Baker Hughes Company — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Baker Hughes is an energy technology company operating through Oilfield Services & Equipment (OFSE) and Industrial & Energy Technology (IET).
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $6.641B | $5.369B | $18.671B | $15.251B |
| Operating income | $714M | $269M | $1.666B | $522M |
| Net income (loss) attributable to Baker Hughes | $518M | ($17M) | $1.503B | ($783M) |
| Diluted EPS | $0.51 | ($0.02) | $1.48 | ($0.80) |
| Operating margin | 10.8% | 5.0% | 8.9% | 3.4% |
Revenue increased 24% in Q3 and 22% for the nine-month period. Q3 growth came from OFSE revenue of $3.951B, up 16%, and IET revenue of $2.691B, up 37%. Higher volumes, pricing and cost-out initiatives supported operating results. The nine-month improvement also reflects far lower restructuring and impairment charges than in 2022.
Other non-operating income was $94M in Q3 and $638M for nine months, including fair-value gains on equity investments of $99M and $639M, respectively. These gains materially contributed to reported pretax income, particularly year to date. Nine-month restructuring, impairment and other charges were $161M, compared with $676M in 2022.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $2.130B, versus $990M; investing cash use was $503M and financing cash use was $861M. Capital expenditures were $868M. Operating cash flow less capital expenditures was approximately $1.262B.
- Cash and equivalents were $3.201B at September 30, versus $2.488B at year-end 2022. Current assets were $16.161B and current liabilities $12.681B.
- Total debt was $6.659B, broadly unchanged from $6.658B at year-end. No borrowings were outstanding under the $3B revolving facility or $3B commercial paper program; the company reported compliance with debt covenants.
- The current portion of debt was $802M, including $650M of notes due December 2023. Management expected to repay the December maturity using cash on hand. The revolving facility matures in December 2024.
- Cash includes $561M held in countries with currency controls; 71% of total cash was outside the U.S. Management said a substantial portion of foreign cash is reinvested in non-U.S. operations.
Material changes and business developments
- Q3 segment operating income rose to $465M for OFSE from $324M and to $346M for IET from $282M. OFSE benefited from international activity, volume, pricing and productivity; IET growth was led by Gas Technology Equipment, with unfavorable mix, inflation, lower productivity and higher new-energy R&D costs as offsets.
- International OFSE revenue rose to $2.887B in Q3, while North American activity weakened: the regional rig count fell 13% year over year. International rig count increased 11% and worldwide count declined 2%.
- Orders were $8.5B in Q3, up 40%; nine-month orders were $23.6B, up 26%. Remaining performance obligations were $32.4B, comprising $3.6B OFSE and $28.8B IET. The company expects to recognize approximately 62% within two years.
- The company acquired Altus Intervention, primarily in OFSE, for total nine-month net cash consideration of $301M, and sold Nexus Controls to GE for proceeds included in $293M of business-disposition proceeds. IET product lines were reorganized effective October 1, 2023, including a new Climate Technology Solutions product line.
- Nine-month cash dividends were $586M; the quarterly dividend was increased to $0.20 per share. The company repurchased $219M of shares during the nine months and had approximately $2.5B of repurchase authorization remaining at quarter-end.
Outlook, risks and contingencies
- Management remained positive on the oil and gas outlook and LNG project pipeline, citing expected international and offshore spending growth and continued LNG demand. North American OFSE activity was trending lower, particularly among private operators and in gas basins. Management cautioned that economic uncertainty and geopolitical developments could affect these expectations.
- No quantified earnings or revenue guidance was provided. For 2023, capital expenditures were expected to be up to 5% of annual revenue; income tax payments were estimated at $575M–$625M. Management expected approximately $30M of additional restructuring charges in Q4 2023, with the plans substantially complete by year-end.
- Risks include oil and gas price and spending shifts, inflation, customer payment delays, foreign-exchange and cash-transfer restrictions, and geopolitical developments. The Middle East conflict had not materially affected operations as of the filing, but escalation could affect the business.
- Off-balance-sheet arrangements, including guarantees, letters of credit and surety bonds, totaled approximately $5B; the company stated none was expected to materially affect financial position, results or cash flows.
- Legal matters include a pending appeal in shareholder derivative litigation and a C3.ai securities class action in which Baker Hughes and its CEO are named. A separate IEC arbitration remains pending against subsidiaries; management said outcomes could not be predicted. Management did not expect currently pending proceedings, in the aggregate, to materially adversely affect results, financial position or cash flows, while noting outcomes remain uncertain.
Important facts for investors to verify
- How much of earnings and cash generation is recurring, versus driven by equity-investment fair-value gains and working-capital movements, including progress collections.
- Whether order growth and the $32.4B performance-obligation backlog convert into revenue and cash flow on the expected schedule and margins.
- Whether international OFSE growth offsets North American weakness, and whether IET can improve mix and productivity while funding new-energy investment.
- Liquidity available for the December 2023 debt repayment, the 2024 revolving-facility maturity, and the practical accessibility of cash held outside the U.S.
- Actual restructuring costs, capital expenditures and taxes versus management’s 2023 estimates, plus developments in the disclosed legal matters and geopolitical risks.