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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|
| | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2019
OR
|
| | |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-38143
Baker Hughes, a GE company
(Exact name of registrant as specified in its charter)
|
| |
Delaware | 81-4403168 |
(State or other jurisdiction | (I.R.S. Employer Identification No.) |
of incorporation or organization) | |
| |
17021 Aldine Westfield, Houston, Texas - 77073-5101 |
(Address of principal executive offices) |
Registrant's telephone number, including area code: (713) 439-8600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer" "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | | |
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ
As of April 23, 2019, the registrant had outstanding 515,558,511 shares of Class A Common Stock, $0.0001 par value per share and 521,543,095 shares of Class B Common Stock, $0.0001 par value per share.
Baker Hughes, a GE company
Table of Contents
BHGE 2019 First Quarter FORM 10-Q | i
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Baker Hughes, a GE company
Condensed Consolidated Statements of Income (Loss)
(Unaudited)
|
| | | | | | |
| Three Months Ended March 31, |
(In millions, except per share amounts) | 2019 | 2018 |
Revenue: |
|
|
|
Sales of goods | $ | 3,202 |
| $ | 3,160 |
|
Sales of services | 2,413 |
| 2,239 |
|
Total revenue | 5,615 |
| 5,399 |
|
|
|
|
|
Costs and expenses: |
|
|
|
Cost of goods sold | 2,810 |
| 2,800 |
|
Cost of services sold | 1,829 |
| 1,758 |
|
Selling, general and administrative expenses | 704 |
| 674 |
|
Restructuring, impairment and other | 62 |
| 162 |
|
Separation and merger related costs | 34 |
| 46 |
|
Total costs and expenses | 5,439 |
| 5,440 |
|
Operating income (loss) | 176 |
| (41 | ) |
Other non operating income, net | 21 |
| 2 |
|
Interest expense, net | (59 | ) | (46 | ) |
Income (loss) before income taxes and equity in loss of affiliate | 138 |
| (85 | ) |
Equity in loss of affiliate | — |
| (20 | ) |
Benefit (provision) for income taxes | (67 | ) | 86 |
|
Net income (loss) | 71 |
| (19 | ) |
Less: Net income (loss) attributable to noncontrolling interests | 39 |
| (89 | ) |
Net income attributable to Baker Hughes, a GE company | $ | 32 |
| $ | 70 |
|
|
|
|
|
|
Per share amounts: |
|
|
Basic and diluted earnings per Class A common stock | $ | 0.06 |
| $ | 0.17 |
|
|
|
|
|
|
Cash dividend per Class A common stock | $ | 0.18 |
| $ | 0.18 |
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
BHGE 2019 First Quarter FORM 10-Q | 1
Baker Hughes, a GE company
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
|
| | | | | | |
| Three Months Ended March 31, |
(In millions) | 2019 | 2018 |
Net income (loss) | $ | 71 |
| $ | (19 | ) |
Less: Net income (loss) attributable to noncontrolling interests | 39 |
| (89 | ) |
Net income attributable to Baker Hughes, a GE company | 32 |
| 70 |
|
Other comprehensive income: | | |
Investment securities | 2 |
| — |
|
Foreign currency translation adjustments | 166 |
| 312 |
|
Cash flow hedges | 4 |
| 7 |
|
Benefit plans | — |
| (3 | ) |
Other comprehensive income | 172 |
| 316 |
|
Less: Other comprehensive income attributable to noncontrolling interests | 87 |
| 198 |
|
Other comprehensive income attributable to Baker Hughes, a GE company | 85 |
| 118 |
|
Comprehensive income | 243 |
| 297 |
|
Less: Comprehensive income attributable to noncontrolling interests | 126 |
| 109 |
|
Comprehensive income attributable to Baker Hughes, a GE company | $ | 117 |
| $ | 188 |
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
BHGE 2019 First Quarter FORM 10-Q | 2
