transactions, a certain number of our employees were granted GE stock options and RSUs under GE's 2007 Long-Term Incentive Plan. Our consolidated and combined financial statements include compensation expense related to these awards for the portion of an employee's vesting period that accrued during employment with us.
INCOME TAXES
At closing, BHGE, GE and BHGE LLC entered into a Tax Matters Agreement. The Tax Matters Agreement governs the administration and allocation between the parties of tax liabilities and benefits arising prior to, as a result of, and subsequent to the Transactions, including certain restructuring transactions in connection therewith, and the respective rights, responsibilities and obligations of GE and BHGE, with respect to various other tax matters. GECompany's direct subscription fees. These annual commitments will be responsiblereduced by any revenue that we generate from certain customers. We have exceeded the annual minimum revenue commitments for certain taxes related to the formationeach of the transaction undertaken by GE and Baker Hughes and their respective subsidiaries. GE has assumed approximately $33 million of tax obligationsC3 AI's fiscal years through 2022. Lorenzo Simonelli, Chief Executive Officer of Baker Hughes, related to the formationserved as a member of the transaction.board of directors of C3 AI until December 17, 2021. See “Note 14. Financial Instruments” for further discussion of our investment in C3 AI.
Following the closing of the Transactions, BHGE or BHGE LLC (or their respective subsidiaries) may be included in group tax returns with GE. To the extent included in such group tax returns, (i) GE will be required to pay BHGE or BHGE LLC to the extent such separate tax returns include net operating losses that are used to reduce taxes payable by GE with respect to the applicable group tax return, and (ii) BHGE or BHGE LLC will be required to make tax sharing payments to GE in an amount intended to approximate the amount that such entity would have paid if it had not been included in such group tax returns and had filed separate tax returns.
The Tax Matters Agreement also provides for the sharing of certain tax benefits (i) arising from the Transactions, including restructuring transactions, and (ii) resulting from allocations of tax items by BHGE LLC. GE is entitled to 100% of these tax benefits to the extent that GE has borne certain taxes related to the formation of the transaction which are currently estimated to be $33 million. Thereafter, these tax benefits will be shared by GE and BHGE in accordance with their economic ownership of BHGE LLC, which will initially be approximately 62.5% and approximately 37.5%, respectively. The sharing of tax benefits generally is expected to result in cash payments by BHGE LLC to its members. Any such cash payments may be subject to adjustment based on certain subsequent events, including tax audits or other determinations as to the availability of the tax benefits with respect to which such cash payments were previously made.
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NOTE 15.17. COMMITMENTS AND CONTINGENCIES
LEASES
At December 31, 2017, we had long-term non-cancelable operating leases covering certain facilities and equipment. The minimum annual rental commitments, net of amounts due under subleases, for each of the five years in the period ending December 31, 2021 are $156 million, $119 million, $95 million, $76 million and $54 million, respectively, and $188 million in the aggregate thereafter. Rent expense was $360 million, $200 million and $206 million for the years ended December 31, 2017, 2016 and 2015, respectively. We did not enter into any significant capital leases during the three years ended December 31, 2017.
LITIGATION
We are subject to a number of lawsuits and claimslegal proceedings arising out ofin the conductordinary course of our business. The abilityBecause legal proceedings are inherently uncertain, we are unable to predict the ultimate outcome of such matters involves judgments, estimates and inherent uncertainties.matters. We record a liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, including accruals for self-insured losses which are calculated based on historical claim data, specific loss development factors and other information.
A range of total possible losses for all litigation matters cannot be reasonably estimated. Based on a considerationthe opinion of all relevant facts and circumstances,management, we do not expect the ultimate outcome of currently pending lawsuits or claims against us, other than those discussed below, willlegal proceedings to have a material adverse effect on our financial position, results of operations, financial position or cash flows, however,flows. However, there can be no assurance as to the ultimate outcome of these matters.
With respect to the litigation matters below, if there was an adverse outcome individually or collectively, there could be a material impact on our business, financial condition and results of operations expected for the year. These litigation matters are subject to inherent uncertainties and management's view of these matters may change in the future. Therefore, there can be no assurance as to the ultimate outcome of these matters.
During 2014, we received notification from a customer related to a possible equipment failure in a natural gas storage system in Northern Germany, which includes certain of our products. We are currently investigating the cause of the possible failure and, if necessary, possible repair and replacement options for our products. Similar products were utilized in other natural gas storage systems for this and other customers. The customer initiated arbitral proceedings against us on June 19, 2015, under the rules of the German Institute of Arbitration e.V. (DIS). On August 3, 2016, the customer amended its claims and now alleges damages of approximately $224 million plus interest at an annual rate of prime + 5%. Hearings before the arbitration panel were held January 16, 2017 through January 23, 2017, and March 20, 2017 through March 21, 2017. In addition, on September 21, 2015, TRIUVA Kapitalverwaltungsgesellschaft mbH filed a lawsuit in the United States District Court for the Southern District of Texas, Houston Division against the Company and Baker Hughes Oilfield Operations, Inc. alleging that the plaintiff is the owner of gas storage caverns in Etzel, Germany in which the Company provided certain equipment in connection with the development of the gas storage caverns. The plaintiff further alleges that the Company supplied equipment that was either defectively designed or failed to warn of risks that the equipment posed, and that these alleged defects caused damage to the plaintiff's property. The plaintiff seeks recovery of alleged compensatory and punitive damages of an unspecified amount, in addition to reasonable attorneys' fees, court costs and pre-judgment and post-judgment interest. The allegations in this lawsuit are related to the claims made in the June 19, 2015 German arbitration referenced above. At this time, we are not able to predict the outcome of these claims.
On April 30, 2015, a class and collective action lawsuit alleging that we failed to pay a nationwide class of workers overtime in compliance with the Fair Labor Standards Act and North Dakota law was filed titled Williams et al. v. Baker Hughes Oilfield Operations, Inc. in the U.S. District Court for the District of North Dakota. On February 8, 2016, the Court conditionally certified certain subclasses of employees for collective action treatment. The parties entered into a settlement agreement which was approved by the Court on December 7, 2017. The amount of the settlement will not have a material impact on the financial results reported by the Company.
