Baker Hughes, a GE company (BHGE) — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. BHGE provides oilfield products, services and digital solutions in more than 120 countries. GE held approximately 62.5% of BHGE LLC; former Baker Hughes shareholders held approximately 37.5% through Class A shares. Results are not directly comparable with 2017 because Baker Hughes was included only from July 3, 2017.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $5.548B | $3.015B | $10.947B | $6.079B |
| Operating income (loss) | $78M | $(66)M | $37M | $20M |
| Net income (loss), consolidated | $(38)M | $(20)M | $(57)M | $46M |
| Net income (loss) attributable to BHGE | $(19)M | $0M | $51M | $0M |
| Operating cash flow | Not separately stated | Not separately stated | $433M | $(389)M |
Q2 revenue rose 84% and six-month revenue rose 80%, primarily reflecting the Baker Hughes acquisition; these growth rates are not like-for-like. Q2 operating margin was approximately 1.4%, and net margin approximately negative 0.7%. Six-month operating margin was approximately 0.3%; consolidated net margin was approximately negative 0.5%.
- Segments, Q2: Oilfield Services (OFS) revenue was $2.884B and segment operating income $189M; Oilfield Equipment (OFE) revenue was $617M and segment loss $12M; Turbomachinery & Process Solutions (TPS) revenue was $1.385B and segment income $113M; Digital Solutions revenue was $662M and segment income $96M. Segment measures exclude corporate costs and specified charges.
- Cash flow and capital spending: Six-month operating cash flow was $433M; investing cash use was $162M, including $411M capital expenditures partly offset by asset-sale proceeds. Financing cash use was $2.372B, including debt repayments, dividends, distributions to noncontrolling interests and share repurchases.
- Liquidity and debt: Cash, cash equivalents and restricted cash were $4.879B, down from $7.030B at year-end. Total borrowings were $7.386B, including $1.067B short-term and $6.319B long-term. Current assets were $16.442B and current liabilities $8.633B. Cash includes $783M held on GE’s behalf, matched by a liability; some overseas cash is subject to currency or capital controls. The company reported no borrowings under its $3B revolving facility or commercial paper program and compliance with credit-facility covenants.
- Shareholder returns: BHGE paid $150M in Class A dividends in the first half ($0.36 per share) and repurchased $1.012B of Class A shares and paired Class B shares/common units.
Material changes and notable items
- Q2 operating income improved from a loss to profit, but the six-month operating result was only modestly higher year over year. Higher OFS results were partly offset by weaker OFE and TPS performance.
- Q2 and six-month results included restructuring, impairment and other charges of $146M and $308M, respectively, and merger-related costs of $50M and $96M. The company estimated approximately $151M of remaining restructuring charges. Q2 also included $15M of inventory impairment.
- Interest expense rose to $63M in Q2 and $109M for the first half, primarily reflecting debt issued in late 2017 and debt assumed in the acquisition. Equity-method losses from BJ Services were $34M in Q2 and $54M for the first half; management said these adjustments had no cash impact.
- Foreign-currency translation contributed to a $536M consolidated other comprehensive loss in Q2; $202M of the loss was attributable to BHGE. Goodwill was $20.758B at June 30, after $911M of acquisition-accounting adjustments. OFE had consecutive operating-loss quarters; management did not deem an interim impairment test necessary and planned its annual test for Q3.
- The company reported $20.9B of remaining performance obligations at June 30, including $5.5B equipment and $15.4B services. These orders can be modified, terminated or reduced.
Outlook, risks and contingencies
- Management expected North American onshore activity to continue growing in 2018 and international onshore activity to increase moderately, while remaining cautious about volatility. Offshore investment decisions remained uncertain; subsea awards were expected to rise in 2018–2019 but remain below 2012–2013 peaks. Management described LNG as oversupplied near term but viewed its long-term economics positively, and expected demand in petrochemical, industrial and Digital Solutions markets.
- No numerical earnings or revenue guidance was provided. Management emphasized that its outlook depends on market conditions and changing industry assumptions. In June, GE announced plans for an orderly full separation from BHGE over two to three years.
- Principal exposures include customer spending and commodity-price volatility, delayed customer payments, foreign-exchange and commodity risks, cash restrictions in some jurisdictions, and possible cancellation or modification of RPO. The company had $3.4B of off-balance-sheet guarantees and similar arrangements.
- Legal matters include a U.S. lawsuit seeking $500M plus unspecified punitive damages, patent disputes, and claims related to a French plant incident with alleged damages of €250M. A German arbitration ruling was not expected to materially affect the financial statements; a related U.S. suit remained unresolved. BHGE was cooperating with GE in an SEC investigation of GE revenue recognition and controls that may include certain BHGE long-term service contracts. Management could not predict outcomes for several matters.
- Following U.S. sanctions changes, non-U.S. affiliates expected to wind down previously authorized Iran activity by November 4, 2018. BHGE also announced an agreement to sell its Natural Gas Solutions business for $375M, subject to closing conditions and regulatory approvals.
Important facts for investors to verify
- Separate acquisition-driven growth from underlying, like-for-like revenue and segment performance.
- Track restructuring and integration costs, synergy realization, and the quality and cash conversion of earnings.
- Monitor cash availability, including GE-held and restricted or foreign cash, alongside debt repayments and shareholder distributions.
- Review the Q3 goodwill impairment test, particularly assumptions for OFE, and the status of significant legal and SEC-related matters.
- Confirm completion and proceeds of the Natural Gas Solutions sale, progress on GE’s separation, and changes in the $20.9B RPO.