UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|
| | | | | | | |
þ☑ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172021
OR
|
| | | | | | | |
o☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-09397 | | |
| Baker Hughes Holdings LLC |
Baker Hughes, a GE company, LLC
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
| Delaware | 76-0207995 |
| (State or other jurisdiction | (I.R.S. Employer Identification No.) |
| of incorporation or organization) | |
| |
Delaware | 76-0207995 |
(State or other jurisdiction | (I.R.S. Employer Identification No.) |
of incorporation or organization) | |
| |
17021 Aldine Westfield Houston, Texas - 77073-5101, United States | |
| Houston, | Texas | 77073-5101 |
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (713) 439-8600
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
| Title of each class | Trading Symbol | Name of each exchange on which registered |
| Share 5.125% Senior Notes due 2040 | - | New York Stock Exchange |
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 þ NO oYes ☑ 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 þ NO oYes ☑ 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"company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Large accelerated filerþ | ☐ | | Accelerated filero | ☐ | | Non-accelerated filero | ☑ | | 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. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þYes ☐ No ☑
As of October 18, 2017,15, 2021, all of the common units of the registrant had 1,145,286,805 outstanding Common Units, $0.0001 par value per unit.are held by affiliates of the registrant. None of the common units are publicly traded.
Baker Hughes a GE company,Holdings LLC
Table of Contents
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | i
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Baker Hughes a GE company,Holdings LLC
Condensed Consolidated and Combined Statements of Income (Loss)
(Unaudited)
| | | | Three Months Ended September 30, | Nine Months Ended September 30, |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| (In millions, except per unit amounts) | 2017 | 2016 | 2017 | 2016 | (In millions, except per unit amounts) | 2021 | 2020 | 2021 | 2020 |
| Revenue: | | Revenue: | |
| Sales of goods | $ | 3,097 |
| $ | 2,182 |
| $ | 7,541 |
| $ | 6,889 |
| Sales of goods | $ | 2,984 | | $ | 3,290 | | $ | 8,997 | | $ | 9,240 | |
| Sales of services | 2,278 |
| 842 |
| 3,955 |
| 2,864 |
| Sales of services | 2,109 | | 1,759 | | 6,020 | | 5,970 | |
| Total revenue | 5,375 |
| 3,024 |
| 11,496 |
| 9,753 |
| Total revenue | 5,093 | | 5,049 | | 15,017 | | 15,210 | |
| | | |
| Costs and expenses: | | Costs and expenses: | |
| Cost of goods sold | 2,589 |
| 1,800 |
| 6,341 |
| 5,760 |
| Cost of goods sold | 2,561 | | 2,920 | | 7,769 | | 8,296 | |
| Cost of services sold | 1,766 |
| 494 |
| 2,818 |
| 1,680 |
| Cost of services sold | 1,522 | | 1,372 | | 4,404 | | 4,724 | |
| Selling, general and administrative expenses | 792 |
| 475 |
| 1,750 |
| 1,476 |
| |
| Selling, general and administrative | | Selling, general and administrative | 607 | | 565 | | 1,836 | | 1,830 | |
| Goodwill impairment | | Goodwill impairment | — | | — | | — | | 14,717 | |
| Restructuring, impairment and other | 191 |
| 77 |
| 292 |
| 452 |
| Restructuring, impairment and other | 14 | | 209 | | 219 | | 1,637 | |
| Merger and related costs | 159 |
| 2 |
| 310 |
| 10 |
| |
| Separation related | | Separation related | 11 | | 32 | | 53 | | 110 | |
| Total costs and expenses | 5,497 |
| 2,848 |
| 11,511 |
| 9,378 |
| Total costs and expenses | 4,715 | | 5,098 | | 14,281 | | 31,314 | |
| Operating income (loss) | (122 | ) | 176 |
| (15 | ) | 375 |
| Operating income (loss) | 378 | | (49) | | 736 | | (16,104) | |
| Other non operating income (loss), net | (3 | ) | 6 |
| 65 |
| 18 |
| |
| Other non-operating loss, net | | Other non-operating loss, net | (102) | | (149) | | (791) | | (367) | |
| Interest expense, net | (42 | ) | (21 | ) | (75 | ) | (74 | ) | Interest expense, net | (67) | | (66) | | (205) | | (195) | |
| Income (loss) before income taxes and equity in loss of affiliate | (167 | ) | 161 |
| (25 | ) | 319 |
| |
| Equity in loss of affiliate | (13 | ) | — |
| (13 | ) | — |
| |
| Income (loss) before income taxes | | Income (loss) before income taxes | 209 | | (264) | | (260) | | (16,666) | |
| Provision for income taxes | (96 | ) | (70 | ) | (125 | ) | (132 | ) | Provision for income taxes | (189) | | (47) | | (422) | | (110) | |
| Net income (loss) | (276 | ) | 91 |
| (163 | ) | 187 |
| Net income (loss) | 20 | | (311) | | (682) | | (16,776) | |
| Less: Net income (loss) attributable to noncontrolling interests | 1 |
| (5 | ) | 5 |
| (68 | ) | |
| Net income (loss) attributable to Baker Hughes, a GE company, LLC | $ | (277 | ) | $ | 96 |
| $ | (168 | ) | $ | 255 |
| |
| Less: Net income attributable to noncontrolling interests | | Less: Net income attributable to noncontrolling interests | 5 | | 9 | | 24 | | 23 | |
| Net income (loss) attributable to Baker Hughes Holdings LLC | | Net income (loss) attributable to Baker Hughes Holdings LLC | $ | 15 | | $ | (320) | | $ | (706) | | $ | (16,799) | |
| | | |
| | | |
| Cash distribution per Common Unit | $ | 0.17 |
|
|
| $ | 0.17 |
|
|
| |
| | | Cash distribution per common unit | | Cash distribution per common unit | $ | 0.18 | | $ | 0.18 | | $ | 0.54 | | $ | 0.54 | |
See accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements.
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 1
Baker Hughes a GE company,Holdings LLC
Condensed Consolidated and Combined Statements of Comprehensive Income (Loss)
(Unaudited)
| | | | Three Months Ended September 30, | Nine Months Ended September 30, | | Three Months Ended September 30, | Nine Months Ended September 30, |
| (In millions) | 2017 | 2016 | 2017 | 2016 | (In millions) | 2021 | 2020 | 2021 | 2020 |
| Net income (loss) | $ | (276 | ) | $ | 91 |
| $ | (163 | ) | $ | 187 |
| Net income (loss) | $ | 20 | | $ | (311) | | $ | (682) | | $ | (16,776) | |
| Less: Net income (loss) attributable to noncontrolling interests | 1 |
| (5 | ) | 5 |
| (68 | ) | |
| Net income (loss) attributable to Baker Hughes, a GE company, LLC | (277 | ) | 96 |
| (168 | ) | 255 |
| |
| Less: Net income attributable to noncontrolling interests | | Less: Net income attributable to noncontrolling interests | 5 | | 9 | | 24 | | 23 | |
| Net income (loss) attributable to Baker Hughes Holdings LLC | | Net income (loss) attributable to Baker Hughes Holdings LLC | 15 | | (320) | | (706) | | (16,799) | |
| Other comprehensive income (loss): | | Other comprehensive income (loss): | |
| Investment securities | 1 |
| — |
| 2 |
| — |
| Investment securities | — | | — | | — | | (2) | |
| Foreign currency translation adjustments | 272 |
| (140 | ) | 207 |
| (161 | ) | Foreign currency translation adjustments | (158) | | 135 | | (51) | | (101) | |
| Cash flow hedges | 9 |
| (1 | ) | 17 |
| (5 | ) | Cash flow hedges | (2) | | 2 | | (13) | | (6) | |
| Benefit plans | (4 | ) | 31 |
| (6 | ) | 69 |
| Benefit plans | 25 | | (54) | | 78 | | (24) | |
| Other comprehensive income (loss) | 278 |
| (110 | ) | 220 |
| (97 | ) | Other comprehensive income (loss) | (135) | | 83 | | 14 | | (133) | |
| Less: Other comprehensive income attributable to noncontrolling interests | — |
| 3 |
| 4 |
| 2 |
| |
Other comprehensive income (loss) attributable to Baker Hughes, a GE company, LLC
| 278 |
| (113 | ) | 216 |
| (99 | ) | |
| Comprehensive income (loss) | 2 |
| (19 | ) | 57 |
| 90 |
| |
| Less: Comprehensive income (loss) attributable to noncontrolling interests | 1 |
| (2 | ) | 9 |
| (66 | ) | |
| Comprehensive income (loss) attributable to Baker Hughes, a GE company, LLC | $ | 1 |
| $ | (17 | ) | $ | 48 |
| $ | 156 |
| |
| Less: Other comprehensive loss attributable to noncontrolling interests | | Less: Other comprehensive loss attributable to noncontrolling interests | (1) | | — | | (1) | | (3) | |
| Other comprehensive income (loss) attributable to Baker Hughes Holdings LLC | | Other comprehensive income (loss) attributable to Baker Hughes Holdings LLC | (134) | | 83 | | 15 | | (130) | |
| Comprehensive loss | | Comprehensive loss | (115) | | (228) | | (668) | | (16,909) | |
| Less: Comprehensive income attributable to noncontrolling interests | | Less: Comprehensive income attributable to noncontrolling interests | 4 | | 9 | | 23 | | 20 | |
| Comprehensive loss attributable to Baker Hughes Holdings LLC | | Comprehensive loss attributable to Baker Hughes Holdings LLC | $ | (119) | | $ | (237) | | $ | (691) | | $ | (16,929) | |
See accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements.
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 2
Baker Hughes a GE company,Holdings LLC
Condensed Consolidated and Combined Statements of Financial Position
(Unaudited) | | | | | | | | |
| (In millions) | September 30, 2021 | December 31, 2020 |
| ASSETS |
| Current assets: | | |
| Cash and cash equivalents | $ | 3,917 | | $ | 4,125 | |
| Current receivables, net | 5,403 | | 5,700 | |
| Inventories, net | 4,110 | | 4,421 | |
| All other current assets | 1,525 | | 2,280 | |
| Total current assets | 14,955 | | 16,526 | |
| Property, plant and equipment (net of accumulated depreciation of $5,082 and $5,115) | 4,982 | | 5,358 | |
| Goodwill | 5,777 | | 5,739 | |
| Other intangible assets, net | 4,151 | | 4,397 | |
| Contract and other deferred assets | 1,738 | | 2,001 | |
| All other assets | 3,172 | | 2,955 | |
| Deferred income taxes | 974 | | 953 | |
| Total assets | $ | 35,749 | | $ | 37,929 | |
| LIABILITIES AND EQUITY |
| Current liabilities: | | |
| Accounts payable | $ | 3,514 | | $ | 3,532 | |
| Short-term debt and current portion of long-term debt | 56 | | 889 | |
| Progress collections and deferred income | 3,263 | | 3,454 | |
| All other current liabilities | 2,587 | | 2,431 | |
| Total current liabilities | 9,420 | | 10,306 | |
| Long-term debt | 6,708 | | 6,744 | |
| Deferred income taxes | 96 | | 108 | |
| Liabilities for pensions and other postretirement benefits | 1,132 | | 1,217 | |
| All other liabilities | 1,385 | | 1,391 | |
| Members' equity: | | |
| Members' capital, common units, 1,038 and 1,035 issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | 36,038 | | 36,512 | |
| Retained loss | (16,645) | | (15,939) | |
| Accumulated other comprehensive loss | (2,527) | | (2,542) | |
| Baker Hughes Holdings LLC equity | 16,866 | | 18,031 | |
| Noncontrolling interests | 142 | | 132 | |
| Total equity | 17,008 | | 18,163 | |
| Total liabilities and equity | $ | 35,749 | | $ | 37,929 | |
|
| | | | | | |
| (In millions) | September 30, 2017 | December 31, 2016 |
| ASSETS |
| Current assets: |
|
|
Cash and equivalents (a) | $ | 4,775 |
| $ | 981 |
|
| Current receivables, net | 5,310 |
| 2,563 |
|
| Inventories, net | 5,309 |
| 3,224 |
|
| All other current assets | 1,279 |
| 633 |
|
| Total current assets | 16,673 |
| 7,401 |
|
Property, plant and equipment - less accumulated depreciation
| 6,255 |
| 2,325 |
|
| Goodwill | 20,086 |
| 6,680 |
|
| Other intangible assets, net | 6,826 |
| 2,449 |
|
| Contract assets | 2,761 |
| 1,967 |
|
| All other assets | 1,654 |
| 573 |
|
| Deferred income taxes | 338 |
| 326 |
|
| Total assets | $ | 54,593 |
| $ | 21,721 |
|
| LIABILITIES AND EQUITY |
| Current liabilities: |
|
|
| Accounts payable | $ | 3,217 |
| $ | 1,898 |
|
Short-term debt and current portion of long-term debt (a) | 1,866 |
| 239 |
|
| Progress collections | 1,543 |
| 1,596 |
|
| All other current liabilities | 2,119 |
| 1,201 |
|
| Total current liabilities | 8,745 |
| 4,934 |
|
| Long-term debt | 3,039 |
| 38 |
|
| Deferred income taxes | 341 |
| 880 |
|
| Liabilities for pensions and other postretirement benefits | 1,262 |
| 519 |
|
| All other liabilities | 996 |
| 495 |
|
| Members' equity: | | |
| Members' capital (Common Units 1,145 & Nil, issued and outstanding as of September 30, 2017 and December 31, 2016, respectively ) | 42,024 |
| — |
|
| Parent's net investment | — |
| 16,582 |
|
| Retained loss | (277 | ) | — |
|
| Accumulated other comprehensive loss | (1,678 | ) | (1,894 | ) |
| Baker Hughes, a GE company, LLC members' equity | 40,069 |
| 14,688 |
|
| Noncontrolling interests | 141 |
| 167 |
|
| Total equity | 40,210 |
| 14,855 |
|
| Total liabilities and equity | $ | 54,593 |
| $ | 21,721 |
|
| |
(a)
| Cash and equivalents includes $1,267 million of cash at September 30, 2017 held on behalf of GE, and a corresponding liability is reported in short-term borrowings. See "Note 14. Related Party Transactions" for further details. |
See accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements.
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 3
Baker Hughes a GE company,Holdings LLC
Condensed Consolidated and Combined Statements of Changes in Members' Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | |
| (In millions, except per unit amounts) | | Members' Capital | Retained
Loss | Accumulated
Other
Comprehensive
Loss | Non-
controlling
Interests | Total Equity |
| Balance at December 31, 2020 | | $ | 36,512 | | $ | (15,939) | | $ | (2,542) | | $ | 132 | | $ | 18,163 | |
| Comprehensive income (loss): | | | | | | |
| Net income (loss) | | | (706) | | | 24 | | (682) | |
| Other comprehensive income (loss) | | | | 15 | | (1) | | 14 | |
| Regular cash distribution to Members ($0.54 per unit) | | (563) | | | | | (563) | |
| | | | | | |
| | | | | | |
| Repurchase and cancellation of common units | | (106) | | | | | (106) | |
| Baker Hughes stock-based compensation cost | | 153 | | | | | 153 | |
| | | | | | |
| Other | | 42 | | | | (13) | | 29 | |
| Balance at September 30, 2021 | | $ | 36,038 | | $ | (16,645) | | $ | (2,527) | | $ | 142 | | $ | 17,008 | |
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | Number of Common Units | Common Unitholders | Parent's Net Investment | Retained
Loss | Accumulated
Other
Comprehensive
Loss | Non-controlling
Interests | Total Equity |
| Balance at December 31, 2016 | — |
| $ | — |
| $ | 16,582 |
| $ | — |
| $ | (1,894 | ) | $ | 167 |
| $ | 14,855 |
|
| Net income |
|
| 109 |
|
|
| 4 |
| 113 |
|
| Other comprehensive income |
|
|
|
| (62 | ) | 4 |
| (58 | ) |
| Changes in Parent's net investment |
|
|
|
| 900 |
|
|
|
| 900 |
|
| 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 |
| 24,991 |
| (24,991 | ) |
|
|
| — |
|
| Issuance of Common Units to Baker Hughes, a GE company (BHGE) on business combination | 428 |
| 24,798 |
|
|
|
|
|
| 77 |
| 24,875 |
|
| Distribution to BHGE |
| (7,498 | ) |
|
|
|
|
|
| (7,498 | ) |
| Activity after business combination of July 3, 2017: | | | | | | | |
| Net income (loss) |
|
|
|
| (277 | ) |
| 1 |
| (276 | ) |
| Other comprehensive income |
|
|
|
|
|
| 278 |
|
| 278 |
|
| Cash distribution to members ($0.17 per unit) |
| (198 | ) |
|
|
|
|
|
| (198 | ) |
| Net activity related to noncontrolling interests |
| (92 | ) |
|
|
| (116 | ) | (208 | ) |
| Other |
| 23 |
|
|
|
|
| 23 |
|
| Balance at September 30, 2017 | 1,145 |
| $ | 42,024 |
| $ | — |
| $ | (277 | ) | $ | (1,678 | ) | $ | 141 |
| $ | 40,210 |
|
|
| | | | | | | | | | | | | | | |
| (In millions) | Number of Common Units | Common Unitholders | Parent's Net Investment | Retained Loss | Accumulated Other Comprehensive Loss | Non-controlling Interests | Total Equity |
| Balance at December 31, 2015 | | | $ | 15,920 |
|
| $ | (1,532 | ) | $ | 157 |
| $ | 14,545 |
|
| Comprehensive loss: | | |
|
|
|
| |
| Net income (loss) | | | 255 |
|
|
| (68 | ) | $ | 187 |
|
| Other comprehensive income (loss) | | |
|
| (99 | ) | 2 |
| $ | (97 | ) |
| Changes in Parent's net investment | | | 542 |
|
|
|
| $ | 542 |
|
| Other | | |
|
|
| 87 |
| $ | 87 |
|
| Balance at September 30, 2016 | | | $ | 16,717 |
| | $ | (1,631 | ) | $ | 178 |
| $ | 15,264 |
|
| | | | | | | | | | | | | | | | | | |
| (In millions, except per unit amounts) | | Members' Capital | Retained
Loss | Accumulated
Other
Comprehensive
Loss | Non-
controlling
Interests | Total Equity |
| Balance at June 30, 2021 | | $ | 36,266 | | $ | (16,660) | | $ | (2,393) | | $ | 142 | | $ | 17,355 | |
| Comprehensive income (loss): | | | | | | |
| Net income | | | 15 | | | 5 | | 20 | |
| Other comprehensive loss | | | | (134) | | (1) | | (135) | |
| Regular cash distribution to Members ($0.18 per unit) | | (188) | | | | | (188) | |
| | | | | | |
| | | | | | |
| Repurchase and cancellation of common units | | (106) | | | | | (106) | |
| Baker Hughes stock-based compensation cost | | 51 | | | | | 51 | |
| | | | | | |
| Other | | 15 | | | | (4) | | 11 | |
| Balance at September 30, 2021 | | $ | 36,038 | | $ | (16,645) | | $ | (2,527) | | $ | 142 | | $ | 17,008 | |
See accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements.
