Baker Hughes Company — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Baker Hughes is an energy technology company operating through Oilfield Services (OFS), Oilfield Equipment (OFE), Turbomachinery & Process Solutions (TPS), and Digital Solutions (DS). The company consolidates Baker Hughes Holdings LLC; GE held a 17.2% economic interest in BHH LLC at quarter-end.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $5.093B | $5.049B | $15.017B | $15.210B |
| Operating income (loss) | $378M | ($49M) | $736M | ($16.160B) |
| Net income (loss) | $16M | ($270M) | ($666M) | ($16.712B) |
| Net income (loss) attributable to Baker Hughes | $8M | ($170M) | ($512M) | ($10.592B) |
| Operating cash flow | Not separately provided | Not separately provided | $1.600B | $927M |
Q3 operating margin was approximately 7.4%, compared with a loss-making operating result in the prior-year quarter. Revenue rose 1% year over year in Q3; nine-month revenue declined 1%. The nine-month 2020 comparison includes $14.773B of goodwill impairment, making the large improvement in reported operating results difficult to interpret without considering that charge. Q3 diluted EPS was $0.01 versus a loss of $0.25; nine-month diluted EPS was a loss of $0.64 versus a loss of $16.01. The quarterly dividend was $0.18 per Class A share.
Segments and material changes
- Q3: OFS revenue increased 5% to $2.419B and segment operating income rose to $190M from $93M. TPS revenue increased 3% to $1.562B and segment income rose to $278M from $191M. OFE revenue declined 17% to $603M and income fell to $14M from $19M. DS revenue increased 1% to $510M, while income declined to $26M from $46M.
- Nine months: TPS revenue rose 24% to $4.675B, while OFS revenue fell 11% to $6.976B and OFE revenue fell 12% to $1.867B. DS revenue rose 3% to $1.499B. Segment operating income increased overall to $1.330B from $931M, led by TPS and OFS; DS income declined.
- Management attributed Q3 OFS growth to stronger North American activity, partly offset by Hurricane Ida and supply-chain shipment delays. TPS benefited from higher equipment and service volume. Supply constraints also affected DS deliveries.
Cash, debt, and liquidity
- Cash and equivalents were $3.926B at September 30, 2021, down from $4.132B at year-end 2020. Total borrowings were $6.764B, including $56M short-term debt; the resulting simple net-debt figure was approximately $2.838B. The next stated debt maturity was December 2022.
- Current assets were $14.887B and current liabilities $9.354B. The company had a $3B committed revolving credit facility, with no borrowings outstanding, and reported compliance with debt covenants.
- Nine-month investing cash outflow was $212M, including $590M of capital expenditures. Financing cash outflow was $1.585B, including $832M repayment of commercial paper, $436M of dividends, $127M distributed to GE, and $106M of share repurchases.
- Management expected 2021 capital expenditures, net of asset-sale proceeds, to be below 2020 levels and expected income-tax payments of $350M–$450M. It stated that cash, operating cash flow, and available credit should meet anticipated liquidity needs.
- About 70% of cash was held outside the U.S.; $691M was held in accounts subject to local transfer or currency-conversion restrictions, though available for local operations. Management cautioned that a sharp revenue decline or cost increase could pressure cash flow and liquidity.
Outlook, risks, and unusual items
- Management expected North American and international onshore activity to improve in Q4 2021 and potentially grow further in 2022 if commodity prices remained at then-current levels. It expected offshore activity to stabilize in 2021 and recover modestly in 2022, and remained positive on long-term LNG prospects. These were market-dependent expectations, not firm financial guidance.
- Management cited pandemic variants, chip shortages, supply-chain constraints, and energy-supply constraints as headwinds. It described the oil outlook as favorable amid recovering demand and disciplined producer spending, and identified growth opportunities in hydrogen, carbon capture, geothermal, and other lower-carbon solutions.
- Other non-operating loss was $102M in Q3 and $791M for nine months. The nine-month amount included a $955M fair-value loss on the C3.ai investment, partly offset by reversals of legal accruals. The C3.ai holding was valued at $401M at quarter-end. Tax expense was $193M for Q3 and $406M for nine months despite reported pretax income of $209M in Q3 and a nine-month pretax loss; management cited losses without tax benefits and uncertain tax positions.
- The board authorized repurchases of up to $2B each by the company and BHH LLC. During Q3, the company and BHH LLC repurchased and canceled 4.4M shares and LLC units for $106M; the separate issuer repurchase disclosure reports 4.8M Class A shares repurchased for approximately $115M, including unsettled shares.
- On October 1, 2021, after quarter-end, Baker Hughes contributed its subsea drilling systems business to a 50/50 joint venture with Akastor, receiving $120M cash at closing, an $80M subordinated note, and a 50% equity interest. The filing classified the business as held for sale at September 30.
- Contingencies include an ongoing SEC investigation concerning books, records, and controls for projects potentially affected by U.S. sanctions, and a voluntary disclosure to OFAC regarding certain payments by non-U.S. affiliates. The company said it could not predict the outcome or impact. It also disclosed other pending litigation, including an IEC arbitration-related dispute, while stating that currently pending proceedings were not expected to materially adversely affect results, financial position, or cash flow. Off-balance-sheet arrangements totaled approximately $4.5B; the company said these were not expected to have a material effect.
- The company reported that the DOJ/SEC inquiry into certain Iraq operations and dealings with Unaoil was closed on September 30, 2021, with no enforcement action. The annual goodwill impairment test in Q3 found fair value substantially above carrying value for all reporting units, with no impairment.
Important facts for investors to verify
- Whether recovery in onshore, offshore, and LNG markets translates into sustained orders, revenue, and segment margins, particularly given supply constraints and activity volatility.
- The valuation sensitivity and future performance of the C3.ai investment, and the effect of related non-operating gains or losses on reported earnings.
- Developments and potential financial or operational consequences of the SEC and OFAC matters, sanctions-related controls review, and other material litigation.
- Execution and financial effects of the subsea drilling systems joint venture, including receipt of the subordinated $80M note.
- Cash availability across jurisdictions, debt repayment and refinancing needs, and the pace and funding of the authorized buyback programs.