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On July 31, 2015, Rapid Completions LLC filed a lawsuit in federal court in the Eastern District of Texas against Baker Hughes Incorporated, Baker Hughes Oilfield Operations, Inc., and others claiming infringement of U.S. Patent Nos. 6,907,936; 7,134,505; 7,543,634; 7,861,774; and 8,657,009. On August 6, 2015, Rapid Completions amended its complaint to allege infringement of U.S. Patent No. 9,074,451. On September 17, 2015, Rapid Completions and Packers Plus Energy Services Inc. sued Baker Hughes Canada Company in the Canada Federal Court on the related Canadian patent 2,412,072. On April 1, 2016, Rapid Completions removed U.S. Patent No. 6,907,936 from its claims in the lawsuit. On April 5, 2016, Rapid Completions filed a second lawsuit in federal court in the Eastern District of Texas against Baker Hughes Incorporated, Baker Hughes Oilfield Operations, Inc. and others claiming infringement of U.S. Patent No. 9,303,501. These patents relate primarily to certain specific downhole completions equipment. The plaintiff has requested a permanent injunction against further alleged infringement, damages in an unspecified amount, supplemental and enhanced damages, and additional relief such as attorney's fees and costs. During August and September 2016, the United States Patent and Trademark Office (USPTO) agreed to institute an inter-partes review of U.S. Patent Nos 7,861,774; 7,134,505; 7,534,634; 6,907,936; 8,657,009; and 9,074,451. On August 29, 2017, the USPTO issued its final written decisions in the inter-partes reviews of U.S. Patent Nos. 8,657,009 and 9,074,451 finding that all claims of those patents were unpatentable. On August 31, 2017, the USPTO issued its final written decision in the inter-partes review of U.S. Patent 6,907,936 - the patent dropped from the lawsuit by the plaintiffs - finding that all claims of this patent were patentable. On October 27, 2017, Rapid Completions filed its notices of appeal of the USPTO’s final written decision in the inter-partes review of U.S. Patent Nos. 8,657,009 and 9,074,451. Trial on the validity of asserted claims from Canada patent 2,412,072, was completed March 9, 2017. On December 7, 2017, the Canadian Court issued its judgment finding the patent claims asserted from Canada patent 2,412,072 against Baker Hughes Canada Company were invalid. On January 5, 2018, Rapid Completions filed its Notice of Appeal of the Canadian Court’s judgment of invalidity. At this time, we are not able to predict the outcome of these claims.
On May 10, 2017, a putative class action complaint was filed on behalf of purported Baker Hughes stockholders in the U.S. District Court for the Southern District of Texas challenging the Transaction Agreement and Plan of Merger combining Baker Hughes with GE O&G. The complaint is captioned Booth Family Trust v. Baker Hughes Inc., et al., Civil Action No. 4:17-cv-01457 (S.D. Tex. 2017). The complaint asserted, among other things, claims under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act) against Baker Hughes and the members of its board of directors and challenged the adequacy of the disclosures made in the combined proxy statement/prospectus dated as of May 9, 2017. In addition to certain unspecified damages and reimbursement of costs, the plaintiff sought to enjoin the consummation of the Transactions. On June 21, 2017, the parties reached an agreement in principle to settle the Booth Family Trust litigation in exchange for the Company making certain additional disclosures. Those disclosures were contained in an 8-K filed with the SEC on June 22, 2017. On September 14, 2017, the parties filed a Stipulation of Dismissal with the Court dismissing all remaining claims of the Booth Family Trust with prejudice. The parties agreed to an award of attorney’s fees in an amount that will not have a material impact on the financial results reported by the Company.
Following consummation of the Transactions, two purported holders of shares of Baker Hughes common stock, representing a total of 1,875,000 shares of common stock of Baker Hughes, filed petitions in the Court of Chancery of the State of Delaware seeking appraisal for their shares pursuant to Section 262 of the Delaware General Corporation Law. The action is captioned as follows: GKC Strategic Value Master Fund, LP F/K/A GKC Appraisal Rights Master Fund, LP and Walleye Trading LLC v. Baker Hughes Incorporated, Case No. 2017-0769. At this time, we are not able to predict the outcome of this action.
On February 17, 2017, GE Infrastructure Sensing, Inc. (now known as GE Infrastructure Sensing, LLC) (GEIS), a subsidiary of the Company, was served with a lawsuit filed in the Eastern District of New York by a company named Saniteq LLC claiming compensatory damages totalling $500 million plus punitive damages of an unspecified amount. The complaint is captioned Saniteq LLC v. GE Infrastructure Sensing, Inc., No. 17-cv-771 (E.D.N.Y 2017). The complaint generally alleges that GEIS breached a contract being negotiated between the parties and misappropriated unspecified trade secrets. At this time, we are not able to predict the outcome of these claims.
In January 2013, INEOS and Naphtachimie initiated expertise proceedings in Aix-en-Provence, France arising out of a fire at a chemical plant owned by INEOS in Lavera, France, which resulted in a 15-day plant shutdown and destruction of a steam turbine, which was part of a compressor train owned by Naphtachimie. INEOS and Naphtachimie claim approximately €195 million in losses as a resultThe most recent quantification of the incident. Twoalleged damages is €250 million. NaN of the Company's
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subsidiaries (and 17 other companies) were notified to participate in the proceedings. The proceedings are ongoing, and at this time, there is no indication that the Company's subsidiaries were involved in the incident. Although the outcome of the claims remains uncertain, our insurer has accepted coverage and is defending the Company in the expertise proceeding.
On July 31, 2018, International Engineering & Construction S.A. ("IEC") initiated arbitration proceedings in New York administered by the International Center for Dispute Resolution ("ICDR") against the Company and its subsidiaries arising out of a series of sales and service contracts entered between IEC and the Company’s subsidiaries for the sale and installation of LNG plants and related power generation equipment in Nigeria ("Contracts"). Prior to the filing of the IEC Arbitration, the Company’s subsidiaries made demands for payment due under the Contracts. On August 15, 2018, the Company’s subsidiaries initiated a separate demand for ICDR arbitration against IEC for claims of additional costs and amounts due under the Contracts. On October 10, 2018, IEC filed a Petition to Compel Arbitration in the United States District Court for the Southern District of New York against the Company seeking to compel non-signatory Baker Hughes entities to participate in the arbitration filed by IEC. The complaint is captioned International Engineering & Construction S.A. et al. v. Baker Hughes, a GE company, LLC, et al. No. 18-cv-09241 ("S.D.N.Y 2018"); this action was dismissed by the Court on August 13, 2019. In the arbitration, IEC alleges breach of contract and other claims against the Company and its subsidiaries and seeks recovery of alleged compensatory damages, in addition to reasonable attorneys' fees, expenses and arbitration costs. On March 15, 2019, IEC amended its request for arbitration to alleged damages of $591 million of lost profits plus unspecified additional costs based on alleged non-performance of the contracts in dispute. The arbitration hearing was held from December 9, 2019 to December 20, 2019. On March 3, 2020, IEC amended their damages claim to $700 million of alleged loss cash flow or, in the alternative, $244.9 million of lost profits and various costs based on alleged non-performance of the contracts in dispute, and in addition $4.8 million of liquidated damages, $58.6 million in take-or-pay costs of feed gas, and unspecified additional costs of rectification and take-or-pay future obligations, plus unspecified interest and attorneys' fees. On May 3, 2020, the arbitration panel dismissed IEC's request for take-or-pay damages. On May 29, 2020, IEC quantified their claim for legal fees at $14.2 million and reduced their alternative claim from $244.9 million to approximately $235 million. The
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Company and its subsidiaries have contested IEC’s claims and are pursuing claims for compensation under the contracts. On October 31, 2020, the ICDR notified the arbitration panel’s final award, which dismissed the majority of IEC’s claims and awarded a portion of the Company’s claims. On January 27, 2021, IEC filed a petition to vacate the arbitral award in the Supreme Court of New York, County of New York. On March 5, 2021, the Company filed a petition to confirm the arbitral award, and on March 8, 2021, the Company removed the matter to the United States District Court for the Southern District of New York. On November 16, 2021, the court granted the Company's petition to confirm the award and denied IEC's petition to vacate. On February 3, 2022, IEC initiated another arbitration proceeding in New York administered by the ICDR against certain of the Company’s subsidiaries arising out of the same project which formed the basis of the first arbitration. At this time, we are not able to predict the outcome of this proceeding.