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 4
Baker Hughes a GE company,Holdings LLC
Condensed Consolidated and Combined Statements of Cash FlowsChanges in Members' Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | |
| (In millions, except per unit amounts) | | Members' Capital | Retained
Loss | Accumulated
Other
Comprehensive
Loss | Non-
controlling
Interests | Total Equity |
| Balance at December 31, 2019 | | $ | 36,998 | | $ | (110) | | $ | (2,589) | | $ | 115 | | $ | 34,414 | |
| Comprehensive income (loss): | | | | | | |
| Net income (loss) | | | (16,799) | | | 23 | | (16,776) | |
| Other comprehensive loss | | | | (130) | | (3) | | (133) | |
| Regular cash distribution to Members ($0.54 per unit) | | (558) | | | | | (558) | |
| | | | | | |
| | | | | | |
| | | | | | |
| Baker Hughes stock-based compensation cost | | 164 | | | | | 164 | |
| Other | | 37 | | (4) | | | (4) | | 29 | |
| Balance at September 30, 2020 | | $ | 36,641 | | $ | (16,913) | | $ | (2,719) | | $ | 131 | | $ | 17,140 | |
|
| | | | | | |
| | Nine Months Ended September 30, |
| (In millions) | 2017 | 2016 |
| Cash flows from operating activities: | | |
| Net income (loss) | $ | (163 | ) | $ | 187 |
|
| Less: Net income (loss) attributable to noncontrolling interests | 5 |
| (68 | ) |
| Net income (loss) after noncontrolling interests | (168 | ) | 255 |
|
| Adjustments to reconcile net income (loss) to net cash flows from operating activities: | | |
| Depreciation and amortization | 716 |
| 439 |
|
| Provision for deferred income taxes | (17 | ) | (40 | ) |
| Changes in operating assets and liabilities: | | |
| Current receivables | (366 | ) | 343 |
|
| Inventories | 162 |
| 11 |
|
| Accounts payable | 98 |
| (271 | ) |
| Progress collections | (126 | ) | (566 | ) |
| Deferred charges | (600 | ) | (217 | ) |
| Other operating items, net | (284 | ) | (149 | ) |
| Net cash flows used in operating activities | (585 | ) | (195 | ) |
| Cash flows from investing activities: | | |
| Expenditures for capital assets | (417 | ) | (330 | ) |
| Proceeds from disposal of assets | 76 |
| 21 |
|
| Net cash paid for acquisitions | (3,365 | ) | (1 | ) |
| Other investing items, net | (173 | ) | (36 | ) |
| Net cash flows used in investing activities | (3,879 | ) | (346 | ) |
| Cash flows from financing activities: | | |
| Net repayments of short-term debt and other borrowings | (325 | ) | (188 | ) |
| Distribution to members | (198 | ) | — |
|
| Contribution received from GE | 7,400 |
| — |
|
| Net transfers from Parent | 1,574 |
| 552 |
|
| Other financing items, net | (241 | ) | (135 | ) |
| Net cash flows from financing activities | 8,210 |
| 229 |
|
| Effect of currency exchange rate changes on cash and equivalents | 48 |
| (122 | ) |
| Increase/ (decrease) in cash and equivalents | 3,794 |
| (434 | ) |
| Cash and equivalents, beginning of period | 981 |
| 1,432 |
|
| Cash and equivalents, end of period | $ | 4,775 |
| $ | 998 |
|
| Supplemental cash flows disclosures: | | |
| Income taxes paid (refunded), net | $ | 122 |
| $ | (7 | ) |
| Interest paid | $ | 31 |
| $ | 29 |
|
| | | | | | | | | | | | | | | | | | |
| (In millions, except per unit amounts) | | Members' Capital | Retained
Loss | Accumulated
Other
Comprehensive
Loss | Non-
controlling
Interests | Total Equity |
| Balance at June 30, 2020 | | $ | 36,762 | | $ | (16,593) | | $ | (2,802) | | $ | 126 | | $ | 17,493 | |
| Comprehensive income (loss): | | | | | | |
| Net income (loss) | | | (320) | | | 9 | | (311) | |
| Other comprehensive income | | | | 83 | | | 83 | |
| Regular cash distribution to Members ($0.18 per unit) | | (186) | | | | | (186) | |
| | | | | | |
| | | | | | |
| | | | | | |
| Baker Hughes stock-based compensation cost | | 52 | | | | | 52 | |
| Other | | 13 | | | | (4) | | 9 | |
| Balance at September 30, 2020 | | $ | 36,641 | | $ | (16,913) | | $ | (2,719) | | $ | 131 | | $ | 17,140 | |
See accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements.
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 5
Baker Hughes a GE company,Holdings LLC
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | |
| Nine Months Ended September 30, |
| (In millions) | 2021 | 2020 |
| Cash flows from operating activities: | | |
| Net loss | $ | (682) | | $ | (16,776) | |
| Adjustments to reconcile net loss to net cash flows from operating activities: | | |
| Depreciation and amortization | 832 | | 1,010 | |
| Loss on equity securities | 955 | | — | |
| Provision (benefit) for deferred income taxes | 42 | | (254) | |
| Property, plant and equipment impairment, net | 21 | | 290 | |
| Goodwill impairment | — | | 14,717 | |
| Intangible assets impairment | — | | 729 | |
| Inventory impairment | — | | 218 | |
| Loss on sale of business | — | | 217 | |
| Write-down of assets held for sale | — | | 129 | |
| Changes in operating assets and liabilities: | | |
| Current receivables | 319 | | 580 | |
| Inventories | 151 | | (183) | |
| Accounts payable | (10) | | (674) | |
| Progress collections and deferred income | (157) | | 619 | |
| Contract and other deferred assets | 178 | | (90) | |
| Other operating items, net | (51) | | 392 | |
| Net cash flows from operating activities | 1,598 | | 924 | |
| Cash flows from investing activities: | | |
| Expenditures for capital assets | (590) | | (801) | |
| Proceeds from disposal of assets | 178 | | 141 | |
| | |
| | |
| Other investing items, net | 200 | | 109 | |
| Net cash flows used in investing activities | (212) | | (551) | |
| Cash flows from financing activities: | | |
| Net repayments of debt and other borrowings | (60) | | (170) | |
| Proceeds from (repayment of) commercial paper | (832) | | 737 | |
| Proceeds from issuance of long-term debt | — | | 500 | |
| | |
| Distributions to Members | (563) | | (558) | |
| Repurchase of common units | (106) | | — | |
| | |
| Other financing items, net | (24) | | (15) | |
| Net cash flows from (used in) financing activities | (1,585) | | 494 | |
| Effect of currency exchange rate changes on cash and cash equivalents | (9) | | (59) | |
| Increase (decrease) in cash and cash equivalents | (208) | | 808 | |
| Cash and cash equivalents, beginning of period | 4,125 | | 3,245 | |
| Cash and cash equivalents, end of period | $ | 3,917 | | $ | 4,053 | |
| Supplemental cash flows disclosures: | | |
| Income taxes paid, net of refunds | $ | 181 | | $ | 317 | |
| Interest paid | $ | 204 | | $ | 188 | |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 6
Baker Hughes Holdings LLC
Notes to Unaudited Condensed 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, BHGEBHH LLC, we, us, or our )our) and the successor to Baker Hughes Incorporated (BHI), is an energy technology company with a Delaware corporationdiversified portfolio of technologies and services that span the entire energy value chain. As of September 30, 2021, General Electric (GE) owns 17.2% of our common units and Baker Hughes Company (Baker Hughes) is a fullstream oilfield technology provider that has a unique mixowns directly or indirectly 82.8% of equipment and service capabilities. We conduct business in more than 120 countries and employ over 65,000 employees.our common units (collectively, the Members).
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) of 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 Operating 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 owns approximately 62.5% of our Common Units and BHGE owns approximately 37.5% 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 accompanying unaudited condensed 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. and such principles, U.S. GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. All intercompany accountsAccordingly, certain information and transactionsdisclosures normally included in our annual financial statements have been eliminated. condensed or omitted. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 (2020 Annual Report).
In the opinion of management, the condensed consolidated and combined financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of theby management to fairly state our results of operations, financial position and cash flows of the Company and its subsidiaries for the periods presented and are not indicative of the results that may be expected for a full year.
The Company's financial statements have been prepared on a consolidated basis, effective July 3, 2017.basis. 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 prior to July 3, 2017,intercompany accounts and transactions have been eliminated.
In the Company's financial statements were prepared on a combined basis. The combined financial statements combineand notes, certain accounts of GE and its subsidiaries that were historically managed as part of its Oil & Gas business. The condensed 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 14. Related Party Transactions" for further information on expenses allocated by GE. The historical financial results in the condensed consolidated and combined financial statements presented may not be indicative of the results that wouldamounts have been achieved had GE O&G operated as a separate, stand-alone entity during those periods.
The GE O&G numbers in the condensed consolidated and combined statements of income (loss) have been reclassedreclassified 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.
In the notes to unaudited condensed consolidated and combined financial statements, all dollar and common unit amounts in tabulations are in millions of dollars and 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.
Baker Hughes, a GE company, LLC
NotesSeparation related costs as reflected in our condensed consolidated statements of income (loss) include costs incurred in connection with the ongoing activities related to Unaudited Condensed Consolidated and Combined Financial Statements
our separation from GE. See "Note 15. Related Party Transactions" for further information.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UsePlease refer to "Note 1. Basis of Estimates
The preparationPresentation and Summary of Significant Accounting Policies," to our consolidated 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 basefrom 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 condensed 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 accounts and inventory valuation reserves; recoverability of long-lived assets, including revenue recognition on 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 derivatives 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.
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 quarterly exchange rates, and revenues, expenses, and cash flows have been translated at average rates2020 Annual Report 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, are included in the condensed consolidated and combined statement of income (loss).
Cost and Equity Method Investment
Investments in privately held companies in which we do not have the ability to exercise significant influence, most often because we hold a voting interest of 0% to 20% are accounted for using the cost method.
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 condensed 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 condensed consolidated and combined statement of financial position.
Sales of Goods and Services
We record all sales of goods and services only when a firm sales agreement is in place, delivery has occurred or services have been rendered and collectability of the fixed or determinable sales price is reasonably assured.
Except for goods sold under long-term construction type contracts and service agreements, we recognize sales of goods under the provisions of SEC Staff Accounting Bulletin (SAB) 104, Revenue Recognition. In situations where arrangements include customer acceptance provisions based on seller or customer-specified objective criteria, we recognize revenue when we have reliably demonstrated that all specified acceptance criteria have been met or when formal acceptance occurs, respectively. We do not provide for anticipated losses before we record sales.
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
We recognize revenue on larger construction and 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 sales based on our progress toward contract completion measured by actual costs incurred in relation to our estimate 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.
We sell product services under long-term product maintenance agreements, where costs of performing services are incurred on an other than straight-line basis. We recognize related sales based on the extentdiscussion of our progress toward completion measured by actual costs incurred in relation to our estimate 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.
For our long-term product maintenance agreements, we regularly assess customer credit risk inherent in the carrying amounts of receivables and contract costs and estimated earnings, including the risk that contractual penalties may not be sufficient to offset our accumulated costs in the event of customer termination. We gain insight into future utilization and cost trends, as well as credit risk, through our knowledge of the installed base of equipment and the close interaction with our customers that comes with supplying critical services and parts over extended periods. Revisions, after applying the cumulative catch up basis ofsignificant accounting may affect a product services agreement's total estimated profitability resulting 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 future service deliverables such as installation, commissioning, training or the future delivery of ancillary products. In most cases, the relative values of the undelivered components are not significant 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.
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 $162 million and $343 million for the three and nine months ended September 30, 2017, respectively, and $87 million and $253 million for the three and nine months ended September 30, 2016, respectively. Research and development expenses were reported in cost of goods sold and cost of services sold.policies.
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 September 30, 2017,2021 and December 31, 2016, $1,2472020, we had $691 million of which approximately $1 billion is related to cash held on behalf of GE, and $752$687 million, respectively, of cash and equivalents 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 $1,267 million of cash at September 30, 2017 held on behalf of GE and a corresponding liability is reportedgrowth in short term borrowings. See "Note 14. Related Party Transactions" for further details.
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
Allowance for Doubtful Accounts
We establish an allowance for doubtful accounts based on various factors including the payment history and financial condition of our debtors and the economic environment. Provisions for doubtful accounts are recorded based on the aging status of the debtor accounts or when it becomes evident that the debtor will not make the required payments at either contractual due dates or in the future.
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) 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.
Property, Plant and Equipment (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 and impairment losses. We manufacture a substantial portion of our tools and equipment and the cost of these items, which includes direct and indirect manufacturing costs, is capitalized and carried in inventory until it is completed.
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 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.
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
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.
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 condensed consolidated and combined statements of income 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.
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
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
(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
We use closing prices for derivatives included in Level 1, which are traded either on exchanges or liquid over-the-counter markets. The majority of our derivatives are valued using internal models. The 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.
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, cost 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 and Equity Method Investments
Cost and 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 for which we do not have comparable observed sales transaction data, collateral values are developed internally and corroborated by external appraisal information. Adjustments to third-party valuations may be performed in circumstances where market comparables are not specific to the attributes of the specific collateral or
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
appraisal information may not be reflective of current market conditions due to the passage of time and the occurrence of market events since receipt of the information.
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. Non-U.S. current and deferred income taxes owed by our subsidiaries are reflected in the 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 actually are paid or recovered and other provisions of the tax law. The effect of a change in tax laws or rates on deferred tax assets 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 may not be realized.
We currently intend to indefinitely reinvest substantially all earnings of our foreign subsidiaries with operations outside the U.S. Most of these earnings have been reinvested in active non-U.S. business operationsjurisdictions, and we do not intendcurrently anticipate a need to repatriatetransfer these earningsfunds to fundthe U.S. operations. If the earnings of our foreign subsidiaries were repatriated, the tax consequence would be applicable at the partner level as we are treated as a pass-through entity for U.S. federal income tax purposes.
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 our 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 realizing 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.
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 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 ADOPTED
On January 1, 2017, we adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2015-11, Simplifying the Measurement of Inventory, which was intended to simplify the subsequent measurement of inventory held by an entity not measured using last-in, first-out (LIFO) or retail inventory method. The amendments eliminated the requirement that entities consider the replacement cost of inventory and the net realizable value less a normal profit margin, which was historically used to establish a floor
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
and ceiling for an assessment of market value. The adoption of this standard was immaterial to our financial statements.
NEW ACCOUNTING STANDARDS TO BE ADOPTED
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The ASU will supersede most of the existing revenue recognition requirements in U.S. GAAP and will require entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity's nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The pronouncement is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.
The standard permits either a full retrospective method of adoption, in which the standard is applied to all the periods presented, or a modified retrospective method of adoption, in which the standard is applied only to the current period with a cumulative-effect adjustment reflected in retained earnings. We will adopt the standard on January 1, 2018, will apply it retrospectively to all periods presented, and will elect the practical expedient for contract modifications.
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.
We expect that the timing of revenue recognition on our long-term product service agreements will be significantly affected. Although we expect to continue to recognize revenue over time on these contracts, we also expect that there will be changes to how contract modifications, termination clauses and purchase options are accounted for by us. In particular, under our existing processes, the cumulative impact from a contract modification on revenue already recorded is recognized in the period in which the modification is agreed. Under the new standard, we expect the impact from certain types of modifications to be recognized over the remaining life of the contract.
Based on our assessment and best estimates to date, we expect a non-cash charge to our January 1, 2016 retained earnings balance of approximately $500 million. This amount includes significant estimates and will remain subject to change as we complete our evaluation of the new standard and reflect actual activity for 2017. We do not currently believe that the adoption of the ASU will have any material impact on post acquisition revenue and operating profits of legacy Baker Hughes, and will validate the impact as we continue the integration of the acquired business.
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 condensed consolidated and combined financial statements.
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
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 $300 million. 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.
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 are currently evaluating the impact of this ASU on our condensed consolidated and combined financial statements and related disclosures.
All other new 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 ACQUISITION
On July 3, 2017, we closed the Transactions to combine GE O&G and Baker Hughes creating a 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 US tax laws and, accordingly, will not incur any material current or deferred U.S. federal income taxes. Our foreign subsidiaries, however, are expected to incur current and deferred foreign income taxes. GE holds an approximate 62.5% 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 our Common Units. Former Baker Hughes shareholders immediately after the completion 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.Holdings LLC 2021 Third Quarter Form 10-Q | 7
Prior to the Transactions, shares of Baker Hughes common stock were registered pursuant 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.
Baker Hughes a GE company,Holdings LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
NOTE 2. REVENUE RELATED TO CONTRACTS WITH CUSTOMERS
The tables below presentDISAGGREGATED REVENUE
We disaggregate our revenue from contracts with customers by primary geographic markets. | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| Total Revenue | 2021 | 2020 | 2021 | 2020 |
| U.S. | $ | 1,199 | | $ | 1,032 | | $ | 3,337 | | $ | 3,330 | |
| Non-U.S. | 3,894 | | 4,017 | | 11,680 | | 11,880 | |
| Total | $ | 5,093 | | $ | 5,049 | | $ | 15,017 | | $ | 15,210 | |
REMAINING PERFORMANCE OBLIGATIONS
As of September 30, 2021 and 2020, the fair valueaggregate amount of the consideration exchangedtransaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $23.5 billion and $23.0 billion, respectively. As of September 30, 2021, we expect to recognize revenue of approximately 50%, 67% and 89% of the total remaining performance obligations within 2, 5, and 15 years, respectively, and the preliminary estimates ofremaining thereafter. Contract modifications could affect both the fair value of assets acquired and liabilities assumed and the associated fair value of the noncontrolling interest relatedtiming to the acquired net assets of Baker Hughes. The final determination of fair value for certain assets and liabilities will be completedcomplete as soonwell as the information necessaryamount to completebe received as we fulfill the analysis is obtained. These amounts, which may differ materiality from these preliminary estimates, 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, deferred income taxes, uncertain tax positions and contingencies.related remaining performance obligations.
|
| | | |
| 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 |
|
|
| | | |
| Preliminary identifiable assets acquired and liabilities assumed | Estimated fair value at July 3, 2017 |
| Assets | |
| Cash and equivalents | $ | 4,133 |
|
| Current receivables | 2,378 |
|
| Inventories | 1,975 |
|
| Property, plant and equipment | 4,048 |
|
Other intangible assets (a) | 4,400 |
|
All other assets | 1,395 |
|
| Liabilities | |
| Accounts payable | $ | (1,115 | ) |
| Borrowings | (3,373 | ) |
| Liabilities for pension and other postretirement benefits | (684 | ) |
All other liabilities (b) | (1,426 | ) |
| Total identifiable net assets | $ | 11,731 |
|
| Noncontrolling interest associated with net assets acquired | (77 | ) |
Goodwill (c) | 13,144 |
|
| Total purchase consideration | $ | 24,798 |
|
| |
(a)
| 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) |
Customer relationships
| $ | 1,300 |
| 15 |
| Trade name - Baker Hughes | 2,000 |
| Indefinite-lived |
| Trade names - other | 200 |
| 10 |
| Developed technology | 900 |
| 10 |
| Total | $ | 4,400 |
| |
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
| |
(b)
| All other liabilities includes approximately $188 million of net deferred tax liabilities related to the estimated fair value of intangible assets included in the preliminary purchase consideration and approximately $134 million of other net deferred tax assets. |
| |
(c)
| 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. |
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 condensed consolidated and combined financial statements.
MERGER AND RELATED COSTS
During the three and nine months ended September 30, 2017, acquisition costs of $159 million and $310 million, respectively, were expensed as incurred and were reported as merger and related costs. Such costs 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 responsibilities 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&G 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 change and the impact of such changes may be material. The unaudited pro forma results do not include any incremental cost savings that may result from the integration.
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 the nine months ended September 30, 2016 and exclusion of those costs from all other periods presented; amortization associated with an estimate of the acquired intangible assets; and the reduction of interest expense for fair value adjustments to debt. A non-recurring contractually obligated termination fee of $3,500 million ($3,320 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 the nine months ended September 30, 2016.
