Baker Hughes, a GE Company — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 23, 2018. Although the request refers to 2017 Q4, this is an annual report, with selected fourth-quarter figures included. BHGE combined GE Oil & Gas and Baker Hughes on July 3, 2017. The 2017 results include Baker Hughes only from that date, so comparisons with 2016 are not like-for-like. GE held approximately 62.5% of BHGE LLC’s economic interest and controlled the company.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $17.259 billion | $13.269 billion |
| Gross profit | $3.213 billion | $3.146 billion |
| Gross margin | 18.6% | 23.7% |
| Operating income (loss) | $(107) million | $659 million |
| Net income (loss) | $(242) million | $334 million |
| Net loss attributable to BHGE | $(73) million | Not applicable |
| Loss per Class A share | $(0.17) | Not applicable |
| Cash from operating activities | $(799) million | $262 million |
| Cash and equivalents | $7.023 billion | $981 million |
| Total borrowings | $8.349 billion | $277 million |
| Total equity | $39.173 billion | $14.855 billion |
Calculated operating margin was approximately (0.6)% and net margin approximately (1.4)%. Current assets were $18.499 billion and current liabilities $8.897 billion at year-end, implying a current ratio of about 2.1. Cash includes $997 million held on behalf of GE; $1.190 billion of cash and equivalents was restricted. FY2017 revenue growth of 30% primarily reflects the acquisition, while operating loss included $412 million in restructuring, impairment and other charges, $373 million in merger-related costs, and $244 million in inventory impairment and related charges.
Revenue mix was 42% equipment and 58% services. Orders rose 54% to $17.376 billion, while year-end backlog declined 3% to $21.022 billion. Segment revenue and operating income were: Oilfield Services (OFS) $5.851 billion and $71 million; Oilfield Equipment (OFE) $2.637 billion and $38 million; Turbomachinery & Process Solutions (TPS) $6.463 billion and $853 million; Digital Solutions (DS) $2.309 billion and $333 million.
Fourth-quarter revenue was $5.763 billion and gross profit $875 million. Net income attributable to BHGE was $30 million, or $0.07 per Class A share. The 10-K disclosed a $59 million correction to the NCI calculation in the company’s earlier earnings release: full-year attributable loss changed from $132 million to $73 million, and Q4 changed from a $29 million loss to $30 million income.
Material changes versus prior period
- Revenue rose by $3.990 billion, principally because Baker Hughes results were included for the second half of 2017. The filing cautions that annual comparisons are not directly comparable.
- Total segment operating income fell 25% to $1.295 billion. The acquired Baker Hughes business contributed segment income, but lower productivity, pricing pressure and weaker performance in OFE and TPS offset that contribution.
- OFE revenue fell 26%, and segment operating income declined to $38 million, amid lower volumes and negative pricing. TPS revenue fell 5% and operating income declined to $853 million, reflecting pricing, lower-margin backlog and unfavorable productivity. DS revenue increased 11%, partly due to the acquisition, while operating income declined slightly.
- Operating cash flow swung to a $799 million use of cash, including a $1.201 billion negative impact from ending the receivables monetization program and restructuring payments. Cash and debt increased substantially following the combination and related financing.
Outlook, risks and unusual items
- Management outlook: BHGE expected North American onshore activity to continue growing in 2018, but more slowly than in 2017, and moderate international onshore growth. Offshore customer spending and project decisions remained cautious; subsea tree awards were expected to rise but remain below 2012–2013 peaks. Management saw near-term LNG oversupply but positive long-term economics, and expected continued demand in petrochemical and industrial markets. The outlook was expressly subject to market volatility.
- 2018 cash requirements: Capital expenditures were expected to be up to 5% of annual revenue, with 2018 income tax payments estimated at $325–$375 million. Management believed cash, operating cash flow and available credit would provide sufficient liquidity.
- Liquidity and debt: BHGE issued $3.950 billion of senior notes in December 2017 and reported $6.312 billion of long-term debt and $2.037 billion of short-term debt/current maturities. It had a $3 billion revolving facility and a $3 billion commercial paper program, with no year-end borrowings under either; their combined borrowing cap was $3 billion. Contractual obligations totaled $13.908 billion, including estimated interest.
- Customer exposure: For its Venezuelan customer, BHGE recorded a $55 million allowance against receivables and other assets and a $32 million inventory write-down for non-redeployable contract inventory. Management said collection could take an extended period.
- Integration, restructuring and tax: Management warned that integration costs and synergies remained uncertain; approximately $150 million of restructuring charges were estimated to remain. The effects of U.S. tax reform were provisional, including a $132 million net tax benefit, and could change with additional guidance and final purchase accounting.
- Contingencies: A German gas-storage customer claimed approximately $224 million plus interest in arbitration; related U.S. litigation sought unspecified damages. BHGE said it could not predict the outcomes. GE was responding to an SEC staff investigation of revenue recognition and internal controls for long-term service agreements that could include some BHGE TPS contracts. Environmental remediation accruals were $82 million, versus $28 million in 2016. A January 2018 Kern County order proposed a $130,000 penalty for alleged process-safety violations.
- Other risks: The filing highlights commodity-price and customer-spending volatility, fixed-price project exposure, competition, geopolitical and currency risks, cyber threats, regulation and climate-related changes, and dependence on GE for services, technology and brand licenses. GE’s majority voting control also makes BHGE a controlled company.
Important facts for investors to verify
- Separate acquisition-driven growth from underlying performance; the reported 2017 period includes Baker Hughes only from July 3. Review the unaudited pro forma results as context, noting they are not forecasts and exclude incremental integration savings.
- Track cash conversion after the receivables monetization program ended, including customer collections, restructuring payments and the extent to which reported cash is restricted or held for GE.
- Assess debt service and refinancing needs alongside the $3 billion combined revolving-credit/commercial-paper limit, scheduled debt maturities and contractual obligations.
- Monitor integration expenses, remaining restructuring costs, segment productivity and pricing, and whether management’s 2018 activity outlook is realized.
- Follow the Venezuelan exposure, German gas-storage claims, SEC investigation and environmental matters for changes in reserves, cash collection or potential liabilities.
- Check final U.S. tax-reform and acquisition accounting adjustments, and the effect of the revenue-recognition standard adopted January 1, 2018. BHGE estimated an approximately $0.4 billion after-tax reduction to opening 2016 retained earnings and $0.1 billion reductions to each of 2016 and 2017 earnings; it expected no cash or contract-economics impact.