Baker Hughes Company — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Baker Hughes is an energy technology company operating through Oilfield Services (OFS), Oilfield Equipment (OFE), Turbomachinery & Process Solutions (TPS), and Digital Solutions (DS).
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $5.047B | $5.142B | $9.882B | $9.924B |
| Operating income (loss) | $(25)M | $194M | $253M | $358M |
| Net loss attributable to Baker Hughes | $(839)M | $(68)M | $(767)M | $(520)M |
| Basic and diluted loss per share | $(0.84) | $(0.08) | $(0.79) | $(0.67) |
| Operating margin | Approximately (0.5)% | Approximately 3.8% | Approximately 2.6% | Approximately 3.6% |
Q2 revenue declined 2% year over year. Goods sales fell while services sales increased. The sharp quarterly loss reflected elevated restructuring and Russia-related charges, a loss on the Russia business held for sale, and losses on equity securities. The company recorded $362M of restructuring, impairment and other charges, $31M of inventory impairment, a $426M loss on the OFS Russia business held for sale, and a $123M loss from changes in equity-security fair value.
Cash flow and liquidity: First-half operating cash flow was $393M, down from $1.184B. Capital expenditures were $494M; disposal proceeds were $143M. Company-defined free cash flow (operating cash flow less capital expenditures plus disposal proceeds) was approximately $42M, versus $883M a year earlier. Cash and equivalents were $2.928B at June 30, 2022, down from $3.853B at year-end 2021; some cash is held in jurisdictions where it cannot readily be transferred. Current assets were $14.199B and current liabilities $9.375B.
Debt and capital returns: Total borrowings were $6.659B, including $6.625B long-term debt; net debt was approximately $3.731B. No borrowings were outstanding under the $3B revolving facility or $3B commercial-paper program, and the company reported compliance with debt covenants. The next debt maturity was December 2023. First-half dividends were $354M, and share repurchases totaled $462M. The quarterly dividend remained $0.18 per share.
Material changes and segment results
- OFS: Q2 revenue rose 14% to $2.689B and segment operating income increased to $261M from $171M, reflecting higher activity, price and favorable mix, partly offset by inflation and Russia-related under-absorption.
- OFE: Revenue fell 15% to $541M; the segment recorded a $12M operating loss versus $28M income. Lower project volume and weaker cost productivity contributed.
- TPS: Revenue fell 21% to $1.293B, while operating income was broadly flat at $218M. Lower equipment/project activity and suspension of Russia-related contracts affected results.
- DS: Revenue was nearly flat at $524M; operating income declined to $18M from $25M, with supply constraints, inflation and lower cost productivity cited.
- Q2 orders increased 15% year over year to $5.9B. Remaining performance obligations were $24.3B at June 30, down $1.5B from March 31, primarily due to Russia contract suspensions and currency movements.
Outlook, risks and unusual items
Management expects North American onshore activity to grow strongly in 2022, international onshore spending to improve outside Russia/Caspian, and offshore activity and subsea awards to recover, assuming commodity prices remain near then-current levels. Management remained positive on long-term natural gas and LNG prospects, while emphasizing that forecasts depend on volatile market conditions. It cited inflation, interest-rate increases, potential demand deterioration, geopolitical uncertainty and supply constraints as material uncertainties. No earnings-per-share or full-year revenue guidance was provided in the supplied filing text.
Management expected 2022 capital expenditures to be up to 5% of annual revenue and income-tax payments of $550M–$650M. It expected the sale of the OFS Russia business to close by year-end 2022, subject to regulatory approval. The company suspended substantially all Russian operations and committed to sell the OFS Russia business; Russia represented approximately 1% of Q2 revenue and 3% of first-half revenue.
The SEC investigation concerning books and records and internal controls for sales connected to projects impacted by U.S. sanctions remained ongoing; the company said it could not predict its timing, outcome or possible impact. Separately, OFAC issued a cautionary letter and stated it would pursue no civil monetary penalty or further enforcement action following the company’s voluntary disclosure. The filing also reported approximately $4.5B of off-balance-sheet arrangements, which management did not expect to materially affect financial position, results or cash flows. Management said pending litigation was not expected to have a material adverse effect, while noting outcomes remain uncertain.
Important facts for investors to verify
- Whether Russia-business sale approvals and closing occur on schedule, and whether further costs or contract impacts arise.
- Progress and eventual findings or consequences of the ongoing SEC investigation.
- Conversion of the $24.3B remaining performance obligations and higher order intake into revenue and cash flow.
- Whether OFS growth and margin gains can offset weakness in OFE, TPS and DS, including inflation and supply-chain pressures.
- Operating cash generation, working-capital requirements, and the sustainability of dividends and repurchases amid lower cash balances.
- Future fair-value changes in equity investments and any material developments in disclosed litigation or guarantees.