On March 15, 2019 and March 18, 2019, the City of Riviera Beach Pension Fund and Richard Schippnick, respectively, filed in the Delaware Court of Chancery shareholder derivative lawsuits for and on Baker Hughes' behalf against GE, the then-current members of the Board of Directors of Baker Hughes and Baker Hughes as a nominal defendant, related to the decision to (i) terminate the contractual prohibition barring GE from selling any of Baker Hughes' shares before July 3, 2019; (ii) repurchase $1.5 billion in Baker Hughes' stock from GE; (iii) permit GE to sell approximately $2.5 billion in Baker Hughes' stock through a secondary offering; and (iv) enter into a series of other agreements and amendments that will govern the ongoing relationship between Baker Hughes and GE (collectively, the “2018 Transactions”). The complaints in both lawsuits allege, among other things, that GE, as Baker Hughes' controlling stockholder, and the members of Baker Hughes' Board of Directors breached their fiduciary duties by entering into the 2018 Transactions. The relief sought in the complaints includes a request for a declaration that the defendants breached their fiduciary duties, that GE was unjustly enriched, disgorgement of profits, an award of damages sustained by the Company, pre- and post-judgment interest, and attorneys’ fees and costs. On March 21, 2019, the Chancery Court entered an order consolidating the Schippnick and City of Riviera Beach complaints under consolidated C.A. No. 2019-0201-AGB, styled in re Baker Hughes, a GE company derivative litigation. On May 10, 2019, Plaintiffs voluntarily dismissed their claims against the members of Baker Hughes' Conflicts Committee, and on May 15, 2019, Plaintiffs voluntarily dismissed their claims against former Baker Hughes director Martin Craighead. On June 7, 2019, the defendants and nominal defendant filed a motion to dismiss the lawsuit on the ground that the derivative plaintiffs failed to make a demand on Baker Hughes' Board of Directors to pursue the claims itself, and GE and Baker Hughes' Board of Directors filed a motion to dismiss the lawsuit on the ground that the complaint failed to state a claim on which relief can be granted. The Chancery Court denied the motions on October 8, 2019, except granted GE’s motion to dismiss the unjust enrichment claim against it. On October 31, 2019, Baker Hughes' Board of Directors designated a Special Litigation Committee and empowered it with full authority to investigate and evaluate the allegations and issues raised in the derivative litigation. The Special Litigation Committee filed a motion to stay the derivative litigation during its investigation. On December 3, 2019, the Chancery Court granted the motion and stayed the derivative litigation until June 1, 2020. On May 20, 2020, the Chancery Court granted an extension of the stay to October 1, 2020, and on September 29, 2020, the Court granted a further extension of the stay to October 15, 2020. On October 13, 2020, the Special Litigation Committee filed its report with the Court. At this time, we are not able to predict the outcome of these claims.
On August 13, 2019, Tri-State Joint Fund filed in the Delaware Court of Chancery, a shareholder class action lawsuit for and on the behalf of itself and all similarly situated public stockholders of Baker Hughes Incorporated ("BHI") against the General Electric Company ("GE"), the former members of the Board of Directors of BHI, and certain former BHI Officers alleging breaches of fiduciary duty, aiding and abetting, and other claims in connection with the combination of BHI and the oil and gas business ("GE O&G") of GE ("the Transactions"). On October 28, 2019, City of Providence filed in the Delaware Court of Chancery a shareholder class action lawsuit for and on behalf of itself and all similarly situated public shareholders of BHI against GE, the former members of the Board of Directors of BHI, and certain former BHI Officers alleging substantially the same claims in connection with the Transactions. The relief sought in these complaints include a request for a declaration that Defendants breached their fiduciary duties, an award of damages, pre- and post-judgment interest, and attorneys’ fees and costs. The lawsuits have been consolidated, and plaintiffs filed a consolidated class action complaint on December 17, 2019 against certain former BHI officers alleging breaches of fiduciary duty and against GE for aiding and abetting those breaches. The December 2019 complaint omitted the former members of the Board of Directors of BHI, except for Mr. Craighead who also served as President and CEO of BHI. Mr. Craighead and Ms. Ross, who served as Senior Vice President and Chief Financial Officer of BHI, remain named in the December 2019 complaint along with GE.
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The relief sought in the consolidated complaint includes a declaration that the former BHI officers breached their fiduciary duties and that GE aided and abetted those breaches, an award of damages, pre- and post-judgment interest, and attorneys’ fees and costs. On or around February 12, 2020, the defendants filed motions to dismiss the lawsuit on the grounds that the complaint failed to state a claim on which relief could be granted. On or around October 27, 2020, the Chancery Court granted GE’s motion to dismiss, and granted in part the motion to dismiss filed by Mr. Craighead and Ms. Ross, thereby dismissing all of the claims against GE and Ms. Ross, and all but one of the claims against Mr. Craighead. At this time, we are not able to predict the outcome of the remaining claim.
