UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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| þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20182019
OR
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| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-381431-09397
Baker Hughes, a GE company, LLC
(Exact name of registrant as specified in its charter)
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| Delaware | 76-0207995 |
| (State or other jurisdiction | (I.R.S. Employer Identification No.) |
| of incorporation or organization) | |
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| 17021 Aldine Westfield, Houston, Texas - 77073-5101 |
| (Address of principal executive offices) |
Registrant's telephone number, including area code: (713) 439-8600
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 o
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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer" "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | Emerging growth company o |
| | (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 þ
As of April 18, 2018,23, 2019, all of the common units of the registrant are held by affiliates of the registrant. None of the common units are publicly traded.
Baker Hughes, a GE company, LLC
Table of Contents
BHGE LLC 20182019 First Quarter FORM 10-Q | i
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Baker Hughes, a GE company, LLC
Condensed Consolidated and Combined Statements of Income (Loss)
(Unaudited)
| |
| Three Months Ended March 31, | Three Months Ended March 31, |
| (In millions, except per unit amounts) | 2018 | 2017 | 2019 | 2018 |
| Revenue: |
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|
|
| Sales of goods | $ | 3,160 |
| $ | 2,239 |
| $ | 3,202 |
| $ | 3,160 |
|
| Sales of services | 2,239 |
| 825 |
| 2,413 |
| 2,239 |
|
| Total revenue | 5,399 |
| 3,064 |
| 5,615 |
| 5,399 |
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|
| Costs and expenses: |
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|
|
|
|
|
| Cost of goods sold | 2,800 |
| 1,846 |
| 2,810 |
| 2,800 |
|
| Cost of services sold | 1,758 |
| 532 |
| 1,829 |
| 1,758 |
|
| Selling, general and administrative expenses | 674 |
| 492 |
| 704 |
| 674 |
|
| Restructuring, impairment and other | 162 |
| 42 |
| 62 |
| 162 |
|
| Merger and related costs | 46 |
| 66 |
| |
| Separation and merger related costs | | 34 |
| 46 |
|
| Total costs and expenses | 5,440 |
| 2,978 |
| 5,439 |
| 5,440 |
|
| Operating income (loss) | (41 | ) | 86 |
| 176 |
| (41 | ) |
| Other non operating income, net | 2 |
| 8 |
| 21 |
| 2 |
|
| Interest expense, net | (46 | ) | (20 | ) | (59 | ) | (46 | ) |
| Income (loss) before income taxes and equity in loss of affiliate | (85 | ) | 74 |
| 138 |
| (85 | ) |
| Equity in loss of affiliate | (20 | ) | — |
| — |
| (20 | ) |
| Provision for income taxes | (38 | ) | (8 | ) | (67 | ) | (38 | ) |
| Net income (loss) | (143 | ) | 66 |
| 71 |
| (143 | ) |
| Less: Net loss attributable to noncontrolling interests | — |
| (2 | ) | |
| Less: Net income attributable to noncontrolling interests | | 6 |
| — |
|
| Net income (loss) attributable to Baker Hughes, a GE company, LLC | $ | (143 | ) | $ | 68 |
| $ | 65 |
| $ | (143 | ) |
|
|
|
|
|
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|
|
|
| |
|
|
|
|
| Cash distribution per common unit | $ | 0.18 |
|
|
| $ | 0.18 |
| $ | 0.18 |
|
See accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements.
BHGE LLC 20182019 First Quarter FORM 10-Q | 1
Baker Hughes, a GE company, LLC
Condensed Consolidated and Combined Statements of Comprehensive Income (Loss)
(Unaudited)
| | | | Three Months Ended March 31, | Three Months Ended March 31, |
| (In millions) | 2018 | 2017 | 2019 | 2018 |
| Net income (loss) | $ | (143 | ) | $ | 66 |
| $ | 71 |
| $ | (143 | ) |
| Less: Net loss attributable to noncontrolling interests | — |
| (2 | ) | |
| Less: Net income attributable to noncontrolling interests | | 6 |
| — |
|
| Net income (loss) attributable to Baker Hughes, a GE company, LLC | (143 | ) | 68 |
| 65 |
| (143 | ) |
| Other comprehensive income (loss): | | |
| Other comprehensive income: | | |
| Investment securities | — |
| 26 |
| 2 |
| — |
|
| Foreign currency translation adjustments | 312 |
| 46 |
| 166 |
| 312 |
|
| Cash flow hedges | 7 |
| 4 |
| 4 |
| 7 |
|
| Benefit plans | (3 | ) | (1 | ) | — |
| (3 | ) |
| Other comprehensive income | 316 |
| 75 |
| 172 |
| 316 |
|
| Less: Other comprehensive income attributable to noncontrolling interests | — |
| 2 |
| — |
| — |
|
| Other comprehensive income attributable to Baker Hughes, a GE company, LLC | 316 |
| 73 |
| 172 |
| 316 |
|
| Comprehensive income | 173 |
| 141 |
| 243 |
| 173 |
|
| Less: Comprehensive income attributable to noncontrolling interests | — |
| — |
| 6 |
| — |
|
| Comprehensive income attributable to Baker Hughes, a GE company, LLC | $ | 173 |
| $ | 141 |
| $ | 237 |
| $ | 173 |
|
See accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements.
BHGE LLC 20182019 First Quarter FORM 10-Q | 2
Baker Hughes, a GE company, LLC
Condensed Consolidated and Combined Statements of Financial Position
| | | (In millions) | March 31, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 |
ASSETS | | Current assets: | | |
Cash, cash equivalents and restricted cash (1) | $ | 5,614 |
| $ | 7,026 |
| |
Cash and cash equivalents (1) | | $ | 3,067 |
| $ | 3,677 |
|
| Current receivables, net | 5,987 |
| 6,128 |
| 6,402 |
| 6,062 |
|
| Inventories, net | 4,696 |
| 4,507 |
| 4,871 |
| 4,620 |
|
| All other current assets | 862 |
| 872 |
| 630 |
| 639 |
|
| Total current assets | 17,159 |
| 18,533 |
| 14,970 |
| 14,998 |
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| Property, plant and equipment (net of accumulated depreciation of $3,049 and $2,817) | 6,593 |
| 6,959 |
| |
| Property, plant and equipment (net of accumulated depreciation of $3,854 and $3,625) | | 6,218 |
| 6,228 |
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| Goodwill | 20,159 |
| 19,654 |
| 20,468 |
| 20,423 |
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| Other intangible assets, net | 6,203 |
| 6,358 |
| 5,663 |
| 5,719 |
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| Contract and other deferred assets | 1,931 |
| 2,044 |
| 1,808 |
| 1,894 |
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| All other assets | 1,718 |
| 2,073 |
| 2,808 |
| 1,900 |
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| Deferred income taxes | 1,287 |
| 715 |
| 997 |
| 1,072 |
|
Total assets (1) | $ | 55,050 |
| $ | 56,336 |
| $ | 52,932 |
| $ | 52,234 |
|
LIABILITIES AND EQUITY | | Current liabilities: | | |
| Accounts payable | $ | 3,429 |
| $ | 3,377 |
| $ | 3,919 |
| $ | 4,018 |
|
Short-term debt and current portion of long-term debt (1) | 1,176 |
| 2,037 |
| 906 |
| 942 |
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| Progress collections and deferred income | 1,676 |
| 1,775 |
| 1,923 |
| 1,765 |
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| All other current liabilities | 2,035 |
| 2,046 |
| 2,274 |
| 2,276 |
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| Total current liabilities | 8,316 |
| 9,235 |
| 9,022 |
| 9,001 |
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| Long-term debt | 6,296 |
| 6,312 |
| 6,270 |
| 6,285 |
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| Deferred income taxes | 388 |
| 332 |
| 42 |
| 94 |
|
| Liabilities for pensions and other postretirement benefits | 1,172 |
| 1,172 |
| 1,033 |
| 1,018 |
|
| All other liabilities | 909 |
| 889 |
| 1,599 |
| 960 |
|
| Members' equity: |
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|
| Members' capital (common units 1,113 & 1,129, issued and outstanding as of March 31, 2018 and December 31, 2017, respectively) | 40,012 |
| 40,678 |
| |
| Members' capital (common units 1,036 and 1,035 issued and outstanding as of March 31, 2019 and December 31, 2018, respectively) | | 37,432 |
| 37,582 |
|
| Retained loss | (617 | ) | (541 | ) | (288 | ) | (354 | ) |
| Accumulated other comprehensive loss | (1,565 | ) | (1,881 | ) | (2,290 | ) | (2,462 | ) |
| Baker Hughes, a GE company, LLC members' equity | 37,830 |
| 38,256 |
| 34,854 |
| 34,766 |
|
| Noncontrolling interests | 139 |
| 140 |
| 112 |
| 110 |
|
| Total equity | 37,969 |
| 38,396 |
| 34,966 |
| 34,876 |
|
| Total liabilities and equity | $ | 55,050 |
| $ | 56,336 |
| $ | 52,932 |
| $ | 52,234 |
|
| |
(1) | Total assets include $992$861 million and $1,124$896 million of assets held on behalf of GE,General Electric Company, of which $836$717 million and $997$747 million is cash and cash equivalents and $156$144 million and $127$149 million is investment securities at March 31, 20182019 and December 31, 2017,2018, respectively, and a corresponding amount of liability is reported in short-term borrowings. See "Note 15. Related Party Transactions" for further details. |
See accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements.
BHGE LLC 20182019 First Quarter FORM 10-Q | 3
Baker Hughes, a GE company, LLC
Condensed Consolidated and Combined Statements of Changes in Members' Equity
(Unaudited)
|
| | | | | | | | | | | | | | | |
| (In millions, except per unit amounts) | Common Unitholders
| Retained
Loss | Accumulated
Other
Comprehensive
Loss | Non-controlling
Interests | Total Equity |
| Balance at December 31, 2018 | $ | 37,582 |
| $ | (354 | ) | $ | (2,462 | ) | $ | 110 |
| $ | 34,876 |
|
| Comprehensive income: | | | | | |
| Net income | | 65 |
| | 6 |
| 71 |
|
| Other comprehensive income | | | 172 |
| | 172 |
|
| Regular cash distribution to members ($0.18 per unit) | (187 | ) |
|
|
| | (187 | ) |
| BHGE stock-based compensation cost | 40 |
| | | | 40 |
|
| Other | (3 | ) | 1 |
|
| (4 | ) | (6 | ) |
| Balance at March 31, 2019 | $ | 37,432 |
| $ | (288 | ) | $ | (2,290 | ) | $ | 112 |
| $ | 34,966 |
|
|
| | | | | | | | | | | | | | | | | | |
| (In millions, except per unit amounts) | Common Unitholders | Parent's Net Investment | Retained
Loss | Accumulated
Other
Comprehensive
Loss | Non-controlling
Interests | Total Equity |
| Balance at December 31, 2017 | $ | 40,678 |
| $ | — |
| $ | (541 | ) | $ | (1,881 | ) | $ | 140 |
| $ | 38,396 |
|
Effect of adoption of ASU 2016-16 on taxes (1) | | | 67 |
|
| | 67 |
|
| Comprehensive income (loss): | | | | | | |
| Net loss | | | (143 | ) |
| | (143 | ) |
| Other comprehensive income | | | | 316 |
| | 316 |
|
| Cash distribution to members ($0.18 per unit) | (203 | ) | | | | | (203 | ) |
| Repurchase of common units | (500 | ) | | | | | (500 | ) |
| Other | 37 |
| | | | (1 | ) | 36 |
|
| Balance at March 31, 2018 | $ | 40,012 |
| $ | — |
| $ | (617 | ) | $ | (1,565 | ) | $ | 139 |
| $ | 37,969 |
|
| |
(1)
| See "Note 1. Basis of Presentation and Summary of Significant Accounting Policies" for further details. |
|
| | | | | | | | | | | | | | | | | | |
| (In millions) | Common Unitholders | Parent's Net Investment | Retained
Loss | Accumulated
Other
Comprehensive
Loss | Non-controlling
Interests | Total Equity |
| Balance at December 31, 2016 | $ | — |
| $ | 16,001 |
| $ | — |
| $ | (1,888 | ) | $ | 167 |
| $ | 14,280 |
|
| Comprehensive income (loss): |
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|
|
|
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|
|
| Net income (loss) |
| 68 |
|
|
| (2 | ) | 66 |
|
| Other comprehensive income |
|
|
| 73 |
| 2 |
| 75 |
|
| Changes in Parent's net investment |
| 221 |
|
|
|
| 221 |
|
| Other |
|
|
|
| 10 |
| 10 |
|
| Balance at March 31, 2017 | $ | — |
| $ | 16,290 |
| $ | — |
| $ | (1,815 | ) | $ | 177 |
| $ | 14,652 |
|
|
| | | | | | | | | | | | | | | |
| (In millions, except per unit amounts) | Common Unitholders
| Retained
Loss | Accumulated
Other
Comprehensive
Loss | Non-controlling
Interests | Total Equity |
| Balance at December 31, 2017 | $ | 40,678 |
| $ | (541 | ) | $ | (1,881 | ) | $ | 140 |
| $ | 38,396 |
|
| Effect of adoption of ASU 2016-16 on taxes |
|
| 67 |
|
|
| 67 |
|
| Comprehensive income (loss): | | | | | |
| Net loss |
|
| (143 | ) |
| | (143 | ) |
| Other comprehensive income |
|
|
| 316 |
|
| 316 |
|
| Regular cash distribution to members ($0.18 per unit) | (203 | ) |
|
|
| | (203 | ) |
| Repurchase and cancellation of common units | (500 | ) |
|
|
| (500 | ) |
| BHGE stock-based compensation cost | 30 |
|
|
|
| 30 |
|
| Other | 7 |
|
|
| (1 | ) | 6 |
|
| Balance at March 31, 2018 | $ | 40,012 |
| $ | (617 | ) | $ | (1,565 | ) | $ | 139 |
| $ | 37,969 |
|
See accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements.
BHGE LLC 20182019 First Quarter FORM 10-Q | 4
Baker Hughes, a GE company, LLC
Condensed Consolidated and Combined Statements of Cash Flows
(Unaudited)
| |
| Three Months Ended March 31, | Three Months Ended March 31, |
| (In millions) | 2018 | 2017 | 2019 | 2018 |
| Cash flows from operating activities: | | |
| Net income (loss) | $ | (143 | ) | $ | 66 |
| $ | 71 |
| $ | (143 | ) |
| Adjustments to reconcile net income (loss) to net cash flows from operating activities: | | |
| Adjustments to reconcile net income (loss) to net cash flows from (used in) operating activities: | | |
| Depreciation and amortization | 388 |
| 132 |
| 350 |
| 388 |
|
| Provision for deferred income taxes | (99 | ) | (115 | ) | (18 | ) | (99 | ) |
| Changes in operating assets and liabilities: |
|
|
| Current receivables | 125 |
| (18 | ) | (192 | ) | 125 |
|
| Inventories | (134 | ) | 24 |
| (220 | ) | (134 | ) |
| Accounts payable | 114 |
| (16 | ) | (63 | ) | 114 |
|
| Progress collections and deferred income | (124 | ) | (130 | ) | 62 |
| (124 | ) |
| Contract and other deferred assets | 140 |
| (222 | ) | 61 |
| 140 |
|
| Other operating items, net | 23 |
| (67 | ) | (194 | ) | 23 |
|
| Net cash flows from (used in) operating activities | 290 |
| (346 | ) | (143 | ) | 290 |
|
| Cash flows from investing activities: | | |
| Expenditures for capital assets | (177 | ) | (76 | ) | (294 | ) | (177 | ) |
| Proceeds from disposal of assets | 108 |
| 8 |
| 59 |
| 108 |
|
| Other investing items, net | (66 | ) | 1 |
| (21 | ) | (66 | ) |
| Net cash flows used in investing activities | (135 | ) | (67 | ) | (256 | ) | (135 | ) |
| Cash flows from financing activities: | | |
| Net borrowings (repayments) of short-term debt and other borrowings | (181 | ) | 227 |
| |
| Net repayments of short-term debt and other borrowings | | (36 | ) | (181 | ) |
| Repayment of long-term debt | (648 | ) | — |
| (12 | ) | (648 | ) |
| Net transfer from Parent | — |
| 228 |
| |
| Distributions to members | (203 | ) | — |
| (187 | ) | (203 | ) |
| Repurchase of common units | (524 | ) | — |
| — |
| (524 | ) |
| Other financing items, net | (5 | ) | 2 |
| 2 |
| (5 | ) |
| Net cash flows from (used in) financing activities | (1,561 | ) | 457 |
| |
| Effect of currency exchange rate changes on cash, cash equivalents and restricted cash | (6 | ) | 2 |
| |
| Increase (decrease) in cash, cash equivalents and restricted cash | (1,412 | ) | 46 |
| |
| Cash, cash equivalents and restricted cash, beginning of period | 7,026 |
| 981 |
| |
| Cash, cash equivalents and restricted cash, end of period | $ | 5,614 |
| $ | 1,027 |
| |
| Net cash flows used in financing activities | | (233 | ) | (1,561 | ) |
| Effect of currency exchange rate changes on cash and cash equivalents | | 22 |
| (6 | ) |
| Decrease in cash and cash equivalents | | (610 | ) | (1,412 | ) |
| Cash and cash equivalents, beginning of period | | 3,677 |
| 7,026 |
|
| Cash and cash equivalents, end of period | | $ | 3,067 |
| $ | 5,614 |
|
| Supplemental cash flows disclosures: |
|
|
| Income taxes paid | $ | 82 |
| $ | 48 |
| $ | 76 |
| $ | 82 |
|
| Interest paid | $ | 72 |
| $ | 8 |
| $ | 56 |
| $ | 72 |
|
See accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements.
BHGE LLC 20182019 First Quarter FORM 10-Q | 5
Baker Hughes, a GE company, 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, LLC, a Delaware limited liability company (the Company, BHGE LLC, we, us, or our), and the successor to Baker Hughes Incorporated, a Delaware corporation (Baker Hughes) is a world-leading, fullstream oilfield technology provider that has a unique mix of equipment and service capabilities. We conduct business in more than 120 countries and employ approximately 64,00067,000 employees.
On July 3, 2017, we completed the combination of the oil and gas business (GE O&G) of General Electric Company (GE) and Baker Hughes (the Transactions). As of March 31, 2019, GE owns approximately 62.5%50.3% of our common units and Baker Hughes, a GE company (BHGE) owns approximately 37.5%49.7% of our common units indirectly through two wholly owned subsidiaries.units.
