Baker Hughes, a GE Company — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. BHGE provides oilfield equipment, services and digital solutions in more than 120 countries. GE held approximately 62.5% of BHGE LLC; BHGE consolidated its results and reported GE’s interest as noncontrolling interest. Nine-month comparisons with 2017 are not directly comparable because BHGE included Baker Hughes results only from the July 3, 2017 combination date.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $5.665 billion | $5.301 billion | $16.612 billion | $11.380 billion |
| Operating income (loss) | $282 million | $(193) million | $319 million | $(173) million |
| Net income (loss), consolidated | $38 million | $(357) million | $(19) million | $(311) million |
| Net income attributable to BHGE | $13 million | $(134) million | $64 million | $(134) million |
| Basic/diluted EPS, Class A | $0.03 | $(0.31) | $0.15 | $(0.31) |
- Q3 operating margin was approximately 5.0%, versus an operating loss margin of approximately 3.6% a year earlier. Revenue rose 7%, principally from Oilfield Services (OFS); segment operating income increased $217 million to $475 million.
- Q3 segment revenue and operating income: OFS $2.993 billion and $231 million; Oilfield Equipment $631 million and $6 million; Turbomachinery & Process Solutions (TPS) $1.389 billion and $132 million; Digital Solutions $653 million and $106 million.
- Nine-month operating cash flow was $673 million, versus cash used of $585 million. Capital expenditures were $653 million. Cash and cash equivalents, including restricted cash, were $4.765 billion, down from $7.030 billion at year-end 2017.
- At September 30, total borrowings were $7.293 billion: $1.000 billion short-term and $6.293 billion long-term. The $936 million GE borrowing represents cash and investment securities held on GE’s behalf, with a corresponding liability. BHGE reported no borrowings under its $3 billion revolving facility or commercial-paper program and was in compliance with facility covenants.
- Current assets were $16.118 billion and current liabilities $8.457 billion. Approximately $3.2 billion of cash was held by foreign subsidiaries; some cash is subject to local transfer restrictions. Management said cash, operating cash flow and available credit should meet global liquidity needs.
Changes, outlook and management commentary
- Q3 improvement reflected higher activity in OFS and stronger results in Digital Solutions and Oilfield Equipment. OFS operating income benefited from synergies and volume. TPS revenue declined 2%, and its operating income was broadly flat.
- Q3 restructuring and impairment charges were $66 million, down from $191 million; merger and related costs were $17 million, down from $159 million. Nine-month restructuring and impairment charges were $374 million, including $242 million of restructuring charges; management estimated approximately $107 million of remaining restructuring charges.
- Management expected North American onshore activity to keep growing through 2018 and international onshore activity to increase moderately. It anticipated improving offshore awards and orders, continued LNG project opportunities, and growth in refining, petrochemical and industrial markets, while cautioning that near-term conditions remained volatile. No quantified earnings guidance was provided.
- Q3 orders were $5.7 billion, flat year over year; service orders rose 6% and equipment orders fell 8%. Remaining performance obligations were $20.8 billion, with approximately 45% expected to be recognized within two years.
- In June, GE announced plans for an orderly full separation from BHGE over two to three years. On October 8, 2018, BHGE agreed to acquire a 5% stake in ADNOC Drilling for $500 million, subject to approvals. Its Natural Gas Solutions business sale for $375 million closed in early October; the gain was expected to be recorded in Q4.
Risks, contingencies and unusual items
- BHGE recorded an $85 million Q3 equity-method loss on its BJ Services investment ($139 million for nine months) and suspended applying the equity method; the loss had no cash impact.
- Significant legal matters include IEC arbitration and related litigation, with IEC alleging damages may exceed $500 million; the company said it would contest the claims and could not predict the outcome. Other disclosed matters include gas-storage claims in Germany, patent litigation, and an appeal in the Saniteq case after dismissal of its claims. The filing states that a range of total possible losses across litigation matters cannot be reasonably estimated.
- GE’s SEC investigation of revenue recognition and internal controls for long-term service agreements may include some BHGE TPS contracts; BHGE was cooperating, and the outcome was uncertain.
- Non-U.S. affiliates reported limited Iran-related activity under prior U.S. authorization and planned to wind it down by November 4, 2018, in compliance with sanctions.
- BHGE disclosed approximately $3.5 billion of off-balance-sheet guarantees, letters of credit and surety bonds, which it said were not expected to materially affect its financial position or results. The company also cited customer collection delays, foreign-cash access restrictions, commodity and currency exposure, and market volatility as liquidity and operating risks.
- The company adopted ASC 606 retrospectively, changing revenue timing and classifications but not cash flows. It estimated that adoption of the new lease standard in 2019 would add approximately $600–$750 million of right-of-use assets and related liabilities.
Investor verification checklist
- Check subsequent results against management’s activity outlook, orders, backlog conversion and segment trends, particularly TPS and Oilfield Equipment.
- Assess cash availability and debt carefully, including foreign cash restrictions and the GE-held cash and matching short-term liability.
- Monitor the BJ Services investment, restructuring charges and remaining cost-reduction plans.
- Track the IEC arbitration, SEC review of long-term service revenue practices and other material legal contingencies.
- Verify completion and financial effects of the NGS sale, ADNOC Drilling investment and GE separation plans.
- Consider comparability limits in year-over-year nine-month results and the effects of ASC 606 and upcoming lease accounting.