Baker Hughes, a GE company — Q3 2017 Form 10-Q
Business context and reporting period. The quarter ended September 30, 2017. On July 3, BHGE combined GE Oil & Gas and Baker Hughes in a partnership structure. GE holds approximately 62.5% of BHGE LLC; former Baker Hughes shareholders hold approximately 37.5%. Results include Baker Hughes only from the acquisition date. Accordingly, comparisons with 2016—and particularly the nine-month comparison—are not fully comparable because prior periods reflect GE Oil & Gas on a combined basis, not the combined business.
Financial performance and liquidity
- Revenue: Q3 revenue was $5.375 billion, up 78% from $3.024 billion, primarily reflecting the acquisition. Goods sales were $3.097 billion and services sales $2.278 billion. Nine-month revenue was $11.496 billion, up 18% from $9.753 billion.
- Profitability: Q3 operating loss was $122 million, versus operating income of $176 million a year earlier; net loss was $273 million, including $169 million of net loss attributable to noncontrolling interests. Net loss attributable to BHGE was $104 million, or $0.24 per Class A share. Nine-month operating loss was $15 million and net loss was $160 million. Q3 included $191 million of restructuring, impairment and other charges and $159 million of merger-related costs. Segment operating income was $329 million, about 6.1% of revenue; consolidated operating margin was approximately negative 2.3%.
- Segments: Q3 Oilfield Services revenue was $2.635 billion and segment operating income $75 million; Oilfield Equipment revenue was $600 million and segment operating loss $43 million; Turbomachinery & Process Solutions revenue was $1.511 billion and income $210 million; Digital Solutions revenue was $629 million and income $87 million. Oilfield Equipment and Turbomachinery profitability weakened year over year, while Oilfield Services benefited substantially from the acquisition.
- Cash flow: Nine-month operating cash flow was negative $585 million, versus negative $195 million in 2016; investing cash flow was negative $3.879 billion, including acquisition-related spending; financing cash flow was positive $8.212 billion, primarily reflecting GE’s $7.4 billion contribution and other financing flows. Capital expenditures were $417 million.
- Balance sheet and liquidity: Cash and equivalents were $4.777 billion at September 30, compared with $981 million at year-end 2016. Total debt was $4.905 billion, versus $277 million; debt-to-capital was 10.89%, versus 1.83%. The company had a $3 billion revolving credit facility, with no direct borrowings and compliance with covenants reported at quarter-end. Cash availability is qualified: $1.267 billion was held on behalf of GE, and 87% of cash was held outside the U.S.; some overseas cash was subject to transfer or currency restrictions.
Material changes and management outlook
- Q3 revenue growth primarily reflected the acquired Baker Hughes business. Excluding the acquisition, management cited negative price and mix in Oilfield Services, weaker activity and pricing in Oilfield Equipment, and lower productivity and unfavorable mix in Turbomachinery & Process Solutions.
- Management expected North American onshore activity to keep growing, but at a slower pace; international onshore activity to improve moderately, with uncertainty; near-term offshore investment decisions to remain delayed and fluid; and LNG markets to remain oversupplied for several years. Management expressed long-term optimism but emphasized near-term volatility and operating flexibility. No specific earnings or revenue guidance was provided.
- Management expected approximately $80 million of additional restructuring charges after September 30. Merger and related costs included executive separation payments, advisory fees, and integration and synergy costs.
- BHGE planned to adopt the new revenue-recognition standard on January 1, 2018 using retrospective application. It expected a noncash charge of approximately $500 million to the January 1, 2016 retained-earnings balance and lower reported earnings on the existing contract book in 2018 and early years after adoption, with no cash impact.
Risks, contingencies, and other notable items
- Results remain sensitive to oil and gas prices, customer spending, pricing pressure, operating productivity, and integration execution. The filing also notes potential liquidity effects from delayed customer collections, cash restrictions, and possible credit-rating pressure if market conditions deteriorate.
- Venezuela exposure included approximately $266 million gross and $40 million net trade receivables, plus about $60 million of inventory that might not be redeployable if contracts ended. Management considered the receivables recoverable but warned that worsening conditions could require adjustments.
- Significant litigation includes a German gas-storage arbitration claiming approximately $224 million plus interest, a related U.S. lawsuit seeking unspecified damages, and a separate lawsuit claiming $500 million plus unspecified punitive damages. Management said outcomes were not predictable. The company also reported approximately $3.6 billion of off-balance-sheet guarantees, letters of credit, and similar arrangements, which it did not expect to materially affect results or liquidity.
- The annual goodwill impairment test found reporting-unit fair values above carrying values; no goodwill impairment was recorded. Acquisition purchase accounting, including certain asset and liability valuations, remained preliminary.
Important facts for investors to verify
- How much of reported revenue and segment performance reflects acquired Baker Hughes versus the legacy GE Oil & Gas business, given the July 3 closing and limited comparability.
- Cash conversion, working-capital trends, and the actual availability of cash held overseas or on behalf of GE; also monitor Venezuela collections and exposure.
- Whether integration synergies and restructuring costs improve underlying segment margins, particularly in Oilfield Equipment and Turbomachinery & Process Solutions.
- Final purchase-accounting valuations, the adoption impact of the revenue-recognition standard, and outcomes or accrual changes in significant litigation.