Baker Hughes, a GE Company — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; this is an annual report, not a standalone fourth-quarter filing. BHGE provides oilfield equipment, services and digital solutions through four segments and operated in more than 120 countries. Comparisons with 2017 are affected by the July 2017 combination with Baker Hughes: 2018 includes a full year of its results, while 2017 includes them only from July 3 onward.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $22.877 billion | $17.179 billion |
| Operating income (loss) | $701 million | $(284) million |
| Net income (loss) | $283 million | $(391) million |
| Net income (loss) attributable to BHGE | $195 million | $(103) million |
| Diluted Class A EPS | $0.45 | $(0.24) |
| Operating cash flow | $1.762 billion | $(799) million |
| Capital expenditures | $995 million | $665 million |
| Cash, cash equivalents and restricted cash | $3.723 billion | $7.030 billion |
| Total borrowings | $7.227 billion | $8.349 billion |
- Revenue increased 33%, largely reflecting a full year of acquired Baker Hughes results. Gross profit was $3.986 billion, or approximately 17.4% of revenue; operating margin was approximately 3.1%.
- Operating cash flow improved by $2.561 billion, supported by better operating performance and working capital, including a roughly $300 million customer progress payment in Q4. The company also paid $473 million, primarily for severance and merger-related costs.
- Cash declined by $3.307 billion during the year. Financing cash outflow was $4.363 billion, including share and LLC-unit repurchases, dividends, distributions to GE and debt repayments. Reported cash includes $747 million held on GE’s behalf; cash also includes restricted balances.
- At year-end, current assets were $14.971 billion and current liabilities $9.020 billion. The company reported a $3 billion revolving credit facility, with no 2018 borrowings, and no commercial paper outstanding. It was in compliance with credit-facility covenants.
- Approximate segment revenue and operating income: Oilfield Services (OFS) $11.617 billion and $785 million; Oilfield Equipment (OFE) $2.641 billion and breakeven; Turbomachinery & Process Solutions (TPS) $6.015 billion and $621 million; Digital Solutions (DS) $2.604 billion and $390 million.
Material changes and unusual items
- OFS operating income rose to $785 million from $67 million, chiefly due to the acquired business being included for a full year, with additional contribution from activity and synergies. DS revenue rose 11% and operating income increased to $390 million.
- OFE revenue was nearly flat, but operating income fell to breakeven, reflecting unfavorable long-term project mix and foreign-exchange headwinds. TPS revenue fell 4% and operating income declined to $621 million on lower volume and weaker cost productivity.
- Reported results included $433 million of restructuring, impairment and other charges; $153 million of merger and related costs; $105 million of inventory impairment and related charges; $223 million of net interest expense; and a $139 million equity-method loss related to BJ Services, with no cash impact stated for that loss.
- A $171 million pretax gain from the sale of the Natural Gas Solutions business contributed to other non-operating income. BHGE also paid $500 million for a 5% stake in ADNOC Drilling.
- Fourth-quarter 2018 revenue was $6.264 billion and net income attributable to BHGE was $131 million, or $0.28 diluted EPS. Fourth-quarter 2017 revenue was $5.799 billion and attributable net income was $31 million; acquisition timing affects the comparison.
Outlook, commentary and risks
- Management expected North American activity to face pressure in 2019 following the sharp Q4 2018 decline in WTI prices; it anticipated moderate international onshore growth, roughly flat subsea tree awards, and continued customer caution on offshore project timing. Management remained positive on longer-term LNG, petrochemical and industrial prospects while emphasizing near-term volatility.
- For 2019, capital expenditures were expected to be up to 5% of annual revenue, and income-tax payments were forecast at $425 million to $475 million. These are company expectations, not earnings guidance.
- The GE separation framework was expected to reduce operating margin rates by approximately 20–40 basis points and involve $0.2–$0.3 billion in one-time separation charges over three years. GE held approximately 50.4% of BHGE LLC’s economic interest at year-end; the framework includes continuing commercial, technology and digital relationships.
- Key exposures include oil and gas price and customer-spending volatility; integration and separation execution; reliance on GE-related agreements and intellectual property; customer credit and order cancellation; foreign exchange, geopolitical, regulatory, environmental and cybersecurity risks; and potential goodwill impairment. RPO was $21.0 billion at year-end, but orders may be modified or terminated.
- Contingencies include IEC arbitration and related litigation alleging damages that may exceed $500 million; the company said it could not predict the outcome. Other disclosed matters include a gas-storage equipment dispute, an SEC review of GE long-term-service revenue recognition that may include BHGE contracts, and environmental remediation accruals of $84 million. BHGE stated the arbitration ruling in the German gas-storage matter did not materially affect its financial statements.
- In 2018, certain non-U.S. affiliates reported Iran-related activity under then-applicable authorization; the company said all such activity ended by November 5, 2018 and it did not intend to seek authorization to collect related revenues.
Important facts for investors to verify
- Assess underlying growth and margins separately from the acquisition-related comparison effect, including organic segment trends and realized synergies.
- Review the composition and accessibility of reported cash, including cash held for GE, restricted or locally trapped funds, and the cash demands of debt, repurchases and distributions.
- Monitor 2019 activity and commodity-price assumptions against management’s outlook, along with actual capital spending and tax payments.
- Track GE separation milestones, definitive agreements, expected margin impact and separation costs, as well as GE’s ownership and future share sales.
- Review developments in the IEC claims, SEC review, environmental obligations and other contingencies; confirm how reported RPO converts into revenue and cash.
- Note that the filing reports an unqualified audit opinion and effective internal control over financial reporting; the filing also adopted ASC 606 retrospectively, which changed historical revenue and earnings presentation.