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | Nine Months Ended September 30, |
| | 2017 | 2016 | 2017 | 2016 |
| Revenue | $ | 5,375 |
| $ | 5,375 |
| $ | 16,158 |
| $ | 17,178 |
|
| Net loss | (116 | ) | (363 | ) | (320 | ) | (2,317 | ) |
| Net loss attributable to the Company | (117 | ) | (357 | ) | (324 | ) | (2,248 | ) |
NOTE 3. CURRENT RECEIVABLES
Current receivables are summarized incomprised of the table below:
|
| | | | | | |
| | September 30, 2017 | December 31, 2016 |
| Customer receivables | $ | 3,808 |
| $ | 1,699 |
|
| Related parties | 696 |
| 236 |
|
| Other | 1,037 |
| 814 |
|
| Total current receivables | 5,541 |
| 2,749 |
|
| Less: Allowance for doubtful accounts | (231 | ) | (186 | ) |
| Total current receivables, net | $ | 5,310 |
| $ | 2,563 |
|
| | | | | | | | |
| September 30, 2021 | December 31, 2020 |
| Customer receivables | $ | 4,569 | | $ | 4,676 | |
| Related parties | 439 | | 507 | |
| Other | 782 | | 890 | |
| Total current receivables | 5,790 | | 6,073 | |
| Less: Allowance for credit losses | (387) | | (373) | |
| Total current receivables, net | $ | 5,403 | | $ | 5,700 | |
Customer receivables are recorded at the invoiced amount. Beyond factoring activities with relatedRelated parties (as described in "Note 14. Related Party Transactions"), the Company also sells certain current receivables externally, which are accounted for in accordance with ASC 860, Transfers and Servicing.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 $390 million and $421 million as of September 30, 2021 and December 31, 2020, respectively, are comprised of the following: | | | | | | | | |
| September 30, 2021 | December 31, 2020 |
| Finished goods | $ | 2,255 | | $ | 2,337 | |
| Work in process and raw materials | 1,855 | | 2,084 | |
| | |
| Total inventories, net | $ | 4,110 | | $ | 4,421 | |
|
| | | | | | |
| | September 30, 2017 | December 31, 2016 |
| Finished goods | $ | 3,037 |
| $ | 1,585 |
|
| Work in process and raw material | 2,272 |
| 1,639 |
|
| Total inventories, net | $ | 5,309 |
| $ | 3,224 |
|
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are compromised of the following:
|
| | | | | | |
| September 30, 2017 | December 31, 2016 |
| Land and improvements | $ | 348 |
| $ | 130 |
|
| Buildings, structures and related equipment | 2,793 |
| 1,344 |
|
| Machinery and equipment | 5,700 |
| 2,916 |
|
| Total cost | 8,841 |
| 4,390 |
|
| Less: Accumulated depreciation | (2,586 | ) | (2,065 | ) |
| Property, plant and equipment - less accumulated depreciation | $ | 6,255 |
| $ | 2,325 |
|
Depreciation on property, plant and equipment was $266 million and $67 million inDuring the three months ended September 30, 2017 and 2016, respectively, and $405 million and $242 million in the nine months ended September 30, 20172020, we recorded inventory impairments of $42 million, predominately in our Oilfield Equipment segment, and 2016, respectively. See "Note 18. Restructuring, impairment and other"$218 million, predominately in our Oilfield Services segment, respectively, as a result of certain restructuring activities initiated by the Company. Charges for additional information on property, plant and equipment impairments.inventory impairments are predominantly reported in the "Cost of goods sold" caption of the condensed consolidated statements of income (loss).
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 8
Baker Hughes a GE company,Holdings LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
NOTE 6.5. GOODWILL AND OTHER 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 | — | | (3) | | (20) | | 61 | | 38 | |
| Balance at September 30, 2021 | $ | 1,301 | | $ | 3 | | $ | 2,214 | | $ | 2,259 | | $ | 5,777 | |
|
| | | | | | | | | | | | | | | |
| Oilfield Services | Oilfield Equipment | Turbo-machinery & Process Solutions | Digital Solutions | Total |
| Balance at December 31, 2016, gross | $ | 3,203 |
| $ | 3,428 |
| $ | 1,814 |
| $ | 1,989 |
| $ | 10,434 |
|
| Accumulated impairment at December 31, 2016 | (2,997 | ) | (503 | ) | — |
| (254 | ) | (3,754 | ) |
| Balance at December 31, 2016 | 206 |
| 2,925 |
| 1,814 |
| 1,735 |
| 6,680 |
|
Acquisitions (a) | 13,144 |
| — |
| — |
| — |
| 13,144 |
|
| Dispositions, currency exchange and others | (47 | ) | 142 |
| 105 |
| 62 |
| 262 |
|
| Balance at September 30, 2017 | $ | 13,303 |
| $ | 3,067 |
| $ | 1,919 |
| $ | 1,797 |
| $ | 20,086 |
|
| |
(a)
| 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 majority of Baker Hughes business was combined with the GE O&G Surface business to create the new Oilfield Services reporting segment.
We test goodwill for impairment annually in the third quarter of each year using data as of July 1 of that year. Theeach fiscal year, in conjunction with our annual strategic planning process. Our reporting units are the same as our 4 reportable segments. We also test goodwill for impairment whenever events or circumstances occur which, in our judgment, could more likely than not reduce the fair value of one or more reporting units below its carrying value. Potential impairment indicators include, but are not limited to, (i) the results of our most recent annual or interim impairment testing, in particular the magnitude of the excess of fair value over carrying value observed, (ii) downward revisions to internal forecasts, and the magnitude thereof, if any, and (iii) declines in Baker Hughes' market capitalization below our book value, and the magnitude and duration of those declines, if any.
During the third quarter of 2021, we completed our annual impairment test consistsand determined that the fair value was substantially in excess of two steps:the carrying value for each reporting unit resulting in step one,no goodwill impairment. There can be no assurances that future sustained declines in macroeconomic or business conditions affecting our industry will not occur, which could result in goodwill impairment charges in future periods.
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, is compared withincluding any goodwill, exceeded 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.
We performed our annual impairment test of goodwill as of July 1, 2017 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;value.
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 9
Baker Hughes a GE company,Holdings LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
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.
As of September 30, 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.
OTHER INTANGIBLE ASSETS
Intangible assets are comprised of the following: | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 | December 31, 2020 |
| Gross
Carrying
Amount | Accumulated
Amortization | Net | Gross
Carrying
Amount | Accumulated
Amortization | Net |
| Customer relationships | $ | 1,944 | | $ | (749) | | $ | 1,195 | | $ | 2,261 | | $ | (916) | | $ | 1,345 | |
| Technology | 1,105 | | (741) | | 364 | | 1,127 | | (696) | | 431 | |
| Trade names and trademarks | 293 | | (168) | | 125 | | 326 | | (181) | | 145 | |
| Capitalized software | 1,306 | | (1,062) | | 244 | | 1,294 | | (1,041) | | 253 | |
| | | | | | |
| | | | | | |
| Finite-lived intangible assets | 4,648 | | (2,720) | | 1,928 | | 5,008 | | (2,834) | | 2,174 | |
| Indefinite-lived intangible assets | 2,223 | | — | | 2,223 | | 2,223 | | — | | 2,223 | |
| Total intangible assets | $ | 6,871 | | $ | (2,720) | | $ | 4,151 | | $ | 7,231 | | $ | (2,834) | | $ | 4,397 | |
|
| | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | December 31, 2016 |
| | Gross
Carrying
Amount | Accumulated
Amortization | Net | Gross
Carrying
Amount | Accumulated
Amortization | Net |
| Technology | $ | 1,538 |
| $ | (451 | ) | $ | 1,087 |
| $ | 596 |
| $ | (371 | ) | $ | 225 |
|
| Customer relationships | 3,267 |
| (771 | ) | 2,496 |
| 1,920 |
| (660 | ) | 1,260 |
|
| Capitalized software | 1,120 |
| (664 | ) | 456 |
| 896 |
| (535 | ) | 361 |
|
| Trade names and trademarks | 890 |
| (156 | ) | 734 |
| 681 |
| (130 | ) | 551 |
|
| Other | 2 |
| (1 | ) | 1 |
| 1 |
| (1 | ) | — |
|
| Finite-lived intangible assets | 6,817 |
| (2,043 | ) | 4,774 |
| 4,094 |
| (1,697 | ) | 2,397 |
|
Indefinite-lived intangible assets (a) | 2,052 |
| — |
| 2,052 |
| 52 |
| — |
| 52 |
|
| Total intangible assets | $ | 8,869 |
| $ | (2,043 | ) | $ | 6,826 |
| $ | 4,146 |
| $ | (1,697 | ) | $ | 2,449 |
|
| |
(a)
| Indefinite-lived intangible assets principally comprise trade names and trademarks acquired in business combinations. |
Finite-lived intangible assets increased by $2,377 million in the nine months ended September 30, 2017, primarily as a result of the acquired Baker Hughes intangible assets offset by amortization during the periods (refer to "Note 2. Business Acquisition").
Intangible assets are generally amortized on a straight-line basis with estimated useful lives ranging from 1 to 3035 years. Amortization expense for the three months ended September 30, 2021 and 2020 was $59 million and $75 million, respectively, and $193 million and $231 million for the nine months ended September 30, 2017 was $115 million2021 and $237 million, respectively, as compared to $65 million and $192 million, respectively, for the three and nine months ended September 30, 2016. We incurred additional2020, respectively.
Estimated amortization expense of $49 million during the three months ended September 30, 2017 due to the acquisition of Baker Hughes.
Indefinite-lived intangible assets increased in September 30, 2017 as a result of the acquisition of the Baker Hughes trade name which was preliminarily valued at $2 billion 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 million and $10 million, respectively).
Amortization expense of intangible assets over the remainder of
20172021 and
for each of the subsequent five fiscal years is expected to be as follows:
| | | | | |
| Year | Estimated Amortization Expense |
| Remainder of 2021 | $ | 58 | |
| 2022 | 213 | |
| 2023 | 200 | |
| 2024 | 182 | |
| 2025 | 135 | |
| 2026 | 92 | |
NOTE 6. CONTRACT AND OTHER DEFERRED ASSETS
A 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: | | | | | | | | |
| September 30, 2021 | December 31, 2020 |
| Long-term product service agreements | $ | 644 | | $ | 660 | |
Long-term equipment contracts (1) | 909 | | 1,160 | |
| Contract assets (total revenue in excess of billings) | 1,553 | | 1,820 | |
| Deferred inventory costs | 153 | | 138 | |
| Non-recurring engineering costs | 32 | | 43 | |
| | |
| Contract and other deferred assets | $ | 1,738 | | $ | 2,001 | |
(1)Reflects revenue earned in excess of billings on our long-term contracts to construct technically complex equipment and certain other service agreements.
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 10
|
| | | |
| Year | Estimated Amortization Expense |
| Remainder of 2017 | $ | 108 |
|
| 2018 | 422 |
|
| 2019 | 397 |
|
| 2020 | 361 |
|
| 2021 | 345 |
|
| 2022 | 329 |
|
Baker Hughes a GE company,Holdings LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
NOTE 7. CONTRACT ASSETS
Contract assets are comprised of the following:
|
| | | | | | |
| | September 30, 2017 | December 31, 2016 |
Long-term product service agreements (a) | $ | 1,408 |
| $ | 1,046 |
|
Long-term equipment contract revenue (b) | 1,050 |
| 703 |
|
| Total revenue in excess of billings | 2,458 |
| 1,749 |
|
Deferred inventory costs (c) | 303 |
| 218 |
|
| Contract assets | $ | 2,761 |
| $ | 1,967 |
|
| |
(a)
| Reflects revenues earned in excess of billings on our long-term product service agreements. |
| |
(b)
| Reflects revenues earned in excess of billings on our long-term contracts to construct technically complex equipment. |
| |
(c)
| Represents cost deferral for shipped goods and other costs for which the criteria for revenue recognition has not yet been met. |
NOTE 8. BORROWINGS
Short-term and long-term borrowings consisted of the following:
|
| | | | | | |
| | September 30, 2017 | December 31, 2016 |
| Short-term borrowings | | |
| Short-term bank borrowings | $ | 202 |
| $ | 79 |
|
| Current portion of long-term borrowings | 274 |
| 34 |
|
| Short-term borrowings from GE | 1,364 |
| 121 |
|
| Other short-term borrowings | 26 |
| 5 |
|
| Total short-term borrowings | $ | 1,866 |
| $ | 239 |
|
| | | |
| Long-term borrowings | | |
7.5% Senior Notes due November 2018
| $ | 557 |
| $ | — |
|
3.2% Senior Notes due August 2021
| 527 |
| — |
|
8.55% Debentures due June 2024
| 142 |
| — |
|
6.875% Notes due January 2029
| 387 |
| — |
|
5.125% Notes due September 2040
| 1,310 |
| — |
|
| Capital leases | 89 |
| 1 |
|
| Other long-term borrowings | 27 |
| 37 |
|
| Total long-term borrowings | 3,039 |
| 38 |
|
| Total borrowings | $ | 4,905 |
| $ | 277 |
|
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 affirmative covenants and no 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. DuringRevenue recognized during the three months ended September 30, 2017, there were no direct borrowings under2021 and 2020 from performance obligations satisfied (or partially satisfied) in previous periods related to our long-term service agreements was $9 million and $(8) million, respectively, and $18 million and $22 million during the 2017 Credit Agreement.nine months ended September 30, 2021 and 2020, 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.
Concurrent withNOTE 7. 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 Transactions associated withfollowing: | | | | | | | | |
| September 30, 2021 | December 31, 2020 |
| Progress collections | $ | 3,140 | | $ | 3,352 | |
| Deferred income | 123 | | 102 | |
| Progress collections and deferred income (contract liabilities) | $ | 3,263 | | $ | 3,454 | |
Revenue recognized during the acquisitionthree months ended September 30, 2021 and 2020 that was included in the contract liabilities at the beginning of the period was $448 million and $501 million, respectively, and $2,033 million and $1,328 million during the nine months ended September 30, 2021 and 2020, respectively.
NOTE 8. LEASES
Our leasing activities primarily consist of operating leases for administrative offices, manufacturing facilities, research centers, service centers, sales offices and certain equipment. | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| Operating Lease Expense | 2021 | 2020 | 2021 | 2020 |
| Long-term fixed lease | $ | 64 | | $ | 71 | | $ | 192 | | $ | 213 | |
| Long-term variable lease | 7 | | 3 | | 24 | | 23 | |
| Short-term lease | 119 | | 102 | | 328 | | 382 | |
| Total operating lease expense | $ | 190 | | $ | 176 | | $ | 544 | | $ | 618 | |
Cash flows used in operating activities for operating leases approximates our expense for the three and nine months ended September 30, 2021 and 2020.
The weighted-average remaining lease term as of September 30, 2021 and December 31, 2020 was approximately nine years and eight years for our operating leases, respectively. The weighted-average discount rate used to determine the operating lease liability as of September 30, 2021 and December 31, 2020 was 3.5% and 3.7%, respectively.
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.Holdings LLC 2021 Third Quarter Form 10-Q | 11
Baker Hughes a GE company,Holdings LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
NOTE 9. BORROWINGS
Our acquisitionShort-term and long-term borrowings are comprised of Baker Hughes assumed all the outstanding borrowings including all notes, senior notes, and debentures. A step-up adjustment of $364 million was recorded upon the acquisition of Baker Hughes to present these borrowings at fair value.following: | | | | | | | | |
| September 30, 2021 | December 31, 2020 |
| Short-term borrowings | | |
| | |
| | |
| Commercial paper | $ | — | | $ | 801 | |
| Short-term borrowings from GE | 11 | | 45 | |
| Other borrowings | 45 | | 43 | |
| Total short-term borrowings | 56 | | 889 | |
| | |
| | |
| Long-term borrowings | | |
| | |
| 2.773% Senior Notes due December 2022 | 1,249 | | 1,247 | |
| 8.55% Debentures due June 2024 | 119 | | 123 | |
| 3.337% Senior Notes due December 2027 | 1,341 | | 1,344 | |
| 6.875% Notes due January 2029 | 280 | | 284 | |
| 3.138% Senior Notes due November 2029 | 522 | | 522 | |
| 4.486% Senior Notes due May 2030 | 497 | | 497 | |
| 5.125% Senior Notes due September 2040 | 1,293 | | 1,297 | |
| 4.08% Senior Notes due December 2047 | 1,337 | | 1,337 | |
| Other long-term borrowings | 70 | | 93 | |
| Total long-term borrowings | 6,708 | | 6,744 | |
| Total borrowings | $ | 6,764 | | $ | 7,633 | |
The estimated fair value of total borrowings at September 30, 20172021 and December 31, 20162020 was $4,975$7,498 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.
BHH LLC has a $3 billion committed unsecured revolving credit facility (the Credit Agreement) with commercial banks maturing in December 2024. The Credit Agreement contains certain customary representations and warranties, certain customary affirmative covenants and certain customary negative covenants. Upon the occurrence of certain events of default, BHH LLC's obligations under the Credit Agreement may be accelerated. Such events of default include payment defaults to lenders under the Credit Agreement and other customary defaults. No such events of default have occurred. At September 30, 2021 and December 31, 2020, there were no borrowings under the Credit Agreement. In addition, 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 September 30, 2021, Baker Hughes Co-Obligor, Inc. is a co-obligor of our long-term debt securities totaling $6,638 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 September 30, 2021, we were in compliance with all debt covenants.
See "Note 14.15. Related Party Transactions" for additional information on the short-term borrowings from GE, and see "Note 12.GE.
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 12
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Instruments" for additional information about borrowings and associated swaps.Statements
NOTE 9.10. EMPLOYEE BENEFIT PLANS
Certain 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 multiemployer 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 $22 million and $25 million in the three months ended September 30, 2017 and 2016, respectively, and $67 million and $73 million in the nine months ended September 30, 2017 and 2016, respectively.
In addition to the GE Plans, we have both funded and unfunded noncontributory defined benefit pension plans (Pension Benefits) covering certain employeeswhich include 4 U.S. plans and 7 non-U.S. plans, primarily in the U.S., UK, Germany, and Canada. Our pension plans include seven U.S. and six non-U.S. pension plansCanada, all with pensionplan assets or obligations greater than $20 million. We alsouse a December 31 measurement date for these plans, and generally provide certain postretirement health care benefits (Other Postretirement Benefits), through unfunded plans, to a closed groupemployees based on formulas recognizing length of U.S. employees who, when they retire, have met certain ageservice and service requirements.earnings.
The components of net periodic cost of plans sponsored by us are as follows for the three months ended September 30:
|
| | | | | | | | | | | | | | | | | | |
| U.S. Pension Benefits | Non-U.S. Pension Benefits | Other Postretirement Benefits |
| 2017 | 2016 | 2017 | 2016 | 2017 | 2016 |
| Service cost | $ | 12 |
| $ | 3 |
| $ | 4 |
| $ | 1 |
| $ | 1 |
| $ | — |
|
| Interest cost | 12 |
| 5 |
| 6 |
| 2 |
| 2 |
| — |
|
| Expected return on plan assets | (20 | ) | (8 | ) | (11 | ) | (1 | ) | — |
| — |
|
| Amortization of prior service credit | — |
| — |
| — |
| — |
| (1 | ) | 1 |
|
| Amortization of net actuarial loss | 2 |
| 2 |
| 2 |
| 1 |
| — |
| — |
|
| Other | — |
| — |
| — |
| — |
| — |
| (3 | ) |
| Net periodic cost (benefit) | $ | 6 |
| $ | 2 |
| $ | 1 |
| $ | 3 |
| $ | 2 |
| $ | (2 | ) |
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| 2021 | 2020 | 2021 | 2020 |
| Service cost | $ | 7 | | $ | 7 | | $ | 21 | | $ | 21 | |
| Interest cost | 15 | | 19 | | 47 | | 59 | |
| Expected return on plan assets | (32) | | (31) | | (95) | | (93) | |
| | | | |
| Amortization of net actuarial loss | 10 | | 9 | | 30 | | 25 | |
| Curtailment/settlement & other loss | 1 | | 3 | | 1 | | 3 | |
| | | | |
| Net periodic cost | $ | 1 | | $ | 7 | | $ | 4 | | $ | 15 | |
The componentsservice cost component of the net periodic cost is included in operating income (loss) and all other components are included in non-operating income (loss) in our condensed consolidated statements of plans sponsoredincome (loss).
NOTE 11. INCOME TAXES
We are a partnership for U.S. federal tax purposes, therefore, any tax effects associated with the U.S. are recognized by us are as followsour Members and not reflected in our provision for income taxes. For the nine months ended September 30:
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidatedthree and Combined Financial Statements
|
| | | | | | | | | | | | | | | | | | |
| U.S. Pension Benefits | Non-U.S. Pension Benefits | Other Postretirement Benefits |
| 2017 | 2016 | 2017 | 2016 | 2017 | 2016 |
| Service cost | $ | 17 |
| $ | 8 |
| $ | 7 |
| $ | 5 |
| $ | 2 |
| $ | 1 |
|
| Interest cost | 23 |
| 17 |
| 9 |
| 9 |
| 4 |
| 4 |
|
| Expected return on plan assets | (38 | ) | (25 | ) | (13 | ) | (10 | ) | — |
| — |
|
| Amortization of prior service credit | — |
| — |
| — |
| — |
| (2 | ) | (2 | ) |
| Amortization of net actuarial loss | 4 |
| 6 |
| 5 |
| 5 |
| (2 | ) | — |
|
Curtailment/settlement gain (a) | — |
| — |
| — |
| (26 | ) | (3 | ) | (2 | ) |
| Other | — |
| — |
| — |
| — |
| — |
| (8 | ) |
| Net periodic cost (benefit) | $ | 6 |
| $ | 6 |
| $ | 8 |
| $ | (17 | ) | $ | (1 | ) | $ | (7 | ) |
| |
(a)
| The curtailment/settlement gain for the non-U.S. pension benefits for the nine months ended September 30, 2016 is primarily associated with two UK plans merging into the GE UK Pension Plan. |
For all pension plans sponsored by us, we make annual contributions to the plans in amounts equal to or greater than amounts necessary to meet minimum government funding requirements. During the nine months ended September 30, 2017, we contributed approximately $492021, the provision for income taxes was $189 million and $422 million, respectively. The difference between the U.S. statutory tax rate of 21% and the effective tax rate is primarily related to our pensionlosses with no tax benefit due to valuation allowances and postretirement benefit plans. For our defined contribution plans (including GE sponsored plans) during the nine months ended September 30, 2017 we contributed approximately $69 million.changes in unrecognized tax benefits related to uncertain tax positions.
