Baker Hughes Company — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Baker Hughes is an energy technology company operating through Oilfield Services (OFS), Oilfield Equipment (OFE), Turbomachinery & Process Solutions (TPS), and Digital Solutions (DS). Comparisons below are with Q1 2020 unless stated otherwise. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Revenue | $4.782 billion | $5.425 billion; down 12% |
| Operating income (loss) | $164 million | $(16.059) billion |
| Net loss | $(605) million; $(452) million attributable to Baker Hughes | $(16.098) billion; $(10.227) billion attributable to Baker Hughes |
| Basic and diluted loss per Class A share | $(0.61) | $(15.66) |
| Operating cash flow | $678 million | $478 million |
| Capital expenditures | $221 million | $365 million |
| Cash and cash equivalents | $4.382 billion | $4.132 billion at Dec. 31, 2020 |
| Total borrowings | $7.620 billion | $7.633 billion at Dec. 31, 2020 |
| Current assets / current liabilities | $15.786 billion / $9.958 billion | $16.455 billion / $10.227 billion at Dec. 31, 2020 |
| Class A dividend | $0.18 per share | $0.18 per share |
Cost of goods and services sold totaled $3.924 billion, implying gross profit of $858 million and a gross margin of approximately 18.0% (derived from reported figures). Operating margin was approximately 3.4%. The company reported a $536 million pretax loss and a $69 million income tax provision.
Cash increased by $250 million during the quarter. Operating cash flow benefited from noncash adjustments, including a $788 million unrealized loss on an equity investment, and $405 million of working-capital cash generation. The company had $832 million of commercial paper outstanding and no borrowings under its $3 billion revolving credit facility. Cash less total borrowings was approximately negative $3.238 billion, derived from reported balances. Management said 73% of cash was held outside the U.S.; some cash in certain jurisdictions is restricted from transfer.
Segments and material changes
- OFS: Revenue fell 30% to $2.200 billion; segment operating income decreased to $143 million from $206 million, reflecting lower activity and unfavorable mix, partly offset by cost productivity.
- OFE: Revenue declined 12% to $628 million; segment operating income improved to $4 million from a loss of $8 million.
- TPS: Revenue increased 37% to $1.485 billion, primarily on higher equipment volume; segment operating income rose to $207 million from $134 million.
- DS: Revenue declined 4% to $470 million; segment operating income was $24 million versus $29 million.
Total segment operating income increased to $379 million from $361 million. The prior-year comparison included $14.773 billion of goodwill impairment, $1.325 billion of restructuring, impairment and other charges, and $160 million of inventory impairment. Q1 2021 included $80 million of restructuring, impairment and other charges and $27 million of separation-related costs.
Q1 2021’s $626 million of other non-operating loss included a $788 million unrealized mark-to-market loss on the C3.ai investment, partly offset by a $121 million reversal of legal accruals following settlements. The investment’s reported fair value was $713 million at quarter-end. Thus, the GAAP net loss reflected a substantial noncash investment valuation loss, while operating income was positive.
Revenue fell $643 million year over year, principally because of lower OFS and OFE activity; TPS growth partly offset declines. Average worldwide rig count fell 40% to 1,236, including a 45% North American decline and a 35% international decline. Orders were $4.5 billion, down 18%. Remaining performance obligations were $23.2 billion, compared with $22.7 billion a year earlier.
Outlook, risks and notable items
- Management was cautiously optimistic about recovery in 2021, expecting North American onshore activity to improve versus the second half of 2020, modest recovery in international onshore spending in the second half, and offshore markets to stabilize. These expectations were expressly subject to volatile market conditions.
- Management described the long-term LNG outlook as positive and anticipated growth in new-energy areas such as hydrogen, geothermal, carbon capture, utilization and storage, and energy storage. It also noted that hydrocarbons are expected to remain important to energy supply.
- In March 2021, Baker Hughes announced a 50/50 joint venture with Akastor for its subsea drilling systems business. The transaction contemplated $200 million of consideration, including $120 million in cash at closing, and was expected to close in the second half of 2021 subject to conditions. The business was classified as held for sale.
- Key exposures include the COVID-19 recovery, oil and gas prices and customer spending, activity levels, customer payment delays, foreign-exchange and cash-transfer restrictions, and potential credit-rating effects if business conditions deteriorate. Management said available cash, operating cash flow and credit capacity should meet near-term needs; the company was in compliance with debt covenants.
- Legal matters include ongoing proceedings and investigations. The company disclosed an SEC formal investigation concerning books and records and internal controls related to sales in projects affected by U.S. sanctions; it could not predict the outcome or impact. It was also cooperating with DOJ and SEC requests concerning Iraq operations and Unaoil-related matters. Management stated pending litigation was not expected to materially adversely affect results, financial position or cash flows, while noting outcomes remain uncertain.
- After quarter-end, on April 16, 2021, the company entered a confidential settlement in a German equipment-related dispute; consideration in cash and in-kind products and services was described as immaterial to the financial statements.
Important facts for investors to verify
- Whether subsequent C3.ai share-price movements materially affect reported non-operating income, earnings and the investment’s carrying value.
- Whether the expected market recovery translates into customer spending, orders and revenue, particularly in OFS and OFE.
- Progress and final terms of the Akastor joint venture, including closing conditions and proceeds.
- Developments, potential financial effects and any disclosures arising from the SEC sanctions-related investigation and other significant legal proceedings.
- Cash availability and debt repayment needs, including the repayment of £600 million of commercial paper due April 30, 2021 and the next stated debt maturity in December 2022.