Baker Hughes Company — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Baker Hughes is an energy technology company operating through Oilfield Services (OFS), Oilfield Equipment (OFE), Turbomachinery & Process Solutions (TPS), and Digital Solutions (DS). Results were shaped by COVID-19 disruption, lower oil and gas prices, and reduced customer activity.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $5.049bn | $5.882bn | $15.210bn | $17.490bn |
| Operating income (loss) | $(49)m | $297m | $(16.160)bn | $744m |
| Net income (loss) | $(270)m | $117m | $(16.712)bn | $177m |
| Net income (loss) attributable to Baker Hughes | $(170)m | $57m | $(10.592)bn | $80m |
| Basic and diluted EPS | $(0.25) | $0.11 | $(16.01) | $0.15 |
| Operating cash flow | Not separately presented | Not separately presented | $927m | $769m |
Q3 revenue declined 14% year over year; nine-month revenue declined 13%. Q3 operating margin was approximately (1.0)%, versus 5.0% a year earlier. Nine-month results include a $14.773bn goodwill impairment. Q3 also included $209m of restructuring, impairment and other charges, $42m of inventory impairment, and a $129m write-down of assets held for sale. The nine-month net loss also reflects a $217m loss on sale of the Rod Lift Systems business.
Q3 segment revenue and operating income: OFS $2.308bn and $93m; OFE $726m and $19m; TPS $1.513bn and $191m; DS $503m and $46m. Compared with Q3 2019, OFS revenue fell 31% and DS fell 17%; TPS revenue rose 26%, while OFE was broadly flat.
Cash, debt and liquidity
- Cash and cash equivalents were $4.061bn at September 30, 2020, up from $3.249bn at year-end 2019. The balance includes $85m held on behalf of GE; $803m was held in jurisdictions with restrictions on transfers or currency conversion.
- Total borrowings were $7.689bn: $935m short-term and $6.754bn long-term. Cash less total borrowings was approximately $3.628bn. The company had $772m of commercial paper outstanding and no borrowings under its $3bn revolving credit facility.
- Nine-month investing cash outflow was $551m, including $801m of capital expenditures; financing activities generated $494m. Operating cash flow less capital expenditures was approximately $126m.
- Current assets were $15.208bn and current liabilities $10.639bn. Debt covenants were in compliance; the next stated debt maturity was December 2022.
- The company paid $359m in Class A dividends during the first nine months and maintained a quarterly dividend of $0.18 per share.
Changes, outlook and risks
- The $14.773bn goodwill impairment was recorded in Q1 after the oil-price collapse, pandemic-related uncertainty, and a sharp decline in market capitalization. No further goodwill impairment was recorded in Q2 or Q3.
- Management’s 2020 restructuring plan totals $1.8bn, primarily for workforce reductions, product-line exits, and asset impairments. Approximately $500m of cash expenditures were expected, with a stated cash payback period of less than one year.
- Management expected 2020 U.S. drilling and completion spending to fall more than 50% versus 2019, international onshore spending to decline more than 15%, and fewer offshore and LNG projects to reach positive final investment decisions. It cautioned that demand recovery was leveling off, excess capacity remained, and renewed COVID-19 restrictions could add volatility.
- Management expected 2020 net capital expenditures to decline more than 20% versus 2019 and anticipated 2020 income tax payments of $350m–$450m. It stated that cash, operating and financing cash flows, and available credit were expected to meet liquidity needs while it focused on preserving liquidity and its investment-grade rating.
- Material contingencies include ongoing German gas-storage claims, an IEC arbitration involving substantial alleged damages, shareholder litigation related to prior GE transactions, and DOJ and SEC inquiries concerning operations in Iraq and dealings with Unaoil. The filing says outcomes of several matters cannot be predicted.
- GE held a 33.8% interest in BHH LLC and announced a plan to divest its interest over approximately three years, subject to market conditions and other factors. Baker Hughes also agreed to sell its SPC Flow business; the held-for-sale write-down was $129m.
Investor facts to verify
- Whether oilfield activity, especially North American OFS demand, and revenue trends recover from the steep year-over-year declines.
- Cash costs, timing, and realized savings from the restructuring plan, including whether expected payback is achieved.
- Liquidity and credit-rating resilience if market conditions worsen, including the availability and cost of commercial paper and revolving credit.
- Final sale terms and completion of the SPC Flow divestiture, and the cash and earnings impact of asset dispositions.
- Developments and potential financial exposure from the identified litigation, arbitration, and regulatory inquiries.