Business Context and Reporting Period
This Form 8-K, dated July 28, 2017, presents the unaudited condensed combined financial statements for GE Oil & Gas (GE O&G) for the three and six months ended June 30, 2017 and 2016. The report serves as a carve-out of GE O&G prior to its business combination with Baker Hughes Incorporated, which closed on July 3, 2017, forming Baker Hughes, a GE company (BHGE). GE O&G operates globally with approximately 34,000 employees across three segments: Turbomachinery & Downstream Technology Solutions, Surface, Subsea & Drilling, and Digital Solutions.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended June 30, 2017 | 3 Months Ended June 30, 2016 | 6 Months Ended June 30, 2017 | 6 Months Ended June 30, 2016 |
|---|---|---|---|---|
| Total Revenues | $3,010 | $3,322 | $6,122 | $6,728 |
| Net Earnings (Loss) | $(10) | $18 | $113 | $96 |
| Net Earnings Attributable to Parent | $(16) | $18 | $109 | $159 |
| Operating Cash Flow | N/A | N/A | $(389) | $(236) |
| Cash and Equivalents (Period End) | $2,021 | $1,129 | $2,021 | $1,129 |
| Total Assets | $23,466 | N/A | $23,466 | N/A |
| Total Liabilities | $6,612 | N/A | $6,612 | N/A |
Note: Operating cash flow is reported for the six-month period only in the source text.
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 9.4% ($311 million) for the three months ended June 30, 2017, and 9.0% ($607 million) for the six months ended June 30, 2017, compared to the prior year. This was driven by a decline in customer activity, lower volumes, pricing pressures, and foreign exchange headwinds.
- Profitability: For the three months ended June 30, 2017, the company reported a net loss of $10 million compared to net earnings of $18 million in the prior year. For the six-month period, net earnings were $113 million, an increase from $96 million in the prior year, though earnings attributable to the parent decreased from $159 million to $109 million.
- Restructuring and Transaction Costs: Restructuring charges decreased significantly year-over-year ($44 million in Q2 2017 vs. $237 million in Q2 2016). However, transactional, integration, and deal-related costs increased to $55 million in Q2 2017 and $120 million for the six months ended June 30, 2017, primarily due to the Baker Hughes combination.
- Liquidity: Cash and equivalents increased to $2,021 million at June 30, 2017, from $981 million at December 31, 2016, largely due to the settlement of intercompany financing positions with GE in anticipation of the merger.
Outlook, Risks, and Unusual Items
- Merger Completion: The business combination with Baker Hughes closed on July 3, 2017. Future financial reporting will reflect the combined entity, with GE O&G treated as the accounting acquirer. The transaction was designed to be debt-free, with GE O&G retaining approximately $100 million in net cash.
- Industry Conditions: Management notes continued challenging industry dynamics, including low oil and gas prices, reduced capital spending by customers, and cost pressures. However, contract orders increased in Q2 2017, evidenced by a strong book-to-bill ratio.
- Key Risks: Significant risks include the successful integration of Baker Hughes and GE O&G, dependence on GE for supplies, volatility in oil and gas prices, geopolitical instability, and cybersecurity threats.
- Unusual Items: The financial statements include allocated corporate services from GE (e.g., payroll, IT, executive compensation) which may not reflect actual costs if GE O&G had operated as a standalone entity. Additionally, approximately $1.0 billion of cash is restricted due to capital controls or lack of market liquidity in certain jurisdictions.
Investor Verification Checklist
- Verify the final debt-free status and cash retention levels of the combined BHGE entity post-merger.
- Confirm the extent of cost synergies realized from the integration of GE O&G and Baker Hughes operations.
- Monitor the impact of fluctuating oil and gas prices on future order books and pricing power.
- Review the allocation methodologies for GE corporate services to understand potential future cost structures as a standalone entity.
- Assess the liquidity of the $1.0 billion in restricted cash and the timeline for potential repatriation.