NOTE 10. INCOME TAXES
Income tax expense was $96 million forFor the three months ended September 30, 2017 compared2020, the provision for income taxes was $47 million. The difference between the U.S. statutory tax rate of 21% and the effective tax rate is primarily related to $70 million for the prior year quarter. The increase was primarily attributable to us not being subject to U.S. tax after the Transactions and unable to recognize alosses with no tax benefit on U.S. losses as those losses are passed throughdue to our members. Consequently, the tax expense is primarily attributable to non-U.S. taxes related to our foreign subsidiaries. The positive impact of foreign tax rates lower than the U.S. rate of 35% is offset by adjustments to prior estimates, increased valuation allowances and withholding taxes. The prior year quarter reflects 100% of the taxes associated with U.S. and non-U.S. earnings of the historic GE O&G business.allowances.
For the nine months ended September 30, 2017, our2020, the provision for income taxes was $110 million. The difference between the U.S. statutory tax expense was $125 million comparedrate of 21% and the effective tax rate is primarily related to incomenon-deductible goodwill impairment, the geographical mix of earnings and losses, and losses with no tax expense of $132 million in the first nine months of 2016. The $7 million net decrease in tax expense isbenefit due to lower income before taxes partially offset by U.S. losses incurred in the current quarter that we are not ablevaluation allowances.
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 13
Baker Hughes Holdings LLC
Notes to benefit from as those losses are passed through to our member. The positive impact of foreign tax rates lower than the U.S. rate of 35% is offset by adjustments to prior estimates, increased valuation allowances and withholding taxes. The prior year nine months reflects 100% of the taxes associated with U.S. and non-U.S. earnings of the historic GE O&G business.Unaudited Condensed Consolidated Financial Statements
NOTE 11.12. MEMBERS' EQUITY
COMMON UNITS
The BHGEBHH LLC Agreement provides that initially there is one class of Common Units,common units (Units), which are currently held currently by BHGE, indirectly through EHHC and CFC Holdings, LLC (CFC Holdings), and by GE or GE's affiliates.the Members. If BHGEBaker Hughes issues a share of Class A Common Stock,common stock, including in connection with an equity incentive or similar plan, BHGE LLCwe will also issue a corresponding Common Unit to BHGEBaker Hughes or one of its direct subsidiaries. For the threenine months ended September 30, 2017,2021 and 2020 we issued 0.45 million Common7,204 thousand and 6,721 thousand Units, respectively, to BHGEBaker Hughes or one of its direct subsidiaries in connection with the issuance of its Class A Common Stockcommon stock. The Members are entitled through their Units to receive distributions on an equal amount of any dividend paid by BHGE. As ofBaker Hughes to its Class A shareholders.
During the nine months ended September 30, 2017, GE owns2021, GE's economic interest in us was reduced to approximately 62.5%17.2% primarily as a result of the exchange of 132.7 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 pursuant to the Exchange Agreement, such shares of Class B common stock, together with associated Units, are canceled.
On July 30, 2021, our Board of Directors authorized us to repurchase up to $2 billion of our CommonUnits. 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. During the three months ended September 30, 2021, we repurchased and canceled 4.4 million Units and BHGE ownsfor a total of $106 million. At September 30, 2021, we had authorization remaining to repurchase up to approximately 37.5%$1.9 billion of the remaining Commonour Units.
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
The following table presents the changes in the number of Units outstanding (in thousands): | | | | | | | | | | | | | | |
| Common Units Held by Baker Hughes | Common Units Held by GE |
| 2021 | 2020 | 2021 | 2020 |
| Balance at January 1 | 723,999 | | 650,065 | | 311,433 | | 377,428 | |
| Issue of Units to Baker Hughes under equity incentive plan | 7,204 | | 6,721 | | — | | — | |
| | | | |
| | | | |
| Exchange of Units | 132,706 | | 27,988 | | (132,706) | | (27,988) | |
| Repurchase and cancellation of Units | (4,430) | | — | | — | | — | |
| Balance at September 30 | 859,480 | | 684,775 | | 178,726 | | 349,440 | |
ACCUMULATED OTHER COMPREHENSIVE LOSS (AOCL)
The following tables present 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, 2020 | $ | — | | $ | (2,096) | | $ | 5 | | $ | (451) | | $ | (2,542) | |
| Other comprehensive income (loss) before reclassifications | — | | (82) | | (6) | | 47 | | (41) | |
| Amounts reclassified from accumulated other comprehensive income (loss) | — | | 31 | | (7) | | 32 | | 56 | |
| Deferred taxes | — | | — | | — | | (1) | | (1) | |
| Other comprehensive income (loss) | — | | (51) | | (13) | | 78 | | 14 | |
| Less: Other comprehensive loss attributable to noncontrolling interests | — | | (1) | | — | | — | | (1) | |
| | | | | |
| | | | | |
| Balance at September 30, 2021 | $ | — | | $ | (2,146) | | $ | (8) | | $ | (373) | | $ | (2,527) | |
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 14
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
|
| | | | | | | | | | | | | | | |
| | Investment Securities | Foreign Currency Translation Adjustments | Cash Flow Hedges | Benefit Plans | Accumulated Other Comprehensive Loss |
| Balance at December 31, 2016 | $ | — |
| $ | (1,801 | ) | $ | (10 | ) | $ | (83 | ) | $ | (1,894 | ) |
| Other comprehensive income (loss) before reclassifications | 40 |
| 217 |
| 12 |
| (12 | ) | 257 |
|
| Amounts reclassified from accumulated other comprehensive income (loss) | (39 | ) | — |
| 9 |
| — |
| (30 | ) |
| Deferred taxes | 1 |
| (10 | ) | (4 | ) | 6 |
| (7 | ) |
| Other comprehensive income (loss) | 2 |
| 207 |
| 17 |
| (6 | ) | 220 |
|
| Less: Other comprehensive income (loss) attributable to noncontrolling interests | 1 |
| 1 |
| — |
| 2 |
| 4 |
|
| Balance at September 30, 2017 | $ | 1 |
| $ | (1,595 | ) | $ | 7 |
| $ | (91 | ) | $ | (1,678 | ) |
|
| | | | | | | | | | | | | | | |
| | 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 income (loss) before reclassifications | — |
| (158 | ) | (39 | ) | 120 |
| (77 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| — |
| 33 |
| 2 |
| 35 |
|
| Deferred taxes | — |
| (3 | ) | 1 |
| (53 | ) | (55 | ) |
| Other comprehensive income (loss) | — |
| (161 | ) | (5 | ) | 69 |
| (97 | ) |
| Less: Other comprehensive income (loss) attributable to noncontrolling interests | — |
| (4 | ) | — |
| 6 |
| 2 |
|
| Balance at September 30, 2016 | $ | — |
| $ | (1,541 | ) | $ | (7 | ) | $ | (83 | ) | $ | (1,631 | ) |
| | | | | | | | | | | | | | | | | |
| 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 loss before reclassifications | (2) | | (101) | | (5) | | (56) | | (164) | |
| Amounts reclassified from accumulated other comprehensive income (loss) | — | | — | | (2) | | 35 | | 33 | |
| Deferred taxes | — | | — | | 1 | | (3) | | (2) | |
| Other comprehensive (loss) | (2) | | (101) | | (6) | | (24) | | (133) | |
| Less: Other comprehensive loss attributable to noncontrolling interests | — | | (3) | | — | | — | | (3) | |
| | | | | |
| Less: Other adjustments | — | | (1) | | — | | 1 | | — | |
| | | | | |
| Balance at September 30, 2020 | $ | — | | $ | (2,371) | | $ | 4 | | $ | (352) | | $ | (2,719) | |
The amounts reclassified from accumulated other comprehensive loss during the nine months ended September 30, 20172021 and 20162020 for benefit plans represent realized gains on investment securities, foreign exchange contracts on our cash flow hedges (see "Note 12. Financial Instruments" for additional details) and amortization of net actuarial loss and prior service credit, and curtailmentsgain (loss) which are included in the computation of net periodic pension cost (see "Note 9.10. Employee Benefit Plans" for additional details). These reclassifications are and recorded across the various cost and expense line items within thein "Other non-operating loss, net" in our condensed consolidated and combined statements of income (loss).
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
NOTE 12.13. 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.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | December 31, 2016 |
| | Level 1 | Level 2 | Level 3 | Net Balance | Level 1 | Level 2 | Level 3 | Net Balance |
| Assets | |
| |
| |
| | | | | |
| Derivatives | $ | — |
| $ | 212 |
| $ | — |
| $ | 212 |
| $ | — |
| $ | 318 |
| $ | — |
| $ | 318 |
|
| Investment securities | 99 |
| — |
| 171 |
| 270 |
| — |
| — |
| — |
| — |
|
| Total assets | 99 |
| 212 |
| 171 |
| 482 |
| — |
| 318 |
| — |
| 318 |
|
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Derivatives | — |
| (196 | ) | — |
| (196 | ) | — |
| (375 | ) | — |
| (375 | ) |
| Total liabilities | $ | — |
| $ | (196 | ) | $ | — |
| $ | (196 | ) | $ | — |
| $ | (375 | ) | $ | — |
| $ | (375 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 | December 31, 2020 |
| Level 1 | Level 2 | Level 3 | Net Balance | Level 1 | Level 2 | Level 3 | Net Balance |
| Assets | | | | | | | | |
| Derivatives | $ | — | | $ | 19 | | $ | — | | $ | 19 | | $ | — | | $ | 118 | | $ | — | | $ | 118 | |
| Investment securities | 403 | | — | | 9 | | 411 | | 1,502 | | — | | 30 | | 1,532 | |
| Total assets | 403 | | 19 | | 9 | | 430 | | 1,502 | | 118 | | 30 | | 1,650 | |
| | | | | | | | |
| Liabilities | | | | | | | | |
| Derivatives | — | | (30) | | — | | (30) | | — | | (52) | | — | | (52) | |
| Total liabilities | $ | — | | $ | (30) | | $ | — | | $ | (30) | | $ | — | | $ | (52) | | $ | — | | $ | (52) | |
There were no transfers between Level 1, 2 and 3 during the three and nine months ended September 30, 2017.2021.
The following table provides a reconciliation of recurring Level 3 fair value measurements:measurements for investment securities: | | | | | | | | |
| 2021 | 2020 |
| Balance at January 1 | $ | 30 | | $ | 259 | |
| Purchases | — | | 10 | |
| Proceeds at maturity | (21) | | (168) | |
| Unrealized gains (losses) recognized in accumulated other comprehensive income (loss) | — | | (3) | |
| Balance at September 30 | $ | 9 | | $ | 98 | |
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 15
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
|
| | | |
| Balance at December 31, 2016 | $ | — |
|
| Additions as a result of business combination | 179 |
|
| Purchases | 65 |
|
| Proceeds at maturity | (71 | ) |
| Unrealized losses recognized in accumulated other comprehensive income (loss) | (2 | ) |
| Balance at September 30, 2017 | $ | 171 |
|
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 condensed consolidated and combined statement of income (loss) on account of any Level 3 instrument still held at the reporting date. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 | December 31, 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) | $ | 9 | | $ | — | | $ | — | | $ | 9 | | $ | 30 | | $ | — | | $ | — | | $ | 30 | |
Equity securities (2) | 61 | | 345 | | (3) | | 403 | | 76 | | 1,431 | | (5) | | 1,502 | |
| Total | $ | 70 | | $ | 345 | | $ | (3) | | $ | 411 | | $ | 106 | | $ | 1,431 | | $ | (5) | | $ | 1,532 | |
(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 $(141) million and nil for the three months ended September 30, 2021 and 2020, respectively, and $(954) million and $(12) million for the nine months ended September 30, 2021 and 2020, respectively.
As of September 30, 2021 and December 31, 2020, our equity securities are comprised primarily of our investment in C3.ai, which consists of 8,650,476 and 10,813,095 shares, respectively, of C3.ai Class A common stock (C3.ai Shares), with a fair value of $401 million and $1,500 million, respectively. There were no C3.ai Shares sold during the three months ended September 30, 2021. We sold approximately 2.2 million of C3.ai Shares during the nine months ended September 30, 2021 and received proceeds of $145 million. For the three and nine months ended September 30, 2021, we recorded a loss of $140 million and $955 million, respectively, from the net change in fair value of our investment in C3.ai, which is reported in the “Other non-operating loss, net” caption in our condensed consolidated statement of income (loss). See “Note 15. Related Party Transactions” for further details on our agreements with C3.ai.
As of September 30, 2021 and December 31, 2020, $403 million and $1,514 million of total investment securities are recorded in "All other current assets" and $9 million and $18 million are recorded in "All other assets" of the condensed consolidated statements of financial position, respectively.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Our financial instruments include cash, andcash equivalents, current receivables, certain investments, accounts payable, short and long-term debt, and derivative financial instruments. Except for long-term debt, the estimated fair value of these financial instruments atas of September 30, 20172021 and December 31, 20162020 approximates their carrying value as reflected in our condensed consolidated and combined financial statements. For further information on the fair value of our debt, see "Note 8.9. Borrowings."
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 16
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
DERIVATIVES AND HEDGING
In this section, we explain how weWe use derivatives to manage our risks and how these financial instruments are reflected in our condensed consolidated and combined financial statements. Our use of derivatives relates solely to risk management; we do not use derivatives for speculation.
The table below summarizes the fair value of all derivatives, including hedging instruments and embedded derivatives.
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
|
| | | | | | | | | | | | |
| | September 30, 2017 | December 31, 2016 |
| | Assets | (Liabilities) | Assets | (Liabilities) |
| Derivatives accounted for as hedges | | | | |
| Currency exchange contracts | $ | 10 |
| $ | — |
| $ | 2 |
| $ | (9 | ) |
| | | | | |
| Derivatives not accounted for as hedges | | | | |
| Currency exchange contracts | 202 |
| (196 | ) | 316 |
| (366 | ) |
| Total derivatives | $ | 212 |
| $ | (196 | ) | $ | 318 |
| $ | (375 | ) |
| | | | | | | | | | | | | | |
| | September 30, 2021 | December 31, 2020 |
| Assets | Liabilities | Assets | Liabilities |
| Derivatives accounted for as hedges | | | | |
| Currency exchange contracts | $ | — | | $ | — | | $ | 5 | | $ | — | |
| Interest rate swap contracts | — | | (12) | | — | | — | |
| | | | |
| Derivatives not accounted for as hedges | | | | |
| Currency exchange contracts and other | 19 | | (18) | | 113 | | (52) | |
| | | | |
| | | | |
| Total derivatives | $ | 19 | | $ | (30) | | $ | 118 | | $ | (52) | |
Derivatives are classified in the captions "All other current assets," "All other assets," "All other current liabilities," and "All other liabilities"condensed consolidated statements of financial position depending on their respective maturity date.
RISK MANAGEMENT STRATEGY
We buy, manufacture As of September 30, 2021 and sell componentsDecember 31, 2020, $18 million and products as well as provide services across global markets. These activities expose us to changes$115 million of derivative assets are recorded in foreign currency exchange rates"All other current assets" and commodity prices, which can adversely affect revenues earned$1 million and costs$3 million are recorded in "All other assets" of operating our business. When the currencycondensed consolidated statements of financial position, respectively. As of September 30, 2021 and December 31, 2020, $27 million and $48 million of derivative liabilities are recorded in which we sell equipment differs from"All other current liabilities" and $4 million and $4 million are recorded in "All other liabilities" of 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 pricecondensed consolidated statements of a raw material that we use in manufacturing can affect the cost of manufacturing. We use derivatives to mitigate or eliminate these exposures.financial position, respectively.
FORMS OF HEDGING
In this section, we explain the hedging methods we use and their effects on our condensed consolidated and combined financial statements.
Cash flow hedgesFlow 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 derivativesIn addition, we are exposed to reduce or eliminate priceinterest rate risk on raw materials purchased for usefluctuations in manufacturing.connection with the planned issuance of long-term debt. During the nine months ended September 30, 2021, the Company executed interest rate swap contracts designated as cash flow hedges. These contracts are expected to mitigate interest rate risk associated with the anticipated refinancing of certain portions of long-term debt.
Under hedge accounting,Changes in 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. WhenAccumulated Other Comprehensive Income, or AOCI) and are recorded in earnings in the period in which the hedged transaction occurs, these amounts are released from equity,occurs. See "Note 12. Members' Equity" for further information on activity in order that the transaction will be reflected 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. The table below summarizes how the derivative is reflected in the condensed consolidated and combined statement of financial position and income (loss) under hedge accounting. The effect of the hedged forecasted transaction is not presented in this table but offsets the earnings effect of the derivative.
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
|
| | | | | | | | | | | | |
| | Three months ended September 30, | Nine months ended September 30, |
| Financial statement effects - cash flow hedges | 2017 | 2016 | 2017 | 2016 |
| Condensed consolidated and combined statement of financial position changes: | | | | |
| Fair value of derivatives increase (decrease) | $ | 9 |
| $ | (4 | ) | $ | 12 |
| $ | (39 | ) |
| Equity (increase) decrease | (9 | ) | 4 |
| (12 | ) | 39 |
|
| | | | | |
| Income (loss) related to ineffectiveness | — |
| — |
| — |
| — |
|
Income (loss) effect of derivatives (a) | — |
| (3 | ) | (9 | ) | (33 | ) |
| |
(a)
| Offsets earnings effect of the hedged forecasted transaction |
The following table explains the effect of changes in market rates on the fair value of derivatives we use most commonly inAOCI for cash flow hedging arrangements.hedges.
|
| | | | |
Currency forwards/swaps | | U.S. dollar strengthens | | U.S. dollar weakens |
Pay U.S. dollars/receive foreign currency | | Fair value decreases | | Fair value increases |
We expect to transfer $4 million to earnings as an expense in the next 12 months contemporaneously with the earnings effectsAs of the related forecast transactions. At September 30, 20172021 and 2016,December 31, 2020, the maximum term of derivative instruments that hedge forecastforecasted transactions was three-yearsone year.
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 two-years, respectively. See "Note 11. Members' Equity" for additional information about reclassification outmay use interest rate swaps to manage the economic effect of accumulated other comprehensive income.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.
For cash flow hedges, theAs of September 30, 2021, we had interest rate swaps with a notional amount of ineffectiveness in the hedging relationship and$500 million that converted a portion of our $1,350 million aggregate principal amount of the3.337% 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 attributable to interest rate risk. We concluded that the interest 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 the fair value of the derivatives that are not includedhedged debt, due to changes in the measurementbenchmark rate, exactly offsets the change in the fair value of
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 17
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
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 were insignificant for each reporting period.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.
The table below provides information about the earnings effects of all derivatives that serve as economic hedges. 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 condensed consolidated and combined statementstatements of income (loss). In general, | | | | | | | | | | | | | | | | | |
| Derivatives not designated as hedging instruments | Condensed consolidated statement of income caption | Three Months Ended September 30, | Nine Months Ended September 30, |
| 2021 | 2020 | 2021 | 2020 |
Currency exchange contracts (1) | Cost of goods sold | $ | (2) | | $ | 20 | | $ | 7 | | $ | 37 | |
| Currency exchange contracts | Cost of services sold | 8 | | 17 | | — | | 63 | |
| Commodity derivatives | Cost of goods sold | — | | 3 | | 5 | | 2 | |
| Other derivatives | Other non-operating loss, net | — | | — | | — | | 8 | |
Total (2) | | $ | 6 | | $ | 40 | | $ | 12 | | $ | 110 | |
(1)Excludes gains of $2 million and losses of $14 million on embedded derivatives for the income (loss) effectsthree months ended September 30, 2021 and 2020, respectively, and gains of $5 million and losses of $9 million during the hedged itemnine months ended September 30, 2021 and 2020, respectively, as embedded derivatives are recordednot considered to be hedging instruments in the same condensed consolidated and combined financial statement lineour economic hedges.
