Baker Hughes, a GE company — Q1 2018 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2018. BHGE provides oilfield equipment, services, turbomachinery and digital solutions in more than 120 countries. GE held approximately 62.5% of BHGE LLC; BHGE shareholders held approximately 37.5%. Results include Baker Hughes from the July 3, 2017 combination, so comparison with Q1 2017—before Baker Hughes was included—is not like-for-like.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $5.399 billion | $3.064 billion |
| Operating income (loss) | $(41) million | $86 million |
| Net income (loss), consolidated | $(19) million | $66 million |
| Net income attributable to BHGE | $70 million | $0 million |
| Basic and diluted Class A EPS | $0.17 | Not presented |
| Operating cash flow | $294 million | $(346) million |
| Capital expenditures | $177 million | $76 million |
Revenue rose 76%, primarily because Baker Hughes was included in the current period. U.S. revenue was $1.483 billion and non-U.S. revenue was $3.916 billion. Segment revenue was $2.678 billion for Oilfield Services, $664 million for Oilfield Equipment, $1.460 billion for Turbomachinery & Process Solutions, and $598 million for Digital Solutions. Total segment operating income was $327 million, compared with $329 million.
Consolidated net loss differs from the $70 million attributable to BHGE chiefly because of the allocation of results to noncontrolling interests, including GE’s interest in BHGE LLC. Operating margin was negative; the filing does not provide a reported consolidated gross-margin percentage.
Cash, cash equivalents and restricted cash totaled $5.631 billion at quarter-end, down from $7.030 billion at December 31, 2017. Current assets were $17.054 billion and current liabilities $8.325 billion. Total borrowings were $7.472 billion, including $992 million owed to GE; long-term debt was $6.296 billion. The company had a $3 billion revolving credit facility, with no borrowings under it, and no commercial paper outstanding. Financing cash outflow was $1.553 billion, including $648 million of long-term debt repayment, $513 million of combined Class A and Class B/common-unit repurchases, and $203 million of dividends and distributions.
Material changes versus prior period
- Revenue increased $2.335 billion, driven mainly by the acquisition; Oilfield Services revenue increased $2.465 billion. Oilfield Equipment revenue fell $52 million and Turbomachinery & Process Solutions revenue fell $184 million.
- Operating income moved from $86 million to a $41 million loss. Restructuring, impairment and other charges rose to $162 million from $42 million; inventory impairments were $61 million versus $15 million.
- Interest expense increased to $46 million from $20 million, primarily reflecting debt issued in late 2017 and debt acquired with Baker Hughes.
- Operating cash flow improved to $294 million from an outflow of $346 million, with management citing lower working capital use and higher collections, partly offset by restructuring and merger-related payments.
Outlook, commentary and risks
- No quantitative earnings or revenue guidance was provided. Management expected North American activity to continue growing in 2018, but more slowly; international onshore growth to remain moderate; and offshore customer spending and final investment decisions to remain cautious and fluid. It described LNG as oversupplied near term while viewing long-term economics positively.
- Management remained optimistic about the industry’s long-term outlook but emphasized near-term volatility and operating flexibility. Results depend on customer spending, energy prices, project decisions, access to financing and regulatory conditions.
- The company recorded a $124 million net tax benefit related mainly to U.S. tax reform, partly offset by approximately $58 million of tax expense on losses for which valuation allowances prevented a tax benefit. The $86 million income tax benefit contributed to the reported results.
- Restructuring plans were expected to generate approximately $173 million of additional charges after March 31. The company also expected a further $34 million accelerated amortization charge in Q2 2018 related to trade names and technology being discontinued.
- Remaining performance obligations were $21.3 billion, including $5.4 billion equipment and $15.9 billion services. Management expected to recognize approximately 45% within two years, 60% within five years and 90% within 15 years.
- Material matters include German gas-storage equipment litigation alleging approximately $224 million plus interest, a Saniteq claim seeking $500 million plus unspecified punitive damages, and an INEOS/Naphtachimie proceeding with alleged damages of €250 million. The company said outcomes were uncertain. It was also cooperating with GE in an SEC inquiry into revenue recognition and controls for long-term service agreements that may include BHGE contracts.
- Other exposures include $3.7 billion of off-balance-sheet guarantees and similar arrangements, cash held in jurisdictions with transfer restrictions, and foreign-currency and commodity risks. Management reported compliance with credit-facility covenants and effective disclosure controls.
Important facts for investors to verify
- Assess the underlying, comparable revenue and profitability trend, given the acquisition-driven year-over-year increase and differing reporting bases.
- Track segment performance, especially the declines in Oilfield Equipment and Turbomachinery & Process Solutions, alongside Oilfield Services integration and synergy progress.
- Monitor cash generation and the accessibility of cash balances, including restricted or GE-held amounts, and the pace of debt repayment and repurchases.
- Review the completion of acquisition purchase accounting, restructuring charges, remaining cost reductions and the effects of ASC 606 revenue recognition.
- Follow the legal proceedings and SEC inquiry, tax-reform estimates, and potential implications of future lease accounting adoption.