Baker Hughes Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited results. Baker Hughes is an energy technology company operating through Oilfield Services (OFS), Oilfield Equipment (OFE), Turbomachinery & Process Solutions (TPS), and Digital Solutions (DS). GE held a 36.6% interest in BHH LLC.
Financial performance and position
- Revenue: $5.425 billion, down 3% from $5.615 billion in Q1 2019. Sales of goods were $3.082 billion and services were $2.343 billion.
- Profit and margins: Operating loss was $16.059 billion versus operating income of $176 million; net loss was $16.098 billion, including $10.210 billion attributable to Baker Hughes Company. Loss per Class A share was $15.64 versus earnings of $0.06. Results included a $14.773 billion goodwill impairment and $1.325 billion of restructuring, impairment and other charges, plus $160 million of inventory impairment. Total segment operating income was $361 million versus $373 million; the filing does not provide a consolidated operating margin excluding these items.
- Cash flow: Operating cash flow was $478 million, compared with cash use of $184 million a year earlier. Investing used $318 million, including $365 million of capital expenditures; financing used $327 million. Cash and cash equivalents fell to $3.010 billion from $3.249 billion.
- Debt and liquidity: Total borrowings were $6.495 billion, including $210 million short-term and $6.285 billion long-term. The company reported a $3 billion committed revolving credit facility with no borrowings outstanding and said it was in compliance with debt covenants. Its next debt maturity was December 2022. Some cash was held abroad or subject to transfer restrictions.
- Dividend: $0.18 per Class A share, unchanged from Q1 2019; $118 million of dividends were paid.
Changes versus Q1 2019
- Revenue declined $190 million. OFS revenue rose 5% to $3.139 billion, while OFE fell 3% to $712 million, TPS fell 17% to $1.085 billion, and DS fell 17% to $489 million.
- Segment operating income decreased $12 million to $361 million: OFS and TPS improved, while OFE moved to an $8 million loss and DS income declined to $29 million.
- Goodwill fell to $5.878 billion from $20.690 billion after impairment charges of $11.484 billion in OFS and $3.289 billion in OFE. Other impairments included $725 million of intangible assets and $218 million of property, plant and equipment.
- Operating cash flow improved from a $184 million use to $478 million provided. Cash and total equity nevertheless declined; total assets fell to $37.229 billion from $53.369 billion.
Outlook, commentary and risks
- Management cited COVID-19, travel and operating restrictions, weaker hydrocarbon demand, increased supply and falling oil prices. It estimated COVID-19 reduced Q1 operating income by approximately $100 million.
- The company expected oil and gas price weakness and market volatility to persist through 2020, with economic conditions beginning to improve in Q3. It forecast U.S. drilling and completion spending to fall more than 50% versus 2019, international onshore spending to decline over 10%, and fewer offshore and LNG projects to reach final investment decisions.
- A $1.8 billion restructuring and rationalization plan was approved; approximately $1.5 billion was recorded in Q1, with most remaining charges expected in Q2 or Q3. Expected cash expenditures were approximately $500 million, with management estimating a payback period of less than one year. 2020 net capital expenditures were expected to decline more than 20% versus 2019.
- Management prioritized liquidity, cash preservation, its investment-grade rating and maintaining the dividend. It estimated 2020 income tax payments of $350 million to $450 million and said available cash, operating cash flow and credit capacity should fund expected needs.
- Risks include further deterioration in oil and gas markets, pandemic-related disruption to customers, employees and suppliers, lower customer payments, constrained access to foreign cash, and additional restructuring or impairment charges. OFS and OFE goodwill had no remaining valuation headroom after testing.
- Material legal matters include German gas-storage claims, an IEC arbitration with amended alleged damages of $700 million or, alternatively, $244.9 million plus other claimed amounts, and ongoing shareholder and regulatory matters. The company stated outcomes could not be predicted for several proceedings.
Investor verification priorities
- Assess whether the $14.773 billion goodwill impairment and other charges adequately reflect the changed market outlook, and whether further impairment is possible.
- Track execution, cash costs and expected benefits of the restructuring plan, including whether the stated payback and activity assumptions remain achievable.
- Monitor cash conversion, restricted or overseas cash availability, debt covenants, and capacity under the undrawn revolver as market conditions evolve.
- Review subsequent operating trends against management’s 2020 activity, capital spending, tax payment and market-recovery expectations.
- Follow developments in the material litigation and regulatory matters, including potential exposure beyond recorded accruals.