On December 11, 2019, BMC Software, Inc. (“BMC”) filed a lawsuit in federal court in the Southern District of Texas against Baker Hughes, a GE company, LLC alleging trademark infringement, unfair competition, and unjust enrichment, arising out of the Company’s use of its new logo and affiliated branding. On January 1, 2020, BMC amended its complaint to add Baker Hughes Company. The relief sought in the complaint includes a request for injunctive relief, an award of damages (including punitive damages), pre- and post-judgment interest, and attorneys’ fees and costs. At this time, we are not able to predict the outcome of these claims.
In late November 2017, staff of the Boston office ofDecember 2020, Baker Hughes received notice that the SEC notified GEis conducting a formal investigation that they are conducting an investigation of GE’s revenue recognition practicesBaker Hughes understands is related to its books and records and internal controls over financial reportingregarding sales of its products and services in projects impacted by U.S. sanctions. Baker Hughes is cooperating with the SEC and providing requested information. Baker Hughes has also initiated an internal review with the assistance of external legal counsel regarding internal controls and compliance related to long-term service agreements. The scopeU.S. sanctions requirements. While Baker Hughes' review remains ongoing, in September 2021, Baker Hughes voluntarily informed the Office of Foreign Assets Control ("OFAC") that non-U.S. Baker Hughes affiliates in two foreign countries appear to have received payments, involving U.S. touchpoints, that are subject to debt restrictions pursuant to applicable U.S. sanctions laws. Although the value of the SEC’s requestpayments in connection with the identified transactions is immaterial, Baker Hughes is unable to determine at this time if any remedial or other actions may include some BHGE contracts, mainly in our TPS business. We havebe taken by OFAC. Baker Hughes provided documents to GE and are cooperating with them in their responsea copy of the letter to the SEC.
The CompanySEC, and, as the SEC investigation is reportingongoing, Baker Hughes cannot anticipate the following matter in compliance with SEC requirements to disclose environmental proceedings wheretiming, outcome or possible impact of the government is a party and that potentially involve monetary sanctions of $100,000investigation or greater. In January 2018, Kern County California issued an administrative enforcement order with a proposed penalty of $130,000 for alleged violations of process safety management regulations at a manufacturing facility in Taft, California that is indirectly owned by the Company.review, financial or otherwise.
We insure against risks arising from our business to the extent deemed prudent by our management and to the extent insurance is available, but no assurance can be given that the nature and amount of that insurance will be sufficient to fully indemnify us against liabilities arising out of pending or future legal proceedings or other claims. Most of our insurance policies contain deductibles or self-insured retentions in amounts we deem prudent and for which we are responsible for payment. In determining the amount of self-insurance, it is our policy to self-insure those losses that are predictable, measurable and recurring in nature, such as claims for automobile liability, general liability and workers compensation.
ENVIRONMENTAL MATTERS
Item 103 of SEC Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings and such proceedings involve potential monetary sanctions that the Company reasonably believes will exceed a specified threshold. The Company uses a threshold of $1 million for such proceedings. Applying this threshold, there are no environmental matters to disclose for this period.
Estimated remediation costs are accrued using currently available facts, existing environmental permits, technology and enacted laws and regulations. Our cost estimates are developed based on internal evaluations and are not discounted. Accruals are recorded when it is probable that we will be obligated to pay for environmental site evaluation, remediation or related activities, and such costs can be reasonably estimated. As additional information becomes available, accruals are adjusted to reflect current cost estimates. Ongoing environmental compliance costs, such as obtaining or renewing environmental permits, installation of pollution control equipment and waste disposal are expensed as incurred. Where we have been identified as a potentially responsible party in a U.S. federal or state Comprehensive Environmental Response, Compensation and Liability Act (“Superfund”("Superfund") site, we accrue our share, if known, of the estimated remediation costs of the site. This share is based on the ratio of the estimated volume of waste we contributed to the site to the total volume of waste disposed at the site.
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Notes to Consolidated Financial Statements
OTHER
In the normal course of business with customers, vendors and others, we have entered into off-balance sheet arrangements, such as surety bonds for performance, letters of credit and other bank issued guarantees. We also provide guarantees which totaledto GE Capital on behalf of a customer who has entered into financing arrangements with GE Capital. Total off-balance sheet arrangements were approximately $3.4$4.5 billion at December 31, 2017.2021. It is not practicable to estimate the fair value of these financial instruments. None of the off-balance sheet arrangements either has, or is likely to have, a material effect on our financial position, results of operations or cash flows. We also had commitments outstanding for purchase obligations for each of the five years in the period ending December 31, 20222026 of $962$1,304 million, $45$119 million, $42$127 million, $36$46 million and $23$40 million, respectively, and $13$65 million in the aggregate thereafter.
We sometimes enter into consortium or similar arrangements for certain projects primarily in our Oilfield Equipment segment. Under such arrangements, each party is responsible for performing a certain scope of work within the total scope of the contracted work, and the obligations expire when all contractual obligations are completed. The failure or inability, financially or otherwise, of any of the parties to perform their obligations could impose additional costs and obligations on us. These factors could result in unanticipated costs to complete the project, liquidated damages or contract disputes. NOTE 16.18. RESTRUCTURING, IMPAIRMENT AND OTHER
WeIn 2021, we recorded restructuring, impairment and other charges totaling $209 million. Charges incurred are primarily related to the continuation of our overall strategy to restructure our business, which is designed to optimize our structural costs for the year-over-year change in activity levels and market conditions.
In 2020, in response to the impact on our business from the COVID-19 pandemic and the significant decline in oil and gas prices, we recorded restructuring, impairment and other charges totaling $1,866 million, and inventory impairments of $246 million, see "Note 4. Inventories" for further discussion. Charges incurred are primarily related to rationalizing certain product lines and restructuring our business to right-size our operations and to address the challenging market conditions in the upstream oil and gas market.
In 2019, we recorded restructuring, impairment and other charges of $412 million, $516 million, and $411 million during$342 million. Charges incurred are primarily related to the years ended December 31, 2017, 2016 and 2015, respectively. Detailsconsolidation of these charges are discussed below.
RESTRUCTURING AND IMPAIRMENT CHARGES
In the current and prior periods, we approved various restructuring plans globally, mainly to consolidatecertain manufacturing and service facilities rationalize product lines and rooftops, and reducereduction in headcount across
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various functions. As a result, we recognized a charge of $385 million, $293 million and $314 million for the years ended December 31, 2017, 2016 and 2015, respectively. These restructuring initiatives will generate charges post 2017, and the related estimated remaining charges are approximately $150 million.