BASIS OF PRESENTATION
In connection with the Transactions, we entered into and are governed by an Amended & Restated Limited Liability Company Agreement, dated as of July 3, 2017 (the BHGE LLC Agreement). Under the BHGE LLC Agreement, EHHC Newco, LLC (EHHC), a wholly owned subsidiary of 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.
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 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 and combined financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
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 the 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, following consummation of the Transactions.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 and contributedamounts have been reclassified to BHGE LLC as part of the Transactions (refer to "Note 3. Business Acquisition" for further details on the Transactions). Additionally, it also includes certain assets, liabilities and results of operations of other businesses of GE that were also contributed to BHGE LLC as part of the Transactions on a fully retrospective basis (in accordanceconform with the guidance applicable to transactions between entities under common control) based on their carrying values, as reflected in the accounting records of GE. The 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. See "Note 15. 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 would have been achieved had GE O&G operated as a separate, stand-alone entity during those periods.
The GE O&G numbers in the condensed consolidated and combined statements of income (loss) have been reclassed to conform to the current year presentation. We believe that the current presentation is a more appropriate
BHGE LLC 2018 First Quarter FORM 10-Q | 6
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
presentation of the combined businesses. Merger and related costs includes all costs associated with the Transactions. Refer to "Note 3. Business Acquisition" for further details.
In the notes to unaudited condensed consolidated and combined financial statements, all dollar and 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.
In June 2018, GE announced their intention to pursue an orderly separation from BHGE over time. In the three months ended March 31, 2019, separation and merger related costs primarily include costs incurred in connection with the finalization of the Master Agreement Framework and costs related to the anticipated separation from GE. In the three months ended March 31, 2018, separation and merger related costs includes all costs associated with the Transactions. See "Note 15. Related Party Transactions" for further information on the Master Agreement Framework.
BHGE LLC 2019 First Quarter FORM 10-Q | 6
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Please refer to "Note 1. Basis of Presentation and Summary of Significant Accounting Policies," to our condensed consolidated and combined financial statements from our Annual Report on Form 10-K for the year ended December 31, 2017 (20172018 (2018 Annual Report) for the discussion of our significant accounting policies. Please refer to 'Newthe "New Accounting Standards Adopted'Adopted" section of this Note for changes to our accounting policies.
Cash and Cash Equivalents and Restricted Cash
As of March 31, 2018,2019 and December 31, 2017,2018, we had $1,124$1,214 million and $1,190$1,208 million, respectively, of cash held in bank accounts that 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. These funds are available to fund operations and growth in these jurisdictions and we do not currently anticipate a need to transfer these funds to the U.S. Included in these amounts is $655are $432 million and $764$461 million, as of March 31, 20182019 and December 31, 2017,2018, respectively, held on behalf of GE.
Cash and cash equivalents and restricted cash includes a total of $836$717 million and $997$747 million of cash at March 31, 20182019 and December 31, 2017,2018, respectively, held on behalf of GE, and a corresponding liability is reported in short-term borrowings. See "Note 15. Related Party Transactions" for further details.
As a result of adopting Financial Accounting Standards Board (FASB)NEW ACCOUNTING STANDARDS ADOPTED
Leases
On January 1, 2019, we adopted Accounting Standards Update (ASU) No. 2016-18 Statement of Cash Flows: Restricted Cash, we reclassified our restricted cash of $7 million from ‘all other assets’ to cash, cash equivalents and restricted cash as of December 31, 2017. At March 31, 2018 we continue to hold $7 million of cash that is restricted in nature as it legally cannot be used unless certain conditions are satisfied by us.
NEW ACCOUNTING STANDARDS ADOPTED
On January 1, 2018, we adopted the FASB ASU No. 2014-09, Revenue from Contracts with Customers, 2016-02, Leases, and the related amendments(ASC 606) (ASC 842). This ASU requires lessees to recognize an operating lease asset and a lease liability on the balance sheet, with the exception of short-term leases. We elected to adoptadopted the new standard using the fullmodified retrospective method, whereapproach under which leases existing at, or entered into after January 1, 2019 were required to be recognized and measured. Prior period amounts have not been adjusted and continue to be reflected in accordance with our historical accounting. The Company has elected the practical expedients upon transition that allow entities not to reassess lease identification, classification and initial direct costs for leases that existed prior to adoption.
The most significant impact of the standard was applied to each prior reporting period presentedis the recognition of right-of-use (ROU) assets and the cumulative effect of applyingoperating lease liabilities by lessees for those leases classified as operating leases. Under the standard, wasdisclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We implemented internal controls and key system functionality to enable the preparation of financial information on adoption.
We determine if an arrangement is a lease at inception. ROU assets are included in "All other assets" and operating lease liabilities are included in "All other current liabilities" and "All other liabilities" on our consolidated statement of financial position. Finance lease assets are included in "Property, plant and equipment," and finance lease liabilities are included in "Short-term debt," and "Long-term debt" on our consolidated statement of financial position.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at the later of the lease commencement date or the effective date of adoption of ASC 842 on January 1, 2016. This standard requires us to identify contractual performance obligations2019, based on the present value of lease payments over the remaining lease term. Finance lease ROU assets and determine whether revenue should beliabilities are recognized at a point in time or over timecommencement date. As most of our leases do not provide an implicit rate, we use our incremental collateralized borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our lease terms may include options to extend or terminate the lease when control of goods and services transfer toit is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a customer. Asstraight-line basis over the lease term. Short-term leases under one year do not result in a result, we changedROU asset, but are recognized in the presentation of our financial statements, including: (1) timing of revenue recognition, and (2) changes in classification between revenue and costs.income statement only on a straight-line basis over the lease term. The standard has no cash impact and, as such, does not affect the economics of our underlying customer contracts. Our policy on recognizing revenue is as follows:Company
BHGE LLC 20182019 First Quarter FORM 10-Q | 7
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
Revenue from Salehas made an election to include within our operating lease liability future payments for both lease and non-lease components. See "Note 8. Leases" for additional information.
The adoption of Equipment
Performance Obligations Satisfied Over Time
We recognize revenue on agreements for sales of goods manufactured to unique customer specifications, including long-term construction projects, on an over-time basis utilizing cost inputs as the measurement criteria in assessing the progress toward completion. Our estimate of costs to be incurred to fulfill our promise to a customer is based on our history of manufacturing or constructing similar assets for customers and is updated routinely to reflect changes in quantity or pricing of the inputs. We begin to recognize revenue on these contracts when the contract specific inventory becomes customized for a customer, which is reflective of our initial transfer of control of the incurred costs. We provide for potential losses on any of these agreements when it is probable that we will incur the loss.
Our billing terms for these over-time contracts vary, but are generally based on achieving specified milestones. The differences between the timing of our revenue recognized (based on costs incurred) and customer billings (based on contractual terms) results in changes to our contract asset or contract liability positions.
Performance Obligations Satisfied at a Point In Time
We recognize revenue for non-customized equipment at the point in time that the customer obtains control of the good, which is no earlier than when the customer has physical possession of the product. Equipment for which we recognize revenue at a point in time include goods we manufacture on a standardized basis for sale to the market. We use proof of delivery for certain large equipment with more complex logistics associated with the shipment, whereas the delivery of other equipment is determined based on historical data of transit times between regions.
On occasion we sell products with a right of return. We use our accumulated experience to estimate and provide for such returns when we record the sale. In situations where arrangements include customer acceptance provisions based on seller or customer-specified objective criteria, we recognize revenue when we have concluded that the customer has control of the goods and that acceptance is likely to occur.
Our billing terms for these point in time equipment contracts vary, but are generally based on shipment of the goods to the customer.
Revenue from Sale of Services
Performance Obligations Satisfied Over Time
We sell product services under long-term product maintenance or extended warranty agreements in our Turbomachinery & Process Solutions and Oilfield Equipment segments. These agreements require us to maintain the customers' assets over the service agreement contract terms, which generally range from 10 to 20 years. In general, these are contractual arrangements to provide services, repairs, and maintenance of a covered unit (drilling rigs, gas or steam turbine or a combined cycle). These services are performed at various times during the life of the contract, thus the costs of performing services are incurred on other than a straight-line basis. We recognize related sales based on the extent of our progress toward completion measured by actual costs incurred in relation to total expected costs. We provide for any loss that we expect to incur on any of these agreements when that loss is probable. BHGE utilizes historical customer data, prior product performance data, statistical analysis, third-party data, and internal management estimates to calculate contract-specific margins. In certain contracts, the total transaction price is variable based on customer utilization, which is excluded from the contract margin until the period that the customer has utilized to appropriately reflect the revenue activitythis standard resulted in the period earned.
Our billing terms for these contracts are generally based on achieving certain milestones or upon the occurrencerecording of a major maintenance event within the contract. The differences between the timingROU assets and operating lease liabilities of our revenue recognized (based on costs incurred) and customer billings (based on contractual terms) results in changes to our contract asset or contract liability positions.
BHGE LLC 2018 First Quarter FORM 10-Q | 8
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
Performance Obligations Satisfied at a Point In Time
We sell certain tangible products, largely spare equipment, through our services business. We recognize revenues for this equipment at the point in time that the customer obtains control of the good, which is at the point in time we deliver the spare part to the customer. Our billing terms for these point in time service contracts vary, but are generally based on shipment of the goods to the customer.
Impact of Adoption
As a result of the adoption of the standard, the timing of revenue recognition on our long-term product service agreements is affected. Although we continue to recognize revenue over time on these contracts, there are changes to how contract modifications, termination clauses and purchase options are accounted for by us. In particular, under the previous standard, 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, the impact from certain types of modifications is recognized over the remaining life of the contract.
The change in historical periods to our statements of income (loss) related to the adoption of the standard is summarized below:
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Year Ended |
| | December 31, 2017 | September 30, 2017 | June 30, 2017 | March 31, 2017 | | December 31, 2017 | December 31, 2016 |
| Revenue: | | | | | | | |
| Sales of goods | $ | 86 |
| $ | 13 |
| $ | 37 |
| $ | 27 |
| | $ | 163 |
| $ | (26 | ) |
| Sales of services | (50 | ) | (86 | ) | (33 | ) | (74 | ) | | (243 | ) | (161 | ) |
| Total revenue | 36 |
| (73 | ) | 4 |
| (47 | ) | | (80 | ) | (187 | ) |
| | | | | | | | |
| Operating loss | (14 | ) | (64 | ) | (6 | ) | (91 | ) | | (175 | ) | (226 | ) |
| | | | | | | | |
| Net income (loss) and net income (loss) attributable to BHGE, LLC | 1 |
| (84 | ) | (10 | ) | (57 | ) | | (150 | ) | (149 | ) |
The increase (decrease) to our statement of financial position related to the adoption of the standard is summarized below:
|
| | | |
| | December 31, 2017 |
| ASSETS | |
| Current receivables, net | $ | 1 |
|
| Inventories, net | (83 | ) |
| Contract and other deferred assets | (701 | ) |
| Deferred income taxes | 233 |
|
| | |
| LIABILITIES AND EQUITY | |
| Progress collections and deferred income | $ | 394 |
|
| All other current liabilities | (64 | ) |
| Deferred income taxes | (34 | ) |
| All other liabilities | (83 | ) |
| Total equity | (763 | ) |
The cumulative impact to our retained earnings (included in our net parent investment) as of January 1, 2016 was a reduction of $432 million.
BHGE LLC 2018 First Quarter FORM 10-Q | 9
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
On January 1, 2018, we adopted the FASB ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. The ASU eliminated 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 are recognized when the sale occurs even though the pre-tax effects of the transaction have not been recognized. The effect of the adoption of the standard was an increase to retained earnings of $67$844 million as of January 1, 20182019 on our consolidated statements of financial position with an immaterial impact on our consolidated statements of equity and no otherrelated impact toon our financial statements. 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.
On January 1, 2018, we adopted the FASB ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which changed 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 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 are presented outside of income from operations.
The change in historical periods to ourconsolidated statements of income (loss) related. Short-term leases have not been recorded on the consolidated statements of financial position. Our accounting for finance leases remained substantially unchanged.
Derivatives and Hedging
On January 1, 2019, we adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. Since there was no impact from the new guidance to our consolidated financial statements, no transition adjustments were recorded. ASU 2017-12 simplifies the application of hedge accounting and expands the strategies that qualify for hedge accounting. In accordance with the ASU, both the effective and ineffective portion of a cash flow hedge are initially reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings when the forecasted transaction affects earnings. The ASU requires certain changes to the adoptionpresentation of ASU No. 2017-07 is summarized below:
|
| | | | | | | | | | | | | |
| | Three Months Ended | | Year Ended |
| | March 31, 2018 | March 31, 2017 | | December 31, 2017 | December 31, 2016 |
| Operating income (loss) | $ | (5 | ) | $ | 2 |
| | $ | (1 | ) | $ | 24 |
|
| Non operating income (loss) | 5 |
| (2 | ) | | 1 |
| (24 | ) |
NEW ACCOUNTING STANDARDS TO BE ADOPTED
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU provides that the stranded tax effects from the Tax Cuts and Jobs Act on the balance of other comprehensive earnings may be reclassified to retained earnings. The ASU is effective for periods beginning after December 15, 2018, with an election to adopt early. We are evaluating the effect of the standard on our financial statements.
In FebruaryJune 2016, the FASB issued ASU No. 2016-02, Leases2016-13, Financial Instruments - Credit Losses. The ASU introduces a new accounting model, the Current Expected Credit Losses model (CECL), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for loans and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current U.S. GAAP, which generally require that a loss be incurred before it is recognized. The new standard establishes a right-of-use (ROU) model that requires a lesseewill also apply to record a ROU assetreceivables arising from revenue transactions such as contract assets 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 lesseesaccounts receivables 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 we2019. We continue to evaluate the effect of the standard on our ongoingconsolidated financial reporting, we anticipate that the adoption of the ASU may materially affect our condensed consolidated and combined financial statements.
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.
BHGE LLC 2018 First Quarter FORM 10-Q | 10
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
NOTE 2. REVENUE RELATED TO CONTRACTS WITH CUSTOMERS
DISAGGREGATED REVENUE
We disaggregate our revenue from contracts with customers by primary geographic markets. |
| | | | | | |
| | Three Months Ended March 31, |
| Total Revenue | 2019 | 2018 |
| U.S. | $ | 1,505 |
| $ | 1,483 |
|
| Non-U.S. | 4,110 |
| 3,916 |
|
| Total | $ | 5,615 |
| $ | 5,399 |
|
BHGE LLC 2019 First Quarter FORM 10-Q | 8
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
|
| | | | | | |
| | Three Months Ended March 31, |
| Total Revenue | 2018 | 2017 |
| U.S. | $ | 1,483 |
| $ | 721 |
|
| Non-U.S. | 3,916 |
| 2,343 |
|
| Total | $ | 5,399 |
| $ | 3,064 |
|
REMAINING PERFORMANCE OBLIGATIONOBLIGATIONS
As of March 31, 2019 and 2018, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $20.5 billion and $21.3 billion. Webillion, respectively. As of March 31, 2019, we expect to recognize revenue of approximately 45%47%, 60%62% and 90%89% of the total remaining performance obligations within 2, 5, and 15 years, respectively, and the remaining thereafter.
As part of our adoption of ASC 606, we elected Contract modifications could affect both the timing to not disclosecomplete as well as the amount of transaction price allocated to be received as we fulfill the related remaining performance obligation for the periods prior to adoption.obligations.
NOTE 3. BUSINESS ACQUISITION
On July 3, 2017, we closed the Transactions to combine GE O&G and Baker Hughes, creating a world-leading, fullstream oilfield technology provider that has a unique mix of equipment and service capabilities. The Transactions were executed using a partnership structure, pursuant to which GE O&G and Baker Hughes each contributed their operating assets to the Company. As a partnership, we are not subject to U.S. federal income tax under current U.S. tax laws. Our foreign subsidiaries, however, have incurred current and deferred foreign income taxes. As of March 31, 2018, GE holds an approximate 62.5% controlling interest in us and former Baker Hughes shareholders hold an approximate 37.5% interest through the ownership of 100% of Class A common stock of BHGE. GE holds its voting interest through Class B common stock in BHGE and its economic interest through a corresponding number of our common units.
Based on the relative voting rights of former Baker Hughes shareholders and GE immediately following completion of the Transactions, and after taking into consideration all relevant facts, GE O&G is considered to be the "acquirer" for accounting purposes. As a result, the Transactions are reported as a business combination using the acquisition method of accounting with GE O&G treated as the "acquirer" and Baker Hughes treated as the "acquired" company. The fair value of the consideration exchanged was $24,798 million.
The tables below present the preliminary estimates of the fair value of assets acquired and liabilities assumed and the associated fair value of the noncontrolling interest related to the acquired net assets of Baker Hughes. The final determination of fair value for certain assets and liabilities will be completed as soon as the information necessary to complete the analysis is obtained. These amounts, which may differ materially from these preliminary estimates, will continue to be refined and will be finalized as soon as possible, but no later than one year from the acquisition date. The primary areas of the preliminary estimates that are not yet finalized relate to inventory, property, plant and equipment, identifiable intangible assets, equity-method investments, deferred income taxes, uncertain tax positions and noncontrolling interest associated with net assets acquired.