Baker Hughes, a GE company
Condensed Consolidated Statements of Financial Position
(Unaudited) |
| | | | | | |
(In millions, except par value) | March 31, 2019 | December 31, 2018 |
ASSETS |
Current assets: | | |
Cash and cash equivalents (1) | $ | 3,073 |
| $ | 3,723 |
|
Current receivables, net | 6,319 |
| 5,969 |
|
Inventories, net | 4,871 |
| 4,620 |
|
All other current assets | 649 |
| 659 |
|
Total current assets | 14,912 |
| 14,971 |
|
Property, plant and equipment (net of accumulated depreciation of $3,854 and $3,625) | 6,218 |
| 6,228 |
|
Goodwill | 20,762 |
| 20,717 |
|
Other intangible assets, net | 5,663 |
| 5,719 |
|
Contract and other deferred assets | 1,808 |
| 1,894 |
|
All other assets | 2,769 |
| 1,838 |
|
Deferred income taxes | 997 |
| 1,072 |
|
Total assets (1) | $ | 53,129 |
| $ | 52,439 |
|
LIABILITIES AND EQUITY |
Current liabilities: | | |
Accounts payable | $ | 3,918 |
| $ | 4,025 |
|
Short-term debt and current portion of long-term debt (1) | 906 |
| 942 |
|
Progress collections and deferred income | 1,923 |
| 1,765 |
|
All other current liabilities | 2,305 |
| 2,288 |
|
Total current liabilities | 9,052 |
| 9,020 |
|
Long-term debt | 6,270 |
| 6,285 |
|
Deferred income taxes | 89 |
| 143 |
|
Liabilities for pensions and other postretirement benefits | 1,033 |
| 1,018 |
|
All other liabilities | 1,599 |
| 960 |
|
Equity: |
|
|
Class A Common Stock, $0.0001 par value - 2,000 authorized, 515 and 513 issued and outstanding as of March 31, 2019 and December 31, 2018, respectively | — |
| — |
|
Class B Common Stock, $0.0001 par value - 1,250 authorized, 522 and 522 issued and outstanding as of March 31, 2019 and December 31, 2018, respectively | — |
| — |
|
Capital in excess of par value | 18,646 |
| 18,659 |
|
Retained earnings | — |
| 25 |
|
Accumulated other comprehensive loss | (1,134 | ) | (1,219 | ) |
Baker Hughes, a GE company equity | 17,512 |
| 17,465 |
|
Noncontrolling interests | 17,574 |
| 17,548 |
|
Total equity | 35,086 |
| 35,013 |
|
Total liabilities and equity | $ | 53,129 |
| $ | 52,439 |
|
| |
(1) | $861 million and $896 million of assets held on behalf of General Electric Company, of which $717 million and $747 million is cash and cash equivalents and $144 million and $149 million is investment securities at March 31, 2019 and December 31, 2018, respectively, and a corresponding amount of liability is reported in short-term borrowings. See "Note 16. Related Party Transactions" for further details. |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
BHGE 2019 First Quarter FORM 10-Q | 3
Baker Hughes, a GE company
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | |
(In millions, except per share amounts) | Class A Common Stock | Class B Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Loss | Non-controlling Interests | Total Equity |
Balance at December 31, 2018 | $ | — |
| $ | — |
| $ | 18,659 |
| $ | 25 |
| $ | (1,219 | ) | $ | 17,548 |
| $ | 35,013 |
|
Comprehensive income: | | | | | | | |
Net income | | | | 32 |
| | 39 |
| 71 |
|
Other comprehensive income | | | | | 85 |
| 87 |
| 172 |
|
Cash dividends to Class A Common Stock ($0.18 per share) | | | (34 | ) | (59 | ) |
| | (93 | ) |
Distribution to noncontrolling interests | | | | | | (94 | ) | (94 | ) |
Stock-based compensation cost | | | 40 |
| | | | 40 |
|
Other | | | (19 | ) | 2 |
|
| (6 | ) | (23 | ) |
Balance at March 31, 2019 | $ | — |
| $ | — |
| $ | 18,646 |
| $ | — |
| $ | (1,134 | ) | $ | 17,574 |
| $ | 35,086 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
(In millions, except per share amounts) | Class A Common Stock | Class B Common Stock | Capital in Excess of Par Value | Retained Loss | Accumulated Other Comprehensive Loss | Non-controlling Interests | Total Equity |
