Baker Hughes Company — Q2 2020 Form 10-Q
Business context and reporting period. Baker Hughes is an energy technology company operating through Oilfield Services (OFS), Oilfield Equipment (OFE), Turbomachinery & Process Solutions (TPS), and Digital Solutions (DS). This unaudited report covers the quarter and six months ended June 30, 2020. Management cited COVID-19, lower hydrocarbon demand, oil-price volatility, and reduced customer spending as major pressures.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $4.736bn | $5.994bn | $10.160bn | $11.608bn |
| Operating income (loss) | $(52)m | $271m | $(16.111)bn | $447m |
| Net income (loss), consolidated | $(355)m | $(11)m | $(16.453)bn | $60m |
| Net income (loss) attributable to Baker Hughes | $(201)m | $(9)m | $(10.411)bn | $23m |
| Basic and diluted EPS | $(0.31) | $(0.02) | $(15.92) | $0.04 |
Q2 revenue fell 21% year over year. On a calculated basis, gross profit (revenue less cost of goods and services) was $678m, or 14.3% of revenue, versus $1.062bn, or 17.7%, a year earlier. Operating margin was approximately (1.1)% versus 4.5%.
Segment performance in Q2: OFS revenue fell 26% to $2.411bn and segment operating income declined to $46m from $233m. OFE revenue was approximately flat at $696m, but it recorded a $14m segment operating loss versus $14m income. TPS revenue fell 17% to $1.161bn, while segment income rose to $149m from $135m. DS revenue fell 26% to $468m and segment income declined to $41m from $84m.
Cash flow, financial position, and liquidity
- For the six months, operating cash flow was $708m versus $409m; investing cash outflow was $437m versus $563m; financing cash flow was $695m versus an outflow of $427m. Capital expenditures were $602m.
- Cash and cash equivalents were $4.132bn at June 30, 2020, up from $3.249bn at year-end 2019. Cash includes $100m held on GE’s behalf. The company said 76% of cash was held outside the U.S.; some funds are subject to local transfer restrictions.
- Total borrowings were $7.700bn, compared with $6.622bn at year-end. This included $750m of commercial paper and $6.766bn of long-term debt. The company issued $500m of 4.486% notes due 2030 and reported no borrowings under its $3bn revolving credit facility. It was in compliance with debt covenants.
- Current assets were $15.502bn and current liabilities were $10.567bn. The quarterly Class A dividend remained $0.18 per share.
- Remaining performance obligations were $22.9bn, up from $20.6bn a year earlier; management estimated 52% would be recognized within two years and 91% within 15 years.
Material changes and unusual items
- The six-month results include a $14.773bn goodwill impairment, recorded in Q1 after a sharp market-capitalization decline and deteriorating oilfield outlook. The charge primarily affected OFS ($11.484bn) and OFE ($3.289bn); no Q2 goodwill impairment was recorded.
- Six-month restructuring, impairment and other charges were $1.429bn, including substantial asset impairments and restructuring costs. The company’s 2020 plan was sized at $1.8bn; management expected almost all remaining charges by year-end, approximately $500m of cash expenditures, and a cash payback period of less than one year.
- Q2 included a $228m loss on the sale of the Rod Lift Systems business, completed June 30, and $103m of restructuring, impairment and other charges. The six-month period also included $176m of inventory impairments.
- Six-month revenue declined 12%. The worldwide average rig count fell 43% in Q2 year over year, including a 61% decline in North America. Management attributed lower revenue and activity to the pandemic, reduced oil prices and spending, mobility restrictions, and supply-chain delays.
Outlook, risks, and contingencies
Management expected oil and gas market volatility to persist through 2020, with economic conditions potentially improving in the second half; it also warned that renewed COVID-19 restrictions remained a significant risk. It forecast U.S. drilling and completion spending down more than 50% versus 2019, international onshore spending down over 15%, and fewer offshore and LNG project final investment decisions than in 2019. 2020 net capital expenditures were expected to decline by more than 20% versus 2019. Management emphasized liquidity and cash preservation, investment-grade credit ratings, and maintaining the dividend.
Risks include weaker-than-expected demand or oil prices, further operational disruption, customer payment delays, restricted access to foreign-held cash, and potential credit-rating pressure. The filing describes material, unresolved litigation, including an IEC arbitration with claims revised to approximately $235m under an alternative damages theory plus other amounts, and German gas-storage-related claims whose outcomes could not be predicted. The company also disclosed DOJ and SEC inquiries concerning Iraq operations and dealings with Unaoil, and a proposed $0.7m Kern County environmental penalty. Management stated that a range of possible losses for all litigation matters could not be reasonably estimated.
Important facts for investors to verify
- Whether demand, rig counts, segment revenue, and margins stabilize as pandemic restrictions and oil-market conditions evolve.
- Cash costs and timing of the $1.8bn restructuring plan, including the projected $500m cash outlay and expected payback.
- Liquidity availability and debt maturities, including commercial-paper refinancing and the December 2022 next debt maturity.
- Whether the $14.773bn goodwill impairment fully reflects the revised outlook, and whether further impairment indicators arise.
- Developments in the IEC arbitration, German claims, government inquiries, and other contingencies.