BHGE LLC 2018 First Quarter FORM 10-Q | 11
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
|
| | | |
| Preliminary identifiable assets acquired and liabilities assumed | Estimated fair value at July 3, 2017 |
| Assets | |
| Cash and equivalents | $ | 4,133 |
|
| Current receivables | 2,342 |
|
| Inventories | 1,706 |
|
| Property, plant and equipment | 4,571 |
|
Intangible assets (1) | 4,078 |
|
| All other assets | 1,596 |
|
| Liabilities | |
| Accounts payable | (1,209 | ) |
| Borrowings | (3,370 | ) |
Deferred income taxes (2) | (52 | ) |
| Liabilities for pension and other postretirement benefits | (654 | ) |
| All other liabilities | (1,421 | ) |
| Total identifiable net assets | $ | 11,720 |
|
| Noncontrolling interest associated with net assets acquired | (76 | ) |
Goodwill (3) | 13,154 |
|
| Total purchase consideration | $ | 24,798 |
|
| |
(1)
| 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) |
| Trade name - Baker Hughes | $ | 2,100 |
| Indefinite life |
Customer relationships
| 1,320 |
| 15 |
| Patents and technology | 465 |
| 10 |
| In-process research and development | 70 |
| Indefinite life |
| Capitalized software | 62 |
| 3-7 |
| Trade names - other | 40 |
| 10 |
| Favorable lease contracts & others | 21 |
| 10 |
| Total | $ | 4,078 |
| |
| |
(2)
| Includes approximately $162 million of net deferred tax liabilities related to the estimated fair value of intangible assets included in the preliminary purchase consideration and approximately $110 million of other net deferred tax assets, including non-U.S. loss carryforwards net of valuation allowances and offsetting liabilities for unrecognized benefits. |
| |
(3)
| Goodwill represents the excess of the total purchase consideration over fair value of the net assets recognized and represents the future economic benefits that we believe will result from combining the operations of GE O&G and Baker Hughes, including expected future synergies and operating efficiencies. Goodwill resulting from the Transactions has been preliminarily allocated to the Oilfield Services segment, of which $67 million is deductible for tax purposes. |
During the first quarter of 2018, the Company made measurement period adjustments to reflect facts and circumstances in existence as of the acquisition date. These adjustments resulted in an increase in goodwill of approximately $376 million primarily due to a reduction in the step-up to fair value of property, plant and equipment of $288 million and a reduction in intangible assets of $45 million from prior quarter. As a result of the reduction in property, plant and equipment and intangible assets during the first quarter of 2018, we recorded an adjustment to depreciation and amortization expense of $27 million that would have been recorded in previous interim reporting periods if the adjustment to the provisional amounts had been recognized at the acquisition date. In addition, we reclassified certain balances to conform to our current presentation.
BHGE LLC 2018 First Quarter FORM 10-Q | 12
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
INCOME TAXES
BHGE LLC is treated as a partnership for U.S. federal income tax purposes. As such, we are not subject to U.S. federal income tax under current U.S. tax laws. Our members are each required to take into account for U.S. federal income tax purposes their distributive share of the items of income, gain, loss and deduction, which generally includes our U.S. operations. BHGE and GE are each 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 months ended March 31, 2018 and 2017, acquisition costs of $46 million and $66 million, respectively, were expensed as incurred and were reported as merger and related costs. Such costs include professional fees of advisors and integration and synergy costs related to the combination of Baker Hughes and GE O&G.
UNAUDITED 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 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 2016 and exclusion of those costs from all other periods presented; amortization associated with an estimate of the acquired intangible assets; depreciation associated with an estimate of the fair value step-up of property, plant and equipment; and reduction of interest expense for fair value adjustments to debt.
|
| | | |
| | Three Months Ended March 31, 2017 |
| Revenue | $ | 5,324 |
|
| Net loss | (17 | ) |
| Net loss attributable to the Company | (14 | ) |
BHGE LLC 2018 First Quarter FORM 10-Q | 13
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
NOTE 4.3. CURRENT RECEIVABLES
Current receivables are comprised of the following:
|
| | | | | | |
| | March 31, 2019 | December 31, 2018 |
| Customer receivables | $ | 5,305 |
| $ | 4,974 |
|
| Related parties | 718 |
| 746 |
|
| Other | 714 |
| 669 |
|
| Total current receivables | 6,737 |
| 6,389 |
|
| Less: Allowance for doubtful accounts | (335 | ) | (327 | ) |
| Total current receivables, net | $ | 6,402 |
| $ | 6,062 |
|
|
| | | | | | |
| | March 31, 2018 | December 31, 2017 |
| Customer receivables | $ | 4,732 |
| $ | 4,700 |
|
| Related parties | 813 |
| 914 |
|
| Other | 788 |
| 844 |
|
| Total current receivables | 6,333 |
| 6,458 |
|
| Less: Allowance for doubtful accounts | (346 | ) | (330 | ) |
| Total current receivables, net | $ | 5,987 |
| $ | 6,128 |
|
Customer receivables are recorded at the invoiced amount. Related parties consists primarily of amounts owed to us by GE. The "Other" category consists primarily consists of indirect taxes, customer retentions, other tax receivables and advance payments to suppliers, indirect taxes and other tax receivables.suppliers.
NOTE 5.4. INVENTORIES
Inventories, net of reserves of $372$438 million and $360$430 million as of March 31, 20182019 and December 31, 2017,2018, respectively, are comprised of the following:
|
| | | | | | |
| | March 31, 2019 | December 31, 2018 |
| Finished goods | $ | 2,782 |
| $ | 2,575 |
|
| Work in process and raw material | 2,089 |
| 2,045 |
|
| Total inventories, net | $ | 4,871 |
| $ | 4,620 |
|
|
| | | | | | |
| | March 31, 2018 | December 31, 2017 |
| Finished goods | $ | 2,527 |
| $ | 2,577 |
|
| Work in process and raw material | 2,169 |
| 1,930 |
|
| Total inventories, net | $ | 4,696 |
| $ | 4,507 |
|
DuringWe recorded inventory impairments of $61 million during the three months ended March 31, 2018 and 2017, we recorded $61 million and $15 million, respectively, of inventory impairments as a result of certain restructuring activities initiated by the Company.we initiated. Charges for inventory impairments are reported in the "Cost of goods sold" caption of the condensed consolidated and combined statements of income (loss).
BHGE LLC 20182019 First Quarter FORM 10-Q | 149
Baker Hughes, a GE company, 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, 2017, gross | $ | 15,565 |
| $ | 3,901 |
| $ | 1,906 |
| $ | 2,036 |
| $ | 23,408 |
|
| Accumulated impairment at December 31, 2017 | (2,633 | ) | (867 | ) | — |
| (254 | ) | (3,754 | ) |
| Balance at December 31, 2017 | 12,932 |
| 3,034 |
| 1,906 |
| 1,782 |
| 19,654 |
|
Purchase accounting adjustments (1) | (157 | ) | 293 |
| 394 |
| 429 |
| 959 |
|
| Currency exchange and others | (26 | ) | (17 | ) | (114 | ) | (33 | ) | (190 | ) |
| Balance at December 31, 2018 | 12,749 |
| 3,310 |
| 2,186 |
| 2,178 |
| 20,423 |
|
| Currency exchange and others | — |
| 22 |
| 6 |
| 17 |
| 45 |
|
| Balance at March 31, 2019 | $ | 12,749 |
| $ | 3,332 |
| $ | 2,192 |
| $ | 2,195 |
| $ | 20,468 |
|
|
| | | | | | | | | | | | | | | |
| Oilfield Services | Oilfield Equipment | Turbo-machinery & Process Solutions | Digital Solutions | Total |
| Balance at December 31, 2016, gross | $ | 2,779 |
| $ | 3,852 |
| $ | 1,814 |
| $ | 1,989 |
| $ | 10,434 |
|
| Accumulated impairment at December 31, 2016 | (2,633 | ) | (867 | ) | — |
| (254 | ) | (3,754 | ) |
| Balance at December 31, 2016 | 146 |
| 2,985 |
| 1,814 |
| 1,735 |
| 6,680 |
|
Acquisition (1) | 12,778 |
| — |
| — |
| — |
| 12,778 |
|
| Currency exchange and others | 8 |
| 49 |
| 92 |
| 47 |
| 196 |
|
| Balance at December 31, 2017 | 12,932 |
| 3,034 |
| 1,906 |
| 1,782 |
| 19,654 |
|
Purchase accounting adjustments (1) | 376 |
| — |
| — |
| — |
| 376 |
|
| Currency exchange and others | 28 |
| 33 |
| 41 |
| 27 |
| 129 |
|
| Balance at March 31, 2018 | $ | 13,336 |
| $ | 3,067 |
| $ | 1,947 |
| $ | 1,809 |
| $ | 20,159 |
|
| |
(1) | Includes the final determination of fair value of the assets and liabilities and the related goodwill associated with the acquisition of Baker Hughes. This amountHughes that was concluded in the second quarter of 2018. Of the total goodwill of $13,669 million resulting from the acquisition of Baker Hughes, $12,604 million is allocated to our Oilfield Services segment and its allocationsthe remainder to our other segments are preliminary.based on the expected benefit from the synergies of the acquisition. |
In addition to our annualWe test goodwill for impairment testing onannually in the third quarter using data as of July 1 each year, weof that year. Our reporting units are the same as our four reportable segments. We also test goodwill for impairment between annual impairment testing dates whenever events or circumstances occur that, in our judgment, could more likely than not reduce the fair value of one or more reporting units below its carrying amount. In assessing the possibility that a reporting unit'sunit’s fair value has been reduced below its carrying amount due to the occurrence of events or circumstances between annual impairment testing dates, we consider all available evidence, including, (butbut not limited to)to, (i) the results of our impairment testing at the prior annual impairment testing date, (inin particular the magnitude of the excess of fair value over carrying value observed),observed, (ii) downward revisions to internal forecasts, (andand the magnitude thereof),thereof, if any, (iii) the impact of the separation from GE, if any, and (iii)(iv) declines in ourthe market capitalization of BHGE below ourits book value, (andand the magnitude and duration of those declines),declines, if any. During the first quarter of 2018,2019, we have not identified any events or circumstances that could more likely than not reduce the fair value of one or more of our reporting units below its carrying amount. However,
As of March 31, 2019, we believe that the goodwill is recoverable, however, there can be no assurances that further sustained declines in macroeconomic or business conditions affecting our industry and businesses (i)business will not occuroccur. The impairment testing involves significant management judgment and (ii) were theyare based on assumptions about future commodity pricing, supply and demand for our goods and services, and market conditions, which are difficult to occur, that those further sustained declines will not resultforecast in additional impairmentsvolatile economic environments. If actual results materially differ from the estimated assumptions utilized in our forecasts, we may need to record impairment charges in future periods.
As of March 31, 2018, 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.
BHGE LLC 20182019 First Quarter FORM 10-Q | 1510
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
OTHER INTANGIBLE ASSETS
Intangible assets are comprised of the following:
|
| | | | | | | | | | | | | | | | | | |
| | March 31, 2019 | December 31, 2018 |
| | Gross
Carrying
Amount | Accumulated
Amortization | Net | Gross
Carrying
Amount | Accumulated
Amortization | Net |
| Customer relationships | $ | 3,101 |
| $ | (983 | ) | $ | 2,118 |
| $ | 3,085 |
| $ | (944 | ) | $ | 2,141 |
|
| Technology | 1,091 |
| (557 | ) | 534 |
| 1,107 |
| (526 | ) | 581 |
|
| Trade names and trademarks | 703 |
| (237 | ) | 466 |
| 698 |
| (229 | ) | 469 |
|
| Capitalized software | 1,169 |
| (866 | ) | 303 |
| 1,118 |
| (824 | ) | 294 |
|
| Other | 1 |
| (1 | ) | — |
| 14 |
| (2 | ) | 12 |
|
| Finite-lived intangible assets | 6,065 |
| (2,644 | ) | 3,421 |
| 6,022 |
| (2,525 | ) | 3,497 |
|
Indefinite-lived intangible assets (1) | 2,242 |
| — |
| 2,242 |
| 2,222 |
| — |
| 2,222 |
|
| Total intangible assets | $ | 8,307 |
| $ | (2,644 | ) | $ | 5,663 |
| $ | 8,244 |
| $ | (2,525 | ) | $ | 5,719 |
|
|
| | | | | | | | | | | | | | | | | | |
| | March 31, 2018 | December 31, 2017 |
| | Gross
Carrying
Amount | Accumulated
Amortization | Net | Gross
Carrying
Amount | Accumulated
Amortization | Net |
| Technology | $ | 1,118 |
| $ | (479 | ) | $ | 639 |
| $ | 1,177 |
| $ | (440 | ) | $ | 737 |
|
| Customer relationships | 3,279 |
| (877 | ) | 2,402 |
| 3,202 |
| (819 | ) | 2,383 |
|
| Capitalized software | 1,138 |
| (753 | ) | 385 |
| 1,130 |
| (697 | ) | 433 |
|
| Trade names and trademarks | 726 |
| (192 | ) | 534 |
| 757 |
| (159 | ) | 598 |
|
| Other | 14 |
| (1 | ) | 14 |
| 10 |
| — |
| 10 |
|
| Finite-lived intangible assets | 6,275 |
| (2,302 | ) | 3,974 |
| 6,276 |
| (2,115 | ) | 4,161 |
|
Indefinite-lived intangible assets (1) | 2,229 |
| — |
| 2,229 |
| 2,197 |
| — |
| 2,197 |
|
| Total intangible assets | $ | 8,504 |
| $ | (2,302 | ) | $ | 6,203 |
| $ | 8,473 |
| $ | (2,115 | ) | $ | 6,358 |
|
| |
(1) | Indefinite-lived intangible assets are principally comprised of the Baker Hughes trade name. |
Intangible assets are generally amortized on a straight-line basis with estimated useful lives ranging from 1 to 30 years. Amortization expense for the three months ended March 31, 2019 and 2018 was $96 million and 2017 was $139 million, and $63 million, respectively. During the three months ended March 31, 2018, we incurred additional amortization expense of $35 million due to the acquisition of Baker Hughes. In addition, we incurred $37 million of accelerated amortization during the first quarter of 2018 related to trade names and technology that we will cease to use by the end of the second quarter of 2018 as a result of the combination of Baker Hughes and GE O&G. This decision is expected to generate an additional charge of $34 million in the second quarter of 2018.
Estimated amortization expense for the remainder of 20182019 and each of the subsequent five fiscal years is expected to be as follows:
|
| | | |
| Year | Estimated Amortization Expense |
| Remainder of 2019 | $ | 261 |
|
| 2020 | 329 |
|
| 2021 | 280 |
|
| 2022 | 237 |
|
| 2023 | 225 |
|
| 2024 | 218 |
|
|
| | | |
| Year | Estimated Amortization Expense |
| Remainder of 2018 | $ | 338 |
|
| 2019 | 375 |
|
| 2020 | 348 |
|
| 2021 | 300 |
|
| 2022 | 266 |
|
| 2023 | 247 |
|
BHGE LLC 20182019 First Quarter FORM 10-Q | 1611
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
NOTE 7.6. 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:
| | | | March 31, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 |
| Long-term product service agreements | $ | 615 |
| $ | 589 |
| $ | 576 |
| $ | 609 |
|
Long-term equipment contract revenue (1) | 1,108 |
| 1,095 |
| |
Long-term equipment contracts (1) | | 1,040 |
| 1,085 |
|
Contract assets (total revenue in excess of billings) (2) | 1,723 |
| 1,684 |
| 1,616 |
| 1,694 |
|
Deferred inventory costs (3) | 208 |
| 360 |
| 144 |
| 179 |
|
| Non-recurring engineering costs | | 48 |
| 21 |
|
| Contract and other deferred assets | $ | 1,931 |
| $ | 2,044 |
| $ | 1,808 |
| $ | 1,894 |
|
| |
(1) | Reflects revenue earned in excess of billings on our long-term contracts to construct technically complex equipment.equipment and certain other service agreements. |
| |
(2) | Contract assets (total revenue in excess of billings) were $1,233$1,684 million as of January 1, 2017.2018. |
| |
(3) | Deferred inventory costs were $276$360 million as of January 1, 2017,2018, which represents cost deferral for shipped goods and other costs where the criteria for revenue recognition has not yet been met. |
Revenue recognized induring the three months ended March 31, 20182019 and 20172018 from performance obligations satisfied (or partially satisfied) in previous periods related to our long-term service agreements was approximately $10$7 million and approximately $30$10 million, respectively. This includes revenue recognized from revisions to cost or billing estimates that may affect a contract’s total estimated profitability resulting in an adjustment of earnings.
NOTE 8.7. 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 following:
| | | | March 31, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 |
| Progress collections | $ | 1,474 |
| $ | 1,456 |
| $ | 1,790 |
| $ | 1,600 |
|
| Deferred income | 202 |
| 319 |
| 133 |
| 165 |
|
Progress collections and deferred income (contract liabilities) (1) | $ | 1,676 |
| $ | 1,775 |
| $ | 1,923 |
| $ | 1,765 |
|
| |
(1) | Progress collections and deferred income (contract liabilities) was $2,038were $1,775 million at January 1, 2017.2018. |
Revenue recognized forduring the three months ended March 31, 20182019 and 20172018 that was included in the contract liabilities at the beginning of the period was $602$553 million and $529$602 million, respectively.
BHGE LLC 20182019 First Quarter FORM 10-Q | 1712
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
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.
|
| | | |
| | |
| Operating Lease Expense | Three Months Ended March 31, 2019 |
| Long-term fixed lease | $ | 48 |
|
| Long-term variable lease | 11 |
|
| Short-term lease | 123 |
|
| Total operating lease expense | $ | 182 |
|
For the three months ended March 31, 2018, total operating lease expense was $147 million. Cash flows used in operating activities for operating leases approximates our expense for the three months ended March 31, 2019 and 2018.
As of March 31, 2019, maturities of our operating lease liabilities are as follows:
|
| | | |
| Year | Operating leases |
| Remainder of 2019 | $ | 165 |
|
| 2020 | 194 |
|
| 2021 | 140 |
|
| 2022 | 113 |
|
| 2023 | 80 |
|
| Thereafter | 386 |
|
| Total lease payments | 1,078 |
|
| Less: imputed interest | 209 |
|
| Total | $ | 869 |
|
| | |
| Amounts recognized in the condensed consolidated statement of financial position as of March 31, 2019: |
| | Operating leases |
| All other current liabilities | $ | 194 |
|
| All other liabilities | 675 |
|
| Total | $ | 869 |
|
ROU assets of $860 million as of March 31, 2019 were included in "All other assets" in our condensed consolidated statements of financial position.
The weighted-average remaining lease term as of March 31, 2019 was approximately nine years for our operating leases. The weighted-average discount rate used to determine the operating lease liability as of March 31, 2019 was 4.4%.