Balance at December 31, 2017 | $ | — |
| $ | — |
| $ | 15,083 |
| $ | (103 | ) | $ | (703 | ) | $ | 24,133 |
| $ | 38,410 |
|
Effect of adoption of ASU 2016-16 on taxes |
|
|
|
| 25 |
|
| 42 |
| 67 |
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
| 70 |
|
| (89 | ) | (19 | ) |
Other comprehensive income |
|
|
|
|
| 118 |
| 198 |
| 316 |
|
Cash dividends to Class A Common Stock ($0.18 per share) |
|
| (76 | ) |
|
|
| | (76 | ) |
Repurchase and cancellation of Class A and Class B common stock |
|
| (187 | ) |
|
| (313 | ) | (500 | ) |
Distribution to noncontrolling interests | | | | | | (127 | ) | (127 | ) |
Stock-based compensation cost |
|
| 30 |
|
|
|
| 30 |
|
Other |
|
| (5 | ) |
|
| (1 | ) | (6 | ) |
Balance at March 31, 2018 | $ | — |
| $ | — |
| $ | 14,845 |
| $ | (8 | ) | $ | (585 | ) | $ | 23,843 |
| $ | 38,095 |
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
BHGE 2019 First Quarter FORM 10-Q | 4
Baker Hughes, a GE company
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
| | | | | | |
| Three Months Ended March 31, |
(In millions) | 2019 | 2018 |
Cash flows from operating activities: | | |
Net income (loss) | $ | 71 |
| $ | (19 | ) |
Adjustments to reconcile net income (loss) to net cash flows from (used in) operating activities: | | |
Depreciation and amortization | 350 |
| 388 |
|
Provision for deferred income taxes | (18 | ) | (233 | ) |
Changes in operating assets and liabilities: |
|
|
Current receivables | (204 | ) | 125 |
|
Inventories | (220 | ) | (134 | ) |
Accounts payable | (93 | ) | 101 |
|
Progress collections and deferred income | 62 |
| (124 | ) |
Contract and other deferred assets | 61 |
| 140 |
|
Other operating items, net | (193 | ) | 50 |
|
Net cash flows from (used in) operating activities | (184 | ) | 294 |
|
Cash flows from investing activities: | | |
Expenditures for capital assets | (294 | ) | (177 | ) |
Proceeds from disposal of assets | 59 |
| 108 |
|
Other investing items, net | (21 | ) | (65 | ) |
Net cash flows used in investing activities | (256 | ) | (134 | ) |
Cash flows from financing activities: | | |
Net repayments of short-term debt and other borrowings | (36 | ) | (181 | ) |
Repayment of long-term debt | (12 | ) | (648 | ) |
Dividends paid | (93 | ) | (76 | ) |
Distributions to noncontrolling interests | (94 | ) | (127 | ) |
Repurchase of Class A common stock | — |
| (190 | ) |
Repurchase of common units from GE by BHGE LLC | — |
| (323 | ) |
Other financing items, net | 3 |
| (8 | ) |
Net cash flows used in financing activities | (232 | ) | (1,553 | ) |
Effect of currency exchange rate changes on cash and cash equivalents | 22 |
| (6 | ) |
Decrease in cash and cash equivalents | (650 | ) | (1,399 | ) |
Cash and cash equivalents, beginning of period | 3,723 |
| 7,030 |
|
Cash and cash equivalents, end of period | $ | 3,073 |
| $ | 5,631 |
|
Supplemental cash flows disclosures: |
|
|
Income taxes paid | $ | 76 |
| $ | 82 |
|
Interest paid | $ | 56 |
| $ | 72 |
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
BHGE 2019 First Quarter FORM 10-Q | 5
Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
Baker Hughes, a GE company (the Company, BHGE, we, us, or our), was formed on October 28, 2016, for the purpose of facilitating the combination of Baker Hughes Incorporated (Baker Hughes) and the oil and gas business (GE O&G) of General Electric Company (GE). BHGE is a fullstream oilfield technology provider that has a unique mix of equipment and service capabilities. We conduct business in more than 120 countries and employ approximately 67,000 employees.