These charges are included as part of "Restructuring, impairment and other" in the consolidated and combined statements of income (loss).RESTRUCTURING AND IMPAIRMENT
The amount of costsfollowing table presents the restructuring and impairment charges by the impacted segment, however, these charges are not included in the reported segment results is as follows:results.
| | | | | | | | | | | |
| 2021 | 2020 | 2019 |
| Oilfield Services | $ | 121 | | $ | 675 | | $ | 211 | |
| Oilfield Equipment | — | | 125 | | 18 | |
| Turbomachinery & Process Solutions | 9 | | 35 | | 48 | |
| Digital Solutions | 2 | | 54 | | 15 | |
| Corporate | 6 | | 14 | | 22 | |
| Total | $ | 138 | | $ | 903 | | $ | 314 | |
|
| | | | | | | | | |
| | 2017 | 2016 | 2015 |
| Oilfield Services | $ | 187 |
| $ | 122 |
| $ | 183 |
|
| Oilfield Equipment | 114 |
| 52 |
| 32 |
|
| Turbomachinery & Process Solutions | 21 |
| 58 |
| 54 |
|
| Digital Solutions | 34 |
| 34 |
| 26 |
|
| Corporate | 29 |
| 27 |
| 19 |
|
| Total | $ | 385 |
| $ | 293 |
| $ | 314 |
|
These costsRestructuring and impairment charges were primarily related to employee termination expenses from reducing our headcount in certain geographical locations, and product line terminations, plantrationalization, including facility closures and related expenses such as property, plant and equipment impairments, and contract terminations and costs of assets' and employees' relocation, employee-related termination benefits, and other incremental costs that were a direct result of the restructuring plans.fees. The table
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|
| | | | | | | | | |
| | 2017 | 2016 | 2015 |
| Property, plant & equipment, net | $ | 131 |
| $ | 93 |
| $ | 137 |
|
| Employee-related termination expenses | 186 |
| 111 |
| 103 |
|
| Asset relocation costs | 10 |
| 17 |
| 14 |
|
| EHS remediation costs | 9 |
| 20 |
| 17 |
|
| Contract termination fees | 26 |
| 37 |
| 26 |
|
| Other incremental costs | 23 |
| 15 |
| 17 |
|
| Total | $ | 385 |
| $ | 293 |
| $ | 314 |
|
| | | | | | | | | | | |
| 2021 | 2020 | 2019 |
| Property, plant and equipment | $ | 7 | | $ | 385 | | $ | 107 | |
| Employee-related termination expenses | 99 | | 464 | | 179 | |
| Asset relocation costs | 20 | | 15 | | 4 | |
| | | |
| Contract termination fees | 2 | | 23 | | 12 | |
| Other incremental costs | 10 | | 16 | | 12 | |
| Total | $ | 138 | | $ | 903 | | $ | 314 | |
OTHER CHARGES
Other charges included in "Restructuring, impairment and other" caption ofin the consolidated and combined statements of income (loss) was $27were $71 million, $223$963 million, and $97$28 million for the years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively. Other
In 2021, such charges includewere primarily related to certain litigation matters in our TPS segment and the release of foreign currency devaluationtranslation adjustments for certain restructured product lines in our DS segment.
In 2020, such charges were comprised of intangible asset impairments of $605 million driven by our decision to exit certain businesses primarily in our OFS segment, other long-lived asset impairments of $216 million ($124 million of intangible assets, $77 million of property, plant and equipment and $15 million of other assets) in our OFE segment, other charges of $12$73 million $138 million and $63 million for the years ended December 31, 2017, 2016 and 2015, respectively, largely driven by significantcertain litigation matters and the impairment of an equity method investment primarily in corporate and the OFE segment, and charges related to corporate facility rationalization.
In 2019, such charges primarily relate to currency devaluations in Angolaour OFS segment.
NOTE 19. BUSINESS DISPOSITIONS
We completed several product line dispositions over the past three years as described below. Any gain or loss on a business disposition is reported in the "Other non-operating income (loss), net" caption of the consolidated statements of income (loss).
•In October 2021, we closed a transaction with Akastor ASA to create a joint venture company ("JV Company") to deliver global offshore drilling solutions. We contributed our subsea drilling systems business, a division of our OFE segment, to the JV Company and Nigeria. These markets have minimal currency derivative liquidity which limitsreceived as consideration 50% of the shares of the JV Company, cash of $70 million, and a promissory note of $80 million. The transaction resulted in an immaterial gain. The Company's interest in the JV Company is accounted for as an equity method investment. Our ongoing operations in the JV Company are not integral to our abilityoperations and, therefore, our share of the income or loss from the JV will be reported as non-operating income (loss).
•In October 2020, we completed the sale of our surface pressure control flow business, a non-strategic product line in our OFE segment that provided surface wellhead and surface tree systems for the onshore market. The sale resulted in a loss before income taxes of $137 million.
•In June 2020, we completed the sale of our rod lift systems ("RLS") business. RLS was part of our OFS segment and provided rod lift products, technologies, services and solutions to offset these exposures.the oil and gas industry. The sale resulted in a loss before income taxes of $216 million.
•In July 2019, we completed the sale of our high-speed reciprocating compression ("Recip") business. Recip was part of our TPS segment and provided high-speed reciprocating compression equipment and aftermarket parts and services for oil and gas production, gas processing, gas distribution and independent power industries. The sale resulted in a loss before income taxes of $138 million. Baker Hughes Holdings LLC 2021 Form 10-K | 83
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Notes to Consolidated Financial Statements
NOTE 17.20. SUPPLEMENTARY INFORMATION
All Other Current LiabilitiesALL OTHER CURRENT LIABILITIES
All other current liabilities as of December 31, 20172021 and 20162020 include approximately $881$953 million and $318$907 million, respectively, of employee related liabilities.
