Baker Hughes Company — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are primarily with FY 2018. Baker Hughes is a global energy technology company operating through Oilfield Services (OFS), Oilfield Equipment (OFE), Turbomachinery & Process Solutions (TPS), and Digital Solutions (DS). The company reported business in more than 120 countries and approximately 68,000 employees. FY 2017 results are not directly comparable because they include Baker Hughes Incorporated only from July 3, 2017.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $23.838 billion | $22.877 billion |
| Gross profit | $4.432 billion | $3.986 billion |
| Operating income | $1.074 billion | $701 million |
| Net income | $271 million | $283 million |
| Net income attributable to Baker Hughes Company | $128 million | $195 million |
| Basic/diluted EPS attributable to Class A shares | $0.23 / $0.23 | $0.46 / $0.45 |
| Operating cash flow | $2.126 billion | $1.762 billion |
| Capital expenditures | $1.240 billion | $995 million |
- Gross margin was approximately 18.6% (up from 17.4%); operating margin was approximately 4.5% (up from 3.1%).
- Cash and equivalents were $3.249 billion, including $162 million held on GE’s behalf. Total borrowings were $6.622 billion, including $321 million short-term and $6.301 billion long-term; reported long-term debt alone was $6.301 billion. The company had no commercial-paper borrowings and no drawings under its revolving credit facility.
- Current assets were $15.222 billion and current liabilities $10.014 billion. The company had a committed $3 billion unsecured revolver maturing in December 2024.
- Financing cash outflow was $1.534 billion, including $395 million of dividends, $350 million distributed to GE, and a $250 million repurchase of GE-held units. Cash declined by $474 million during the year.
- Orders increased to $26.973 billion from $23.904 billion; remaining performance obligations (RPO) rose to $22.9 billion from $21.0 billion.
Changes versus FY 2018
- Revenue rose 4%, led by OFS and OFE, partially offset by lower TPS and DS revenue. Segment operating income increased 13% to $2.035 billion.
- OFS revenue increased $1.272 billion, principally from international activity; North American revenue declined. OFE revenue increased $280 million. TPS revenue fell $479 million, while DS revenue fell $112 million.
- Attributable net income declined to $128 million from $195 million, despite higher operating income. Income tax expense increased to $482 million from $258 million, primarily due to foreign taxes and geographic earnings mix. FY 2019 also included a $138 million loss on the sale of the high-speed reciprocating compression business; FY 2018 included a $171 million gain on the sale of the Natural Gas Solutions business.
- Operating cash flow improved by $364 million, supported in part by $553 million of working-capital generation, including progress collections. Investing outflow increased to $1.045 billion, with higher capital spending.
- GE’s ownership fell to 36.7% by year-end; Baker Hughes changed its name in October 2019 and began trading as BKR. GE’s secondary share sales generated no proceeds for Baker Hughes.
Outlook, risks and unusual items
- Management expected North American onshore activity to decline in 2020; international onshore activity to grow more slowly; offshore orders to remain solid; and LNG, refinery, petrochemical and industrial markets to offer opportunities. The outlook was expressly subject to volatile market conditions.
- Management expected 2020 capital expenditures, net of asset-disposal proceeds, of up to 5% of annual revenue and income-tax payments of $500–$600 million. It stated that cash, operating cash flow and available credit were expected to fund needs, obligations, capital spending and dividends.
- Management estimated the GE separation agreements would reduce operating margin rates by approximately 20–40 basis points and expected $0.2–$0.3 billion of one-time separation charges over three years.
- Key risks include oil and gas price and activity volatility, customer credit and cancellations, fixed-price project overruns, geopolitical and currency exposure, cybersecurity, environmental and climate regulation, and reliance on GE agreements. Approximately 88% of cash was held outside the U.S.; some foreign cash is subject to restrictions or may not be quickly transferable.
- OFS and OFE goodwill valuations had limited headroom at the July 2019 impairment test: fair value exceeded carrying value by 8% and 10%, respectively. The filing says both units could be impaired under specified sensitivity scenarios and remain at risk of future impairment.
- Contingencies include a $591 million lost-profit claim in IEC arbitration concerning Nigerian LNG/power projects; a separate German gas-storage dispute with a further €142 million claim; shareholder litigation related to GE transactions; DOJ and SEC document requests concerning Iraq operations and Unaoil; and criminal proceedings concerning alleged hazardous air emissions in Alaska. Management said outcomes could not be predicted for several matters. Environmental remediation accruals were $82 million.
- Other notable commitments include $12.610 billion of contractual obligations, including $6.410 billion of debt and finance-lease principal and $3.609 billion of estimated interest payments. Off-balance-sheet guarantees, letters of credit and surety bonds totaled approximately $3.9 billion; management did not expect them to materially affect the financial statements.
Most important facts for investors to verify
- Whether revenue growth and improved segment operating income translate into sustained attributable earnings and cash generation, given higher taxes and restructuring/separation costs.
- How North American weakness, international growth, LNG/offshore project timing, and customer order cancellations affect 2020 performance and conversion of the $22.9 billion RPO.
- Goodwill sensitivity in OFS and OFE, including changes in forecasts, commodity assumptions, discount rates, and market capitalization.
- Cash availability and location, debt maturities and refinancing costs, and the company’s ability to fund capital spending, dividends and obligations.
- Developments in the GE separation and commercial arrangements, including the expected margin impact, remaining transition costs, GE’s continuing ownership and potential share sales.
- Updates on material litigation, government inquiries and contingencies, especially the IEC arbitration, German claims, Iraq-related requests and Alaska proceedings.