BHGE LLC 2019 First Quarter FORM 10-Q | 13
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 9. BORROWINGS
Short-term and long-term borrowings are comprised of the following:
|
| | | | | | |
| | March 31, 2019 | December 31, 2018 |
| Short-term borrowings | | |
| Short-term borrowings from GE | $ | 861 |
| $ | 896 |
|
| Other borrowings | 45 |
| 46 |
|
| Total short-term borrowings | 906 |
| 942 |
|
| | | |
| Long-term borrowings | | |
| 3.2% Senior Notes due August 2021 | 522 |
| 523 |
|
| 2.773% Senior Notes due December 2022 | 1,245 |
| 1,245 |
|
| 8.55% Debentures due June 2024 | 130 |
| 131 |
|
| 3.337% Senior Notes due December 2027 | 1,343 |
| 1,343 |
|
| 6.875% Notes due January 2029 | 292 |
| 294 |
|
| 5.125% Senior Notes due September 2040 | 1,305 |
| 1,306 |
|
| 4.08% Senior Notes due December 2047 | 1,336 |
| 1,336 |
|
| Other long-term borrowings | 97 |
| 107 |
|
| Total long-term borrowings | 6,270 |
| 6,285 |
|
| Total borrowings | $ | 7,176 |
| $ | 7,227 |
|
|
| | | | | | |
| | March 31, 2018 | December 31, 2017 |
| Short-term borrowings | | |
| Short-term bank borrowings | $ | 124 |
| $ | 171 |
|
| Current portion of long-term borrowings | — |
| 639 |
|
| Short-term borrowings from GE | 992 |
| 1,124 |
|
| Other borrowings | 60 |
| 103 |
|
| Total short-term borrowings | $ | 1,176 |
| $ | 2,037 |
|
| | | |
| Long-term borrowings | | |
| 3.2% Senior Notes due August 2021 | $ | 525 |
| $ | 526 |
|
| 2.773% Senior Notes due December 2022 | 1,245 |
| 1,244 |
|
| 8.55% Debentures due June 2024 | 134 |
| 135 |
|
| 3.337% Senior Notes due December 2027 | 1,343 |
| 1,342 |
|
| 6.875% Notes due January 2029 | 303 |
| 308 |
|
| 5.125% Notes due September 2040 | 1,310 |
| 1,311 |
|
| 4.08% Senior Notes due December 2047 | 1,337 |
| 1,337 |
|
| Capital leases | 79 |
| 87 |
|
| Other long-term borrowings | 20 |
| 22 |
|
| Total long-term borrowings | 6,296 |
| 6,312 |
|
| Total borrowings | $ | 7,472 |
| $ | 8,349 |
|
We have a 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. During the three months endedAt March 31, 2019 and December 31, 2018, there were no borrowings under the 2017 Credit Agreement.
We have a commercial paper program under which itwe may issue from time to time up to $3 billion in commercial paper with maturities of no more than 397 days. At March 31, 2019 and December 31, 2018, we hadthere were no borrowings outstanding under the commercial paper program. The maximum combined borrowing at any time under both the 2017 Credit Agreement and the commercial paper program is $3 billion.
In January 2018, we purchased all of the remaining outstanding 2018 Senior Notes of $615 million for a total consideration of $637 million. The carrying value of the 2018 Senior Notes was $639 million, which includes $24 million of fair value step-up from the Baker Hughes acquisition. As a result of the repurchase, we recorded a gain of $2 million. Also in January 2018, we commenced an offering to exchange $3,950 million of all the outstanding, unregistered senior notes that were issued in a private offering in December 2017, for identical, registered 2.773% Senior Notes due 2022, 3.337% Senior Notes due 2027 and 4.080% Senior Notes due 2047. The exchange offer was completed at the end of January 2018.
Concurrent with the Transactions associated with the acquisition of Baker Hughes on July 3, 2017, Baker Hughes Co-Obligor, Inc. became a co-obligor, jointly and severally with us, on our registered debt securities. This co-obligor is a 100%-owned finance subsidiary of usthe Company that was incorporated for the sole purpose of serving as a co-obligor of debt securities and has no assets or operations other than those related to its sole purpose. Baker Hughes Co-Obligor, Inc. is also a co-obligor of the $3,950 million senior notes issued in December 2017 by us in a private placement and subsequently registered in January 2018.
BHGE LLC 2018 First Quarter FORM 10-Q | 18
Baker Hughes, a GE company, LLC
Certain Senior Notes contain covenants that restrict our ability to Unaudited Condensed Consolidatedtake certain actions, including, but not limited to, the creation of certain liens securing debt, the entry into certain sale-leaseback transactions and Combined Financial Statements
engaging in certain merger, consolidation and asset sale transactions in excess of specified limits.
The estimated fair value of total borrowings at March 31, 20182019 and December 31, 20172018 was $7,320$6,966 million and $8,466$6,629 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.
See "Note 15. Related Party Transactions" for additional information on the short-term borrowings from GE.
BHGE LLC 2019 First Quarter FORM 10-Q | 14
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 10. EMPLOYEE BENEFIT PLANS
CertainIn 2018, certain of our U.S. employees arewere covered under various U.S. GE employee benefit plans, including GE's retirement plans (pension, retiree health and life insurance, and savings benefit plans). Beginning in 2019, such employees ceased to participate in these GE U.S. plans. In addition, certain United Kingdom (UK) employees participate in the GE UK Pension Plan. We are allocated relevant participation costs for these GE employee benefit plans as part of multi-employer plans. As such, we have not recorded any liabilities associated with our participation in these plans. Expenses associated with our participation in these plans was $37$2 million and $26$37 million in the three months ended March 31, 2019 and 2018, respectively. In November 2018, the Company entered into an agreement with GE whereby GE will transfer the assets and 2017, respectively.liabilities of the GE UK Pension Plan related to the oil & gas businesses to BHGE on what is intended to be a fully funded basis. Subsequent to this transfer, BHGE employees shall cease to participate in the GE UK Pension Plan. This transfer is expected to close in 2019.
In addition to these GE plans, certain of our employees are also covered by company sponsored employee defined benefit plans. These defined benefit plans include sevenfour U.S. plans and six non-U.S. plans, primarily in the UK, Germany, and Canada, all with plan assets or obligations greater than $20 million. We use a December 31 measurement date for these plans. These defined benefit plans generally provide benefits to employees based on formulas recognizing length of service and earnings.
The components of net periodic cost (benefit) of plans sponsored by us are as follows for the three months ended March 31:
|
| | | | | | |
| 2019 | 2018 |
| Service cost | $ | 4 |
| $ | 5 |
|
| Interest cost | 19 |
| 18 |
|
| Expected return on plan assets | (25 | ) | (30 | ) |
| Amortization of net actuarial loss | 4 |
| 2 |
|
| Net periodic cost (benefit) | $ | 2 |
| $ | (5 | ) |
|
| | | | | | |
| Pension Benefits |
| 2018 | 2017 |
| Service cost | $ | 5 |
| $ | 3 |
|
| Interest cost | 18 |
| 7 |
|
| Expected return on plan assets | (30 | ) | (10 | ) |
| Amortization of prior service credit | — |
| — |
|
| Amortization of net actuarial (gain) loss | 2 |
| 3 |
|
| Net periodic cost (benefit) | $ | (5 | ) | $ | 3 |
|
The service cost component of the net periodic cost (benefit) is included in operating income (loss) and all other components are included in non operating income (loss) in our condensed consolidated and combined statements of income (loss). NOTE 11. INCOME TAXES
We are treated as a partnership for U.S. federal income tax purposes. As such, except for certain U.S. corporations owned by the Company, we are not subject to U.S. federal income tax under current U.S. tax laws. Our members are each 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 includes the U.S. operations of both Baker Hughes and GE O&G. BHGE and GE are each taxed on their distributive share of income and gain, whether or not a corresponding amount of cash or other property is distributed to them. For assets held indirectly by us through subsidiaries, including both foreign and U.S., the taxes attributable to those subsidiaries are reflected in our condensed consolidated and combined financial statements.
BHGE LLC 2018 First Quarter FORM 10-Q | 19
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (U.S. tax reform) that lowers the statutory tax rate on U.S. earnings, taxes historic foreign earnings previously deferred from U.S. taxation at a reduced rate of tax (transition tax), establishes a territorial tax system and enacts new taxes associated with global operations. The transition tax associated with our non-U.S. operations will be borne by our members. The impact of U.S. tax reform was recorded on a provisional basis as the legislation provides for additional guidance to be issued by the U.S. Department of the Treasury on several provisions including the computation of the transition tax which could impact the calculation of the transition tax charge and the revaluation of deferred taxes. In addition, analysis performed and conclusions reached as part of the tax return filing process and additional guidance on accounting for tax reform could affect the provisional amount. As part of purchase accounting for the Baker Hughes acquisition, we have made preliminary estimates of the fair value of assets acquired and liabilities assumed. Accordingly, changes to these estimates resulting from the finalization of the fair values may also require us to adjust the provisional impact of U.S. tax reform.
Additionally, as part of U.S. tax reform, the U.S. has enacted a tax on "base eroding" payments from the U.S. and a minimum tax on foreign earnings (global intangible low-taxed income) that would be borne by our members. Because aspects of the new law and the effect on our operations is uncertain and because aspects of the accounting rules associated with this provision have not been resolved, our members have not made a provisional accrual for the deferred tax aspects of this provision and consequently have not made an accounting policy election on the deferred tax treatment of this tax.
For the quarter ended March 31, 2018,2019, income tax expense was $38$67 million compared to tax expense of $8$38 million infor the first quarter of 2017.prior year quarter. The difference between the U.S. statutory tax rate of 21% and the current effective tax rate is primarily duerelated to higher tax expensethe geographical mix of approximately $58earnings and losses, coupled with $21 million related to losses with no tax benefit. Since we are a partnership for U.S. federal tax purposes, any tax benefits associated with U.S. losses are recognized by our members and not reflected in our tax expense. The prior year quarter reflects 100% of the taxes associated with U.S. and non-U.S. earnings of the GE O&G business.benefit due to valuation allowances.
NOTE 12. MEMBERS' EQUITY
COMMON UNITS
The BHGE LLC Agreement provides that initially there is one class of common units, which are currently held by BHGE indirectly through EHHC and CFC Holdings, LLC (CFC Holdings), and by GE and certain indirectly wholly-owned subsidiaries of GE. If BHGE issues a share of Class A common stock, including in connection with an equity incentive or similar plan, we will also issue a corresponding common unit to BHGE or one of its direct subsidiaries. For the three months ended March 31, 2017,2019 we issued 382$1,541 thousand common units to BHGE in connection with the issuance of Class A common stock by BHGE. As of March 31, 2017, GE owns approximately 62.5% of our common units and BHGE owns approximately 37.5% of the common units.
The following table presents the changes in number of common units outstanding (in thousands): |
| | | | |
| | Common Units Held by BHGE | Common Units Held by GE |
| Balance at December 31, 2017 | 422,208 |
| 706,985 |
|
| Issue of units to BHGE under equity incentive plan | 382 |
| — |
|
Repurchase of common units (1) | (6,290 | ) | (10,524 | ) |
| Balance at March 31, 2018 | 416,300 |
| 696,460 |
|
| |
(1)
| On November 2, 2017, BHGE's board of directors authorized us to repurchase up to $3 billion of our common units from BHGE and GE. During the three months ended March 31, 2018, we repurchased 16,814,293 units for a total consideration of $500 million. At March 31, 2018, we had authorization remaining to repurchase up to approximately $2 billion of common units from BHGE and GE. |
BHGE LLC 20182019 First Quarter FORM 10-Q | 2015
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 common units outstanding (in thousands): |
| | | | |
| | Common Units Held by BHGE | Common Units Held by GE |
| Balance at December 31, 2018 | 513,399 |
| 521,543 |
|
| Issue of units to BHGE under equity incentive plan | 1,541 |
| — |
|
| Balance at March 31, 2019 | 514,940 |
| 521,543 |
|
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, 2017 | $ | 1 |
| $ | (1,824 | ) | $ | 2 |
| $ | (60 | ) | $ | (1,881 | ) |
| Other comprehensive income (loss) before reclassifications | — |
| 312 |
| 8 |
| (3 | ) | 317 |
|
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| — |
| — |
| — |
| — |
|
| Deferred taxes | — |
| — |
| (1 | ) | — |
| (1 | ) |
| Other comprehensive income (loss) | — |
| 312 |
| 7 |
| (3 | ) | 316 |
|
| Less: Other comprehensive income (loss) attributable to noncontrolling interests | — |
| — |
| — |
| — |
| — |
|
| Balance at March 31, 2018 | $ | 1 |
| $ | (1,512 | ) | $ | 9 |
| $ | (63 | ) | $ | (1,565 | ) |
|
| | | | | | | | | | | | | | | |
| | Investment Securities | Foreign Currency Translation Adjustments | Cash Flow Hedges | Benefit Plans | Accumulated Other Comprehensive Loss |
| Balance at December 31, 2018 | $ | — |
| $ | (2,326 | ) | $ | (3 | ) | $ | (133 | ) | $ | (2,462 | ) |
| Other comprehensive income (loss) before reclassifications | 2 |
| 166 |
| 5 |
| (2 | ) | 171 |
|
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| — |
| — |
| 1 |
| 1 |
|
| Deferred taxes | — |
| — |
| (1 | ) | 1 |
| — |
|
| Other comprehensive income | 2 |
| 166 |
| 4 |
| — |
| 172 |
|
| Less: Other comprehensive income attributable to noncontrolling interests | — |
| — |
| — |
| — |
| — |
|
| Balance at March 31, 2019 | $ | 2 |
| $ | (2,160 | ) | $ | 1 |
| $ | (133 | ) | $ | (2,290 | ) |
|
| | | | | | | | | | | | | | | |
| | Investment Securities | Foreign Currency Translation Adjustments | Cash Flow Hedges | Benefit Plans | Accumulated Other Comprehensive Loss |
| Balance at December 31, 2017 | $ | 1 |
| $ | (1,824 | ) | $ | 2 |
| $ | (60 | ) | $ | (1,881 | ) |
| Other comprehensive income (loss) before reclassifications | — |
| 312 |
| 8 |
| (3 | ) | 317 |
|
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| — |
| — |
| — |
| — |
|
| Deferred taxes | — |
| — |
| (1 | ) | — |
| (1 | ) |
| Other comprehensive income (loss) | — |
| 312 |
| 7 |
| (3 | ) | 316 |
|
| Less: Other comprehensive income (loss) attributable to noncontrolling interests | — |
| — |
| — |
| — |
| — |
|
| Balance at March 31, 2018 | $ | 1 |
| $ | (1,512 | ) | $ | 9 |
| $ | (63 | ) | $ | (1,565 | ) |
|
| | | | | | | | | | | | | | | |
| | Investment Securities | Foreign Currency Translation Adjustments | Cash Flow Hedges | Benefit Plans | Accumulated Other Comprehensive Loss |
| Balance at December 31, 2016 | $ | — |
| $ | (1,795 | ) | $ | (10 | ) | $ | (83 | ) | $ | (1,888 | ) |
| Other comprehensive income (loss) before reclassifications | 39 |
| 49 |
| (2 | ) | (2 | ) | 84 |
|
| Amounts reclassified from accumulated other comprehensive income (loss) | 1 |
| — |
| 7 |
| (2 | ) | 6 |
|
| Deferred taxes | (14 | ) | (3 | ) | (1 | ) | 3 |
| (15 | ) |
| Other comprehensive income (loss) | 26 |
| 46 |
| 4 |
| (1 | ) | 75 |
|
| Less: Other comprehensive income attributable to noncontrolling interests | — |
| — |
| — |
| 2 |
| 2 |
|
| Balance at March 31, 2017 | $ | 26 |
| $ | (1,749 | ) | $ | (6 | ) | $ | (86 | ) | $ | (1,815 | ) |
The amounts reclassified from accumulated other comprehensive loss during the three months ended March 31, 2018 and 20172019 represent realized gains on investment securities, foreign exchange contracts on our cash flow hedges (see "Note 13. Financial Instruments" for additional details) and amortization of net actuarial gain (loss) and prior service credit, which are included in the computation of net periodic pension cost (see "Note 10. Employee Benefit Plans" for additional details). These reclassifications are recorded across the various cost and expense line items within the condensed consolidated and combined statements of income (loss).
BHGE LLC 20182019 First Quarter FORM 10-Q | 2116
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
NOTE 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.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2019 | December 31, 2018 |
| | Level 1 | Level 2 | Level 3 | | Net Balance | Level 1 | Level 2 | Level 3 | Net Balance |
| Assets | |
| |
| |
| | | | | | |
| Derivatives | $ | — |
| $ | 55 |
| $ | — |
| | $ | 55 |
| $ | — |
| $ | 74 |
| $ | — |
| $ | 74 |
|
| Investment securities | 49 |
| — |
| 290 |
| | 339 |
| 39 |
| — |
| 288 |
| 327 |
|
| Total assets | 49 |
| 55 |
| 290 |
| | 394 |
| 39 |
| 74 |
| 288 |
| 401 |
|
| | | | | | | | | | |
| Liabilities | | | | | | | | | |
| Derivatives | — |
| (47 | ) | — |
| | (47 | ) | — |
| (82 | ) | — |
| (82 | ) |
| Total liabilities | $ | — |
| $ | (47 | ) | $ | — |
| | $ | (47 | ) | $ | — |
| $ | (82 | ) | $ | — |
| $ | (82 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2018 | December 31, 2017 |
| | Level 1 | Level 2 | Level 3 | Net Balance | Level 1 | Level 2 | Level 3 | Net Balance |
| Assets | |
| |
| |
| | | | | |
| Derivatives | $ | — |
| $ | 205 |
| $ | — |
| $ | 205 |
| $ | — |
| $ | 150 |
| $ | — |
| $ | 150 |
|
| Investment securities | 75 |
| — |
| 326 |
| 401 |
| 81 |
| 8 |
| 304 |
| 393 |
|
| Total assets | 75 |
| 205 |
| 326 |
| 606 |
| 81 |
| 158 |
| 304 |
| 543 |
|
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Derivatives | — |
| (129 | ) | — |
| (129 | ) | — |
| (95 | ) | — |
| (95 | ) |
| Total liabilities | $ | — |
| $ | (129 | ) | $ | — |
| $ | (129 | ) | $ | — |
| $ | (95 | ) | $ | — |
| $ | (95 | ) |
There were no transfers between Level 1, 2 and 3 during the three months ended March 31, 2018.2019.