ALLOWANCE FOR CREDIT LOSSES
The change in allowance for credit losses is as follows: | | | | | | | | |
| 2021 | 2020 |
| Balance at beginning of year | $ | 373 | | $ | 323 | |
| Provision | 72 | | 66 | |
| Write-offs & other | (45) | | (16) | |
| | |
| Balance at end of year | $ | 400 | | $ | 373 | |
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Notes to Consolidated and Combined Financial Statements
Product Warranties
We provide for estimated product warranty expenses when we sell the related products. Because warranty estimates are forecasts that are based on the best available information, primarily historical claims experience, claims costs may differ from amounts provided. An analysis of changes in the liability for product warrantiesSupplemental cash flow disclosures are as follows:follows for the years ended December 31:
| | | | | | | | | | | |
| 2021 | 2020 | 2019 |
| Income taxes paid, net of refunds | $ | 314 | | $ | 452 | | $ | 446 | |
| Interest paid | $ | 305 | | $ | 289 | | $ | 285 | |
|
| | | | | | |
| Balance at December 31, 2016, and 2015, respectively | $ | 74 |
| $ | 100 |
|
| Provisions | 37 |
| 29 |
|
| Expenditures | (44 | ) | (49 | ) |
Other (1) | 97 |
| (6 | ) |
| Balance at December 31, 2017, and 2016, respectively | $ | 164 |
| $ | 74 |
|
| |
(1)
| Includes an increase of $93 million in the year ended December 31, 2017 as a result of the Baker Hughes acquisition. |
NOTE 18. QUARTERLY DATA (UNAUDITED)
|
| | | | | | | | | | | | | | | |
| (In millions, except per unit amounts) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total Year |
| 2017 | | | | | |
| Revenue | $ | 3,111 |
| $ | 3,010 |
| $ | 5,375 |
| $ | 5,763 |
| $ | 17,259 |
|
Gross profit (1) | 775 |
| 542 |
| 1,020 |
| 875 |
| 3,213 |
|
Restructuring, impairment and other (2) | 42 |
| 59 |
| 191 |
| 119 |
| 412 |
|
| Merger and related costs | 66 |
| 85 |
| 159 |
| 63 |
| 373 |
|
| Net income (loss) attributable to BHGE LLC | 125 |
| (16 | ) | (277 | ) | (182 | ) | (350 | ) |
| Cash distribution per common unit | | | 0.17 |
| 0.18 |
| 0.35 |
|
| | | | | | |
| 2016 | | | | | |
| Revenue | $ | 3,407 |
| $ | 3,322 |
| $ | 3,024 |
| $ | 3,516 |
| $ | 13,269 |
|
Gross profit (1) | 798 |
| 785 |
| 730 |
| 833 |
| 3,146 |
|
Restructuring, impairment and other (2) | 147 |
| 228 |
| 77 |
| 64 |
| 516 |
|
| Merger and related costs | 5 |
| 3 |
| 2 |
| 23 |
| 33 |
|
| Net income attributable to BHGE LLC | 141 |
| 18 |
| 96 |
| 148 |
| 403 |
|
| |
(1)
| Represents revenue less cost of sales and cost of services. |
| |
(2)
| Restructuring, impairment and other costs associated with asset impairments, workforce reductions, facility closures and contract terminations recorded during 2017 and 2016. See "Note 16. Restructuring, Impairment and Other" for further discussion. |
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Change of Independent Registered Public Accounting FirmNone.
In connection with the consummation of the Transactions, on July 3, 2017, the Audit Committee approved the engagement of KPMG LLP (KPMG) as the Company's independent registered public accountants to audit the financial statements of the Company and its consolidated subsidiaries for the period beginning July 3, 2017 and ending on December 31, 2017, such engagement to be effective on July 28, 2017. Deloitte was the independent auditor that audited Baker Hughes' financial statements for the fiscal years ended December 31, 2016 and 2015 and the subsequent interim period from January 1, 2017 through July 3, 2017.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2017,2021, our disclosure controls and procedures (as defined in Rule 15d-15(e) of the Exchange Act) were effective at a reasonable assurance level.
There has been no change in our internal controls over financial reporting during the quarteryear ended December 31, 20172021 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
In a presentation at the Barclays Industrial Select Conference held February 21, 2018, GE Chief Financial Officer Jamie Miller, in a response to a question regarding BHGE and the scheme of GE’s divestment program, stated “at this point in time, we have no intent to change anything or execute prior to the expiration of any of the lockup periods.”None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 9584
PART III
Note: Item 10, "Directors, Executive Officers and Corporate Governance;" Item 11, "Executive Compensation;" Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters;" and Item 13, "Certain Relationships and Related Transactions, and Director Independence" have been omitted from this report pursuant to the reduced disclosure format permitted by General Instruction I to Form 10-K.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Not required.
ITEM 11. EXECUTIVE COMPENSATION
Not required.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Not required.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Not required.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
On July 3, 2017 Our independent registered public accounting firm is KPMG LLP, Houston, Texas, Auditor Firm ID: 185.
The Audit Committee of the Board of Directors of Baker Hughes ("the Audit Committee approved the engagement ofCommittee") appointed KPMG LLP as the Company’s independent registered public accountant to audit the financial statements of the Company and its consolidated subsidiaries for the period beginning July 3, 2017 andfiscal years ending on December 31, 2017, such engagement to be effective on July 28, 2017. Deloitte was the independent auditor that audited Baker Hughes Incorporated’s financial statements for the fiscal years ended December 31, 20162021 and 2015 and the subsequent interim period from January 1, 2017 through July 3, 2017. As a result of the consummation of the Transactions on July 3, 2017, which was treated as a “reverse acquisition” for accounting purposes, the historical financial statements of the accounting acquirer, GE O&G, became the historical financial statements of the Company for periods ending after July 3, 2017. KPMG S.p.A. was the independent auditing firm that audited GE O&G’s financial statements for the fiscal years ended December 31, 2016, 2015 and 2014. The Audit Committee subsequently determined to dismiss KPMG S.p.A. as the independent registered public accounting firm of GE O&G subsequent to the filing of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.2020.
Deloitte, KPMG LLP and KPMG S.p.A. severally billed or will bill the Company or its subsidiaries for the aggregate fees set forth in the respective tables below for services provided during fiscal years 20172021 and 2016.2020. These amounts include fees paid or to be paid by the Company for (i) professional services rendered for the audit of the Company’s annual financial statements, review of quarterly financial statements and audit services related to the effectiveness of the Company’s internal control over financial reporting, (ii) assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements and (iii) professional services rendered for tax compliance, tax advice, and tax planning.