(2)The effect on earnings of derivatives 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).
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidatedthe economically hedged items in the current and Combined Financial Statements
|
| | | | | | | | | | | | |
| | Three months ended September 30, | Nine months ended September 30, |
Financial statement effects - economic hedges (a) | 2017 | 2016 | 2017 | 2016 |
| Condensed consolidated and combined statement of financial position changes: | | | | |
Change in fair value of economic hedge increase (decrease) (b) | $ | 59 |
| $ | (41 | ) | $ | 60 |
| $ | (126 | ) |
| Change in fair value of economic hedges which has current earnings offset from hedged assets/liabilities increase (decrease) | 53 |
| (1 | ) | 53 |
| (3 | ) |
Income (loss) effect of economic hedges on forecasted transactions with no current period earnings offset (c) | $ | 6 |
| $ | (40 | ) | $ | 7 |
| $ | (123 | ) |
| |
(a)
| Include both the realized and unrealized movements, as well as those which cover future cash flows yet to be recognized on the condensed consolidated and combined statement of financial position. |
| |
(b)
| Include fair value changes in embedded derivatives |
| |
(c)
| Offset by the future earnings effects of economically hedged item. |
The table below explains the effects of market rate changes on the fair value of derivatives we use most commonly as economic hedges.
|
| | | | |
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 |
future periods.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). We generally disclose derivative notional amounts on a gross basis.underlying. A substantial majority of the outstanding notional amount of $11.5$5.3 billion and $7.1$7.0 billion at September 30, 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 table below provides additional information about hownotional 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 reflected in our condensed consolidated and combined financial statements.
|
| | | | | | |
| Carrying amount related to derivatives | September 30, 2017 | December 31, 2016 |
| Derivative assets | $ | 212 |
| $ | 318 |
|
| Derivative liabilities | (196 | ) | (375 | ) |
| Net derivatives | $ | 16 |
| $ | (57 | ) |
EFFECTS OF DERIVATIVES ON EARNINGS
All derivatives are marked to fair value on our condensed 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 discussed 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.
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
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.
As of September 30, 2021 and December 31, 2020, the carrying amount of equity securities without readily determinable fair values was $572 million and $554 million, respectively, and includes $500 million related to our 5 percent investment in ADNOC Drilling. These investments are recorded in "All other assets" of the condensed consolidated statements of financial position.
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 18
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 13.14. 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. These products and services operate across upstream oil & gas and broader energy and industrial markets.
OILFIELD SERVICES (OFS)
Oilfield Services provides equipmentdiscrete products and integrated well services for onshore and offshore operations across the lifecycle of a well, ranging from welldrilling, evaluation, to decommissioning.completion, production, and intervention. Products and services include diamond and tri-cone drill bits, drilling services, (includingincluding directional drilling technology, measurement while drilling & logging while drilling),drilling, oilfield and industrial chemicals, artificial lift technologies, including electrical submersible pumps, downhole completion tools and systems, wellbore intervention tools and services, wireline services,pressure pumping, drilling and completions fluids, oilfieldwireline services and industrial chemicals, pressure pumping,diamond and artificial lift technologies (including electrical submersible pumps).tri-cone drill bits.
OILFIELD EQUIPMENT (OFE)
Oilfield Equipment provides a broad portfolio of products and services required to facilitate the safe and reliable 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 pressure control equipment and services, Subsea production systems and services, drilling equipment,flexible pipe systems for offshore and flexible pipeline systems. Oilfield Equipment operation designsonshore applications, and manufactures onshore and offshore drilling and production systems and equipment for floating production platforms and provideslife-of-field solutions including well intervention, covering the entire life cycle of a full range of services related to onshore and offshore drilling activities.field.
TURBOMACHINERY & PROCESS SOLUTIONS (TPS)
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 productsdecarbonization 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) and small-scale liquefied natural gas (LNG) solutions used primarily for shale oil and gas field development.LNG solutions.
DIGITAL SOLUTIONS (DS)
Digital Solutions provides equipment, software, and services for a wide range of industries, including oil & 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.
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 19
Baker Hughes a GE company,Holdings LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| Segment revenue | 2021 | 2020 | 2021 | 2020 |
| Oilfield Services | $ | 2,419 | | $ | 2,308 | | $ | 6,976 | | $ | 7,858 | |
| Oilfield Equipment | 603 | | 726 | | 1,867 | | 2,133 | |
| Turbomachinery & Process Solutions | 1,562 | | 1,513 | | 4,675 | | 3,759 | |
| Digital Solutions | 510 | | 503 | | 1,499 | | 1,460 | |
| Total | $ | 5,093 | | $ | 5,049 | | $ | 15,017 | | $ | 15,210 | |
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 impairments and certain gains and losses not allocated to the operating segments. | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| Segment income (loss) before income taxes | 2021 | 2020 | 2021 | 2020 |
| Oilfield Services | $ | 190 | | $ | 93 | | $ | 505 | | $ | 345 | |
| Oilfield Equipment | 14 | | 19 | | 45 | | (4) | |
| Turbomachinery & Process Solutions | 278 | | 191 | | 705 | | 473 | |
| Digital Solutions | 26 | | 46 | | 75 | | 117 | |
| Total segment | 508 | | 349 | | 1,330 | | 931 | |
| Corporate | (105) | | (115) | | (324) | | (353) | |
| Goodwill impairment | — | | — | | — | | (14,717) | |
Inventory impairment (1) | — | | (42) | | — | | (218) | |
| Restructuring, impairment and other | (14) | | (209) | | (219) | | (1,637) | |
| Separation related | (11) | | (32) | | (53) | | (110) | |
| Other non-operating loss, net | (102) | | (149) | | (791) | | (367) | |
| Interest expense, net | (67) | | (66) | | (205) | | (195) | |
| Income (loss) before income taxes | $ | 209 | | $ | (264) | | $ | (260) | | $ | (16,666) | |
(1)Charges for inventory impairments are predominantly reported in the "Cost of goods sold" caption of the condensed consolidated statements of income (loss).
The following table presents depreciation and amortization by segment: | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| Segment depreciation and amortization | 2021 | 2020 | 2021 | 2020 |
| Oilfield Services | $ | 183 | | $ | 217 | | $ | 578 | | $ | 714 | |
| Oilfield Equipment | 22 | | 35 | | 81 | | 114 | |
| Turbomachinery & Process Solutions | 30 | | 33 | | 90 | | 87 | |
| Digital Solutions | 22 | | 24 | | 66 | | 73 | |
| Total segment | 257 | | 309 | | 815 | | 988 | |
| Corporate | 5 | | 6 | | 17 | | 22 | |
| Total | $ | 262 | | $ | 315 | | $ | 832 | | $ | 1,010 | |
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 20
|
| | | | | | | | | | | | |
| | Three Months Ended | Three Months Ended |
| | September 30, 2017 | September 30, 2016 |
| Segments | Revenue | Income (Loss) before Income Taxes | Revenue | Income (Loss) before Income Taxes |
| Oilfield Services | $ | 2,635 |
| $ | 75 |
| $ | 192 |
| $ | (66 | ) |
| Oilfield Equipment | 600 |
| (43 | ) | 829 |
| 61 |
|
| Turbomachinery & Process Solutions | 1,511 |
| 210 |
| 1,480 |
| 258 |
|
| Digital Solutions | 629 |
| 87 |
| 523 |
| 101 |
|
| Total segment | 5,375 |
| 329 |
| 3,024 |
| 354 |
|
| Corporate | — |
| (89 | ) | — |
| (75 | ) |
Inventory impairment (a) | — |
| (12 | ) | — |
| (24 | ) |
| Restructuring, impairment and other | — |
| (191 | ) | — |
| (77 | ) |
| Merger and related costs | — |
| (159 | ) | — |
| (2 | ) |
| Other non operating income (loss), net | — |
| (3 | ) | — |
| 6 |
|
| Interest expense, net | — |
| (42 | ) | — |
| (21 | ) |
| Total | $ | 5,375 |
| $ | (167 | ) | $ | 3,024 |
| $ | 161 |
|
|
| | | | | | | | | | | | |
| | Nine Months Ended | Nine Months Ended |
| | September 30, 2017 | September 30, 2016 |
| Segments | Revenue | Income (Loss) before Income Taxes | Revenue | Income (Loss) before Income Taxes |
| Oilfield Services | $ | 3,077 |
| $ | (42 | ) | $ | 599 |
| $ | (164 | ) |
| Oilfield Equipment | 1,965 |
| 9 |
| 2,693 |
| 190 |
|
| Turbomachinery & Process Solutions | 4,841 |
| 707 |
| 4,950 |
| 942 |
|
| Digital Solutions | 1,613 |
| 226 |
| 1,511 |
| 240 |
|
| Total segment | 11,496 |
| 900 |
| 9,753 |
| 1,208 |
|
| Corporate | — |
| (282 | ) | — |
| (240 | ) |
Inventory impairment (a) | — |
| (31 | ) | — |
| (131 | ) |
| Restructuring, impairment and other | — |
| (292 | ) | — |
| (452 | ) |
| Merger and related costs | — |
| (310 | ) | — |
| (10 | ) |
| Other non operating income (loss), net | — |
| 65 |
| — |
| 18 |
|
| Interest expense, net | — |
| (75 | ) | — |
| (74 | ) |
| Total | $ | 11,496 |
| $ | (25 | ) | $ | 9,753 |
| $ | 319 |
|
| |
(a)
| Charges for inventory impairments are reported in the "Cost of goods sold" caption of the condensed consolidated and combined statements of income (loss). |
Baker Hughes a GE company,Holdings LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
The following table presents total assets by segment: |
| | | | | | |
| Segments | September 30, 2017 | December 31, 2016 |
Oilfield Services (a) | $ | 33,505 |
| $ | 3,266 |
|
| Oilfield Equipment | 8,887 |
| 9,406 |
|
| Turbomachinery & Process Solutions | 9,075 |
| 8,565 |
|
| Digital Solutions | 3,644 |
| 3,113 |
|
| Total segment | 55,111 |
| 24,350 |
|
Corporate and eliminations (b) | (518 | ) | (2,629 | ) |
| Total | $ | 54,593 |
| $ | 21,721 |
|
| |
(a)
| Goodwill acquired as a result of the Baker Hughes acquisition have preliminarily been allocated to Oilfield Services. See "Note 6. Goodwill and Other Intangible Assets" for further details. |
(b)Corporate and eliminations in total segment assets include adjustments of intercompany investments and receivables that are reflected within the total assets of the four reportable segments.NOTE 14.15. 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. Until GE and its affiliates own less than 20% of the voting power of Baker Hughes' outstanding common stock, which includes both Class A and B common stock, GE is entitled to designate 1 person for nomination to our board of directors. At September 30, 2021 and December 31, 2020, GE's ownership interest in BHH LLC was 17.2% and 30.1%, respectively. At September 30, 2021, GE owned Class A common stock in addition to their Class B common stock, which represents their overall Baker Hughes ownership of 20.6%.
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 pursuant to which GEAero JV, of $366 million and its affiliates and 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$384 million per year. Costs of $14 million related to the Intercompany Services Agreement were incurred during the three months ended September 30, 2021 and 2020, respectively, and $988 million and $993 million during the nine months ended September 30, 2017. 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,2021 and the fees for such services are based on actual usage of such services and historical GE intercompany pricing.2020, respectively. In addition, we will providesold products and services to GE and its affiliates with confidential accessfor $48 million and $46 million during the three months ended September 30, 2021 and 2020, respectively, and $136 million and $150 million during the nine months ended September 30, 2021 and 2020, respectively.
The Company has $300 million and $356 million of accounts payable at September 30, 2021 and December 31, 2020, respectively, for goods and services provided by GE in the ordinary course of business. The Company has $362 million and $429 million of current receivables at September 30, 2021 and December 31, 2020, respectively, for goods and services provided to certainGE in the ordinary course of our proprietary technologybusiness. Additionally, the Company has $77 million and related developments$78 million of current receivables at September 30, 2021 and enhancements thereto related to GE's operations, products or service offerings.December 31, 2020, respectively, from Baker Hughes.
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 (such as most of our employee benefit costs).
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 ofOn July 3, 2017, we were required to repay anyexecuted a promissory note with GE that represents certain cash in excess of $100 million, net of any third-party debt in GE O&G, to GE. Duethat we are holding 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.cash. 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 Governmentgovernment 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 on the promissory note, but we remain obligated to
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
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. As of September 30, 2017, $1,2672021, of the $11 million of such cashdue to GE, all was held on behalfin the form of cash. As of December 31, 2020, of the $45 million due to GE, $44 million was held in the form of cash and a$1 million was held in the form of investment securities. A corresponding liability is reported in short-term borrowings bothdebt in the condensed consolidated and combined statements of financial position.
RECEIVABLES MONETIZATIONRELATED PARTY TRANSACTIONS WITH C3.ai
We monetizehave agreements with C3.ai under which, among other things, we received a portionsubscription (which we refer to below as direct subscription fees) to use certain C3.ai offerings for internal use and the development of applications on the C3.ai AI Suite, as well as the right to resell C3.ai offerings worldwide on an exclusive basis in the 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 agreement has an expiration date in the fiscal year ending April 30, 2024 with annual contractual amounts of our current receivables through programs established for GEminimum revenue commitment of $75 million, $125 million, and various GE subsidiaries. We account for receivables monetized$150 million per year, which amounts are inclusive of direct subscription fees of approximately $28 million per year, over the fiscal years ending April 30, 2022, 2023, and 2024, respectively. To the extent we are unable to meet the annual minimum revenue commitment under such arrangement, we are obligated to pay C3.ai the shortfall; if we exceed the annual minimum revenue commitment, C3.ai will pay us a sales commission. Lorenzo Simonelli, Chief Executive Officer of Baker Hughes, serves as true sales in accordance with ASC 860, Transfers and Servicing.
Our current receivables are legally transferred through receivable factoring programs established for GE and various GE subsidiaries administered by Working Capital Solutions (WCS), an operating unit of GE Capital.
We factor 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 WCS, GE Capital or sold to external investors through WCS agent arranger or buy/sell structures. Under the factoring programs, GE Capital performs a risk analysis and allocates a nonrecourse credit limit for each customer. If the portfolio exceeds this credit limit, then the receivable is factored with recourse. The evaluation of whether recourse transactions qualify for accounting derecognition is based, in part, upon the legal jurisdictionmember of the sales, as such, the majorityboard of recourse transactions outside the U.S. qualifydirectors of C3.ai. See “Note 13. Financial Instruments” for sale treatment. The Company has $147 million and $198 million at September 30, 2017 and December 31, 2016, respectively,further discussion of accounts payable to GE that relate to cash collected on current receivables under this monetization program.
In addition, prior to the Transactions, we participatedour investment 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.
Transfers of receivables under WCS administered programs are generally accounted for as sales.C3.ai.
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 21
|
| | | | | | |
| | September 30, 2017 |
| December 31, 2016 |
|
| Transfers of receivables accounted for as sales | $ | 1,452 |
| $ | 2,168 |
|
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 condensed consolidated and combined statements of financial position as of September 30, 2017 and December 31, 2016. Under the programs, we incurred interest expense and finance charges of $17 million and $22 million for the three months ended September 30, 2017 and 2016, respectively, and $57 million and $66 million for the nine months ended September 30, 2017 and 2016, respectively, which is reflected on the condensed consolidated and combined statements of income (loss).
TRADE PAYABLES ACCELERATED PAYMENT PROGRAM
Our North American operations participate in accounts payable programs with GE Capital. We settle invoices with vendors per our payment terms to obtain cash discounts. GE Capital provides funding for the period from the date at which an invoice is eligible for a cash discount through the final termination date for invoice settlement. Our liability associated with the funded participation in the accounts payable programs, which is presented as accounts payable within the condensed consolidated and combined statements of financial position, was $139 million and $104 million as of September 30, 2017 and December 31, 2016, respectively.
Baker Hughes a GE company,Holdings LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
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 condensed consolidated and combined statements of financial position. At September 30, 2017, GE's equity ownership is reflected in noncontrolling interest in our condensed consolidated and combined statements of financial position.
OTHER
The Company has $516 million and $228 million of accounts payable at September 30, 2017 and December 31, 2016, respectively, for services provided by GE in the ordinary course of business.
Prior to 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 condensed 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. GE will be responsible for certain taxes related to the formation of the transaction undertaken by GE and Baker Hughes and their respective subsidiaries. GE has assumed approximately $35 million of tax obligations of Baker Hughes related to the formation of the transaction.
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) 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, and (ii) 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.
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. 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.
NOTE 15.16. COMMITMENTS AND CONTINGENCIES
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
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
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 have agreed in principle to a settlement of the class claims, subject to Court approval. The amount of the class settlement, if approved by the Court, will not have a material impact in the financial results reported by the Company.
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.
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
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. Trial on the validity of asserted claims from Canada patent 2,412,072, was completed March 9, 2017, with no decision from the Court. 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 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 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. At this time, we are not able to predict the outcome of these proceedings.
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
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 22
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
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 Baker Hughes, 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.
In March 2019, Baker Hughes received a document request from the United States Department of Justice (the “DOJ”) related to certain of Baker Hughes' operations in Iraq and its dealings with Unaoil Limited and its affiliates. In December 2019, Baker Hughes received a similar document request from the SEC. Baker Hughes has cooperated with the DOJ and the SEC in connection with their requests and any related matters. On September 30, 2021, Baker Hughes was informed that the matter has been closed and no enforcement action has been taken.
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 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. 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
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 23
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
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 December 2020, Baker Hughes received notice that the SEC is conducting a formal investigation that Baker Hughes understands is related to its books and records and internal controls regarding 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 U.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 payments in connection with the identified transactions is immaterial, Baker Hughes is unable to determine at this time if any remedial or other actions may be taken by OFAC. Baker Hughes provided a copy of the letter to the SEC, and, as the SEC investigation is ongoing, Baker Hughes cannot anticipate the timing, outcome or possible impact of the investigation or 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.
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed 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 warranties are as follows: |
| | | | | | |
| Balance at December 31, 2016, and 2015, respectively | $ | 74 |
| $ | 100 |
|
| Provisions | 27 |
| 21 |
|
| Expenditures | (33 | ) | (40 | ) |
Other (a) | 97 |
| (1 | ) |
| Balance at September 30, 2017, and 2016, respectively | $ | 165 |
| $ | 80 |
|
| |
(a)
| Includes an increase of $93 million in the nine months ended September 30, 2017 as a result of the Baker Hughes acquisition. |
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 totalledto GE Capital on behalf of some customers who have entered into financing arrangements with GE Capital. Total off-balance sheet arrangements were approximately $3.6$4.5 billion at September 30, 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 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 16.17. RESTRUCTURING, IMPAIRMENT AND OTHER
RESTRUCTURING CHARGES
In the currentWe recorded restructuring, impairment and prior periods, we approved various restructuring plans globally, mainly to consolidate manufacturing and service facilities, rationalize product lines and rooftops, and reduce headcount across various functions. As a result, we recognized a chargeother charges of $191$14 million and $49$209 million forduring the three months ended September 30, 20172021 and 2016,2020, respectively, and $264$219 million and $255$1,637 million forduring the nine months ended September 30, 20172021 and 2016,2020, respectively. These restructuring initiatives will generate charges post September 30, 2017,Charges incurred in 2021 are primarily related to the continuation of our overall strategy to right-size our structural costs for the year-over-year change in activity levels and the related estimated remainingmarket conditions. Details of these charges are approximately $80 million.discussed below.
TheseBaker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 24
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
RESTRUCTURING AND IMPAIRMENT
The following table presents restructuring and impairment charges by the impacted segment, however, these charges are included as part of "Restructuring, impairment and other" in the condensed consolidated and combined statements of income (loss).