The following table provides a reconciliation of recurring Level 3 fair value measurements for investment securities: |
| | | | | | |
| | 2019 | 2018 |
| Balance at January 1 | $ | 288 |
| $ | 304 |
|
| Purchases | 6 |
| 34 |
|
| Proceeds at maturity | (6 | ) | (12 | ) |
| Unrealized gains recognized in AOCI | 2 |
| — |
|
| Balance at March 31 | $ | 290 |
| $ | 326 |
|
|
| | | |
| Balance at December 31, 2017 | $ | 304 |
|
| Purchases | 34 |
|
| Proceeds at maturity | (12 | ) |
| Balance at March 31, 2018 | $ | 326 |
|
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. At March 31, 2019 and December 31, 2018, we held $156$144 million and $149 million, respectively, of these investment securities on behalf of GE.
| | | | March 31, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 |
| | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | 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 | $ | 325 |
| $ | 1 |
| $ | — |
| $ | 326 |
| $ | 310 |
| $ | 2 |
| $ | — |
| $ | 312 |
| $ | 288 |
| $ | 2 |
| $ | — |
| $ | 290 |
| $ | 288 |
| $ | — |
| $ | — |
| $ | 288 |
|
Equity securities | 75 |
| — |
| — |
| 75 |
| 81 |
| — |
| — |
| 81 |
| 49 |
| — |
| — |
| 49 |
| 39 |
| — |
| — |
| 39 |
|
| Total | $ | 400 |
| $ | 1 |
| $ | — |
| $ | 401 |
| $ | 391 |
| $ | 2 |
| $ | — |
| $ | 393 |
| $ | 337 |
| $ | 2 |
| $ | — |
| $ | 339 |
| $ | 327 |
| $ | — |
| $ | — |
| $ | 327 |
|
| |
(1) | All of our investment securities are classified as available for sale instruments. Non-U.S. debt securities mature within four years. |
| |
(2) | Gains (losses) recorded to earnings related to these securities were $10 million and $(13) million for the three months ended March 31, 2019 and 2018, respectively. |
All of our non-U.S. debt securities are classified as available for sale instruments and mature within three years.BHGE LLC 2019 First Quarter FORM 10-Q | 17
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Our financial instruments include cash, cash equivalents, and restricted cash, current receivables, 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 at March 31, 20182019 and December 31, 20172018 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 9. Borrowings."
BHGE LLC 2018 First Quarter FORM 10-Q | 22
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
DERIVATIVES AND HEDGING
We use derivatives to manage our risks and do not use derivatives for speculation.
The table below summarizes the fair value of all derivatives, including hedging instruments and embedded derivatives.
|
| | | | | | | | | | | | |
| | March 31, 2019 | December 31, 2018 |
| | Assets | (Liabilities) | Assets | (Liabilities) |
| Derivatives accounted for as hedges | | | | |
| Currency exchange contracts | $ | 1 |
| $ | — |
| $ | — |
| $ | (7 | ) |
| | | | | |
| Derivatives not accounted for as hedges | | | | |
| Currency exchange contracts | 52 |
| (46 | ) | 74 |
| (75 | ) |
| Commodity derivatives | 2 |
| — |
| — |
| — |
|
| Other derivatives | — |
| (1 | ) | — |
| — |
|
| Total derivatives | $ | 55 |
| $ | (47 | ) | $ | 74 |
| $ | (82 | ) |
|
| | | | | | | | | | | | |
| | March 31, 2018 | December 31, 2017 |
| | Assets | (Liabilities) | Assets | (Liabilities) |
| Derivatives accounted for as hedges | | | | |
| Currency exchange contracts | $ | 10 |
| $ | — |
| $ | 6 |
| $ | — |
|
| | | | | |
| Derivatives not accounted for as hedges | | | | |
| Currency exchange contracts | 195 |
| (129 | ) | 144 |
| (95 | ) |
| Total derivatives | $ | 205 |
| $ | (129 | ) | $ | 150 |
| $ | (95 | ) |
Derivatives are classified in the captions "All other current assets," "All other assets," "All other current liabilities," and "All other liabilities" depending on their respective maturity date.
As of March 31, 2019 and December 31, 2018, $50 million and $67 million of derivative assets are recorded in "All other current assets" and $5 million and $7 million are recorded in "All other assets" of the condensed consolidated statements of financial position, respectively. As of March 31, 2019 and December 31, 2018, $44 million and $79 million of derivative liabilities are recorded in "All other current liabilities" and $3 million and $3 million are recorded in "All other liabilities" of the condensed consolidated statements of financial position, respectively.
RISK MANAGEMENT STRATEGY
We buy, manufacture and sell components and products as well as provide services across global markets. These activities expose us to changes in foreign currency exchange rates and commodity prices, which can adversely affect revenues earned and costs of operating our business. When the currency in which we sell equipment differs from the primary currency (known as its functional currency) and the exchange rate fluctuates, it will affect the revenue we earn on the sale. These sales and purchase transactions also create receivables and payables denominated in foreign currencies, along with other monetary assets and liabilities, which expose us to foreign currency gains and losses based on changes in exchange rates. Changes in the price of a raw material that we use in manufacturing can affect the cost of manufacturing. We use derivatives to mitigate or eliminate these exposures.
FORMS OF HEDGING
Cash Flow Hedges
We use cash flow hedging primarily to reduce or eliminate the effects of foreign exchange rate changes on purchase and sale contracts. Accordingly, the vast majority of our derivative activity in this category consists of currency exchange contracts. We also use commodity derivatives to reduce or eliminate price risk on raw materials
BHGE LLC 2019 First Quarter FORM 10-Q | 18
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
purchased for use in manufacturing.
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 economic hedges are used when changes in the carrying amount of the hedged item are already recorded in earnings in the same period as the derivative, making hedge accounting unnecessary. For some other types of economic hedges, changes in the fair value of the derivative are recorded in earnings currently but changes in the value of the forecasted foreign currency cash flows are only recognized in earnings when they occur. As a result, even though the derivative is an effective economic hedge, there is a net effect on earnings in each period due to differences in the timing of earnings recognition between the derivative and the hedged item. These derivatives are marked to fair value through earnings each period.
BHGE LLC 2018 First Quarter FORM 10-Q | 23
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
NOTIONAL AMOUNT OF DERIVATIVES
The notional amount of a derivative is the number of units of the underlying (for example, the notional principal amount of the debt in an interest rate swap). A substantial majority of the outstanding notional amount of $11.3$5.4 billion and $10.2$6.4 billion at March 31, 20182019 and December 31, 2017,2018, respectively, is related to hedges of anticipated sales and purchases in foreign currency, commodity purchases, and contractual terms in contracts that are considered embedded derivatives and for intercompany borrowings in foreign currencies. We generally disclose derivative notional amounts on a gross basis to indicate the total counterparty risk. Where we have gross purchase and sale derivative contracts for a particular currency, we look to execute these contracts with the same counterparty to reduce our exposure. The corresponding net notional amounts were $3.0$2.9 billion and $3.3$2.8 billion at March 31, 20182019 and December 31, 2017,2018, respectively.
The table below provides additional information about how derivatives are reflected in our condensed consolidated and combined financial statements.CASH FLOW HEDGES
|
| | | | | | |
| Carrying amount related to derivatives | March 31, 2018 | December 31, 2017 |
| Derivative assets | $ | 205 |
| $ | 150 |
|
| Derivative liabilities | (129 | ) | (95 | ) |
| Net derivatives | $ | 76 |
| $ | 55 |
|
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. The table below summarizes these offsets and the net effect on pre-tax earnings. |
| | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2018 | 2017 |
| | Cash Flow Hedges | Economic Hedges | Cash Flow Hedges | Economic Hedges |
| Effect on hedging instrument | $ | (8 | ) | $ | 17 |
| $ | 2 |
| $ | (8 | ) |
| Effect on underlying | 8 |
| (15 | ) | (2 | ) | 9 |
|
Effect on earnings (1) | — |
| 2 |
| — |
| 1 |
|
| |
(1)
| For cash flow hedges, the effect on earnings, if any, is primarily related to ineffectiveness. For economic hedges on forecasted transactions, the effect on earnings is substantially offset by future earnings on economically hedged items. |
Changes in the fair value of cash flow hedges are recorded in a separate component of equity (referred to below as Accumulated Other Comprehensive Income, or AOCI) and are recorded in earnings in the period in which the hedged transaction occurs. The table below summarizes this activity by hedging instrument.
|
| | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2018 | 2017 | 2018 | 2017 |
| | Gain (loss) recognized in AOCI | Gain (loss) reclassified from AOCI to earnings |
| Currency exchange contracts | $ | 8 |
| $ | (2 | ) | $ | — |
| $ | (7 | ) |
|
| | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | Gain (Loss) Recognized in AOCI | Gain (Loss) Reclassified from AOCI to Earnings |
| | 2019 | 2018 | 2019 | 2018 |
| Currency exchange contracts | $ | 5 |
| $ | 8 |
| $ | — |
| $ | — |
|
We expect to transfer $7$1 million to earnings as an expenseincome in the next 12 months contemporaneously with the earnings effects of the related forecast transactions. At March 31, 20182019 and December 31, 2017,2018, the maximum term of derivative instruments that hedge forecast transactions was two-yearsone year and three-years,two years, respectively. See
BHGE LLC 20182019 First Quarter FORM 10-Q | 2419
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
"Note 12. Members' Equity"ECONOMIC HEDGES
The following table summarizes the gains (losses) from derivatives not designated as hedges on the condensed consolidated statements of income (loss) for additional information about reclassification out of accumulated other comprehensive income.the three months ended March 31, 2019 and 2018. For cash flow hedges, the amount of ineffectiveness in the hedging relationship and amount of the changes in fair value of the derivatives that are not included in the measurement of ineffectiveness were insignificant for each reporting period. |
| | | | | | | |
| Derivatives not designated as hedging instruments | Condensed consolidated statement of income caption | Three Months Ended March 31, |
| 2019 | 2018 |
Currency exchange contracts (1) | Cost of goods sold | $ | 3 |
| $ | 41 |
|
| Currency exchange contracts | Selling, general and administrative expenses | (1 | ) | (24 | ) |
| Commodity derivatives | Cost of goods sold | 2 |
| — |
|
| Other derivatives | Other non operating income, net | (1 | ) | — |
|
Total (2) | | $ | 3 |
| $ | 17 |
|
| |
(1) | Excludes losses on embedded derivatives of $2 million and $39 million for the three months ended March 31, 2019 and 2018, respectively, as embedded derivatives are not considered to be hedging instruments in our economic hedges. |
| |
(2) | The effect on earnings of derivatives not designated as hedges is substantially offset by change in fair value of the economically hedged items in the current and future periods. |
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.
NOTE 14. SEGMENT INFORMATION
Our operating segments are organized based on the nature of markets and customers. We report our operating results through four operating segments that consists of similar products and services within each segment as described below.
OILFIELD SERVICES (OFS)
Oilfield ServicesOFS provides products and services for onshore and offshore operations across the lifecycle of a well, ranging from drilling, evaluation, completion, production and intervention. Products and services include diamond and tri-cone drill bits, drilling services, including directional drilling technology, measurement while drilling & logging while drilling, downhole completion tools and systems, wellbore intervention tools and services, wireline services, drilling and completions fluids, oilfield and industrial chemicals, pressure pumping, and artificial lift technologies, including electrical submersible pumps.
OILFIELD EQUIPMENT (OFE)
Oilfield EquipmentOFE 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. Products and services include pressure control equipment and services, subsea production systems and services, drilling equipment, and flexible pipeline systems. Oilfield EquipmentOFE designs and manufactures onshore and offshore drilling and production systems and equipment for floating production platforms and provides a full range of services related to onshore and offshore drilling activities.
TURBOMACHINERY & PROCESS SOLUTIONS (TPS)
Turbomachinery & Process SolutionsTPS provides equipment and related services for mechanical-drive, compression and power-generation applications across the oil and gas industry as well as products and services to serve the downstream segments of the industry including refining, petrochemical, distributed gas, flow and process control and other industrial
BHGE LLC 2019 First Quarter FORM 10-Q | 20
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
applications. The Turbomachinery & Process SolutionsTPS 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-key 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.
DIGITAL SOLUTIONS (DS)
Digital SolutionsDS provides equipment and services for a wide range of industries, including oil & gas, power generation, aerospace, metals, and transportation. The offerings include sensor-based measurement, non-destructive testing and inspection, turbine, generator and plant controls and condition monitoring, as well as pipeline integrity solutions.
BHGE LLC 2018 First Quarter FORM 10-Q | 25
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
SEGMENT RESULTS
Summarized financial information is shown in the following tables. Consistent accounting policies have been applied by all segments within the Company, for all reporting periods. The current period results may not be comparable to prior periods as the current period includes the results of Baker Hughes.
|
| | | | | | |
| | Three Months Ended March 31, |
| Segments revenue | 2019 | 2018 |
| Oilfield Services | $ | 2,986 |
| $ | 2,678 |
|
| Oilfield Equipment | 735 |
| 664 |
|
| Turbomachinery & Process Solutions | 1,302 |
| 1,460 |
|
| Digital Solutions | 592 |
| 598 |
|
| Total | $ | 5,615 |
| $ | 5,399 |
|
|
| | | | | | |
| | Three Months Ended March 31, |
| Segments revenue | 2018 | 2017 |
| Oilfield Services | $ | 2,678 |
| $ | 212 |
|
| Oilfield Equipment | 664 |
| 716 |
|
| Turbomachinery & Process Solutions | 1,460 |
| 1,644 |
|
| Digital Solutions | 598 |
| 491 |
|
| Total | $ | 5,399 |
| $ | 3,064 |
|
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 operating income (loss), corporate expenses, restructuring, impairment and other charges, inventory impairments, separation and merger and related costs and certain gains and losses not allocated to the operating segments.
|
| | | | | | |
| | Three Months Ended March 31, |
| Segment income (loss) before income taxes | 2019 | 2018 |
| Oilfield Services | $ | 176 |
| $ | 141 |
|
| Oilfield Equipment | 12 |
| (6 | ) |
| Turbomachinery & Process Solutions | 118 |
| 119 |
|
| Digital Solutions | 68 |
| 73 |
|
| Total segment | 373 |
| 327 |
|
| Corporate | (100 | ) | (98 | ) |
Inventory impairment (1) | — |
| (61 | ) |
| Restructuring, impairment and other | (62 | ) | (162 | ) |
| Separation and merger related costs | (34 | ) | (46 | ) |
| Other non operating income, net | 21 |
| 2 |
|
| Interest expense, net | (59 | ) | (46 | ) |
| Total | $ | 138 |
| $ | (85 | ) |
|
| | | | | | |
| | Three Months Ended March 31, |
| Segment income (loss) before income taxes | 2018 | 2017 |
| Oilfield Services | $ | 141 |
| $ | (57 | ) |
| Oilfield Equipment | (6 | ) | 50 |
|
| Turbomachinery & Process Solutions | 119 |
| 252 |
|
| Digital Solutions | 73 |
| 84 |
|
| Total segment | 327 |
| 329 |
|
| Corporate | (98 | ) | (120 | ) |
Inventory impairment (1) | (61 | ) | (15 | ) |
| Restructuring, impairment and other | (162 | ) | (42 | ) |
| Merger and related costs | (46 | ) | (66 | ) |
| Other non operating income, net | 2 |
| 8 |
|
| Interest expense, net | (46 | ) | (20 | ) |
| Total | $ | (85 | ) | $ | 74 |
|
| |
(1) | Charges for inventory impairments are reported in the "Cost of goods sold" caption of the condensed consolidated and combined statements of income (loss). |
BHGE LLC 20182019 First Quarter FORM 10-Q | 2621
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
NOTE 15. RELATED PARTY TRANSACTIONS
Following the Transactions, GE and its affiliates have provided and continue to provide a variety of services to us.
In connection with the Transactions on July 3, 2017, we entered into various agreements with GE and its affiliates that govern our relationship with GE following the Transactions including an Intercompany Services Agreement pursuant to which GE and its affiliates and the Company provide certain services to each other. GE provides certain administrative services, GE proprietary technology and use of certain GE trademarks in consideration for a paymentan annual service fee of $55 million per year. Costs of $14 million related to the Intercompany Services Agreement were incurred during the three months ended March 31, 2018.million. GE may also provide us with certain additional administrative services under the Intercompany Services Agreement not included as consideration for the $55 million per year payment, and the fees for such services are based on actual usage of such services and historical GE intercompany pricing. In addition, we provide GE and its affiliates with confidential access to certain of our proprietary technology and related developments and enhancements thereto related to GE's operations, products or service offerings.
Prior Under the terms of the Master Agreement Framework, entered into on November 13, 2018, the annual intercompany services fee of $55 million that we agreed to pay GE as part of the Transactions is reduced by 50% to $27.5 million per year beginning on January 1, 2019. The Intercompany Services Agreement will terminate 90 days following the Trigger Date. See further discussion below. We incurred costs of $7 million and $14 million related to the Transactions, GE and its affiliates provided a variety of services and funding to us. The cost of these services was either (a) recognized through our allocated portion of GE's corporate overhead; or (b) billed directly to us. Costs of $38 million forIntercompany Services Agreement during the three months ended March 31, 2017 were recorded in our condensed consolidated2019 and combined statement of income (loss) in respect of services provided by GE and its affiliates prior to the close of the Transactions.2018, respectively.
We sold $100$81 million and $149$100 million of products and services to GE and its affiliates during the three months ended March 31, 20182019 and 2017,2018, respectively. Purchases from GE and its affiliates were $403$451 million and $346$403 million during the three months ended March 31, 20182019 and 2017,2018, respectively.
EMPLOYEE BENEFITSMASTER AGREEMENT FRAMEWORK
CertainIn June 2018, GE announced their intention to pursue an orderly separation from BHGE over time. On November 13, 2018, we entered into a Master Agreement and a series of related ancillary agreements and binding term sheets (which were later negotiated into definitive agreements) with GE and BHGE (collectively, the Master Agreement Framework) designed to further solidify the commercial and technological collaborations between us and GE and to facilitate our ability to transition from operating as a controlled company. In particular, the Master Agreement Framework contemplates long-term agreements between us, BHGE and GE on technology, fulfillment and other key areas to provide greater clarity to customers, employees and shareholders.
Key elements of the Master Agreement Framework include:
Secured long-term collaboration on critical rotating equipment
Under the terms of the Master Agreement Framework, we have defined the parameters for a long-term collaboration and strategic relationship with GE on certain critical rotating equipment products.
We have entered into an aero-derivative joint venture (JV) agreement with GE to form a JV relating to the parties’ respective aero-derivative gas turbine products and services. Effectiveness of the JV is subject to regulatory clearances and other customary closing conditions. In addition, the JV cannot become effective prior to the first business day of the month after the "Trigger Date" which is defined as the later of (i) July 3, 2019 and (ii) the date on which GE and its affiliates cease to own more than 50% of the voting power of BHGE’s outstanding common stock. These jet engine aero-derivative products are mainly used in our LNG, onshore-offshore production, pipeline and industrial segments within our Turbomachinery & Process Solutions segment and by GE in its power generation business. GE and we will contribute certain assets, inventory and service facilities into the JV and both companies will jointly control operations. In addition to the contributions to the JV, we agreed to pay $60 million to GE, in order to equalize each party's interests in the JV at 50%. The JV will have a supply and technology development agreement with GE’s aviation business (GE Aviation), which will revise and extend pricing arrangements as compared to BHGE’s existing supply agreement, and which will become effective at the Trigger Date.