BHGE LLC 2017 FORM 10-K | 96
The table below shows the aggregate fees paid or to be paid to Deloitte for professional services related to fiscal years 2017 and 2016:
|
| | | | | | |
| | 2017 | 2016 |
| Audit fees | $ | 7.2 |
| $ | 14.0 |
|
| Audit-related fees | | |
| Halliburton merger fees | — |
| 0.1 |
|
| All other audit-related fees | 0.1 |
| 0.2 |
|
| Tax fees | 0.1 |
| 0.3 |
|
| All other | 0.1 |
| 0.1 |
|
| Total | $ | 7.5 |
| $ | 14.7 |
|
The table below shows the aggregate fees paid or to be paid to KPMG LLP for professional services related to fiscal years 20172021 and 2016:2020:
|
| | | | | | |
| | 2017 | 2016 |
| Audit fees | $ | 31.8 |
| $ | — |
|
| Audit-related fees | 0.3 |
| — |
|
| Tax fees | 0.3 |
| 0.4 |
|
| All other | — |
| 0.2 |
|
| Total | $ | 32.4 |
| $ | 0.6 |
|
The table below shows the aggregate fees paid or to be paid to KPMG S.p.A. for professional services related to fiscal years 2017 and 2016:
| | | | 2017 | 2016 | | 2021 | 2020 |
| Audit fees | $ | 8.8 |
| $ | — |
| Audit fees | $ | 28.3 | | $ | 28.4 | |
| Audit-related fees | — |
| — |
| Audit-related fees | 0.5 | | 0.3 | |
| Tax fees | — |
| — |
| Tax fees | — | | — | |
| All other | — |
| — |
| All other | — | | — | |
| Total | $ | 8.8 |
| $ | — |
| Total | $ | 28.8 | | $ | 28.7 | |
Audit fees include fees related to the audit of the Company’s annual financial statements, including fees related to the statutory audit requirements of most of our subsidiaries in foreign countries, review of quarterly financial statements and audit services related to the effectiveness of the Company’s internal control over financial reporting.
Audit-related fees are primarily for audit services not directly related to the Company’s annual financial statements, for example audits related to possible divestitures or reorganization activities, assistance in connection with various registration statements and debt offerings, proxy statements and similar matters.
Tax fees are primarily for the preparation of income, payroll, value added and various other miscellaneous tax returns in certain countries where the Company operates. The Company also incurs local country tax advisory services in these countries. Examples of these kinds of services are assistance with audits by the local country tax
Baker Hughes Holdings LLC 2021 Form 10-K | 85
authorities, acquisition and disposition advice, consultation regarding changes in legislation or rulings and advice on the tax effect of other structuring and operational matters.
In addition to the above services and fees, Deloitte and KPMG LLP provide audit and other services to various Company-sponsored benefit plans which fees are incurred by and paid by the respective plans. Fees paid to Deloitte and KPMG LLP for these services totaled approximately $0.2 million and $0.0 million in 2017, respectively, and $0.4 million to Deloitte in 2016.
BHGE LLC 2017 FORM 10-K | 97
Pre-Approval Policies and Procedures
The Audit Committee has the sole authority and responsibility to select, evaluate, compensate and oversee the work of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company (including resolution of disagreements between management and the auditor regarding financial reporting). The independent auditor and each such registered public accounting firm reports directly to the Audit Committee. The Audit Committee also has the sole authority to approve all audit engagement fees and terms and the Audit Committee, or the chair of the Audit Committee, must pre-approve any audit and non-audit service provided to the Company by the Company’s independent auditor. All of the services and related fees described above under “audit fees,” “audit-related fees,” “tax fees” and “all other” were approved pursuant to Section 202 of the Sarbanes-Oxley Act and by the Audit Committee.
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 9886
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of Documents filed as part of this annual report.
(1) Financial Statements
All financial statements of the Company as set forth under Item 8 of this annual report on Form 10-K.
(2) Financial Statement Schedules
The schedules listed in Reg. 210.5-04 have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
(3) Exhibits
Each exhibit identified below is filed as a part of this annual report. Exhibits designated with an "*" are filed as an exhibit to this annual report on Form 10-K and exhibits designated with an "**" are furnished as an exhibit to this annual report on Form 10-K. Exhibits designated with a "+" are identified as management contracts or compensatory plans or arrangements. Exhibits previously filed as indicated below are incorporated by reference.
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Exhibit Number | Exhibit Description |
| Transaction Agreement and Plan of Merger, dated as of October 30, 2016, among General Electric Company, Baker Hughes Incorporated, Bear Newco, Inc. and Bear MergerSub, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report of Baker Hughes, a GE company, LLC on Form 8-K filed November 1, 2016). |
| Amendment, dated as of March 27, 2017, to the Transaction Agreement and Plan of Merger, dated as of October 30, 2016, among General Electric Company, Baker Hughes Incorporated, Bear Newco, Inc., Bear MergerSub, Inc., BHI Newco, Inc. and Bear MergerSub 2, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report of Baker Hughes, a GE company, LLC on Form 8-K filed March 31, 2017). |
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| Second Supplemental Indenture, dated July 3, 2017, to the Indenture dated as of October 28, 2008, among Baker Hughes a GE company,Holdings LLC, Baker Hughes Co-Obligor, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Current Report of Baker Hughes, a GE company, LLC on Form 8-K12B filed on July 3, 2017)trustee. |
| Third Supplemental Indenture, dated December 11, 2017, to the Indenture dated as of October 28, 2008, among Baker Hughes a GE company,Holdings LLC, Baker Hughes Co-Obligor, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee (including the forms of 2.773% senior notes due 2022, 3.337% senior notes due 2027 and 4.080% senior notes due 2047) (incorporated by reference to Exhibit 4.3 to the Current Report of Baker Hughes, a GE company, LLC on Form 8-K filed on December 12, 2017).trustee. |
| |
| First Supplemental IndentureNovember 7, 2019, to the Indenture dated as of May 15, 1994,October 28, 2008, among Baker Hughes a GE company,Holdings LLC, Baker Hughes Co-Obligor, Inc. and the Bank of New York Mellon Trust Company, N.A., as Trustee. |
| Fifth Supplemental Indenture, dated May 1, 2020 to the Indenture dated as of October 28, 2008, among Baker Hughes Holdings LLC, Baker Hughes Co-Obligor, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.4 to the Current Report of Baker Hughes, a GE company, LLC on Form 8-K12B filed on July 3, 2017).Trustee.