BASIS OF PRESENTATION
On July 3, 2017, we closed the business combination (the Transactions) of GE O&G and Baker Hughes. As a result, substantially all of the businesses of GE O&G and of Baker Hughes were transferred to a subsidiary of the Company, Baker Hughes, a GE company, LLC (BHGE LLC). As of March 31, 2019, GE has approximately 50.3% of the economic interest and the Company has approximately 49.7% of the economic interest in BHGE LLC. Although we hold a minority economic interest in BHGE LLC, we conduct and exercise full control over all its activities, therefore, we consolidate the financial results of BHGE LLC and report a noncontrolling interest in our consolidated financial statements for the economic interest in BHGE LLC not held by us. We consider BHGE LLC to be a consolidated variable interest entity. We are a holding company and have no material assets other than our ownership interest in BHGE LLC and certain intercompany and tax related balances. BHGE LLC is a Securities and Exchange Commission (SEC) Registrant with separate filing requirements with the SEC and its separate financial information can be obtained from www.sec.gov.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. and such principles, U.S. GAAP) and pursuant to the rules and regulations of the SEC for interim financial information. Accordingly, certain information and disclosures normally included in our annual financial statements have been condensed or omitted. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated and combined financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of operations, financial position and cash flows of the Company and its subsidiaries for the periods presented and are not indicative of the results that may be expected for a full year. The Company's financial statements have been prepared on a consolidated basis. Under this basis of presentation, our financial statements consolidate all of our subsidiaries (entities in which we have a controlling financial interest, most often because we hold a majority voting interest). All intercompany accounts and transactions have been eliminated.
In the Company's financial statements and notes, certain amounts have been reclassified to conform with the current year presentation. In the notes to unaudited condensed consolidated financial statements, all dollar and share amounts in tabulations are in millions of dollars and shares, respectively, unless otherwise indicated. Certain columns and rows in our financial statements and notes thereto may not add due to the use of rounded numbers.
In June 2018, GE announced their intention to pursue an orderly separation from BHGE over time. In the three months ended March 31, 2019, separation and merger related costs primarily include costs incurred in connection with the finalization of the Master Agreement Framework and costs related to the anticipated separation from GE. In the three months ended March 31, 2018, separation and merger related costs includes all costs associated with the Transactions. See "Note 16. Related Party Transactions" for further information on the Master Agreement Framework.
BHGE 2019 First Quarter FORM 10-Q | 6
Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Please refer to "Note 1. Basis of Presentation and Summary of Significant Accounting Policies," to our consolidated financial statements from our Annual Report on Form 10-K for the year ended December 31, 2018 (2018 Annual Report) for the discussion of our significant accounting policies. Please refer to the "New Accounting Standards Adopted" section of this Note for changes to our accounting policies.
Cash and Cash Equivalents
As of March 31, 2019 and December 31, 2018, we had $1,214 million and $1,208 million, respectively, of cash held in bank accounts that cannot be released, transferred or otherwise converted into a currency that is regularly transacted internationally, due to lack of market liquidity, capital controls or similar monetary or exchange limitations limiting the flow of capital out of the jurisdiction. These funds are available to fund operations and growth in these jurisdictions and we do not currently anticipate a need to transfer these funds to the U.S. Included in these amounts are $432 million and $461 million, as of March 31, 2019 and December 31, 2018, respectively, held on behalf of GE.