The amount of costs not included in the reported segment
results is as follows:results: | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| 2021 | 2020 | 2021 | 2020 |
| Oilfield Services | $ | 14 | | $ | 144 | | $ | 119 | | $ | 453 | |
| Oilfield Equipment | 3 | | 21 | | 4 | | 121 | |
| Turbomachinery & Process Solutions | (3) | | 7 | | 11 | | 27 | |
| Digital Solutions | — | | 18 | | 3 | | 52 | |
| Corporate | — | | 1 | | 7 | | 15 | |
| Total | $ | 14 | | $ | 191 | | $ | 144 | | $ | 668 | |
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | Nine Months Ended September 30, |
| | 2017 | 2016 | 2017 | 2016 |
| Oilfield Services | $ | 118 |
| $ | 13 |
| $ | 141 |
| $ | 119 |
|
| Oilfield Equipment | 31 |
| 2 |
| 41 |
| 38 |
|
| Turbomachinery & Process Solutions | 16 |
| 12 |
| 38 |
| 47 |
|
| Digital Solutions | 13 |
| 17 |
| 27 |
| 28 |
|
| Corporate | 13 |
| 5 |
| 17 |
| 23 |
|
| Total | $ | 191 |
| $ | 49 |
| $ | 264 |
| $ | 255 |
|
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 coststermination fees. The table below includes any gains on the dispositions of assets' and employees' relocation, employee-related termination benefits, andcertain property, plant & equipment previously impaired as a consequence of exit activities. Details of these charges are as follows: | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| 2021 | 2020 | 2021 | 2020 |
| Property, plant & equipment, net | $ | (1) | | $ | 65 | | $ | 21 | | $ | 214 | |
| Employee-related termination expenses | 1 | | 108 | | 94 | | 406 | |
| | | | |
| Contract termination fees | 3 | | 1 | | 4 | | 23 | |
| Other incremental costs | 11 | | 17 | | 25 | | 25 | |
| Total | $ | 14 | | $ | 191 | | $ | 144 | | $ | 668 | |
OTHER
During the three months ended September 30, 2021, there were no other incremental costs that were a direct resultcharges incurred. During the nine months ended September 30, 2021, we incurred other charges of the restructuring plans.
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
|
| | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| 2017 | 2016 | 2017 | 2016 |
Property, plant & equipment, net (a) | $ | 68 |
| $ | 13 |
| $ | 80 |
| $ | 84 |
|
| Employee-related termination expenses | 87 |
| 18 |
| 126 |
| 96 |
|
| Asset relocation costs | 2 |
| 6 |
| 7 |
| 14 |
|
| EHS remediation costs | 1 |
| 2 |
| 8 |
| 19 |
|
| Contract termination fees | 16 |
| 5 |
| 21 |
| 31 |
|
| Other incremental costs | 17 |
| 5 |
| 22 |
| 11 |
|
| Total | $ | 191 |
| $ | 49 |
| $ | 264 |
| $ | 255 |
|
| |
(a)
| Includes $74 million for the nine months ended September 30, 2017 of accelerated depreciation related for certain activities associated with our restructuring plans. |
IMPAIRMENT CHARGES
We conduct impairment tests on long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable based on estimated future cash flows.$75 million. During the three and nine months ended September 30, 2017 and 2016,2020, we did not identify any indicatorsincurred other charges of potential impairment for assets still in use that would require further examination. Impairments related to assets removed from service are included in restructuring charges above.
OTHER CHARGES
Other charges included in "Restructuring, impairment and other" caption of the condensed consolidated and combined statements of income (loss) was nil and $28 million in the three months ended September 30, 2017 and 2016, respectively, and $28$18 million and $197$969 million, respectively.
Charges for the nine months ended September 30, 20172021 were primarily related to certain litigation matters in our TPS segment and 2016, respectively. Other charges includethe release of foreign currency devaluation charges of nil and $25 milliontranslation adjustments for certain restructured product lines in the three months ended September 30, 2017 and 2016, respectively, and $12 million and $124 millionour DS segment.
Charges for the nine months ended September 30, 2017 and 2016, respectively, largely2020 were comprised of intangible asset impairments of $605 million driven by significantour 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 and other charges of $73 million driven by certain litigation matters and impairment of an equity method investment primarily in corporate and the OFE segment, and charges related to corporate facility rationalization.
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 25
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 18. ASSETS AND LIABILITIES OF BUSINESS HELD FOR SALE
In March 2021, we announced that we entered into an agreement with Akastor ASA to create a joint venture company (JV Company) to deliver global offshore drilling solutions. The JV Company will be known as HMH and owned 50-50 by Baker Hughes and Akastor ASA. Consequently, on October 1, 2021, we closed the transaction and contributed our subsea drilling systems (SDS) business, a division of our Oilfield Equipment segment, to the JV Company and received as consideration 50% of the shares of the JV Company and $200 million cash of which $120 million was paid at the time of closing. The JV Company issued notes to Baker Hughes for $80 million representing the balance of the consideration owed that will be subordinated to the JV Company’s external debt financing. Our ongoing operations in the JV Company will not be integral to our operations. The Company's interest in the JV Company will be accounted for as an equity method investment.
As of September 30, 2021, the SDS business was classified as held for sale and measured and reported at the lower of its carrying amount or fair value less costs to sell. Based on our preliminary estimates, the carrying value is expected to approximate the fair value less costs to sell, which would include deal costs and foreign currency devaluationstranslation adjustments associated with this business. The following table presents financial information related to the assets and liabilities of the SDS business being contributed to the JV Company that are classified as held for sale and reported in Angola"All other current assets" and Nigeria. These markets have minimal currency derivative liquidity"All other current liabilities" in our condensed consolidated statement of financial position as of September 30, 2021. | | | | | |
| Assets and liabilities of business held for sale | September 30, 2021 |
| Assets | |
| |
Current assets(1) | $ | 122 | |
| |
| Property, plant and equipment | 108 | |
| Intangible assets | 122 | |
| All other assets | 56 | |
| Total assets | 408 | |
| Liabilities | |
| Current liabilities | 48 | |
| |
| |
| All other liabilities | 6 | |
| Total liabilities | 54 | |
| Total carrying amount of net assets contributed | $ | 354 | |
(1)On the closing date, we contributed cash in lieu of customer receivables, which limits our abilitywas incremental to offset these exposures.the assets held for sale detailed in the table above.
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 26
ITEM 2. 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 consolidated and combined financial statements and the related notes included in Item 1 thereto.
EXECUTIVE SUMMARY
On July 3, 2017, we closedWe are an energy technology company with a broad and diversified portfolio of technologies and services that span the Transactions to combine GE O&Genergy and Baker Hughes, creating a fullstream oilfield technology provider that has a unique mix of integrated oilfield products, servicesindustrial value chain. We conduct business in more than 120 countries 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 number of our Common Units. 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 quarter ended September 30, 2017.employ approximately 54,000 employees. We operate through our four business segments: Oilfield Services (OFS), Oilfield Equipment (OFE), Turbomachinery & ProcessingProcess Solutions (TPS), and Digital Solutions (DS). BHGE employs approximately 65,000We sell products and services primarily in the global oil and gas markets, within the upstream, midstream and downstream segments.
In 2020, the industry experienced multiple factors which drove expectations for global oil and gas related spending to be lower. The COVID-19 pandemic lowered global demand for hydrocarbons, as social distancing and travel restrictions were implemented across the world.
The health and safety of our employees continues to be a top priority. Throughout the COVID-19 pandemic, we have utilized remote working where possible, limited travel, and implemented rigorous safety protocols at our sites including pre-entry screenings, social distancing, and face coverings. As conditions improve in certain locations, we are starting to return additional employees to offices/worksites and enabling opportunities for more in-person engagements where it is safe to do so. We are also closely monitoring the evolving dynamics and vaccine situation, and will adjust our protocols as needed to continue protecting our employees and operatesdelivering for our customers, in more than 120 countries.alignment with all associated requirements.
As we look at the macro environment in 2021 and into 2022, the global economy continues to recover from the impact of the global pandemic. However, the pace of growth is being constrained by effects from variant strains of the COVID-19 virus, global chip shortages, supply chain challenges, and energy supply constraints in multiple parts of the world. Despite these headwinds, global growth appears to be on relatively solid footing, underpinning a favorable outlook for the oil market, aided by continued spending discipline by the world’s largest producers. In the natural gas and liquefied natural gas (LNG) markets, fundamentals remain strong with a combination of solid demand growth and extremely tight supply in many parts of the world. We anticipate future demand improving as governments around the world accelerate the transition towards cleaner sources of energy. Outside of the oil and gas industry, the focus on cleaner energy sources and technology to decarbonize resource-intensive industries continue to accelerate. In the U.S., Europe, and Asia, various projects around wind, solar, and green and blue hydrogen are moving forward, as well as a number of carbon capture projects.
In the third quarter of 2017,2021, we took steps to accelerate our strategy and to view our company in two broad business areas: Oilfield Services & Equipment and Industrial Energy Technology 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 execution, and provide long-term optionality as the energy markets evolve.
On the Oilfield Services & Equipment 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. Oilfield Services & Equipment 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.
Industrial Energy Technology is our TPS and DS businesses. Both product companies have compelling portfolios that are beginning to see significant secular growth opportunities, particularly in areas such as hydrogen and carbon capture, utilization and storage (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, industrial asset management and digital, we have a strong foundation on which to build an even more comprehensive presence in the broad industrial energy technology markets.
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 27
In the third quarter of 2021, we generated revenue of $5,375$5,093 million compared to $3,024$5,049 million in the third quarter of 2020. The increase in revenue was driven by higher volume in the OFS, TPS and DS segments, partially offset by lower activity in the OFE segment. Income before income taxes was $209 million for the third quarter of 2016. The increase in revenue was driven primarily by OFS as a result2021, which included restructuring, impairment and other charges of the acquisition$14 million and separation related costs of Baker Hughes, and to a lesser extent, by TPS and DS partially offset by declines in OFE. Loss before income taxes and equity in loss of affiliate was $167 million for$11 million. In the third quarter of 2017,2020, loss before income taxes was $264 million, which included the write-down of assets held for sale of $129 million, restructuring, impairment and included restructuring and impairmentother charges of $191$209 million, and merger andseparation related costs of $159 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. For the third quarter of 2016, income before income taxes and equity in loss of affiliate was $161 million, which also included restructuring and impairment charges of $77$32 million, and merger and related costsinventory impairments of $2$42 million.
OutlookOUTLOOK
Our business is exposed to a number of different macro factors, which influence our outlook and expectations and outlook.given the 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 the increased activity in North America onshore activity to continue to grow, however at a slower pace than seen in the first nine months of 2017. In the third quarter, we experienced a deceleration in rig count growth, as compared to the prior two quarters. We remain optimistic about the outlook, but expect the pace of growth to slow in the near term.
International onshore activity: we have seen a moderate increase in rig count activity and expect growth to continue, the pace at which is undetermined. We have seen signs of improvement, but due to continuous volatility, remain cautious as to growth expectations.
Offshore projects: due to the ongoing oil price volatility, we expect final investment decisions to continue to remain fluid. We have seen an increase in subsea tree awards in 2017, but do not expect a material amount of awardsimprove in the fourth quarter of 2017, and2021 as compared to the third quarter of 2021 along with further growth in 2022 should commodity prices remain at current levels.
•International onshore activity: we expect international activity to continue to improve in the fourth quarter of 2021 across a broad range of markets compared to the third quarter of 2021 with further growth in 2022 should commodity prices remain at current levels.
•Offshore projects: we expect delaysthe offshore markets to stabilize in major customer capital expenditures2021 and for the near term.number of tree awards in the market to remain stable or grow modestly compared to 2020 levels. Looking ahead to 2022, we expect a modest recovery in offshore activity.
Liquefied Natural Gas•LNG projects: we believeremain optimistic on the LNG market continueslong-term and view natural gas as a transition and destination fuel. We continue 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 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.positive.
We have other segments in our portfolio that are more correlated with differentvarious industrial metrics, including GDP, such as our Digital Solutions business. segment.
We also have segments within our portfolio that are exposed to new energy solutions, specifically focused around decarbonization of energy and industry, including hydrogen, geothermal, CCUS, and energy storage. We expect to see continued growth in these segments 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 termlong-term economics of the industry, but we are continuing to operate with flexibility given our expectations for volatility and changing assumptionsactivity levels in the near term. While governments may change or discontinue incentives for renewable energy additions, we do not anticipate any significant impacts to our business in the foreseeable future.
Over time, we believe the world’s demand for energy will continue to rise, and that hydrocarbons will play a major role in meeting the world's energy needs for the foreseeable future. As such, we remain focused on delivering innovative, cost-efficient solutions that deliver step changes in operating and economic performance for our customers.
BUSINESS ENVIRONMENT
The following discussion and analysis summarizes the significant factors affecting theour results of operations, financial condition and liquidity position of BHGE LLC as of and for the three months ended September 30, 2017 and 2016 and for the nine months ended September 30, 20172021 and 2016,2020, and should be read in conjunction with the condensed consolidated and combined financial statements and related notes of the Company.
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
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 28
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. | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| 2021 | 2020 | 2021 | 2020 |
Brent oil price ($/Bbl) (1) | $ | 73.51 | | $ | 42.91 | | $ | 67.89 | | $ | 41.15 | |
WTI oil price ($/Bbl) (2) | 70.58 | | 40.89 | | 65.05 | | 38.04 | |
Natural gas price ($/mmBtu) (3) | 4.35 | | 2.00 | | 3.61 | | 1.87 | |
(1)Energy Information Administration (EIA) Europe Brent Spot Price per Barrel |
| | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| 2017 | 2016 | 2017 | 2016 |
Brent oil price ($/Bbl) (a) | $ | 52.11 |
| $ | 45.79 |
| $ | 51.82 |
| $ | 41.67 |
|
WTI oil price ($/Bbl) (b) | 48.16 |
| 44.85 |
| 49.39 |
| 41.14 |
|
Natural gas price ($/mmBtu) (c) | 2.95 |
| 2.88 |
| 3.01 |
| 2.34 |
|
| |
(a)(3)EIA Henry Hub Natural Gas Spot Price per million British Thermal Unit Oil and natural gas prices increased during the three and nine months ended September 30, 2021 largely driven by increased demand as a result of the global recovery from the COVID-19 pandemic which has outpaced a constrained supply. Outside North America, customer spending is most heavily influenced by Brent oil prices, which increased from the same quarter last year, ranging from a low of $65.51/Bbl in August 2021 to a high of $78.85/Bbl in September 2021. For the nine months ended September 30, 2021, Brent oil prices averaged $67.89/Bbl, which represented an increase of $26.74/Bbl from the same period last year. | Energy Information Administration (EIA) Europe Brent Spot Price per Barrel |
| |
(b)
| EIA Cushing, OK WTI spot price |
| |
(c)
| EIA Henry Hub Natural Gas Spot Price per million British Thermal Unit |
In North America, customer spending is highly driven by West Texas Intermediate (WTI)WTI oil prices, which were upincreased from $44.85the same quarter last year. Overall, WTI oil prices ranged from a low of $62.25/Bbl in the third quarterAugust 2021 to a high of 2016 to $48.16$75.54/Bbl in the third quarter of 2017. This represented an increase of 7%.September 2021. For the nine months ended September 30, 20172021, WTI oil prices averaged $49.39,$65.05/Bbl, which represented an increase of $8.25$27.01/Bbl from the same period last year.
Outside ofIn North America, customer spending is drivennatural gas prices, as measured by Brent oil prices, which also grew year-over-year. Brent oil prices were $45.79the Henry Hub Natural Gas Spot Price, averaged $4.35/mmBtu in the third quarter of 2016 as compared to $52.11 in the third quarter of 2017. This represented an2021, representing a 118% increase of 14%. For the nine months ended September 30, 2017 Brent oil prices averaged $51.82, which represented an increase of $10.15 from the same period lastquarter in the prior year.
Although both WTI and Brent oil prices increased, there were fluctuations within Throughout the quarter, which drove uncertainty in the oil price outlook for customers. In the three months ended September 30, 2017, Brent oil prices reached a maximum of $59.77 and a minimum of $43.98, and WTI reached a maximum of $52.14 and a minimum of $42.48.
Natural gas prices in North America are measured using the Henry Hub Natural Gas Prices. Natural gas prices increasedSpot Prices ranged from $2.88a low of $3.56/mmBtu in the third quarterJuly 2021 to a high of 2016 to $2.95$5.94/mmBtu in the third quarter of 2017. This represented an increase of $0.07. For the nine months ended September 30, 2017, natural gas prices averaged $3.01, which represented an increase of $0.67 from the same period last year.2021.
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 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
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 29
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.
The rig counts are summarized in the table below as averages for each of the periods indicated. | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | |
| 2021 | 2020 | % Change | 2021 | 2020 | % Change |
| North America | 647 | | 301 | | 115 | % | 570 | | 566 | | 1 | % |
| International | 770 | | 729 | | 6 | % | 735 | | 877 | | (16) | % |
| Worldwide | 1,417 | | 1,030 | | 38 | % | 1,305 | | 1,443 | | (10) | % |
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2017 | 2016 | % Change | 2017 | 2016 | % Change |
| North America | 1,154 |
| 600 |
| 92 | % | 1,068 |
| 600 |
| 78 | % |
| International | 947 |
| 936 |
| 1 | % | 948 |
| 966 |
| (2 | %) |
| Worldwide | 2,101 |
| 1,536 |
| 37 | % | 2,016 |
| 1,566 |
| 29 | % |
Rig count in North America increased 92% in the third quarter of 2017, compared to the same period last year. InternationalThe worldwide rig count increased 1%was 1,417 for the third quarter of 2017, as compared to the same period last year. In addition, North America rig count increased 78% in the nine months ended September 30, 2017, as compared to the same period last year. International rig count decreased 2% in the nine months ended September 30, 2017, as compared to the same period last year.
Overall rig count was 2,101 for the third quarter of 2017,2021, an increase of 37%38% as compared to the same period last year due primarily to an increase in North American activity, and a slower increase internationally. America.
Within North America, the increase was primarily driven by landthe Canada rig count, which was up 101%220% when compared to the same period last year, and to a lesser extent, offshorean increase in the U.S. rig count, which was up 5%.95% when compared to the same period last year. Internationally, the rig count increase was driven primarily by increases in the Latin America and Africa which was up 5%regions of 78% and 28%, the Middle East and Asia-Pacific region, which were both up 2%, partially offset by the Europe region, which was down 6%.
Key Performances Indicators (millions)
Product services and backlog of product servicesrespectively.
The Company's condensed 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, as well as in the orders and backlog charts included in this Management's Discussion and Analysis section, the Company distinguishes 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 ordersworldwide rig count was 1,305 for products and services believed to be firm. For product services, an amount is included for the expected life of the contract.
Orders for the Three and Nine Months Ended, and Backlog as of September 30, 2017 and 2016 (millions)
Orders: For the three months ended September 30, 2017, we recognized orders of $5,722 million, an increase of $3,242 million, or 131%, from the three months ended September 30, 2016. The increase in orders was driven by the acquisition of Baker Hughes. Service orders were up 105% and equipment orders were up 183%.
For the nine months ended September 30, 2017, we recognized orders2021, a decrease of $11,619 million, an increase of $3,807 million, or 49%, from the nine months ended September 30, 2016. The increase in orders was mainly driven by the acquisition of Baker Hughes. Service orders were up 31% and equipment orders were up 90%, also mainly driven by the acquisition of Baker Hughes.
Backlog: As at September 30, 2017, backlog was $20,906 million, an increase of $293 million, or 1%, from June 30, 2017. Equipment backlog increased from June 30, 2017 primarily driven by a large order signed within the quarter. Service backlog increased from June 30, 201710% as a result of order intake. Backlog decreased $1,741 million, or 8%, from September 30, 2016. The decrease was primarily driven by equipment backlog, which decreased $1,436 million, or 20% duecompared to lower order intake versus the same period last year. Within North America, the rig count was relatively flat primarily driven by the land rig count, which was up 1%, and a decrease in the offshore rig count of 19%. Internationally, the rig count decline was driven by decreases in the Middle East and Africa regions of 29% and 21%, respectively.
RESULTS OF OPERATIONS
The discussions below relating to significant line items from our unaudited condensed 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 resultsOur condensed consolidated statement of operations forincome (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 Company includeamounts 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 our operations. We refer to "product services" simply as "services" within the resultsBusiness Environment section of Baker Hughes from July 3, 2017, the date of acquisition, through the end of the quarter ended September 30, 2017.
The results of operations of the Company are evaluated by the Chief Executive Officer of the Company on a combinedManagement's Discussion and consolidated basis as well as at the segment level.
Analysis.
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 impairments, inventory impairment, merger andimpairments, separation related costs, and certain gains and losses not allocated to the operating segments.
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 30
In evaluating the segment performance, the Company primarily 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 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 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 & benefits and overhead costs.