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BHGE LLC 2017 FORM 10-K | 99
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| Sixth Supplemental Indenture, dated December 9, 2021 to the Indenture dated as of June 8, 2006,October 28, 2008, among Baker Hughes a GE company,Holdings LLC, Baker Hughes Co-Obligor, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee. |
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| First Supplemental Indenture dated July 3, 2017, to the Indenture dated as of May 15, 1994, among Baker Hughes Oilfield Operations,Holdings LLC, Baker Hughes International Branches, LLCCo-Obligor, Inc. and Wells FargoThe Bank National Association,of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.3trustee. |
Baker Hughes Holdings LLC 2021 Form 10-K | 87
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| First Supplemental Indenture, dated as of July 3, 2017, to the Current ReportIndenture dated as of May 15, 1991, among Baker Hughes a GE company,Holdings LLC, on Form 8-K12B filed on July 3, 2017).Baker Hughes Co-Obligor, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee. |
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| Exchange Agreement, dated as of July 3, 2017, among General Electric Company, GE Oil & Gas US Holdings I, Inc., GE Oil & Gas US Holdings IV, Inc., GE Holdings (US), Inc., Baker Hughes a GE companyCompany and Baker Hughes a GE company, LLC (incorporated by reference to Exhibit 10.1 to the Current Report of Baker Hughes, a GE company, LLC on Form 8-K12B dated July 3, 2017).Holdings LLC. |
| Tax Matters Agreement, dated as of July 3, 2017, among General Electric Company, Baker Hughes a GE company,Company, EHHC Newco, LLC and Baker Hughes a GE company, LLC (incorporated by reference to Exhibit 10.2 to the Current Report of Baker Hughes, a GE company, LLC on Form 8-K12B dated July 3, 2017).Holdings LLC. |
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Baker Hughes Holdings LLC 2021 Form 10-K | 88
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| Amendment to the Amended and Restated Intercompany Services Agreement, dated as of July 3, 2017,31, 2019, between Baker Hughes Holdings LLC and General Electric Company and Baker Hughes, a GE company, LLC (incorporated by reference to Exhibit 10.8 to the Current Report of Baker Hughes, a GE company, LLC on Form 8-K12B dated July 3, 2017).Company. |
| Amended and Restated Supply Agreement, dated as of July 3, 2017,November 13, 2018, between General Electric Company, as Seller, and Baker Hughes a GE company,Holdings LLC, as Buyer (incorporated by reference to Exhibit 10.9 to the Current Report of Baker Hughes, a GE company, LLC on Form 8-K12B dated July 3, 2017). |
| Amended and Restated Supply Agreement, dated as of July 3, 2017,November 13, 2018, between Baker Hughes a GE company,Holdings LLC, as Seller, and General Electric Company, as Buyer (incorporated by reference to Exhibit 10.10 to the Current Report of Baker Hughes, a GE company, LLC on Form 8-K12B dated July 3, 2017). |
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| Credit Agreement, dated as of July 3, 2017,December 10, 2019, among Baker Hughes a GE company,Holdings LLC, the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, and the Lenders party thereto (incorporated by reference to Exhibit 10.11 to the Current Report of Baker Hughes, a GE company, LLC on Form 8-K12B dated July 3, 2017).Agent. |
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BHGE LLC 2017 FORM 10-K | 100
BHGE LLC 2017 FORM 10-K | 101
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101.INS* | |
| 101.INS* | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH* | XBRL Schema Document |
| 101.CAL* | XBRL Calculation Linkbase Document |
| 101.LAB* | XBRL Label Linkbase Document |
| 101.PRE* | XBRL Presentation Linkbase Document |
| 101.DEF* | XBRL Definition Linkbase Document |
BHGE LLC 2017ITEM 16. FORM 10-K SUMMARY
None.
Baker Hughes Holdings LLC 2021 Form 10-K | 10289
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| | | BAKER HUGHES HOLDINGS LLC |
| | | |
| Date: | February 11, 2022 | | BAKER HUGHES, A GE COMPANY, LLC |
| | | |
Date: | February 23, 2018 | | /s/ LORENZO SIMONELLI |
| | | Lorenzo Simonelli
Chairman, Baker Hughes a GE company
Company
President and Chief Executive Officer |
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Lorenzo Simonelli, Brian Worrell and William D. Marsh,Regina Jones, each of whom may act without joinder of the other, as their true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for such person and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 23rd11th day of February 2018.2022.
| | | | | | | | |
| Signature | | Title |
| | |
| /s/ LORENZO SIMONELLI | | Chairman, Baker Hughes Company
President and Chief Executive Officer |
| (Lorenzo Simonelli) | | (principal executive officer) |
| | |
/S/ BRIAN WORRELL | | Chief Financial Officer |
| (Brian Worrell) | | (principal financial officer) |
| | |
/S/ KURT CAMILLERI | | Senior Vice President, Controller and Chief Accounting Officer |
| (Kurt Camilleri) | | (principal accounting officer) |
Baker Hughes Holdings LLC 2021 Form 10-K | 90
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| Signature | | Title |
| | |
| /s/ W. GEOFFREY BEATTIE | | Director, Baker Hughes Company |
| (W. Geoffrey Beattie) | | |
| | |
Signature/s/ GREGORY D. BRENNEMAN | | TitleDirector, Baker Hughes Company |
| (Gregory D. Brenneman) | | |
| | |
/s/ LORENZO SIMONELLICYNTHIA B. CARROLL | | Chairman,Director, Baker Hughes a GE company
President and Chief Executive Officer
Company |
(Lorenzo Simonelli)Cynthia B. Carroll) | | (principal executive officer) |
| | |
/S/ BRIAN WORRELL s/ NELDA J. CONNORS | | Chief Financial Officer Director, Baker Hughes Company |
(Brian Worrell)Nelda J. Connors) | | (principal financial officer) |
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/S/ KURT CAMILLERI s/ CLARENCE P. CAZALOT, JR. | | Vice President, Controller and Chief Accounting OfficerDirector, Baker Hughes Company |
(Kurt Camilleri)Clarence P. Cazalot, Jr.) | | (principal accounting officer) |
BHGE LLC 2017 FORM 10-K | 103
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| /s/ MICHAEL R. DUMAIS | | Director, Baker Hughes Company |
| (Michael R. Dumais) | | |
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| /s/ GREGORY L. EBEL | | Director, Baker Hughes Company |
| (Gregory L. Ebel) | | |
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/s/ W. GEOFFREY BEATTIE | | Lead Director, Baker Hughes, a GE company |
(W. Geoffrey Beattie) | | |
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/s/ GREGORY D. BRENNEMAN | | Director, Baker Hughes, a GE company |
(Gregory D. Brenneman) | | |
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/s/ CLARENCE P. CAZALOT, JR. | | Director, Baker Hughes, a GE company |
(Clarence P. Cazalot, Jr.) | | |
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/s/ MARTIN S. CRAIGHEAD | | Vice Chairman of the Board, Baker Hughes, a GE company |
(Martin S. Craighead) | | |
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/s/ LYNN L. ELSENHANS | | Director, Baker Hughes a GE companyCompany |
| (Lynn L. Elsenhans) | | |
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/s/ JAMIE S. MILLER | | Director, Baker Hughes, a GE company |
(Jamie S. Miller) | | |
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/s/ JAMES J. MULVA | | Director, Baker Hughes, a GE company |
(James J. Mulva) | | |
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| /s/ JOHN G. RICE | | Director, Baker Hughes a GE companyCompany |
| (John G. Rice) | | |
| | |
BHGEBaker Hughes Holdings LLC 2017 FORM2021 Form 10-K | 10491
