Baker Hughes, a GE company — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; financial statements are unaudited. BHGE provides oilfield equipment, services and digital solutions across more than 120 countries. GE held approximately 50.3% of BHGE LLC’s economic interest and controlling interest at quarter-end.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $5.615 billion | $5.399 billion |
| Operating income (loss) | $176 million | $(41) million |
| Operating margin | 3.1% | (0.8)% |
| Consolidated net income (loss) | $71 million | $(19) million |
| Net income attributable to BHGE | $32 million | $70 million |
| Basic and diluted Class A EPS | $0.06 | $0.17 |
| Operating cash flow | $(184) million | $294 million |
| Capital expenditures | $294 million | $177 million |
Revenue increased 4%, driven mainly by Oilfield Services (OFS) and Oilfield Equipment (OFE); Turbomachinery & Process Solutions (TPS) and Digital Solutions revenue declined. Total segment operating income rose to $373 million from $327 million. OFS revenue was $2.986 billion and segment income $176 million; OFE revenue was $735 million and segment income $12 million; TPS revenue was $1.302 billion and segment income $118 million; Digital Solutions revenue was $592 million and segment income $68 million.
Cash and cash equivalents were $3.073 billion at March 31, down from $3.723 billion at year-end. Total borrowings were $7.176 billion, including $906 million short-term and $6.270 billion long-term. BHGE had no borrowings under its $3 billion revolving credit facility or commercial paper program. Current assets were $14.912 billion and current liabilities $9.052 billion. Cash flow from operations was weighed down by $394 million of net working-capital use and approximately $81 million of restructuring and separation payments. The company paid $93 million in dividends and distributed $94 million to noncontrolling interests. The quarterly Class A dividend remained $0.18 per share.
Material changes versus the prior-year quarter
- Revenue grew $216 million, or 4%; OFS increased $308 million and OFE increased $71 million, partially offset by a $158 million TPS decline and a $6 million Digital Solutions decline.
- Operating income improved by $218 million, from a loss to income. Restructuring, impairment and other charges fell to $62 million from $162 million; separation and merger costs fell to $34 million from $46 million.
- Despite the improvement in consolidated net income, income attributable to BHGE declined to $32 million from $70 million, reflecting the allocation of income between BHGE and noncontrolling interests.
- Operating cash flow swung to an outflow of $184 million from an inflow of $294 million. Capital spending increased to $294 million from $177 million.
- Orders were $5.7 billion, up 9%; service orders rose 4% and equipment orders 17%. Remaining performance obligations were $20.5 billion, compared with $21.3 billion a year earlier.
Outlook, management commentary and risks
Management characterized near-term markets as volatile, while remaining optimistic about long-term industry prospects. It expected subdued near-term North American onshore activity, moderate international onshore growth, and subsea awards roughly flat in 2019, with possible project delays. Management also cited positive longer-term LNG, petrochemical and industrial-market prospects. These expectations are market-dependent and are not firm financial guidance.
The GE separation and collaboration framework was finalized during Q1. BHGE estimated the agreements would modestly reduce operating margin by approximately 20–40 basis points and anticipated $0.2–$0.3 billion of one-time separation costs over three years, mainly for IT infrastructure and transaction fees. Related arrangements include long-term rotating-equipment collaboration, a planned aero-derivative joint venture, an industrial steam turbine business transfer, and continuing GE Digital relationships. Certain transactions remained subject to closing conditions.
Other risks include customer spending sensitivity to energy prices, delayed customer payments, foreign-exchange and commodity exposure, and the potential impact of Brexit. The filing identifies significant unresolved legal and regulatory matters, including German gas-storage claims (including a new €142 million arbitration claim), IEC’s amended $591 million lost-profits demand, shareholder derivative litigation related to GE transactions, a DOJ document request concerning Iraq operations and Unaoil, and an SEC review of GE revenue-recognition practices that may include BHGE contracts. Outcomes were uncertain; the company stated it could not predict several of them. Off-balance-sheet guarantees and similar arrangements totaled approximately $3.8 billion.
Operating lease accounting adoption added $844 million of right-of-use assets and lease liabilities at January 1, 2019, with no material income-statement impact. Management reported that disclosure controls were effective at a reasonable assurance level.
Key facts for investors to verify
- Whether negative operating cash flow and working-capital use reverse, and whether capital spending remains elevated.
- How reported consolidated profit translates into earnings attributable to BHGE and future Class A EPS.
- Progress and final economics of the GE separation framework, including the expected margin impact, one-time costs and contingent transaction closings.
- Developments in the major litigation, DOJ request and SEC review, and any resulting accruals or financial effects.
- Usable liquidity: $717 million of reported cash was held on behalf of GE, and $1.214 billion of cash was in jurisdictions with restrictions on transfer or currency conversion.
- Market trends, particularly North American activity, project timing, energy prices and the $20.5 billion remaining performance obligations.