Baker Hughes Company — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report. Baker Hughes is a global energy technology company with four operating segments: Oilfield Services (OFS), Oilfield Equipment (OFE), Turbomachinery & Process Solutions (TPS), and Digital Solutions (DS).
Financial performance
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $20.705 billion | $23.838 billion |
| Operating income (loss) | $(15.978) billion | $1.074 billion |
| Net income (loss), consolidated | $(15.761) billion | $271 million |
| Net income (loss) attributable to Baker Hughes Company | $(9.940) billion | $128 million |
| Operating cash flow | $1.304 billion | $2.126 billion |
| Capital expenditures | $974 million | $1.240 billion |
| Cash and cash equivalents at year-end | $4.132 billion | $3.249 billion |
| Total borrowings at year-end | $7.633 billion | $6.622 billion |
| Class A dividend per share | $0.72 | $0.72 |
2020 operating results included a $14.773 billion goodwill impairment, $1.866 billion of restructuring, impairment and other charges, and $246 million of inventory impairments. Other non-operating income included a $1.417 billion unrealized gain on the C3.ai investment, partly offset by losses on business sales. The consolidated net loss therefore includes substantial unusual, largely non-cash items; the company-attributable loss was $9.940 billion.
Segment results
| Segment | Revenue, 2020 | Revenue, 2019 | Segment operating income, 2020 | Segment operating income, 2019 |
|---|---|---|---|---|
| Oilfield Services | $10.140 billion | $12.889 billion | $487 million | $917 million |
| Oilfield Equipment | $2.844 billion | $2.921 billion | $19 million | $55 million |
| Turbomachinery & Process Solutions | $5.705 billion | $5.536 billion | $805 million | $719 million |
| Digital Solutions | $2.015 billion | $2.492 billion | $193 million | $343 million |
Material changes and liquidity
- Revenue fell 13% year over year, primarily from lower activity in OFS and DS. Total segment operating income declined 26% to $1.504 billion. TPS revenue and segment operating income increased; the other three segments reported lower revenue and income.
- Industry conditions deteriorated sharply amid COVID-19, reduced hydrocarbon demand, oil-price volatility and lower customer spending. Average worldwide rig count fell 38% to 1,349; North American rig count fell 52%.
- Operating cash flow declined to $1.304 billion. Cash generation included working-capital benefits, while cash payments primarily for restructuring severance and separation costs were $670 million, versus $307 million in 2019.
- Year-end cash was $4.132 billion, with $3 billion available under an undrawn revolving credit facility maturing in December 2024. The company also had $801 million of commercial paper outstanding, due April 2021; it reported compliance with debt covenants. The next stated debt maturity was December 2022.
- Debt and finance lease obligations in the contractual-obligations table totaled $7.446 billion, distinct from reported borrowings. Approximately 76% of cash was held outside the U.S.; some cash is subject to local transfer or currency restrictions.
- The company paid $488 million in Class A dividends and distributed $256 million to GE through BHH LLC. Management said liquidity was adequate for expected needs and that the dividend would be maintained.
Outlook, risks and unusual items
- Management expected North American onshore activity to improve in 2021 versus the second half of 2020; international onshore spending to stabilize early in 2021 with a modest recovery later; and offshore markets to stabilize, with subsea tree awards stable or modestly higher. These were expectations amid substantial uncertainty, not firm guidance.
- 2021 capital expenditures, net of asset-disposal proceeds, were expected to be below 2020 levels. The company anticipated 2021 income tax payments of $350 million to $450 million.
- Management described long-term LNG prospects as positive and expected growth over time in new-energy areas such as hydrogen, geothermal, carbon capture, utilization and storage, and energy storage. It also emphasized near-term flexibility, cost improvement and cash preservation.
- The $14.773 billion goodwill impairment followed the market and oil-price downturn; $11.484 billion related to OFS and $3.289 billion to OFE. Management cautioned that further sustained deterioration could trigger future impairments. The original $1.8 billion restructuring plan was increased by $0.3 billion; management estimated cash payback of less than one year.
- Material exposures include continued pandemic and commodity-market uncertainty; customer spending and credit risk; execution of restructuring and energy-transition plans; fixed-price project, contract termination and indemnity risks; foreign-exchange, geopolitical, regulatory, cybersecurity and climate-related risks; and reliance on GE-related agreements and services. GE held a 30.1% economic interest in BHH LLC at year-end and had announced a multi-year divestiture program.
- Contingencies include ongoing litigation and investigations. The company disclosed a continuing SEC investigation concerning books, records and internal controls for sales in projects affected by U.S. sanctions, and an internal review; timing, outcome and financial impact were not predictable. Other notable matters include German gas-storage claims, a French plant incident proceeding, shareholder litigation, and an IEC arbitration award challenged by IEC. Management did not expect currently pending legal proceedings, in aggregate, to materially adversely affect results, financial position or cash flows, but outcomes remain uncertain.
- Environmental remediation accruals were $78 million at year-end 2020. Off-balance-sheet performance bonds, letters of credit and guarantees totaled approximately $4.1 billion. The company reported no environmental proceedings meeting its stated disclosure threshold.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor reported effective controls as of year-end.
Important facts for investors to verify
- How much of the reported loss and asset reduction reflects non-cash impairments and restructuring, and whether further impairments or restructuring costs arise.
- Whether cash flow, segment profitability and activity recover as management expected, particularly in OFS and DS, and whether TPS performance is sustainable.
- Commercial-paper repayment, debt maturities, restricted or offshore cash availability, and the company’s ability to maintain the dividend while funding operations.
- Final outcomes and potential exposure from the SEC sanctions-related investigation, other legal proceedings, and customer receivables or contract disputes.
- The assumptions underlying the $1.417 billion C3.ai valuation gain, the investment’s subsequent value, and the economics of the related commercial commitments.
- Progress on GE’s divestiture and the remaining financial, operational and governance ties between Baker Hughes and GE.