Additionally, we have entered into an industrial steam turbine (IST) sale agreement with GE, which, among other things, sets forth the terms and conditions on which BHGE LLC will transfer certain of its assets, liabilities and employees that are related to BHGE LLC’s existing business of developing, designing, engineering, marketing, supplying, installing and servicing certain industrial steam turbine product lines to GE. In addition to the IST
BHGE LLC 2019 First Quarter FORM 10-Q | 22
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
business transfer, the agreement provides that we will make a cash payment of $13 million to an affiliate of GE at the closing of the transactions subject to certain working capital adjustments. Subject to the satisfaction of customary closing conditions, the transfer of the IST business is expected to close in the second quarter of 2019.
In parallel, we have also entered into an agreement for the long-term supply and related distribution arrangement with GE for heavy-duty gas turbine technology at the current pricing levels, which will become effective at the Trigger Date. Under this agreement BHGE LLC will be appointed as GE's exclusive distributor (with limited exceptions) within the oil and gas industry with respect to the heavy-duty gas turbine units for an initial term of 5 years and associated services (including parts and components) for an initial term of 20 years or the operating service life of the relevant gas turbine, whichever is more. The heavy-duty gas turbine technologies are important components of TPS’ offerings and the long-term agreements provide greater clarity on the commercial approach and customer fulfillment, and will enable us and GE to jointly innovate on leading technology.
Preserved access to GE Digital software & technology
As part of the Master Agreement Framework, BHGE LLC has agreed with GE Digital to maintain, subject to certain conditions, BHGE LLC's current status as the exclusive reseller of GE Digital offerings in the oil & gas space, and BHGE LLC will continue to source exclusively from GE Digital for certain GE Digital offerings for oil and gas applications. As part of this agreement, BHGE LLC and GE Digital have revised and extended certain pricing arrangements and have established service level obligations.
Other key agreements
• GE and we agreed to maintain current operations and pricing levels with regards to Control upgrade services we offer through our Digitals Solution segment division for the 4 years commencing on the Trigger Date.
• GE will transfer to BHGE certain UK pension liabilities related to the oil and gas businesses of BHGE and certain specified former oil and gas businesses of GE on what is intended to be a fully funded basis (using agreed upon actuarial assumptions). No liabilities associated with GE’s broad-based U.S. defined benefit pension plan will be transferred to us. The transfer of the UK pension liabilities is expected to be completed in 2019.
• The Tax Matters Agreement with GE that was negotiated at the time of the Transactions will be clarified but otherwise will remain substantially in place and both companies retain the ability to monetize certain tax benefits.
• Under the terms of the Master Agreement Framework, the annual intercompany services fee of $55 million that we agreed to pay GE as part of the Transactions is reduced by 50% to $27.5 million per year beginning on January 1, 2019. The Intercompany Services Agreement will terminate 90 days following the Trigger Date (except with respect to certain tools access).
In connection with the Master Agreement Framework, we have agreed to terminate certain aspects of the transfer restrictions previously applicable to GE under the Stockholders Agreement, dated as of July 3, 2017, by and between us and GE, as amended from time to time (the Stockholders Agreement). The transfer restrictions prohibited GE from transferring any shares of our employees are covered under variouscommon stock prior to July 3, 2019 (except to its affiliates) without the approval of the Conflicts Committee of our board of directors. Other provisions of the Stockholders Agreement, including continuing restrictions on certain private transfers of shares of our common stock by GE, sponsored employee benefit plans, including GE's retirement plans (pension, retiree health and life insurance,approval requirements for related party transactions, remain in effect.
In addition, the Stockholders Agreement was amended and savings benefit plans)restated to provide that, following the Trigger Date and active healthuntil GE and life insurance benefit plans. Further details are provided in "Note 10. Employee Benefit Plans."its affiliates own less than 20% of the voting power of our outstanding common stock, GE shall be entitled to designate one person for nomination to our board of directors.
OTHER RELATED PARTY BALANCES
In connection with the Transactions, on July 3, 2017, we were requiredexecuted a promissory note with GE that represents
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Baker Hughes, a GE company, LLC
Notes to repay anyUnaudited Condensed Consolidated Financial Statements
certain cash in excessthat we are holding on GE's behalf due to the restricted nature of $100 million, netthe cash. The restriction arises as the majority of any third-party debt in GE O&G, to GE. We continue to hold this cash on behalf of GE as suchthe cash cannot be released, transferred or otherwise converted into a non-restricted market currency due to the lack of market liquidity, capital controls or similar monetary or exchange limitations by a Government entity of the jurisdiction in which such cash is situated. Accordingly, on July 3, 2017, we executed a promissory note with GE. There is no maturity date 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. As of March 31, 2018,2019, of the amount$861 million due to GE, of $992 million, $836$717 million was held in the form of cash and $156$144 million was held in the form of investment securities. As of December 31, 2018, of the $896 million due to GE, $747 million was held in the form of cash and $149 million was held in the form of investment securities. A corresponding liability is reported in short-term borrowings in the condensed consolidated and combined statements of financial position.
Additionally, the Company has $556$510 million and $575$538 million of accounts payable at March 31, 20182019 and December 31, 2017,2018, respectively, for goods and services provided by GE in the ordinary course of business. The Company has $122$635 million and $653 million of current receivables at March 31, 2019 and December 31, 2018, respectively, for goods and services provided to GE in the ordinary course of business. Additionally, the company has $83 million and $93 million of current receivable at March 31, 2019 and December 31, 2018, respectively from BHGE.
We also provide guarantees to GE Capital on behalf of some customers who have entered into financing arrangements with GE Capital.
TRADE PAYABLES ACCELERATED PAYMENT PROGRAM
Our North American operations participate in accounts payable programs with GE Capital. Invoices are settled with vendors per our payment terms to obtain cash discounts. GE Capital provides funding for the period from the date at which an invoice isinvoices eligible for a cash discount through the final termination date for invoice settlement.discount. Our liability associated with the funded participation in the accounts payable programs, which is presented as accounts
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Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
payable within the condensed consolidated and combined statements of financial position, was $346$456 million and $293$471 million as of March 31, 20182019 and December 31, 2017,2018, respectively.
PARENT'S NET INVESTMENT
At March 31, 2017, On January 16, 2019, GE announced the remaindersale of GE's total investment, in excess of our debt from GE is reflected as equityCapital’s accounts payable program platform to a third-party and their intent to start transitioning their existing program to an accounts payable program with that party. As a GE affiliate, we are covered under the caption "Parent's net investment" in our condensed consolidated and combined statements of changes in equity. At March 31, 2018, GE's equity ownership is reflected in noncontrolling interest in our condensed consolidated and combined statements of equity and financial position.
OTHER
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.
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 is 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 $33 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 is 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 is 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.agreement.
NOTE 16. COMMITMENTS AND CONTINGENCIES
LITIGATION
We are subject to a number of lawsuits and claims arising out of the conduct of our business. The ability to predict the ultimate outcome of such matters involves judgments, estimates and inherent uncertainties. We record a liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, including accruals for self-insured losses which are calculated based on historical claim data, specific loss development factors and other information.
A range of total possible losses for all litigation matters cannot be reasonably estimated. Based on a consideration of all relevant facts and circumstances, we do not expect the ultimate outcome of currently pending lawsuits or claims against us, other than those discussed below, will have a material adverse effect on our financial
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position, results of operations or cash 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 allegesalleged damages of approximately $224€202 million plus interest at an annual
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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. On June 7, 2018, the DIS arbitration panel issued a confidential Arbitration Ruling which addressed all claims asserted by the customer. The estimated financial impact of the Arbitration Ruling has been reflected in the Company's financial statements and did not have a material impact. Further, on March 11, 2019, the customer initiated a second arbitral proceeding against us, under the rules of the German Institute of Arbitration e.V. (DIS). The customer alleged damages of €142 million plus interest at an annual rate of prime + 5% since June 20, 2015. The allegations in this second arbitration proceeding are related to the claims made in the June 19, 2015 German arbitration and Houston Federal Court proceedings referenced above. The Company is vigorously contesting the claims made by TRIUVA in the Houston Federal Court and the claims made by the customer in the 2019 arbitration proceeding. At this time, we are not able to predict the outcome of these claims.the claims asserted in the Houston Federal Court or the 2019 arbitration proceeding.
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;7,543,634; 6,907,936; 8,657,009; and 9,074,451. On August 29, 2017, the USPTO issued its final written decisions in the inter-partes reviews of U.S. Patent Nos. 8,657,009 and 9,074,451 finding that all claims of those patents were unpatentable. On August 31, 2017, the USPTO issued its final written decision in the inter-partes review of U.S. Patent 6,907,936 - the patent dropped from the lawsuit by the plaintiffs - finding that all claims of this patent were patentable. On October 27, 2017, Rapid Completions filed its notices of appeal of the USPTO’s final written decision in the inter-partes review of U.S. Patent Nos. 8,657,009 and 9,074,451. On September 26, 2018, the USPTO issued its final written decision in the inter-partes review of U.S. Patent No. 7,134,505 finding all of the challenged claims unpatentable. On September 27, 2018, the USPTO issued its final written decision in the inter-partes review of U.S. Patent No. 7,543,634 finding all of the challenged claims unpatentable. Trial on the validity of asserted claims from Canada patent 2,412,072, was completed March 9, 2017. On December 7, 2017, the Canadian Court issued its judgment finding the patent claims asserted from Canada patent 2,412,072 against Baker Hughes Canada Company were invalid. On January 5, 2018, Rapid Completions filed its Notice of Appeal of the Canadian Court’s judgment of invalidity. AtOn November 19, 2018, the U.S. Court of Appeals for the Federal Circuit affirmed the USPTO’s unpatentability findings with respect to U.S. Patent Nos. 8,657,009 and 9,074,451. On November 26, 2018, Rapid Completions filed notices of appeal of the USPTO’s final written decisions in the inter partes reviews of U.S. Patent No. 7,134,505, and 7,543,634. On April 24, 2019, the Canadian Court of Appeals ruled against Rapid Completions and dismissed Rapid Completion’s appeal in Canada. The remaining appeals of the USPTO decisions finding Rapid Completion’s U.S. Patent claims unpatentable are still pending and, at this time, we are not able to predict the outcome of these claims.
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
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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 totaling $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
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destruction of a steam turbine, which was part of a compressor train owned by Naphtachimie. The most recent quantification of the alleged damages is €250 million. Two 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, BHGE's insurer has accepted coverage and is defending the Company in the expertise proceeding.
In late November 2017, staff of the Boston office of the SEC notified GE that they are conducting an investigation of GE’s revenue recognition practices and internal controls over financial reporting related to long-term service agreements. The scope of the SEC’s request may include some BHGE contracts, expected to be mainly in our TPS business. We have provided documents to GE and are cooperating with them in their response to the SEC. At this time, we are not able to predict the outcome of this review.
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 BHGE entities to participate in the arbitration filed by IEC. The Companycomplaint is reporting the following matter in compliance with SEC requirements to disclose environmental proceedings where the government is a party potentially involving monetary sanctions of $100,000 or greater. As previously reported, in January 2018, Kern County California issued an administrative order with a proposed penalty of $130,000 for alleged violations of process safety management regulations at a manufacturing facility in Taft, California that is indirectly owned bycaptioned International Engineering & Construction S.A. et al. v. Baker Hughes, a GE company.Company LLC, et al. No. 18-cv-09241 (S.D.N.Y 2018). 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 matterCompany has vigorously contested IEC’s claims and is pursuing BHGE’s claims for compensation under the contracts. At this time, we are not able to predict the outcome of these claims.
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 BHGE's behalf against GE, the current members of the Board of Directors of BHGE and BHGE as a nominal defendant, related to the decision to (i) terminate the contractual prohibition barring GE from selling any of BHGE's shares before July 3, 2019; (ii) repurchase $1.5 billion in BHGE's stock from GE; (iii) permit GE to sell approximately $2.5 billion in BHGE's stock through a secondary offering; and (iv) enter into a series of other agreements and amendments that will govern the ongoing relationship between BHGE and GE (collectively, the “2018 Transactions”). The complaints in both lawsuits allege, among other things, that GE, as BHGE’s controlling stockholder, and the members of BHGE’s 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 resolvedunjustly enriched, disgorgement of profits, an award of damages sustained by BHGE, 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. At this time, we are not able to predict the outcome of these claims.
In March 20182019, BHGE received a document request from the United States Department of Justice (the “DOJ”) related to certain of the Company’s operations in Iraq and its dealings with a final penalty amountUnaoil Limited and its affiliates. BHGE and the Company are cooperating with the DOJ in connection with this request and any related matters. In addition, BHGE has agreed to toll any statute of $80,000.limitations in connection with the matters subject to the DOJ’s document request until December 2019.
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
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those losses that are predictable, measurable and recurring in nature, such as claims for automobile liability, general liability and workers compensation.
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: |
| | | | | | |
| | 2019 | 2018 |
| Balance at January 1 | $ | 236 |
| $ | 164 |
|
| Provisions | 3 |
| 10 |
|
| Expenditures | (5 | ) | (7 | ) |
| Other | 2 |
| 2 |
|
| Balance at March 31 | $ | 236 |
| $ | 169 |
|
|
| | | | | | |
| Balance at December 31, 2017, and 2016, respectively | $ | 164 |
| $ | 74 |
|
| Provisions | 10 |
| 6 |
|
| Expenditures | (7 | ) | (12 | ) |
| Other | 2 |
| — |
|
| Balance at March 31, 2018, and 2017, respectively | $ | 169 |
| $ | 68 |
|
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Notes to Unaudited Condensed Consolidated and Combined Financial Statements
OTHER
In the normal course of business with customers, vendors and others, we have entered into off-balance sheet arrangements, such as surety bonds for performance, letters of credit and other bank issued guarantees, which totaled approximately $3.7$3.8 billion at March 31, 2018.2019. 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.
NOTE 17. RESTRUCTURING, IMPAIRMENT AND OTHER
We recorded restructuring, impairment and other charges of $162$62 million and $42$162 million during the three months ended March 31, 20182019 and 2017,2018, respectively. Details of these charges are discussed below.
RESTRUCTURING AND IMPAIRMENT CHARGES
In the current 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 charge of $125$62 million and $35$125 million for the three months ended March 31, 20182019 and 2017,2018, respectively. These restructuring initiatives will generate charges post March 31, 2018,2019, and the related estimated remaining charges are approximately $173$74 million.
The amount of costs not included in the reported segment results is as follows:
| | | | Three Months Ended March 31, | Three Months Ended March 31, |
| | 2018 | 2017 | 2019 | 2018 |
| Oilfield Services | $ | 59 |
| $ | 12 |
| $ | 17 |
| $ | 59 |
|
| Oilfield Equipment | 12 |
| 1 |
| 18 |
| 12 |
|
| Turbomachinery & Process Solutions | 28 |
| 10 |
| 19 |
| 28 |
|
| Digital Solutions | 9 |
| 10 |
| 3 |
| 9 |
|
| Corporate | 17 |
| 2 |
| 5 |
| 17 |
|
| Total | $ | 125 |
| $ | 35 |
| $ | 62 |
| $ | 125 |
|
These costs were primarily related to product line terminations, plant closures and related expenses such as property, plant and equipment impairments, contract terminations and costs of assets' and employees' relocation, employee-related termination benefits, and other incremental costs that were a direct result of the restructuring plans.
|
| | | | | | |
| Three Months Ended March 31, |
| 2018 | 2017 |
| Property, plant & equipment, net | $ | 19 |
| $ | 10 |
|
| Employee-related termination expenses | 83 |
| 15 |
|
| Asset relocation costs | 5 |
| 3 |
|
| Environmental remediation costs | 3 |
| 3 |
|
| Contract termination fees | 7 |
| 1 |
|
| Other incremental costs | 8 |
| 3 |
|
| Total | $ | 125 |
| $ | 35 |
|
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|
| | | | | | |
| Three Months Ended March 31, |
| 2019 | 2018 |
| Property, plant & equipment, net | $ | 9 |
| $ | 19 |
|
| Employee-related termination expenses | 44 |
| 83 |
|
| Asset relocation costs | 2 |
| 5 |
|
| Environmental remediation costs | — |
| 3 |
|
| Contract termination fees | 7 |
| 7 |
|
| Other incremental costs | — |
| 8 |
|
| Total | $ | 62 |
| $ | 125 |
|
OTHER CHARGES
Other charges included in "Restructuring, impairment and other" of the condensed consolidated and combined statements of income (loss) were $37 million and $7 million infor the three months ended March 31, 2018 and 2017, respectively. During the three months ended March 31, 2018, other charges comprised ofrelating to accelerated amortization related tofor certain trade names, and technology that we will cease to use by the end of the second quarter of 2018 as a result of the combination of Baker Hughes and GE O&G. This decision is expected to generate an additional charge of $34 million in the second quarter of 2018. During the three months ended March 31, 2017, other charges include currency devaluation charges of $6 million largely driven by significant currency devaluations in Angola and Nigeria.our Oilfield Services segment.
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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 closed the Transactions to combine GE O&G and Baker Hughes, creating a fullstream oilfield technology provider that has a unique mix of integrated oilfield products, services and digital solutions. 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 of March 31, 2019, GE holds an approximate 62.5% controlling50.3% interest in us and former Baker Hughes shareholders holdBHGE holds an approximate 37.5% interest through the ownership of 100% of Class A common stock of BHGE.49.7% interest. 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 onward, therefore, the current period results and balances may not be comparable to prior periods. The majority of the Baker Hughes business operations are included in the Oilfield Services segment. We operate through our four business segments: Oilfield Services (OFS), Oilfield Equipment (OFE), Turbomachinery & Processing Solutions (TPS), and Digital Solutions (DS). As of March 31, 2018,2019, BHGE LLC employs approximately 64,00067,000 employees and operates in more than 120 countries.
