Baker Hughes Company — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; financial statements are unaudited. Baker Hughes is an energy technology company operating through Oilfield Services (OFS), Oilfield Equipment (OFE), Turbomachinery & Process Solutions (TPS), and Digital Solutions (DS). Consolidated results include Baker Hughes Holdings LLC (BHH LLC); GE held a 20.5% noncontrolling interest at quarter-end.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $5.142B | $4.736B | $9.924B | $10.160B |
| Operating income (loss) | $194M | ($52M) | $358M | ($16.111B) |
| Net loss attributable to Baker Hughes | ($68M) | ($195M) | ($520M) | ($10.422B) |
| Basic and diluted loss per Class A share | ($0.08) | ($0.30) | ($0.67) | ($15.93) |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $1.184B | $708M |
Q2 operating margin was approximately 3.8%, compared with a loss margin of approximately 1.1% a year earlier. Six-month operating results improved sharply versus 2020, which included $14.773B of goodwill impairment. The company nevertheless reported a first-half net loss, largely reflecting an $815M fair-value loss on its C3.ai equity investment, included in other non-operating losses. The first-half income tax provision was $213M despite the pretax loss, primarily due to losses without tax benefits and changes in unrecognized tax benefits.
Revenue and segment trends
- Q2 revenue increased 9% year over year, led by TPS (+40%) and DS (+11%); OFS declined 2% and OFE declined 8%.
- Q2 total segment operating income rose to $444M from $221M. OFS income improved to $171M from $46M, OFE returned to income of $28M from a $14M loss, and TPS increased to $220M from $149M. DS income fell to $25M from $41M.
- First-half revenue declined 2%: OFS fell 18% and OFE 10%, partly offset by TPS growth of 39% and DS growth of 3%. Total segment operating income increased to $824M from $583M.
- Orders were $5.1B in Q2, up 4% year over year; first-half orders were $9.6B, down 8%. Remaining performance obligations were $23.8B at June 30, 2021.
Cash, debt and liquidity
- Cash and cash equivalents were $3.913B at June 30, 2021, down from $4.132B at year-end 2020. Current assets were $15.512B and current liabilities $9.805B.
- Total borrowings were $6.773B, down from $7.633B at year-end; debt less cash was approximately $2.860B. The next stated debt maturity was December 2022.
- First-half operating cash flow of $1.184B included $571M of net working-capital cash generation. Investing activities used $130M, including $392M of capital expenditures. Financing activities used $1.285B, including repayment of $832M of commercial paper, $280M of dividends and $95M of distributions to GE.
- The company reported no borrowings under its $3B revolving credit facility, commercial paper program or uncommitted credit lines at quarter-end and stated it was in compliance with debt covenants. The annual Class A dividend was $0.36 per share in the first half.
Outlook, commentary and significant items
- Management was cautiously optimistic about recovery in global energy demand, while emphasizing near-term volatility and risks from COVID-19 variants, oil and gas prices, customer spending and activity levels. It expected North American and international onshore activity to improve in the second half of 2021; offshore activity to stabilize, with awards stable or modestly higher; and remained positive on long-term LNG demand.
- Management anticipated continued growth in businesses serving decarbonization, including hydrogen, geothermal, carbon capture, utilization and storage, and energy storage. It announced several collaborations and a 15% investment in a growth-stage technology company focused on CCUS-related solutions.
- For 2021, capital expenditures net of asset-sale proceeds were expected to be below 2020 levels; income tax payments were estimated at $350M–$450M. Management believed available cash, operating cash flow and credit capacity would meet expected needs, while noting that a significant revenue decline or cost increase could pressure liquidity.
- Restructuring, impairment and other charges were $125M in Q2 and $205M in the first half of 2021, primarily tied to OFS cost reductions, plus litigation-related matters and foreign-currency translation adjustments. Q2 also included $15M of separation-related costs.
- The company planned to contribute its subsea drilling systems business to a 50/50 joint venture with Akastor ASA. The stated consideration was $200M, including $120M cash at closing; closing was expected in the second half of 2021, subject to customary conditions and regulatory approvals.
Risks, contingencies and unusual matters
- The SEC was conducting a formal investigation understood by the company to concern books and records and internal controls for sales in projects affected by U.S. sanctions. The company was cooperating and conducting an internal review; it said timing, outcome and potential impact could not be anticipated. It also reported ongoing DOJ and SEC requests concerning Iraq operations and dealings with Unaoil.
- Other disclosed litigation included the IEC arbitration and related proceedings, shareholder litigation, and a trademark dispute. The filing states that outcomes of certain matters could not be predicted; management did not expect pending proceedings, in aggregate, to materially adversely affect results, financial position or cash flows, but gave no assurance.
- Off-balance-sheet arrangements, including surety bonds, letters of credit and guarantees, totaled approximately $4.4B. The company stated these were not expected to have a material effect, while noting consortium-partner failure could create additional costs or obligations.
- Cash held in jurisdictions subject to currency controls totaled $639M. The filing notes that foreign cash may not be readily available for U.S. use. Customer payment delays, market deterioration and credit-rating downgrades could also affect liquidity.
- GE reduced its BHH LLC economic interest from 30.1% to 20.5%, primarily through exchanges of 97.4M paired Class B shares and LLC units for Class A shares during the first half.
Important facts for investors to verify
- Whether the $815M C3.ai fair-value loss and remaining C3.ai stake materially affect subsequent-period earnings or liquidity.
- Progress and realized cash proceeds from the subsea drilling systems joint venture transaction.
- Developments, potential financial exposure and control implications from the SEC sanctions-related investigation and other legal proceedings.
- Whether the anticipated second-half activity recovery, LNG demand and decarbonization opportunities translate into orders, revenue and cash generation.
- Cash availability by jurisdiction, working-capital conversion, debt repayment needs and the assumptions behind 2021 tax and capital-spending expectations.