Baker Hughes Company — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Baker Hughes is an energy technology company operating through four segments during the quarter: Oilfield Services (OFS), Oilfield Equipment (OFE), Turbomachinery & Process Solutions (TPS), and Digital Solutions (DS). Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $5,369 | $5,093 | $15,251 | $15,017 |
| Operating income | $269 | $378 | $522 | $736 |
| Operating margin | 5.0% | 7.4% | 3.4% | 4.9% |
| Income (loss) before tax | $144 | $209 | $(323) | $(260) |
| Net income (loss) attributable to Baker Hughes | $(17) | $8 | $(783) | $(512) |
| Basic and diluted EPS | $(0.02) | $0.01 | $(0.80) | $(0.64) |
Quarterly revenue increased 5% year over year, while operating income declined 29%. Nine-month revenue rose 2%, but operating income fell 29%. The Q3 operating margin figures are calculated as operating income divided by revenue.
Q3 segment revenue and operating income were: OFS $2,842 and $330; OFE $561 and $(6); TPS $1,438 and $262; and DS $528 and $20. OFS was the principal source of year-over-year segment growth and profit improvement. Consolidated results also reflect corporate expenses and costs not allocated to segments.
Cash flow, balance sheet and liquidity
- Cash from operations: $990 for the first nine months, down from $1,600 in 2021. Management cited $224 of working-capital cash usage, mainly from receivables and inventory, partly offset by progress collections.
- Investing and financing: Investing cash outflow was $580, including $720 of capital expenditures. Financing cash outflow was $1,297, including $536 of dividends and $727 of share repurchases.
- Cash: $2,851 at September 30, versus $3,853 at December 31, 2021. The filing reports $611 of cash in jurisdictions where it cannot readily be transferred or converted; management says it is available for local operations.
- Debt: Total borrowings were $6,655, compared with $6,727 at year-end 2021. Net debt, calculated as borrowings less reported cash, was approximately $3,804. The $3 billion revolving credit facility and $3 billion commercial paper program were undrawn; the company was in compliance with debt covenants. Its next debt maturity was December 2023.
- Current assets and liabilities: $14,335 and $9,465, respectively, at quarter-end. The filing states that $4.3 billion of off-balance-sheet arrangements were not expected to have a material effect on financial position, results or cash flows.
- Dividend: $0.18 per Class A share for Q3; $0.54 per share for the first nine months, unchanged from 2021.
Material changes and unusual items
- Q3 restructuring, impairment and other charges were $230, versus $14 in Q3 2021. The nine-month total was $653, versus $219. Q3 charges primarily reflected restructuring for the new organization, footprint actions, and impairment of OFE subsea production systems assets.
- Nine-month other non-operating loss was $657 and included a $426 loss on the planned sale of OFS Russia and $164 of losses from fair-value changes in equity investments. Q3 other non-operating loss was $60, including $52 of investment fair-value losses.
- Russia-related sanctions and the suspension of substantially all Russian operational activity led to contract suspensions and asset impairments. Russia accounted for approximately 1% of Q3 revenue and 2% of nine-month revenue. The OFS Russia sale to local management remained subject to regulatory approval, with completion expected by year-end 2022.
- In July, Baker Hughes agreed to sell its Nexus Controls business to GE, with completion expected in mid-2023, subject to conditions including regulatory approvals. Management said the carrying value was expected to approximate fair value less costs to sell.
- Effective October 1, 2022, the company reorganized into two reporting segments: Oilfield Services & Equipment (OFSE) and Industrial & Energy Technology (IET). Management said the change is intended to simplify operations and improve flexibility, scale and profitability.
Outlook, management commentary and risks
Management described the outlook as increasingly uncertain because of inflation, rising interest rates, currency fluctuations and geopolitical developments, while remaining constructive on a multi-year recovery in global upstream spending. It expected North American onshore activity to level off in Q4 2022 and projected growth in 2023 if commodity prices remained at then-current levels. International activity was expected to improve in Q4 and continue growing in 2023 under the same price assumption. Offshore activity and subsea awards were expected to recover; management remained positive on long-term LNG economics but noted inflation and higher capital costs facing developers. These are market-based expectations, not numerical company earnings guidance.
Management expected 2022 capital expenditures to be up to 5% of annual revenue and income tax payments of $550–$650. It said existing cash, operating cash flows and available credit supported expected liquidity needs. Principal risks discussed include weaker energy prices or customer spending, inflation and supply constraints, sanctions and geopolitical uncertainty, currency and interest-rate movements, collection delays, and the possibility of lower credit ratings or reduced access to commercial paper.
Legal matters include an ongoing SEC investigation understood by the company to concern books and records and internal controls for sales in projects affected by U.S. sanctions; the company said it could not predict the timing, outcome or impact. OFAC issued a cautionary letter and said it would not pursue a civil monetary penalty or further enforcement action following the company’s voluntary disclosure. The filing also describes other pending litigation, including an additional arbitration related to a Nigeria project; management said it could not predict that proceeding’s outcome. Management did not expect currently pending legal proceedings to have a material adverse effect, while cautioning that outcomes are uncertain.
Most important facts for investors to verify
- Whether segment growth and margins—particularly OFS improvement and continued weakness in OFE, TPS and DS—are sustained after the reporting reorganization.
- How much of the $653 in nine-month restructuring, impairment and other charges is nonrecurring, and whether further charges or impairments occur.
- Completion, proceeds and any remaining obligations associated with the OFS Russia and Nexus Controls disposals.
- Whether operating cash generation improves as receivables and inventory build, and how cash levels change after dividends, buybacks and capital spending.
- Developments in the SEC investigation, the additional arbitration and other disclosed legal matters, including any material financial or operational consequences.