In the first quarter of 2018,2019, we generated revenue of $5,399$5,615 million, compared to $3,064$5,399 million for the first quarter of 2017.2018. The increase in revenue was primarily driven primarily by increased activity in OFS as a result of the acquisition of Baker Hughes, and to a lesser extent, by DSOFE, partially offset by declines in TPS and OFE. LossDS. Income before income taxes and equity in loss of affiliate was $85$138 million for the first quarter of 2018,2019, and included restructuring and impairment charges of $162$62 million and separation and merger and related costs of $46$34 million. TheseThe 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.structure. For the first quarter of 2017, income2018, loss before income taxes and equity in loss of affiliate was $74$85 million, which also included restructuring and impairment charges of $42$162 million, and separation and merger and related costs of $66$46 million.
In June 2018, GE announced their intention to pursue an orderly separation from BHGE over time. To that end, during the fourth quarter of 2018, certain equity transactions were completed and GE’s ownership of BHGE was reduced from approximately 62.5% to approximately 50.4%. At the same time, we entered into a Master Agreement Framework which includes a series of related ancillary agreements and binding term sheets (which were later negotiated into definitive agreements) designed to further solidify the commercial and technological collaboration between us and GE and to position us for the future. The Master Agreement Framework focuses on areas where we work most closely with GE on developing leading technology and executing for customers. First, we defined the parameters for long-term collaboration and partnership with GE on critical rotating equipment technology. Second, for our digital software and technology business we will maintain the status quo as the exclusive supplier of GE Digital oil and-gas applications. Finally, we reached agreements on a number of other areas including our controls business, pension, taxes, and intercompany services. All agreements within the Master Agreement Framework were finalized during the first quarter of 2019. For further details on the Master Agreement Framework see "Note 15. Related Party Transactions" of the Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report.
In aggregate, we anticipate that the net financial impact of the agreements contemplated by the Master Agreement Framework will have a slightly negative impact on our operating margin rates of approximately 20 to 40 basis points. In addition, we expect to incur one-time charges related to separation from GE of approximately $0.2 billion to $0.3 billion over the next three years. We expect these charges to be primarily related to the build-out of information technology infrastructure as well as customary transaction fees.
OUTLOOK
Our business is exposed to a number of different macro factors, which influence our expectations and outlook. All of our outlook expectations are purely based on the market as we see it today, and are subject to changing conditions in the industry.
North America onshore activity: in the first quarter of 2018,2019, we experienced an accelerationa decline in the rig count, growth, as compared to the first quarter of 2017.2018. We expect the increased activity in North America to continue to grow in 2018, however, at a slower pace than seenthat in the last few quarters. Weshort-term, North American onshore activity will remain subdued as commodity prices fluctuate and supply chain constraints abate. Over the long-term, we remain optimistic about the outlook.
BHGE LLC 2019 First Quarter FORM 10-Q | 29
International onshore activity: we have seen a moderate increase in rig count activity in the first quarter of 20182019 and expect this growth to continue for the remainder of the year, at a moderate rate. We have seen signs of improvement with the increase in commodity prices during the quarter, but due to continued volatility, we remain cautious as to growth expectations.
Offshore projects: although commodity prices increased in the last quarter, we have yetbegun to see a change inincreasing customer spending behavior, as a result of continued oil price volatility. We expectactivity on offshore projects and more final investment decisions to continue to remain fluid.being made. Subsea tree awards increased in 2017,2018 and we expect treesubsea awards to increasebe roughly flat in 2018, but2019, though still at levels significantlywell below prior 2012 & 2013 peaks, aspeaks. We expect customers to continue to remain cautious with regards to major capital expenditures forevaluate the near term.timing of final investment decisions, and in light of increased commodity price volatility, there may be some project delays.
Liquefied Natural Gas (LNG) projects: while currently oversupplied, we believe the market continues to be oversupplied, and will remain in its current state for the next few years. We expect somea significant number of final investment decisions are needed to move forwardfill the projected supply-demand imbalance in the short term.early to middle part of the next decade. We do, however,continue to view the long termlong-term economics of the LNG industry as positive given our outlook for supply and demand.
BHGE LLC 2018 First Quarter FORM 10-Q | 33
Refinery, petrochemical and industrial projects: in refining, we believe large, complex refineries should gain advantage in a more competitive, oversupplied landscape in 20182019 as the industry globalizes and refiners position to meet local demand and secure export potential. In petrochemicals, we continue to see healthy demand and cost-advantaged supply driving projects forward in 2018.2019. The industrial market continues to grow as outdated infrastructure is replaced, policy changes come into effect and power is decentralized. We continue to see growing demand across these markets in 2018.2019.
We have other segments in our portfolio that are more correlated with different industrial metrics such as our Digital Solutions business.business, which we expect to grow at or above global Gross Domestic Product (GDP). Overall, we believe our portfolio is uniquely positioned to compete across the value chain, and deliver unique solutions for our customers. We remain optimistic about the long-term economics of the industry, but are continuing to operate with flexibility given our expectations for volatility and changing assumptions in the near term.
In 2016, solarSolar and wind net additions exceededcontinue to exceed coal and gas for the first time. This also occurred in 2017.gas. Governments may change or may not continue incentives for renewable energy additions. In the long term, renewables' cost decline may accelerate to compete with new-built fossil capacity, however, we do not anticipate any significant impacts to our business in the foreseeable future.
Despite the near-term volatility, the long-term outlook for our industry remains strong. We believe the world’s demand for energy will continue to rise, and the supply of energy will continue to increase in complexity, requiring greater service intensity and more advanced technology from oilfield service companies. 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 our results of operations, financial condition and liquidity position as of and for the three months ended March 31, 20182019 and 2017,2018, 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 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.
BHGE LLC 2019 First Quarter FORM 10-Q | 30
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 March 31, | Three Months Ended March 31, |
| 2018 | 2017 | 2019 | 2018 |
Brent oil price ($/Bbl) (1) | $ | 66.86 |
| $ | 53.59 |
| $ | 63.10 |
| $ | 66.86 |
|
WTI oil price ($/Bbl) (2) | 62.91 |
| 51.62 |
| 54.82 |
| 62.91 |
|
Natural gas price ($/mmBtu) (3) | 3.08 |
| 3.02 |
| 2.92 |
| 3.08 |
|
| |
(1) | Energy Information Administration (EIA) Europe Brent Spot Price per Barrel |
| |
(2) | EIA Cushing, OK WTI (West Texas Intermediate) spot price |
| |
(3) | EIA Henry Hub Natural Gas Spot Price per million British Thermal Unit |
BHGE LLC 2018 First Quarter FORM 10-Q | 34
Outside North America, customer spending is most heavily influenced by Brent oil prices, which increased throughoutduring the quarter, ranging from a low of $61.94/$53.23/Bbl in February 2018January 2019 to a high of $71.08/$68.35/Bbl in January 2018.March 2019. For the three months ended March 31, 2019, Brent oil prices averaged $63.10/Bbl, which represented a decrease of $3.76/Bbl from the same period last year.
In North America, customer spending is highly driven by WTI oil prices, which similar to Brent oil prices, increased throughoutduring the quarter. Overall, WTI oil prices ranged from a low of $59.20/$46.31/Bbl in February 2018January 2019 to a high of $66.27/$60.19/Bbl in January 2018.March 2019. For the three months ended March 31, 2019, WTI oil prices averaged $54.82/Bbl, which represented a decrease of $8.09/Bbl from the same period last year.
In North America, natural gas prices, as measured by the Henry Hub Natural Gas Spot Price, averaged $3.08/$2.92/mmBtu in the first quarter of 2018,2019, representing a 2% increase5% decrease over the prior year. Throughout the quarter, Henry Hub Natural Gas Spot Prices ranged from a high of $6.24/mmBtu in January 2018 to a low of $2.49/$2.54/mmBtu in February 2018.2019 to a high of $4.25/mmBtu in March 2019.
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 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,
BHGE LLC 2019 First Quarter FORM 10-Q | 31
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 March 31, | | Three Months Ended March 31, | |
| | 2018 | 2017 | % Change | 2019 | 2018 | % Change |
| North America | 1,235 |
| 1,038 |
| 19 | % | 1,226 |
| 1,235 |
| (1 | )% |
| International | 971 |
| 940 |
| 3 | % | 1,028 |
| 971 |
| 6 | % |
| Worldwide | 2,206 |
| 1,978 |
| 12 | % | 2,254 |
| 2,206 |
| 2 | % |
InOverall rig count was 2,254 for the first quarter of 2018,2019, an increase of 2% as compared to the same period last year due primarily to International activity. Internationally, the rig count increased 6% and the rig count in North America increased 19% and the international rig count increased 3%decreased 1% when compared to the same period last year.
Within North America, the increasedecrease was primarily driven by the landCanadian rig count, which was down 32% on average when compared to the same period last year, partially offset with an increase in the U.S. rig count, which was up 20%, partially offset by a decrease8% on average. Internationally, the improvement in the offshore rig count of 19%. Internationally, the rig count increase was driven primarily by increases in the Africa region of 35%, the Asia-Pacific region of 8% and Latin America of 9%Europe region, were also up by 10% and 6%, respectively, partially offset by Europe,the Latin America region, which was down 14%3%.
BHGE LLC 2018 First Quarter FORM 10-Q | 35
RESULTS OF OPERATIONS
The discussions below relating to significant line items from our 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. 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.
Our consolidated condensed and combinedconsolidated statement of income (loss) displays sales and costs of sales in accordance with SEC regulations under which "goods" is required to include all sales of tangible products and "services" must include all other sales, including other service activities. For the amounts shown below, we distinguish between "equipment" and "product services", where product services refer to sales under product services agreements, including sales of both goods (such as spare parts and equipment upgrades) and related services (such as monitoring, maintenance and repairs), which is an important part of its operations. We refer to "product services" simply as "services" within the Business Environment section of Management's Discussion and Analysis.
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 operating income, corporate expenses, restructuring, impairment and other charges, inventory impairments, separation and merger related costs, and certain gains and losses not allocated to the operating segments.
In evaluating the segment performance, the Company primarily uses the following:
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. It 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 U.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.
BHGE LLC 2019 First Quarter FORM 10-Q | 32
(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.
BHGE LLC 2018 First Quarter FORM 10-Q | 36
Orders and Remaining Performance Obligations
Orders: For the three months ended March 31, 2018,2019, we recognized orders of $5,238 million, an increase$5.7 billion, up 9% compared to the first quarter of $2,680 million, or 105%, from the three months ended March 31, 2017. The increase in orders was driven by the acquisition of Baker Hughes.2018. Service orders were up 91%4% and equipment orders were up 133%17%.
Remaining Performance Obligations: Obligations (RPO): As of March 31, 2018,2019, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $21.3 billion, of which equipment was $5.4 billion and service was $15.9$20.5 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 March 31, | $ Change | Three Months Ended March 31, | $ Change |
| | 2018 | 2017 | 2019 | 2018 |
| Revenue: | | |
| Oilfield Services | $ | 2,678 |
| $ | 212 |
| $ | 2,465 |
| $ | 2,986 |
| $ | 2,678 |
| $ | 308 |
|
| Oilfield Equipment | 664 |
| 716 |
| (52 | ) | 735 |
| 664 |
| 71 |
|
| Turbomachinery & Process Solutions | 1,460 |
| 1,644 |
| (184 | ) | 1,302 |
| 1,460 |
| (158 | ) |
| Digital Solutions | 598 |
| 491 |
| 107 |
| 592 |
| 598 |
| (6 | ) |
| Total | $ | 5,399 |
| $ | 3,064 |
| $ | 2,335 |
| $ | 5,615 |
| $ | 5,399 |
| $ | 216 |
|
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 operating income (loss), corporate expenses, restructuring, impairment and other charges, inventory impairments, merger and related costs, and certain gains and losses not allocated to the operating segments.
|
| | | | | | | | | |
| | Three Months Ended March 31, | $ Change |
| | 2018 | 2017 |
| Segment operating income (loss): | | | |
| Oilfield Services | $ | 141 |
| $ | (57 | ) | $ | 198 |
|
| Oilfield Equipment | (6 | ) | 50 |
| (56 | ) |
| Turbomachinery & Process Solutions | 119 |
| 252 |
| (133 | ) |
| Digital Solutions | 73 |
| 84 |
| (11 | ) |
| Total segment operating income | 327 |
| 329 |
| (2 | ) |
| Corporate | (98 | ) | (120 | ) | 22 |
|
| Inventory impairment | (61 | ) | (15 | ) | (46 | ) |
| Restructuring, impairment and other | (162 | ) | (42 | ) | (120 | ) |
| Merger and related costs | (46 | ) | (66 | ) | 20 |
|
| Operating income (loss) | (41 | ) | 86 |
| (126 | ) |
| Other non operating income, net | 2 |
| 8 |
| (6 | ) |
| Interest expense, net | (46 | ) | (20 | ) | (26 | ) |
| Income (loss) before income taxes and equity in loss of affiliate | (85 | ) | 74 |
| (159 | ) |
| Equity in loss of affiliate | (20 | ) | — |
| (20 | ) |
| Provision for income taxes | (38 | ) | (8 | ) | (30 | ) |
| Net income (loss) | $ | (143 | ) | $ | 66 |
| $ | (209 | ) |
BHGE LLC 20182019 First Quarter FORM 10-Q | 3733
|
| | | | | | | | | |
| | Three Months Ended March 31, | $ Change |
| | 2019 | 2018 |
| Segment operating income (loss): | | | |
| Oilfield Services | $ | 176 |
| $ | 141 |
| $ | 35 |
|
| Oilfield Equipment | 12 |
| (6 | ) | 18 |
|
| Turbomachinery & Process Solutions | 118 |
| 119 |
| (1 | ) |
| Digital Solutions | 68 |
| 73 |
| (5 | ) |
| Total segment operating income | 373 |
| 327 |
| 47 |
|
| Corporate | (100 | ) | (98 | ) | (2 | ) |
| Inventory impairment | — |
| (61 | ) | 61 |
|
| Restructuring, impairment and other | (62 | ) | (162 | ) | 100 |
|
| Separation and merger related costs | (34 | ) | (46 | ) | 12 |
|
| Operating income (loss) | 176 |
| (41 | ) | 218 |
|
| Other non operating income, net | 21 |
| 2 |
| 19 |
|
| Interest expense, net | (59 | ) | (46 | ) | (13 | ) |
| Income (loss) before income taxes and equity in loss of affiliate | 138 |
| (85 | ) | 223 |
|
| Equity in loss of affiliate | — |
| (20 | ) | 20 |
|
| Provision for income taxes | (67 | ) | (38 | ) | (29 | ) |
| Net income (loss) | $ | 71 |
| $ | (143 | ) | $ | 214 |
|
Segment Revenues and Segment Operating Income
First Quarter of 20182019 Compared to the First Quarter of 20172018
Revenue increased $2,335$216 million, or 76%4%, primarily driven by the acquisition of Baker Hughes.increased activity in Oilfield Services and Oilfield Equipment. Oilfield Services increased $2,465$308 million and Digital SolutionsOilfield Equipment increased $107$71 million, partially offset withby the decrease in Turbomachinery & Process Solutions of $184$158 million and Oilfield Equipmentin Digital Solutions of $52$6 million.
Total segment operating income decreased $2increased $47 million. The decreaseincrease was primarily driven by Oilfield Services, which increased $35 million and Oilfield Equipment which increased $18 million, partially offset by Digital Solutions which decreased $5 million and Turbomachinery & Process Solutions which decreased $133 million, Oilfield Equipment, which decreased $56 million, and Digital Solutions, which decreased $11 million, offset by Oilfield Services, which increased $198$1 million.
Oilfield Services
Oilfield Services revenue increased $2,465$308 million, or 12% in the first quarter of 2019 compared to the first quarter of 2018, as a result of increased activity as evidenced by an increase in the U.S. and International rig counts. North America revenue was $1,156 million in the first quarter of 20182019, an increase of $62 million from the first quarter of 2018. International revenue was $1,830 million in the first quarter of 2019, an increase of $246 million from the first quarter of 2018.
Oilfield Services segment operating income was $176 millionin the first quarter of 2019 compared to $141 million of segment operating income in the first quarter of 2018. The increase was primarily driven by synergy benefits and to a lesser extent by higher volume.
Oilfield Equipment
Oilfield Equipment revenue increased $71 million, or 11%, in the first quarter of 2019 compared to the first quarter of 2017, as a result of2018. The increase was driven by higher volume in the acquisition of Baker Hughes which added $2,473 million of revenue.subsea production systems business, subsea services business, and subsea drilling systems business. These increases were partially offset by lower volume in the flexible pipe business.
BHGE LLC 2019 First Quarter FORM 10-Q | 34
Oilfield ServicesEquipment segment operating income was $141$12 million in the first quarter of 20182019 compared to a loss of $57 million in the first quarter of 2017. The acquisition of Baker Hughes drove this increase.
Oilfield Equipment
Oilfield Equipment revenue decreased $52 million, or 7%, in the first quarter of 2018 compared to the first quarter of 2017. The decrease was driven by lower throughput as a result of decreasing backlog in the Subsea Production Systems business, as well as lower convertible orders across the Drilling Systems and Flexible Pipe businesses, partially offset with higher volume in the Surface Pressure Control and Services businesses.
Oilfield Equipment segment operating loss wasof $6 million in the first quarter of 2018 compared to segment operating2018. The increase in income of $50 million in the first quarter of 2017. The loss was driven primarily by lower volume,positive cost productivity and product mix.to a lesser extent by volume increases.
Turbomachinery & Process Solutions
Turbomachinery & Process Solutions revenue of $1,460$1,302 million decreased $184$158 million, or 11%, in the first quarter of 20182019 compared to the first quarter of 2017.2018. The decrease was driven by lower equipment installation volume, for new unitslower services upgrades and services in the upstream segment,sale of the natural gas solutions business, partially offset by increased volume in the businesses that serve the downstream segments.higher contractual services revenue. Equipment revenue in the quarter represented 41%35%, and Serviceservice revenue represented 59%65% of total revenue. Equipment revenue was down 23% year-over-year, and service revenue was down 2%.
Turbomachinery & Process Solutions segment operating income was $118 million in the first quarter of 2019 compared to segment operating income of $119 million in the first quarter of 2018 compared to segment operating income of $252 million in the first quarter of 2017.2018. The decline in profitability iswas driven primarily by lower volume and the sale of the natural gas solutions business, partially offset by higher cost productivity as well as unfavorable equipment and servicesfavorable business mix.
Digital Solutions
Digital Solutions revenue increased $107decreased $6 million, or 22%1%, in the first quarter of 20182019 compared to the first quarter of 2017,2018, driven primarily by lower volume in controls and software businesses, partially offset with higher volume in the acquisition of Baker Hughes which added $87 million of revenue.measurement & sensing and pipeline and process solutions businesses.
