Baker Hughes, a GE company — Q2 2019 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. Baker Hughes provides oilfield products, services and digital solutions through Oilfield Services (OFS), Oilfield Equipment (OFE), Turbomachinery & Process Solutions (TPS) and Digital Solutions (DS). GE held approximately 50.3% of BHGE LLC’s economic interest and retained control; BHGE consolidated its results.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $5.994bn | $5.548bn | $11.608bn | $10.947bn |
| Operating income | $271m | $78m | $447m | $37m |
| Operating margin | 4.5% | 1.4% | 3.9% | 0.3% |
| Net income (loss) attributable to BHGE | $(9)m | $(19)m | $23m | $51m |
| Basic and diluted EPS | $(0.02) | $(0.05) | $0.04 | $0.12 |
| Cash from operating activities | — | $409m | $433m |
Q2 revenue increased 8%; first-half revenue grew 6%. Q2 segment operating income was $466m, up from $387m. Higher activity and profitability in OFS, OFE and TPS more than offset DS declines. First-half operating income improved substantially, but attributable net income fell year over year, reflecting non-operating items and higher tax expense.
Six-month capital expenditures were $594m, versus $411m a year earlier. Operating cash less capital expenditures was negative $185m, compared with positive $22m in first-half 2018. Cash and cash equivalents were $3.138bn at June 30, down from $3.723bn at year-end; $739m was held on GE’s behalf. Total borrowings were $7.148bn, including $856m short-term borrowings due to GE and $6.256bn long-term debt. The company reported no borrowings under its $3bn revolving credit facility or commercial paper program. Current assets were $14.985bn and current liabilities $9.341bn.
Material changes and unusual items
- Q2 revenue growth was led by OFS (+13%) and OFE (+12%); DS revenue declined 5%. For the first half, TPS revenue declined 5%, while OFS and OFE grew 12% and 11%, respectively.
- Q2 included a $136m valuation allowance on the Recip compression business disposal group, recorded in other non-operating loss. BHGE agreed to sell the business for $80m; closing was expected later in 2019, subject to customary approvals.
- Q2 restructuring and impairment charges were $50m, down from $146m; separation and merger costs were $40m, versus $50m. First-half amounts were $112m and $74m, respectively. Approximately $54m of remaining restructuring charges were estimated after June 30.
- Q2 other non-operating loss was $131m. Income tax expense was $95m on $84m of pretax income, a reported effective rate of 113%, principally reflecting geographic earnings mix and $69m of losses with no tax benefit due to valuation allowances.
- Cash dividends were $0.18 per Class A share in Q2 ($0.36 for the first half), unchanged from 2018. First-half cash distributions to noncontrolling interests were $188m.
Outlook, commentary and risks
- Management described near-term markets as volatile, while remaining optimistic about long-term industry economics. It expected subdued North American onshore activity in the short term, slower international onshore growth for the rest of 2019, and possible delays to offshore projects amid commodity-price volatility. It saw long-term LNG demand and continued refinery, petrochemical and industrial opportunities; DS was expected to grow at or above global GDP.
- The GE Master Agreement Framework was finalized in Q1 2019. Management estimated a slightly negative operating-margin impact of 20–40 basis points and expected $0.2–$0.3bn of one-time separation costs over three years. The framework includes long-term commercial and technology arrangements, including a planned aero-derivative joint venture subject to conditions.
- On July 31, 2019, after the quarter, BHGE and GE signed an Omnibus Agreement addressing transition services, certain asset and employee transfers, commercial arrangements, and repayment of amounts owed. It also contemplated a $50m sale of certain BHGE digital assets to GE, subject to conditions and approvals.
- Significant contingencies include a Nigerian contracts arbitration in which IEC alleged $591m of lost profits plus additional costs; German gas-storage-related litigation and arbitration; a DOJ document request concerning Iraq operations and dealings with Unaoil; and Alaska criminal proceedings concerning alleged hazardous air emissions. The company said outcomes could not be predicted. It also disclosed shareholder derivative litigation concerning 2018 transactions with GE and an SEC investigation of GE revenue-recognition practices that may include some BHGE contracts.
- Liquidity risks include customer payment delays and restrictions on access to foreign cash; 87% of cash was held outside the U.S., and $1.267bn was in jurisdictions where funds could not readily be transferred or converted. Other risks include oil and gas price and activity swings, foreign exchange exposure, and possible goodwill impairment if market or operating conditions deteriorate.
Important facts for investors to verify
- Whether the Recip sale closed on expected terms and how its disposal charge and proceeds affected later results.
- Actual separation costs and margin effects from GE agreements, and the timing and terms of GE’s further separation.
- Cash conversion, capital spending and working-capital trends, including how much reported cash is accessible for general use.
- Developments and potential financial exposure in the disclosed arbitrations, litigation, investigations and Alaska proceedings.
- Segment activity and margins, particularly North American onshore demand, TPS equipment trends and DS performance.