Cash and cash equivalents includes a total of $717 million and $747 million of cash at March 31, 2019 and December 31, 2018, respectively, held on behalf of GE, and a corresponding liability is reported in short-term borrowings. See "Note 16. Related Party Transactions" for further details.
NEW ACCOUNTING STANDARDS ADOPTED
Leases
On January 1, 2019, we adopted Accounting Standards Update (ASU) No. 2016-02, Leases, and the related amendments (ASC 842). This ASU requires lessees to recognize an operating lease asset and a lease liability on the balance sheet, with the exception of short-term leases. We adopted the standard using the modified retrospective approach under which leases existing at, or entered into after January 1, 2019 were required to be recognized and measured. Prior period amounts have not been adjusted and continue to be reflected in accordance with our historical accounting. The Company has elected the practical expedients upon transition that allow entities not to reassess lease identification, classification and initial direct costs for leases that existed prior to adoption.
The most significant impact of the standard is the recognition of right-of-use (ROU) assets and operating lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We implemented internal controls and key system functionality to enable the preparation of financial information on adoption.
We determine if an arrangement is a lease at inception. ROU assets are included in "All other assets" and operating lease liabilities are included in "All other current liabilities" and "All other liabilities" on our consolidated statement of financial position. Finance lease assets are included in "Property, plant and equipment," and finance lease liabilities are included in "Short-term debt," and "Long-term debt" on our consolidated statement of financial position.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at the later of the lease commencement date or the effective date of adoption of ASC 842 on January 1, 2019, based on the present value of lease payments over the remaining lease term. Finance lease ROU assets and liabilities are recognized at commencement date. As most of our leases do not provide an implicit rate, we use our incremental collateralized borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Short-term leases under one year do not result in a ROU asset, but are recognized in the income statement only on a straight-line basis over the lease term. The Company
BHGE 2019 First Quarter FORM 10-Q | 7
Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements
has made an election to include within our operating lease liability future payments for both lease and non-lease components. See "Note 8. Leases" for additional information.
The adoption of this standard resulted in the recording of ROU assets and operating lease liabilities of $844 million as of January 1, 2019 on our consolidated statements of financial position with an immaterial impact on our consolidated statements of equity and no related impact on our consolidated statements of income (loss). Short-term leases have not been recorded on the consolidated statements of financial position. Our accounting for finance leases remained substantially unchanged.
Derivatives and Hedging
On January 1, 2019, we adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. Since there was no impact from the new guidance to our consolidated financial statements, no transition adjustments were recorded. ASU 2017-12 simplifies the application of hedge accounting and expands the strategies that qualify for hedge accounting. In accordance with the ASU, both the effective and ineffective portion of a cash flow hedge are initially reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings when the forecasted transaction affects earnings. The ASU requires certain changes to the presentation of hedge accounting in the financial statements and some new or modified disclosures. See "Note 14. Financial Instruments" for additional information.
NEW ACCOUNTING STANDARDS TO BE ADOPTED
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses. The ASU introduces a new accounting model, the Current Expected Credit Losses model (CECL), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for loans and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current U.S. GAAP, which generally require that a loss be incurred before it is recognized. The new standard will also apply to receivables arising from revenue transactions such as contract assets and accounts receivables and is effective for fiscal years beginning after December 15, 2019. We continue to evaluate the effect of the standard on our consolidated financial statements.
All other new accounting pronouncements that have been issued but not yet effective are currently being evaluated and at this time are not expected to have a material impact on our financial position or results of operations.