Digital Solutions segment operating income was $68 million in the first quarter of 2019 compared to segment operating income of $73 million in the first quarter of 2018 compared to $84 million in the first quarter of 2017.2018. The decrease in profitability iswas driven by product mix and the acquisition of Baker Hughes.
BHGE LLC 2018 First Quarter FORM 10-Q | 38
Corporate
Corporate expenses in the first quarter of 2018 totaled $98 million, a decrease of $22 million compared to the first quarter of 2017, primarily due to synergies realized from the acquisition of Baker Hughes and other cost reductions.unfavorable business mix.
Restructuring, Impairment and Other
For the first quarter of 2018,2019, we recognized $162$62 million in restructuring and impairment charges, an increasea decrease of $120$100 million from the first quarter of 2017. This increase was2018, primarily due tofrom reduced restructuring activity as we conclude the integration costs driven by the implementation of our synergy plans.Baker Hughes.
Separation and Merger and Related Costs
For the first quarter of 2018,2019, we incurred separation and merger and related costs of $46$34 million, a decrease of $20$12 million from the first quarter of 2017. Such costs include integration and other costs related2018. Costs in the first quarter of 2019 primarily relate to the combinationfinalization of the Master Agreement Framework and the anticipated separation from GE. In the first quarter of 2018, separation and merger related costs primarily include costs associated with the acquisition of Baker Hughes and GE O&G.Hughes.
Equity in Loss of Affiliate
As we have discontinued applying the equity method on our investment in BJ Services, we did not record any gain or loss during the first quarter of 2019 compared to a loss of $20 million recorded in the first quarter of 2018. We will resume application of the equity method only after our share of unrecognized net income equals our share of net loss not recognized during the period the equity method was suspended.
Interest Expense, Net
For the first quarter of 2018,2019, we incurred interest expense, net of interest income, of $46$59 million, an increase of $26$13 million from the first quarter of 2017,2018, primarily driven by $3.95 billion of debt issued in the fourth quarter of 2017 and debt obtained in the Baker Hughes acquisition, partially offset by the reduction inlower interest expense as we ceased participation in the GE monetization program.income.
Income Taxes
For the first quarter ended March 31, 2018,of 2019, income tax expense was $38$67 million compared to tax expense of $8$38 million for the prior year quarter. The difference between the U.S. statutory tax rate of 21% and the current effective tax rate is primarily due to higher tax expensethe geographical mix of approximately $58earnings and losses, coupled with $21 million related to losses with no tax benefit.benefit due to
BHGE LLC 2019 First Quarter FORM 10-Q | 35
valuation allowances. Since we are a partnership for U.S. federal tax purposes, any tax benefits associated with U.S. losses are recognized by our members and not reflected in our tax expense. The prior year quarter reflects 100% of the taxes associated with U.S. and non-U.S. earnings of the GE O&G business.expense.
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. At March 31, 2018,2019, we had cash and cash equivalents and restricted cash of $5,614$3,067 million compared to $7,026$3,677 million at December 31, 2017.
At2018. Cash and cash equivalents includes $717 million and $747 million of cash held on behalf of GE at March 31, 2019 and December 31, 2018, respectively.
Excluding cash held on behalf of GE, our U.S. subsidiaries held approximately $3.1$0.4 billion and $0.7 billion while our foreign subsidiaries held approximately $1.9 billion and $2.3 billion of our cash and cash equivalents was held by foreign subsidiaries compared to approximately $3.2 billion atas of March 31, 2019 and December 31, 2017.2018, respectively. A substantial portion of the cash held by foreign subsidiaries at March 31, 20182019 has been reinvested in active non-U.S. business operations. At March 31, 2018, our intent is, among other things, to use this cash to fund the operations of our foreign subsidiaries, and we have not changed our indefinite reinvestment decision as a result of U.S. tax reform but will reassess this during the course of 2018. If we decide at a later date to repatriate those funds to the U.S., we may be required to provide taxes on certain of those funds, however, due to the enactment of U.S. tax reform, repatriations of foreign earnings will generally be free of U.S. federal tax but may incur other taxes such as withholding or state taxes.
BHGE LLC hasWe have a 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. During the three months ended March 31, 2019 and 2018, there were no borrowings under the 2017 Credit Agreement.
We were in compliance with all of the credit facility's covenants.
BHGE LLC 2018 First Quarter FORM 10-Q | 39
BHGE LLC hashave a commercial paper program under which itwe may issue from time to time up to $3 billion in commercial paper with maturities of no more than 397 days. AtDuring the three months ended March 31, 2019 and 2018, we hadthere were no borrowings outstanding under the commercial paper program. The maximum combined borrowing at any time under both the 2017 Credit Agreement and the commercial paper program is $3 billion.
On November 6, 2017, BHGE announced that its board of directors authorized us to repurchase up to $3 billion of our common units from GE and BHGE. As of March 31, 2018, we repurchased 16,814,293 of our common units for total consideration of $500 million. At March 31, 2018, we had authorization remaining to repurchase up to approximately $2.0 billion of our common units from BHGE and GE.
On December 15, 2017, BHGE LLC and Baker Hughes Co-Obligor, Inc. jointly filed a shelf registration statement on Form S-3 with the SEC in order to sell up to $3 billion in debt securities in amounts to be determined at the time of an offering. Any such offering, if it does occur, may happen in one or more transactions. The specific terms of any securities to be sold will be described in supplemental filings with the SEC. The registration statement will expire in 2020.
During the three months ended March 31, 2018, we used cash to fund a variety of activities including certain working capital needs and restructuring costs, capital expenditures, repurchase of our common units and distribution to members. We believe that cash on hand, cash flows generated from operations and the available credit facility will provide sufficient liquidity to manage our global cash needs.
Cash Flows
Cash flows provided by (used in) each type of activity were as follows for the three months ended March 31:
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| | | | | | |
| (In millions) | 2018 | 2017 |
| Operating activities | $ | 290 |
| $ | (346 | ) |
| Investing activities | (135 | ) | (67 | ) |
| Financing activities | (1,561 | ) | 457 |
|
Operating Activities
Our largest source of operating cash is payments from customers, of which the largest component is collecting cash related to product or services sales including advance payments or progress collections for work to be performed. The primary use of operating cash is to pay our suppliers, employees, tax authorities and others for a wide range of material and services.
Cash flows from operating activities provided cash of $290 million in the three months ended March 31, 2018. These cash inflows were primarily driven by our net loss adjusted for certain non cash items (depreciation, amortization and provision for deferred taxes) and approximately $100 million decrease in net working capital, mainly due to higher collections. These items were partially offset by cash usage of approximately $100 million related to restructuring and merger related payments.
Investing Activities
Cash flows from investing activities used cash of $135 million and $67 million for the three months ended March 31, 2018 and 2017, 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 $177 million and $76 million for the three months ended March 31, 2018 and 2017, respectively, partially offset by proceeds from the sale of property, plant and equipment of $108 million and $8 million for the three months ended March 31, 2018 and 2017, respectively.
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Financing Activities
Cash flows from financing activities used cash of $1,561 million and generated cash of $457 million for the three months ended March 31, 2018 and 2017, respectively.
Repayment of long-term debt during the three months ended March 31, 2018, consisted primarily of the repayment of the remaining outstanding 2018 Senior Notes for a total consideration of $637 million.
As part of the authorization to repurchase $3 billion of our common units, during the three months ended March 31, 2018, we used cash of $524 million to repurchase our common units on a pro rata basis from BHGE and GE. Additionally, we made a distribution to our members of $203 million.
Other Factors Affecting Liquidity
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 cause the rating agencies to lower our credit rating. There are no ratings 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 three months ended March 31, 2019, we used cash to fund a variety of activities including certain working capital needs and restructuring and GE separation related costs, capital expenditures and distribution to members. We believe that cash on hand, cash flows generated from operations and the available credit facility will provide sufficient liquidity to manage our global cash needs.
Cash Flows
Cash flows provided by (used in) each type of activity were as follows for the three months ended March 31: |
| | | | | | |
| (In millions) | 2019 | 2018 |
| Operating activities | $ | (143 | ) | $ | 290 |
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| Investing activities | (256 | ) | (135 | ) |
| Financing activities | (233 | ) | (1,561 | ) |
Operating Activities
Our largest source of operating cash is payments from customers, of which the largest component is collecting cash related to sales of products and services including advance payments or progress collections for work to be
BHGE LLC 2019 First Quarter FORM 10-Q | 36
performed. The primary use of operating cash is to pay our suppliers, employees, tax authorities and others for a wide range of material and services.
Cash flows from operating activities used cash of $143 million and generated cash of $290 million for the three months ended March 31, 2019 and 2018, respectively.
For the three months ended March 31, 2019 cash used in operating activities were primarily driven by our working capital needs, annual payments associated with employee compensation, and cash payments for restructuring and separation related costs. Net working capital usage was $352 million for the three months ended March 31, 2019, mainly due to higher trade receivables and inventory to sustain expected volume growth. We also had restructuring and GE separation related payments of approximately $81 million during the quarter.
For the three months ended March 31, 2018, operating cash inflows were primarily driven by our net loss adjusted for certain non cash items (depreciation, amortization and provision for deferred taxes) and approximately $100 million decrease in net working capital, mainly due to higher collections. These items were partially offset by cash usage of approximately $100 million related to restructuring and merger related payments.
Investing Activities
Cash flows from investing activities used cash of $256 million and $135 million for the three months ended March 31, 2019 and 2018, 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 $294 million and $177 million for the three months ended March 31, 2019 and 2018, respectively, partially offset by proceeds from the sale of property, plant and equipment of $59 million and $108 million for the three months ended March 31, 2019 and 2018, respectively.
Financing Activities
Cash flows from financing activities used cash of $233 million and $1,561 million for the three months ended March 31, 2019 and 2018, respectively.
We had net repayments of short-term debt and other borrowings of $36 million and $181 million for the three months ended March 31, 2019 and 2018, respectively. Repayment of long-term debt in the three months ended March 31, 2019 was $12 million compared to $648 million in the three months ended March 31, 2018. There were no repayments of Senior notes in the three months ended March 31, 2019.
Additionally, we made a distribution to our members of $187 million and $203 million for the three months ended March 31, 2019 and 2018, respectively.
During the three months ended March 31, 2018, we used cash of $524 million to repurchase our common units, on a pro rata basis from BHGE and GE. We had no such repurchases in the three months ended March 31, 2019.
Other Factors Affecting Liquidity
Registration Statement: In December 2017, Credit Agreement.BHGE LLC 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 2020.
Customer receivables:In line with industry practice, we may bill our customers for services provided in arrears dependent upon contractual terms. In a challenging economic environment, we may experience delays in the payment of our invoices due to customers' lower cash flow from operations or their more limited access to credit markets. While historically there have not been material non-payment events, we attempt to mitigate this risk through working with our customers to restructure their debts. A customer's failure or delay in payment could have a material adverse effect on our short-term liquidity and results from operations. As of March 31, 2018, 18%2019, 22% of our gross trade receivables were from customers in the United States. Other than the United States, no other country
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or single customer accounted for more than 10% of our gross trade receivables at this date. As of December 31, 2017, 20%2018, 24% of our gross trade receivables were from customers in the United States.
International operations:Our cash that is held outside the U.S. is 58%88% of the total cash balance as of March 31, 2018.2019. We may not be able to use this cash quickly and efficiently due to exchange or cash controls that could make it challenging. As a result, our cash balance may not represent our ability to quickly and efficiently use this cash.
OTHER ITEMS
Iran Threat Reduction And Syria Human Rights Act Of 2012Brexit
Under Section 13(r)In June 2016, UK voters approved the UK’s exit (Brexit) from the EU. The UK was originally due to leave in March 2019 but the EU and UK have agreed a delay to Brexit, which can currently happen up to October 31, 2019 if a withdrawal agreement is ratified by the UK Parliament. There remains significant uncertainty as to whether the withdrawal agreement between the UK government and the EU will be approved, when, if and on what terms Brexit will happen. There is a range of outcomes possible, from no Brexit to an abrupt cut-off of the Securities Exchange Act of 1934, enactedUK’s future trading relationship with the EU. The above withdrawal agreement contemplates a transition period to allow time for a future trade deal to be agreed.
Although our customer base is global with predominant exposure to the U.S. dollar, we have a manufacturing and service base in 2012,the UK with some euro procurement, thus we are requiredexposed to disclosefluctuations in our periodic reports if we or anyvalue of our affiliates knowingly engaged in business activities relating to Iran, even if those activities are conducted in accordance with authorizations subsequently issued bythe British pound versus the U.S. Government. Reportable activities include investments that significantly enhance Iran’s abilitydollar, euro and other currencies. We have a hedging program which looks to develop petroleum resources valued at $20 million or more in the aggregate during a twelve-month period. Reporting is also required for transactions related to Iran’s domestic production of refined petroleum products or Iran’s ability to import refined petroleum products valued at $5 million or more in the aggregate during a twelve-month period.
In January 2016, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) issued General License H authorizing U.S.-owned or controlled foreign entities to engage in transactions with Iran if these entities meet the requirements of the general license. Pursuant toaccommodate this authorization, a non-U.S. BHGE affiliate received a purchase order during the first quarter of 2018 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. This purchase order is valued at less than €0.1 million ($0.1 million). This non-U.S. affiliate attributed €5.4 million ($6.7 million) in gross revenue and €1.7 million ($2.1 million) in net profits against previously reported transactions during the quarter ended March 31, 2018.
BHGE LLC 2018 First Quarter FORM 10-Q | 41
A second non-U.S. BHGE affiliate received ten purchase orders during the first quarter of 2018 for the sale of spares parts to support gas plants, petrochemical plants and gas production projects in Iran. Three of the ten purchase orders are individually valued at €0.1 million ($0.1 million) and the remaining seven purchase orders are individually valued at less than €0.1 million ($0.1 million). This non-U.S. affiliate did not recognize any revenue or profit during the quarter ended March 31, 2018.
All of these non-U.S. affiliates intend to continue the activities described above, as permitted by all applicable laws and regulations.potential volatility.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, (each a "forward-looking statement"). 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," "seek," "anticipate," "estimate," "overestimate," "underestimate," "believe," "could," "project," "predict," "continue," "target" or other similar words or expressions. Forward-looking statements are based upon current plans, estimates and expectations that are subject to risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. The inclusion of such statements should not be regarded as a representation that such plans, estimates or expectations will be achieved. Important factors that could cause actual results to differ materially from such plans, estimates or expectations include, among others, the risk factors identified in the "Risk Factors" section of Part II of Item 1A contained herein, the risk factors in the "Risk Factors" section of Part I of Item 1A of our 20172018 Annual Report and those set forth from time-to-time in other filings by the Company with the SEC. These documents are available through our website or through the SEC's Electronic Data Gathering and Analysis Retrieval (EDGAR) 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
For quantitative and qualitative disclosures about market risk affecting us, see Item 7A., “Quantitative and Qualitative Disclosures about Market Risk,” in our 20172018 Annual Report. Our exposure to market risk has not changed materially since December 31, 2017.2018.
BHGE LLC 2019 First Quarter FORM 10-Q | 38
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 report, our disclosure controls and procedures (as defined in Rule 15d-15(e) of the Exchange Act) were effective at a reasonable assurance level.
Effective January 1, 2018,2019, we adopted the new revenuelease guidance under ASC Topic 606, Revenue from Contracts with Customers,842, Leases, using the fullmodified retrospective method of adoption. The adoption of this guidance required the implementation of new accounting policies and processes, including changes to our information systems, which changed the Company’s internal controls over financial reporting for revenue recognitionleases and related disclosures for both our restated historical financial statements and current period reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See discussion of legal proceedings in "Note 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 20172018 Annual Report and Note 1517 of the Notes to Consolidated and Combined Financial Statements included in Item 8 of our 20172018 Annual Report.
ITEM 1A. RISK FACTORS
As of the date of this filing, the Company and its operations continue to be subject to the risk factors previously disclosed in our "Risk Factors" section of Part I of Item 1A of our 2017contained in the 2018 Annual Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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. Information concerning 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 is included in Exhibit 95 to this Quarterly Report.
ITEM 5. OTHER INFORMATION
On April 24, 2018, BHGE granted to Brian Worrell, Chief Financial Officer, and certain other key employees retention awards in the form of restricted stock units (“RSUs”) and performance share units (“PSUs”) under the Company’s 2017 Long-Term Incentive Plan and previously filed forms of award agreement. The awards are intended to assist in stabilizing succession plans, protect domain expertise, drive business continuity and reward business performance in critical areas. The grants to Mr. Worrell consist of 21,657 RSUs, which cliff vest on the third anniversary of the grant date, and 21,657 PSUs (at target), which are eligible to vest based on attainment of a total shareholder return goal measured over the three-year performance period ending April 30, 2021.None.
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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 a "+" are identified as management contracts or compensatory plans or arrangements. Exhibits previously filed as indicated below are incorporated by reference.
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| | Stock and Asset Purchase Agreement, dated February 25, 2019, among Baker Hughes, a GE company, LLC, GE Energy Switzerland GmbH and, for the limited purpose of the last sentence of Section 11.06, GE, and for the limited purpose of Section 11.15(b) and the last sentence of Section 11.06, Baker Hughes, a GE company (incorporated by reference to Exhibit 10.2 to the Current Report of Baker Hughes, a GE company, LLC on Form 8-K filed on February 28, 2019). |
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| | Amendment No. 2 to the Master Agreement, dated as of February 22, 2019, among General Electric Company, Baker Hughes, a GE company, and Baker Hughes, a GE company, LLC (incorporated by reference to Exhibit 10.6 to the Current Report of Baker Hughes, a GE company, LLC on Form 8-K filed on February 28, 2019). |
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| 101.INS* | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH* | | XBRL Schema Document |
| 101.CAL* | | XBRL Calculation Linkbase Document |
| 101.LAB* | | XBRL Label Linkbase Document |
| 101.PRE* | | XBRL Presentation Linkbase Document |
| 101.DEF* | | XBRL Definition Linkbase Document |
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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.
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| | | Baker Hughes, a GE company, LLC
(Registrant) |
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| Date: | April 27, 201830, 2019 | By: | /s/ BRIAN WORRELL |
| | | Brian Worrell |
| | | Chief Financial Officer |
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| Date: | April 27, 201830, 2019 | By: | /s/ KURT CAMILLERI |
| | | Kurt Camilleri |
| | | Vice President, Controller and Chief Accounting Officer |
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