Productivity: Productivity is measured by the remaining variance in profit, after adjusting for the period-over-period impact of volume & 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
Orders: For the nine months ended September 30, 2021, we recognized orders of $15.0 billion, a decrease of $0.5 billion, or 3%, from the nine months ended September 30, 2020. For the three months ended September 30, 2021, we recognized orders of $5.4 billion, an increase of $0.3 billion, or 5%, from the three months ended September 30, 2020. Service orders were up 18% and equipment orders were down 7%. The increase in orders was driven by OFE, OFS and DS, partially offset by TPS.
Remaining Performance Obligations (RPO): As of September 30, 2021, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $23.5 billion.
Revenue and Segment Operating Income (Loss) Before Tax
Revenue and segment operating income (loss) for each of our four operating segments is provided below. | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | $ Change | Nine Months Ended September 30, | $ Change |
| 2021 | 2020 | 2021 | 2020 |
| Segment revenue: | | | | | | |
| Oilfield Services | $ | 2,419 | | $ | 2,308 | | $ | 111 | | $ | 6,976 | | $ | 7,858 | | $ | (882) | |
| Oilfield Equipment | 603 | | 726 | | (123) | | 1,867 | | 2,133 | | (266) | |
| Turbomachinery & Process Solutions | 1,562 | | 1,513 | | 49 | | 4,675 | | 3,759 | | 916 | |
| Digital Solutions | 510 | | 503 | | 7 | | 1,499 | | 1,460 | | 39 | |
| Total | $ | 5,093 | | $ | 5,049 | | $ | 44 | | $ | 15,017 | | $ | 15,210 | | $ | (193) | |
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 31
| | | | | | | | | | | | | | | | Three Months Ended September 30, | $ Change | Nine Months Ended September 30, | $ Change |
| | Three Months Ended September 30, | $ Change | Nine Months Ended September 30, | $ Change | | 2021 | 2020 | 2021 | 2020 |
| | 2017 | 2016 | 2017 | 2016 | |
| Revenue: | | |
| Segment operating income (loss): | | Segment operating income (loss): | |
| Oilfield Services | $ | 2,635 |
| $ | 192 |
| $ | 2,443 |
| $ | 3,077 |
| $ | 599 |
| $ | 2,478 |
| Oilfield Services | $ | 190 | | $ | 93 | | $ | 97 | | $ | 505 | | $ | 345 | | $ | 160 | |
| Oilfield Equipment | 600 |
| 829 |
| (229 | ) | 1,965 |
| 2,693 |
| (728 | ) | Oilfield Equipment | 14 | | 19 | | (5) | | 45 | | (4) | | 49 | |
| Turbomachinery & Process Solutions | 1,511 |
| 1,480 |
| 31 |
| 4,841 |
| 4,950 |
| (109 | ) | Turbomachinery & Process Solutions | 278 | | 191 | | 87 | | 705 | | 473 | | 232 | |
| Digital Solutions | 629 |
| 523 |
| 106 |
| 1,613 |
| 1,511 |
| 102 |
| Digital Solutions | 26 | | 46 | | (20) | | 75 | | 117 | | (42) | |
| Total | $ | 5,375 |
| $ | 3,024 |
| $ | 2,351 |
| $ | 11,496 |
| $ | 9,753 |
| $ | 1,743 |
| |
| Total segment operating income | | Total segment operating income | 508 | | 349 | | 159 | | 1,330 | | 931 | | 399 | |
| Corporate | | Corporate | (105) | | (115) | | 10 | | (324) | | (353) | | 29 | |
| Goodwill impairment | | Goodwill impairment | — | | — | | — | | — | | (14,717) | | 14,717 | |
| Inventory impairment | | Inventory impairment | — | | (42) | | 42 | | — | | (218) | | 218 | |
| Restructuring, impairment and other | | Restructuring, impairment and other | (14) | | (209) | | 195 | | (219) | | (1,637) | | 1,418 | |
| Separation related | | Separation related | (11) | | (32) | | 21 | | (53) | | (110) | | 57 | |
| Operating income (loss) | | Operating income (loss) | 378 | | (49) | | 427 | | 736 | | (16,104) | | 16,840 | |
| Other non-operating loss, net | | Other non-operating loss, net | (102) | | (149) | | 47 | | (791) | | (367) | | (424) | |
| Interest expense, net | | Interest expense, net | (67) | | (66) | | (1) | | (205) | | (195) | | (10) | |
| Income (loss) before income taxes | | Income (loss) before income taxes | 209 | | (264) | | 473 | | (260) | | (16,666) | | 16,406 | |
| | Provision for income taxes | | Provision for income taxes | (189) | | (47) | | (142) | | (422) | | (110) | | (312) | |
| Net income (loss) | | Net income (loss) | $ | 20 | | $ | (311) | | $ | 331 | | $ | (682) | | $ | (16,776) | | $ | 16,094 | |
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | $ Change | Nine Months Ended September 30, | $ Change |
| | 2017 | 2016 | 2017 | 2016 |
| Segment operating income (loss): | | | | | | |
| Oilfield Services | $ | 75 |
| $ | (66 | ) | $ | 141 |
| $ | (42 | ) | $ | (164 | ) | $ | 122 |
|
| Oilfield Equipment | (43 | ) | 61 |
| (104 | ) | 9 |
| 190 |
| (181 | ) |
| Turbomachinery & Process Solutions | 210 |
| 258 |
| (48 | ) | 707 |
| 942 |
| (235 | ) |
| Digital Solutions | 87 |
| 101 |
| (14 | ) | 226 |
| 240 |
| (14 | ) |
| Total segment operating income (loss) | 329 |
| 354 |
| (25 | ) | 900 |
| 1,208 |
| (308 | ) |
| Corporate | (89 | ) | (75 | ) | (14 | ) | (282 | ) | (240 | ) | (42 | ) |
| Inventory impairment | (12 | ) | (24 | ) | 12 |
| (31 | ) | (131 | ) | 100 |
|
| Restructuring, impairment and other | (191 | ) | (77 | ) | (114 | ) | (292 | ) | (452 | ) | 160 |
|
| Merger and related costs | (159 | ) | (2 | ) | (157 | ) | (310 | ) | (10 | ) | (300 | ) |
| Operating income (loss) | (122 | ) | 176 |
| (298 | ) | (15 | ) | 375 |
| (390 | ) |
| Other non operating income (loss), net | (3 | ) | 6 |
| (9 | ) | 65 |
| 18 |
| 47 |
|
| Interest expense, net | (42 | ) | (21 | ) | (21 | ) | (75 | ) | (74 | ) | (1 | ) |
| Income (loss) before income taxes and equity in loss of affiliate | (167 | ) | 161 |
| (328 | ) | (25 | ) | 319 |
| (344 | ) |
| Equity in loss of affiliate | (13 | ) | — |
| (13 | ) | (13 | ) | — |
| (13 | ) |
| Provision for income taxes | (96 | ) | (70 | ) | (26 | ) | (125 | ) | (132 | ) | 7 |
|
| Net income (loss) | $ | (276 | ) | $ | 91 |
| $ | (367 | ) | $ | (163 | ) | $ | 187 |
| $ | (350 | ) |
The following charts show segment revenues and segment operating income for each of our reportable segments for the three months ended September 30, 2017 and 2016:
Segment Revenues and Segment Operating Income (millions)
Third Quarter of 20172021 Compared to the Third Quarter of 2016
Consolidated Results2020
Revenue increased $2,351$44 million, or 78%1%, primarily driven by the acquisition of Baker Hughes. Oilfield Serviceshigher volume in OFS, TPS and DS, partially offset by lower volume in OFE. OFS increased $2,443$111 million, Turbomachinery & Process SolutionsTPS increased $31$49 million and Digital SolutionsDS increased $106$7 million, partially offset with the decrease in Oilfield Equipment of $229by OFE which decreased $123 million.
Total segment operating income increased $159 million. The increase was driven by OFS which increased $97 million and TPS which increased $87 million, partially offset by DS which decreased $25$20 million and OFE which decreased $5 million.
Oilfield Services
OFS revenue of $2,419 million increased $111 million, or 5%, in the third quarter of 2021 compared to the third quarter of 2020, as a result of increased activity in North America, as evidenced by an increase in the North America rig count. North America revenue was $714 million in the third quarter of 2021, an increase of $155 million from the third quarter of 2020. International revenue was $1,705 million in the third quarter of 2021, a decrease of $44 million from the third quarter of 2020, mainly driven by the Middle East region. OFS revenue growth was affected by Hurricane Ida and supply chain related shipment delays in the quarter.
OFS segment operating income was $190 million in the third quarter of 2021 compared to $93 million in the third quarter of 2020, primarily driven by higher volume and increased cost productivity as a result of cost efficiencies and restructuring actions, partially offset by commodity cost inflation.
Oilfield Equipment
OFE revenue of $603 million decreased $123 million, or 17%, in the third quarter of 2021 compared to the third quarter of 2020. The decrease was primarily driven by Oilfield Equipment which decreased $104 million, Turbomachinery & Process Solutions which decreased $48 million,lower volume in the subsea production systems and Digital Solutions which decreased $14 million,surface pressure control projects businesses, and from the disposition of the surface pressure control flow business in the fourth quarter of 2020, partially offset by Oilfield Services which increased $141 million.higher volume in the services and flexible pipe businesses.
Oilfield ServicesBaker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 32
Oilfield Services revenue increased $2,443
OFE segment operating income was $14 million in the third quarter of 20172021 compared to segment operating income of $19 million in the third quarter of 2020. The decrease in income was primarily driven by lower volume.
Turbomachinery & Process Solutions
TPS revenue of $1,562 million increased $49 million, or 3%, in the third quarter of 2021 compared to the third quarter of 2016, primarily as a result2020. The increase was driven by higher equipment and services volume.Equipment revenue was up 2% and service revenue was up 4% when compared to the prior year. Equipment revenue in the quarter represented 45% and service revenue represented 55% of the acquisition of Baker Hughes on July 3, 2017 (up $2,427 million).total segment revenue.
Oilfield ServicesTPS segment operating income was $75$278 million in the third quarter of 20172021 compared to a loss of $66$191 million in the third quarter of 2016.2020. The acquisition of Baker Hughes added $136 million of segment operatingincrease in income which includes thewas driven primarily by higher volume and increased intangible amortization expense of $49 million. Organically, negative price and mix were offset by strong cost productivity.
Digital Solutions
Oilfield Equipment
Oilfield EquipmentDS revenue decreased $229of $510 million increased $7 million, or 28%1%, in the third quarter of 20172021 compared to the third quarter of 2016. The decrease in revenue can be attributed to activity reductions2020, mainly driven by higher volume across the SPSProcess & Pipeline Services and DrillingWaygate Technologies businesses, partially offset by declines in the Nexus Control and Bently Nevada businesses. DS revenue growth was affected by supply chain constraints that impacted product lines, and to a lesser extent price deterioration.deliveries.
Oilfield EquipmentDS segment operating lossincome was $43$26 million in the third quarter of 20172021 compared to segment operating income of $61$46 million in the third quarter of 2016.2020. The declinedecrease in profitability was due toprimarily driven by lower revenues and the impact of negative cost productivity and only partially offset by deflation savings.unfavorable business mix.
Turbomachinery & Process SolutionsCorporate
Turbomachinery & Process Solutions revenue of $1,511 million increased $31 million, or 2%, inIn the third quarter of 20172021, corporate expenses were $105 million compared to $115 million in the third quarter of 2020. The decrease of $10 million was primarily driven by lower expenses related to cost efficiencies and restructuring actions.
Restructuring, Impairment and Other
In the third quarter of 2016. The increase was primarily driven by fulfillment2021, we recognized $14 million of long-term service contracts as well as gasrestructuring, impairment and steam turbine installations, partially offset by lower volume in the Flow & Process Technologies business.
Turbomachinery & Process Solutions segment operating income was $210other items, compared to $209 million in the third quarter of 2017 compared to segment operating income of $258 million2020. The charges in the third quarter of 2016.2021 primarily relate to initiatives in our OFS segment that are the continuation of our overall strategy to right-size our structural costs. The decline in profitability is primarily due to lower variable cost productivity, unfavorable equipment mix and lower volume/price versus the prior year.
Digital Solutions
Digital Solutions revenue increased $106 million, or 20%,charges in the third quarter of 2017 compared2020 primarily related to the continuation of activities from our first quarter 2020 restructuring plan.
Other Non-Operating Loss, Net
In the third quarter of 2016, driven by the acquisition of Baker Hughes which added $1082021, we incurred $102 million of revenues versus the prior year.
Digital Solutions segment operating incomeother non-operating losses. Included in this amount was $87a loss of $140 million related to marking our investment in the third quarter of 2017 comparedC3.ai to $101 million in the third quarter of 2016. The decrease in profitability is driven by the acquisition of Baker Hughes down $6 million in the quarter, and by unfavorable organic cost productivity.
Corporate
Corporate expenses in the third quarter of 2017 totalled $89 million, an increase of $14 million compared to the third quarter of 2016, primarily due to an increase in costs of $29 million from the acquisition of Baker Hughes, partially offset by realized synergies in the period.
Restructuring, Impairment and Other
fair value. For the third quarter of 2017,2020, we recognized $191incurred $149 million of other non-operating losses. Included in restructuring charges, an increasethis amount was a loss of $114$129 million fromrelated to the disposition of our surface pressure control flow business.
Interest Expense, Net
In the third quarter of 2016. This increase was primarily due to integration driven synergy plans.
Merger and Related Costs
For the third quarter of 2017, we incurred merger and related costs of $159 million, an increase of $157 million from the third quarter of 2016, primarily related to the acquisition of Baker Hughes. Such costs 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.
Interest Expense, Net
For the third quarter of 2017,2021, we incurred interest expense, net of interest income, of $42$67 million, an increase of $21which increased $1 million fromcompared to the third quarter of 2016,2020, primarily driven by the acquisition of Baker Hughes.
lower interest income.
Income Taxes
IncomeIn the third quarter of 2021, the provision for income taxes was $189 million. The difference between the U.S. statutory tax rate of 21% and the effective tax rate is primarily related to losses with no tax benefit due to valuation allowances and changes in unrecognized tax benefits related to uncertain tax positions.
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In the third quarter of 2020, the income tax expense was $96 million for$47 million. The difference between the quarter ended September 30, 2017 comparedU.S. statutory tax rate of 21% and the effective tax rate is primarily related to $70 million for the three months ended September 30, 2016. The increase was primarily attributable to us not being subject to U.S. tax after the Transactions and unable to recognize alosses with no tax benefit on U.S. losses as those losses are passed throughdue to our members. Consequently, the tax expense is primarily attributable to non-U.S. taxes related to our foreign subsidiaries. The positive impact of tax rates below the U.S. rate of 35% is offset by adjustments to prior estimates, increased valuation allowances and withholding taxes. The prior year quarter reflects 100% of the taxes associated with U.S. and non-U.S. earnings of the historic GE O&G business.
Segment Revenues and Segment Operating Income (millions)
The following charts show segment revenues and segment operating income for each of our reportable segments for the nine months ended September 30, 2017 and 2016:
The First Nine Months of 20172021 Compared to the First Nine Months of 2016
Consolidated Results2020
Revenue increased $1,743decreased $193 million, or 18%1%, primarily driven by the acquisition of Baker Hughes. Oilfield Services increased $2,478lower volume in OFS and OFE, partially offset by higher volume in TPS and DS. OFS decreased $882 million Digital Solutions increased $102and OFE decreased $266 million, partially offset by Turbomachinery and Process SolutionsTPS which decreased $109increased $916 million and Oilfield EquipmentDS which decreased $728increased $39 million.
SegmentTotal segment operating income decreased $308increased $399 million. The decreaseincrease was primarily driven by Turbomachinery and Process SolutionsTPS which decreased $235increased $232 million, Oilfield EquipmentOFS which decreased $181increased $160 million, and Digital SolutionsOFE which decreased $14increased $49 million, partially offset by Oilfield ServicesDS which increased $122decreased $42 million.
Oilfield Services
Oilfield Services
OFS revenue increased $2,478of $6,976 million decreased $882 million, or 11%, in the first nine months of 2021 compared to the first nine months of 2020, as a result of decreased activity internationally and in North America as evidenced by the decrease in the worldwide rig count. North America revenue was $2,031 million in the first nine months of 20172021, a decrease of $150 million from the first nine months of 2020. International revenue was $4,945 million in the first nine months of 2021, a decrease of $732 million from the first nine months of 2020, mainly driven by the Middle East region.
OFS segment operating income was $505 million in the first nine months of 2021 compared to $345 million in the first nine months of 2020. The increase in income was primarily driven by increased cost productivity as a result of cost efficiencies and restructuring actions, partially offset by lower volume and unfavorable business mix.
Oilfield Equipment
OFE revenue of $1,867 million decreased $266 million, or 12%, in the first nine months of 2021 compared to the first nine months of 2016,2020. The decrease was primarily as a resultdriven by lower volume in the subsea drilling systems and surface pressure control projects businesses, and from the disposition of the acquisitionsurface pressure control flow business in the fourth quarter of Baker Hughes on July 3, 2017 (up $2,427 million).2020, partially offset by higher volume in the flexible pipe business.
Oilfield ServicesOFE segment operating lossincome was $42$45 million in the first nine months of 20172021 compared to asegment operating loss of $164$4 millionin the first nine months of 2016.2020. The acquisitionincrease in income was primarily driven by increased cost productivity from our cost-out programs.
Turbomachinery & Process Solutions
TPS revenue of Baker Hughes contributed $136$4,675 million of segment operating income, which includes the increased intangible amortization expense of $49 million. Organically negative price and volume were only partially offset by deflation benefits and improved cost productivity.
Oilfield Equipment
Oilfield Equipment revenue decreased $728$916 million, or 27%24%, in the first nine months of 20172021 compared to the first nine months of 2016.2020. The increase was primarily driven by higher equipment volume. Equipment revenue was up 50% and service revenue was up 8% when compared to the prior year. Equipment revenue in the period represented 47% and service revenue represented 53% of total segment revenue.
Oilfield EquipmentTPS segment operating income was $9$705 million in the first nine months of 20172021 compared to segment operating income of $190$473 million in the first nine months of 2016.2020. The impact from the declineincrease in revenueincome was driven primarily by higher volume and partial price erosion, together with the impact of negativeincreased cost productivity, was only partially offset by the benefitunfavorable business mix.
Digital Solutions
DS revenue of cost deflation.
Turbomachinery & Process Solutions
Turbomachinery & Process Solutions revenue decreased $109$1,499 million increased $39 million, or 2%3%, in the first nine months of 20172021 compared to the first nine months of 2016 primarily2020, mainly driven by pricing pressures on equipment deals.volume increases in Process & Pipeline Services and Waygate Technologies, partially offset by declines in the Nexus Controls business.
Turbomachinery & Process SolutionsDS segment operating income was $707$75 million in the first nine months of 20172021 compared to segment operating income of $942$117 million in the first nine months of 2016.2020. The decrease in profitability iswas primarily driven by year-over-year top line pricing pressures, unfavorable equipment mix and lower variable decreased cost productivity, only partially offset by cost deflation savings and foreign exchange favorability.productivity.
Digital SolutionsBaker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 34
Digital Solutions revenue increased $102 million or 7% in
Corporate
In the first nine months of 20172021, corporate expenses were $324 million compared to the first nine months of 2016. The Baker Hughes acquisition contributed $108 million of revenue compared to the prior year.
Digital Solutions segment operating income was $226$353 million in the first nine months of 2017 compared2020. The decrease of $29 million was primarily driven by lower expenses related to $240cost efficiencies and restructuring actions.
Goodwill Impairment
In the first quarter of 2020, Baker Hughes' market capitalization declined significantly driven by macroeconomic and 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 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 induring the first quarter of 2020.
Restructuring, Impairment and Other
In the first nine months of 2016. The decrease2021, we recognized $219 million of restructuring, impairment and other charges, primarily related to initiatives in profitability is driven byour OFS segment that are the acquisitioncontinuation of Baker Hughes in the quarter and by pricing and FX pressure on the organic performance.
Corporate
Corporate expenses were $282 million inour overall strategy to right-size our structural costs. For the first nine months of 2017, an increase2020, we recognized $1,637 million of $42 million comparedrestructuring, impairment and other charges, primarily related to product line rationalization and headcount reductions in certain geographical locations to align our workforce with expected activity levels and market conditions.
Other Non-Operating Loss, Net
In the first nine months of 2016. This is attributed2021, we incurred $791 million of other non-operating losses. Included in this amount were losses of $955 million related to the acquisition of Baker Hughes, which is $29 million, and lower organic cost productivity.
Restructuring, Impairment and Other
For the nine months ended September 30, 2017, we recognized $292 millionmarking our investment in restructuring charges, a decrease of $160 million from the nine months ended September 30, 2016. This decrease was primarily dueC3.ai to a reduction in market driven restructuring programs,fair value, partially offset by synergy driven restructuring items. We continuethe reversal of current accruals of $121 million due to evaluate the market and make cost rationalization decisions based on changes to short and long-term market indicators.
Merger and Related Costs
settlement of certain legal matters. For the first nine months ended September 30, 2017,of 2020, we incurred merger and related costs$367 million of $310other non-operating losses. Included in this amount was a loss of $217 million an increase of $300 million from the prior year, primarily related to the acquisitionsale of Baker Hughes. Such costs include severanceour rod lift systems business in the second quarter of 2020, and other separation payments made to certain executive officersa loss of Baker Hughes with change-in-control agreements, professional fees of advisors, and integration and synergy costs$129 million related to the combinationdisposition of Baker Hughes and GE O&G.our surface pressure control flow business.
Interest Expense, Net
ForIn the first nine months ended September 30, 2017,of 2021, we incurred interest expense, net of interest income, of $75$205 million, an increase of $1 million from the prior year. The acquisition of Baker Hughes has driven an increase in expense, offset by a reduction in organic interest expenses.
Income Taxes
For the nine months ended September 30, 2017, BHGE LLC income tax expense was $125which increased $10 million compared to income tax expense of $132 million in the first nine months of 2016.2020, driven by lower interest income.
Income Taxes
In the first nine months of 2021, the provision for income taxes was $422 million. The $7 million net decrease in tax expense is due to a decrease in income before taxes, including U.S. losses incurred in the current quarter that BHGE LLC is not able to benefit as those losses are passed through to our member. The positive impact of foreign tax rates lower thandifference between the U.S. statutory tax rate of 35%21% and the effective tax rate is offset by adjustmentsprimarily related to prior estimates, increasedlosses with no tax benefit due to valuation allowances and withholding taxes. The prior yearchanges in unrecognized tax benefits related to uncertain tax positions.
In the first nine months reflects 100% of 2020, the taxes associatedincome tax expense was $110 million. The difference between the U.S. statutory tax rate of 21% and the effective tax rate is primarily related to non-deductible goodwill impairment, the geographical mix of earnings and losses with U.S. and non-U.S. earnings of the historic GE O&G business.no tax benefit due to valuation allowances.
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 since the first quarter of 2020, we continue to maintain solid financial strength and liquidity. At September 30, 2017,2021, we had cash and cash equivalents of $4,775 million$3.9 billion compared to $981$4.1 billion at December 31, 2020. Our liquidity is further supported by a revolving credit facility of $3 billion, and access to both commercial paper and uncommitted lines of credit. At September 30, 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 2022.
Cash and cash equivalents includes $11 million and $44 million of cash and equivalents held on behalf of GE at September 30, 2021 and December 31, 2016.2020, respectively. Excluding cash held on behalf of GE, our U.S. subsidiaries held
At September 30, 2017, Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 35
approximately $4,167 million$1.2 billion and $1 billion while our foreign subsidiaries held approximately $2.7 billion and $3.1 billion of our cash and cash equivalents was held by foreign subsidiaries compared to approximately $878 million atas of September 30, 2021 and December 31, 2016.2020, respectively. A substantial portion of the cash held by foreign subsidiaries at September 30, 2017 was2021 has been reinvested in our international operations as our intent is to use this cash to, among other things, fund the operations of our foreign subsidiaries.active non-U.S. business operations. If we decide at a later date to repatriate those funds to the U.S., wethey will generally be free of U.S. federal tax but may be required to provideincur other taxes on certain of those funds based on applicable U.S. tax rates net of foreign tax credits.such as withholding or state taxes.
On July 3, 2017, in connection with the Transactions, we entered intoWe have a new five-year $3 billion committed unsecured revolving credit facility (the "2017 Credit Agreement")Agreement) with commercial banks maturing in July 2022.December 2024. The Credit Agreement contains certain customary representations and warranties, certain customary affirmative covenants and certain customary negative covenants. Upon the occurrence of certain events of default, our obligations under the Credit Agreement may be accelerated. Such events of default include payment defaults to lenders under the Credit Agreement and other customary defaults. No such events of default have occurred. We have no borrowings under the Credit Agreement.
In addition, 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 £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 9. "Borrowings" of the Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report for further details. At September 30, 2017, there2021, we were in compliance with all debt covenants.
We continuously review our liquidity and 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 negatively impacted. Additionally, it could cause the rating agencies to lower our credit ratings. There are no directratings triggers that would accelerate the maturity of any borrowings under our committed credit 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 nine months ended September 30, 2017,2021, we useddispersed cash to fund a variety of activities including certain working capital needs, restructuring and restructuringGE separation related costs, capital expenditures, business acquisitionsdistributions to Members, and the paymentrepurchases of dividends.our Units. We believe that cash on hand, cash flows generated from operationsoperating and financing activities, 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 nine months ended September 30:
|
| | | | | | |
| (In millions) | 2017 | 2016 |
| Operating activities | $ | (585 | ) | $ | (195 | ) |
| Investing activities | (3,879 | ) | (346 | ) |
| Financing activities | 8,210 |
| 229 |
|
| | | | | | | | |
| (In millions) | 2021 | 2020 |
| Operating activities | $ | 1,598 | | $ | 924 | |
| Investing activities | (212) | | (551) | |
| Financing activities | (1,585) | | 494 | |
Operating Activities
Our largest source of operating cash is payments from customers, of which the largest component is collecting cash related to product orour sales of products and 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 usedgenerated cash of $585$1,598 million inand $924 million for the nine months ended September 30, 2017. These2021 and 2020, respectively.
For the nine months ended September 30, 2021, cash outflowsgenerated from operating activities were primarily driven by $129net losses adjusted for certain noncash items (including depreciation, amortization, and loss on equity securities) and working capital, which includes contract and other deferred assets. Net working capital cash generation was
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 36
$481 million increase in net working capital,for the nine months ended September 30, 2021, mainly due to lowerreceivables, inventory, and contract assets, partially offset by progress collections, as we continue to improve our working capital processes. Restructuring and GE separation related payments were $210 million for the nine months ended September 30, 2021.
For the nine months ended September 30, 2020, cash generated from operating activities were primarily driven by net losses adjusted for certain noncash items (including depreciation, amortization, impairments, loss on sale of business, and write-down of assets held for sale) and working capital, which includes contract and other deferred assets. Net working capital generation was $252 million for the nine months ended September 30, 2020, mainly due to positive customer progress collections, partially offset by increasedhigher inventory liquidations. Other operating items thatto deliver the volume for TPS equipment contracts in the second half of the year. We also used cashworking capital from net negative receivables and payables as a result of lower revenues. Restructuring and GE separation related payments were restructuring and deal related outflows, including severance, employee incentive compensation payments and other integration costs; and tax payments in foreign jurisdictions.$480 million for the nine months ended September 30, 2020.
Investing Activities
Cash flows from investing activities used cash of $3,879$212 million and $346$551 million for the nine months ended September 30, 20172021 and 2016,2020, respectively.
Our principal recurring investing activity is the funding of capital expenditures including property, plant and equipment and software, to support and generate revenue from operations. Expenditures for capital assets were $417$590 million and $330$801 million for the nine months ended September 30, 20172021 and 2016, respectively; partially offset by cash flows2020, respectively. Proceeds from the sale of property, plant and equipment of $76were $178 million and $21$141 million for the nine months ended September 30, 20172021 and 2016,2020, 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.
ForDuring the nine months ended September 30, 2017, cash flow from2021, we sold approximately 2.2 million shares of C3.ai Class A common stock and received proceeds of $145 million, which is reported as an other investing activities also includes $7,498 million of distribution to BHGE to fund the special dividend by BHGE to former Baker Hughes shareholders on the completion of the Transactions, net of $4,133 million of cash received from the acquisition.activity.
Financing Activities
Cash flows from financing activities providedused cash of $8,210$1,585 million and $229generated cash of $494 million for the nine months ended September 30, 20172021 and 2016,2020, respectively.
DuringWe had net repayments of debt and other borrowings of $60 million and $170 million for the nine months ended September 30, 2017,2021 and 2020, respectively. In addition, in April 2021 we repaid $832 million (£600 million) of commercial paper originally issued in May 2020 under the COVID Corporate Financing Facility established by the Bank of England. In May 2020, we received $7,400proceeds from the issuance of $500 million contribution from GE to fund substantially allaggregate principal amount of the distribution paid to BHGE. Additionally, we4.486% Senior Notes due May 2030.
We made distributions of $198 million to our members.
Cash flows from financing activities also includes net transfers from GEMembers of $1,574 million primarily driven by the cash pooling activity with GE prior to the Transactions. Other financing items includes a payment of $193 million to complete the purchase of the non-controlling interest in the Pipeline Inspection and Integrity business within Digital Solutions.
Total debt outstanding was $4,905$563 million and $277$558 million atduring the nine months ended September 30, 20172021 and December 31, 2016,2020, respectively. The total debt-to-capital (defined as total debt plus equity) ratio was 10.87% and 1.83% at September 30, 2017 and at December 31, 2016, respectively. The increase was driven by the debt assumed in the Baker Hughes acquisition.
Available Credit Facility
On July 3, 2017, in connection with30, 2021, our Board of Directors authorized us to repurchase up to $2 billion of our Units. During 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 affirmative covenants and no 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. We were in compliance with all of the credit facility's covenants, and there were no direct borrowings under the credit facility during the quarterthree months ended September 30, 2017.2021, we repurchased and canceled 4.4 million Units for a total of $106 million.
If market conditions were to change and our revenue was reduced significantly or operating costs were to increase, our cash flows and liquidity could be reduced. Additionally, it could causeCash Requirements
For the rating agencies to lower our credit rating. There are no ratings triggers that would accelerate the maturityremainder of any borrowings under our committed credit 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,2021, we would seek alternative sources of funding, including borrowing under the credit facility.
We believe our current credit ratings would allow us to obtain interim financing over and above our existing credit facility for any currently unforeseen significant needs.
We currently believe cash on hand, cash flows from operating and financing activities, the available revolving credit facility, and the available credit facilityavailability to issue debt under our existing shelf registrations will provide us with sufficient capital resources and liquidity to manage our working capital needs, meet contractual obligations, fund capital expenditures, dividends and dividends,repurchases of our common units, and support the development of our short-term and long-term operating strategies. When necessary, we 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.
Our capital expenditures can be adjusted and managed by us to match market demand and activity levels. Based on current market conditions, capital expenditures, net of proceeds from disposal of assets, in 2021 are expected to be below 2020 levels. The expenditures are expected to be used primarily for normal, recurring items
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 37
necessary to support our business. We currently anticipate making income tax payments in the range of $350 million to $450 million in 2021.
Other factors affecting liquidityFactors Affecting Liquidity
Registration Statements: In May 2021, Baker Hughes filed a universal shelf registration statement on Form S-3ASR (Automatic Shelf Registration) 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 the sale of our receivables in monetization programs or working with our customers to restructure their debts; however, not all countries and programs allow monetization on a non-recourse basis.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 September 30, 2017, we have2021, no customer balances which exceed 7% of our net customer receivables. As of September 30, 2017, 18% of our gross trade receivables were from customers in the United States and 4% were from customers in Venezuela. As of December 31, 2016, 13% of our gross trade receivables were from customers in the United States and 1% were from customers in Venezuela. Other than the United States, no other country or single customer accounted for more than 15%10% of our gross trade receivables at these dates.receivables.
Venezuela: Although we continue to experience delays in collecting payments on our receivables from our primary customer in Venezuela, our outstanding receivables are not disputed, and we continue to believe that they are recoverable. In assessing the collectability of these receivables, we considered our collection experience with this customer. To date we have had no material write-offs related to this customer historically and we have collected $86 million in 2017. In addition, we consider the continued importance to the Venezuelan economy of oil production, our strategic relationship with this customer, our current activity levels and our current intention to continue to provide services to this customer, and an evaluation of this customer’s financial solvency. We continue to actively manage our relationship with this customer, with ongoing dialogue between key executives of both companies, including discussions regarding this customer's intention to pay trade receivables.
We also have outstanding trade receivables with a gross amount of approximately $266 million, and a net amount of approximately $40 million as well as approximately $60 million of on-hand inventory that we may not be able to redeploy to other customers should the contracts with this customer be terminated unexpectedly.
We believe our collectability assumptions to be reasonable according to the current facts and circumstances. However, differences in actual experience or changes in facts and circumstances may materially affect our financial position or results of operations. Our assumptions and related judgments are sensitive to the political and economic conditions in Venezuela. If conditions in Venezuela worsen or if low commodity prices persist for an extended period of time, we may be required to record adjustments to our receivables balance. Our financial results can be affected, positively or negatively, by changes in our assessment of the collectability of these trade receivables.
International operations:ourOur cash that is held outside the United States, which comprised 87%U.S. is 70% of the total cash balance as of September 30, 2017, is in certain circumstances subject2021. We may not be able to use this cash quickly and efficiently due to exchange or cash controls that could
make it challenging to quickly access.challenging. As a result, our cash balance may not represent itsour ability to quickly and efficiently use this cash.
Cash heldSupply 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 behalfthe terms originally negotiated with our supplier, regardless of GE: In connectionwhether 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 Transactions, as of July 3, 2017, we were required to repay any cash in excess of $100 million, net of any third-party debt in GE O&G, to GE. Due to the restricted nature of the majority of this excess cash, weprogram. These liabilities continue to hold this cash on behalfbe presented as accounts payable in our condensed consolidated statements of GE until cash is unrestrictedfinancial position and available for repayment to GE. Accordingly, on July 3, 2017, we executed a promissory note with GE. There is no maturity date on 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. 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.
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, BHGE is required to disclose in its periodic reports if it or any of its affiliates knowingly engaged in businessflow from operating activities relating to Iran, even if those activities are conducted in accordance with authorizations subsequently issued by the U.S. Government. Reportable activities include investmentswhen settled. We do not believe that significantly enhance Iran's ability to develop petroleum resources valued at $20 million or morechanges in the aggregate duringavailability of supply chain financing programs would have 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. affiliate of the Company received five purchase orders during the third 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 production projects in Iran. These purchase orders are valued at €0.1million ($0.1 million), €0.5 million ($0.5 million), €0.2 million ($0.2 million), €0.1 million ($0.1 million), €1.3 million ($1.5 million). This non-US affiliate also booked a modification of a previously reported contract for the sale of spare parts for gas turbines to add additional scope valued at €0.1 million ($0.1 million) and a further modification to another previously reported contract for the sale of spare parts to reduce the value of the contract by €1.6 million ($1.8 million). This non-US affiliate attributed €1.5 million ($1.8 million) in gross revenues and €0.8 million ($0.9 million) in net profits against previously reported transactions during the quarter ended September 30, 2017.
A second non-U.S. affiliate of the Company received two purchase orders during the third quarter of 2017 for the sale of consumable parts, instruments and a digital recording system to be applied to industrial machinery and equipmentmaterial impact on gas plants. The purchase orders are valued at €0.1 million ($0.1 million) and €0.1 million ($0.1 million). This non-US affiliate attributed €0.3 million ($0.3 million) in gross revenues and €0.1 million ($0.1 million) in net profits to these transactions during the quarter ended September 30, 2017.
All of these non-U.S. affiliates intend to continue the activities described above and as permitted by all applicable laws and regulations.our liquidity.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, contains "forward-looking"forward-looking statements as that term is defined inwithin the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act.Act of 1934, as amended, (each a "forward-looking statement"). All statements, other than historical facts, including statements regarding the presentation of the Company's operations in future reports and any assumptions underlying any of the foregoing, are forward-looking statements. 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,"would," "seek," "anticipate," "estimate," "overestimate," "underestimate," "believe," "could," "project," "predict," "continue," "target", "goal" 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 identified in the "Risk Factors" section of the Registration Statement on Form S-4 (File No. 333-216991), as amended, filed by the Company with the SEC and declared effective on May 30, 2017; the Company’s subsequent quarterly report on Form 10-Q for the quarterly period ended June 30, 2017Part I of Item 1A of our 2020 Annual Report and those set forth from time-to-time in other filings by the Company with the SEC. These
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 38
documents are available through our website or through the SEC's Electronic Data Gathering and Analysis Retrieval (EDGAR) system at http://www.sec.gov.
Any forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. The Company does not undertake any obligation to update any forward-looking statements, whether as a result of new information or developments, future events or otherwise, except as required by law. Readers are cautioned not to place undue reliance on any of these forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certainFor quantitative and qualitative disclosures about market risks that are inherentrisk affecting us, see Item 7A. “Quantitative and Qualitative Disclosures about Market Risk,” in our financial instruments and arise from changes in interest rates and foreign currency exchange rates. We may enter into derivative financial instrument transactions2020 Annual Report. Our exposure to manage or reduce market risk but dohas not enter into derivative financial instrument transactions for speculative purposes. (See "Note 12. Financial Instruments" in Item 1 of Part 1 for further details). A discussion of our primary market risk exposure in financial instruments is presented below.changed materially since December 31, 2020.
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 revenues earned and costs of its 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 notional amounts aggregating $11,476 million to hedge exposure to currency fluctuations in various foreign currencies at September 30, 2017. Based on quoted market prices as of September 30, 2017 or 2016 for forward contracts with similar terms and maturity dates, we recorded gains/(losses), both realized and unrealized in nature, of $59 million and ($127 million), respectively, to adjust these forward contracts to their fair market value.
Interest rate risk
We have debt in fixed and floating rate instruments. We are subject to interest rate risk on our debt and investment portfolio. We maintain an interest rate risk management strategy which primarily uses a mix of fixed and variable rate debt that is intended to mitigate the risk exposure to changes in interest rates in the aggregate. We may use interest rate swaps to manage the economic effect of fixed rate obligations associated with certain debt. There were no outstanding interest rate swap agreements as of September 30, 2017 or 2016.
ITEM 4. 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 the end of the period covered by this quarterly report, 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 quarter ended September 30, 20172021 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Change of Independent Registered Public Accounting FirmBaker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 39
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See discussion of legal proceedings in "Note 15.16. Commitments And Contingencies" of the Notes to Unaudited Condensed Consolidated and Combined Financial Statements in this Quarterly Report, Item 3 of Part I of our 2020 Annual Report and Note 17 of the Notes to Consolidated Financial Statements included in Item 8 of our 2020 Annual Report.
ITEM 1A. RISK FACTORS
The Company is subject to those risk factors set forth under the caption "Risk Factors" in the Prospectus that is partAs of the Registration Statement on Form S-4 (File No. 333-216991), as amended, filed with the SEC bydate of this filing, the Company and declared effectiveits operations continue to be subject to the risk factors previously discussed in the "Risk Factors" sections contained in the 2020 Annual Report and our Quarterly Report on May 30, 2017.Form 10-Q for the quarter ended March 31, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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 the current quarter.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Each exhibit identified below is filed as a part of this report. Exhibits designated with an "*" are filed as an exhibit to this Quarterly Report on Form 10-Q and Exhibits designated with an "**" are furnished as an exhibit to this Quarterly Report on Form 10-Q. Exhibits designated with ana "+" are identified as management contracts or compensatory plans or arrangements.
Exhibits previously filed are incorporated by reference. | | | | | | | | |
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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*101.DEF* | | XBRL Definition Linkbase Document |
| 101.LAB* | | XBRL Label Linkbase Document |
| 101.PRE* | | XBRL Presentation Linkbase Document |
101.DEF* | | XBRL Definition Linkbase Document |
Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | Baker Hughes Holdings LLC
(Registrant) |
| | | |
| Date: | October 22, 2021 | Baker Hughes, a GE company, LLC (Registrant) |
| | | |
Date: | October 30, 2017 | By: | /s/ BRIAN WORRELL |
| | Brian Worrell |
| | Chief Financial Officer |
| | | |
| Date: | October 30, 201722, 2021 | By: | /s/ KURT CAMILLERI |
| | Kurt Camilleri |
| | Senior Vice President, Controller and Chief Accounting Officer |
57Baker Hughes Holdings LLC 2021 Third Quarter Form 10-Q | 41