NOTE 2. REVENUE RELATED TO CONTRACTS WITH CUSTOMERS
DISAGGREGATED REVENUE
We disaggregate our revenue from contracts with customers by primary geographic markets. |
| | | | | | |
| Three Months Ended March 31, |
Total Revenue | 2019 | 2018 |
U.S. | $ | 1,505 |
| $ | 1,483 |
|
Non-U.S. | 4,110 |
| 3,916 |
|
Total | $ | 5,615 |
| $ | 5,399 |
|
BHGE 2019 First Quarter FORM 10-Q | 8
Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements
REMAINING PERFORMANCE OBLIGATIONS
As of March 31, 2019 and 2018, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $20.5 billion and $21.3 billion, respectively. As of March 31, 2019, we expect to recognize revenue of approximately 47%, 62% and 89% of the total remaining performance obligations within 2, 5, and 15 years, respectively, and the remaining thereafter. Contract modifications could affect both the timing to complete as well as the amount to be received as we fulfill the related remaining performance obligations.
NOTE 3. CURRENT RECEIVABLES
Current receivables are comprised of the following:
|
| | | | | | |
| March 31, 2019 | December 31, 2018 |
Customer receivables | $ | 5,305 |
| $ | 4,974 |
|
Related parties | 635 |
| 653 |
|
Other | 714 |
| 669 |
|
Total current receivables | 6,654 |
| 6,296 |
|
Less: Allowance for doubtful accounts | (335 | ) | (327 | ) |
Total current receivables, net | $ | 6,319 |
| $ | 5,969 |
|
Customer receivables are recorded at the invoiced amount. Related parties consists primarily of amounts owed to us by GE. The "Other" category consists primarily of indirect taxes, customer retentions, other tax receivables and advance payments to suppliers.
NOTE 4. INVENTORIES
Inventories, net of reserves of $438 million and $430 million as of March 31, 2019 and December 31, 2018, respectively, are comprised of the following:
|
| | | | | | |
| March 31, 2019 | December 31, 2018 |
Finished goods | $ | 2,782 |
| $ | 2,575 |
|
Work in process and raw material | 2,089 |
| 2,045 |
|
Total inventories, net | $ | 4,871 |
| $ | 4,620 |
|
We recorded inventory impairments of $61 million during the three months ended March 31, 2018 as a result of certain restructuring activities we initiated. Charges for inventory impairments are reported in the "Cost of goods sold" caption of the condensed consolidated statements of income (loss).
BHGE 2019 First Quarter FORM 10-Q | 9
Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
The changes in the carrying value of goodwill are detailed below by segment:
|
| | | | | | | | | | | | | | | |
| Oilfield Services | Oilfield Equipment | Turbo-machinery & Process Solutions | Digital Solutions | Total |
Balance at December 31, 2017, gross | $ | 15,838 |
| $ | 3,901 |
| $ | 1,906 |
| $ | 2,036 |
| $ | 23,681 |
|
Accumulated impairment at December 31, 2017 | (2,633 | ) | (867 | ) | — |
| (254 | ) | (3,754 | ) |
Balance at December 31, 2017 | 13,205 |
| 3,034 |
| 1,906 |
| 1,782 |
| 19,927 |
|
Purchase accounting adjustments (1) | (136 | ) | 293 |
| 394 |
| 429 |
| 980 |
|
Currency exchange and others | (26 | ) | (17 | ) | (114 | ) | (33 | ) | (190 | ) |
Balance at December 31, 2018 | 13,043 |
| 3,310 |
| 2,186 |
| 2,178 |
| 20,717 |
|
Currency exchange and others | — |
| 22 |
| 6 |
| 17 |
| 45 |
|
Balance at March 31, 2019 | $ | 13,043 |
| $ | 3,332 |
| $ | 2,192 |
| $ | 2,195 |
| $ | 20,762 |
|
| |
(1) | Includes the final determination of fair value of the assets and liabilities and the related goodwill associated with the acquisition of Baker Hughes that was concluded in the second quarter of 2018. Of the total goodwill of $13,963 million resulting from the acquisition of Baker Hughes, $12,898 million is allocated to our Oilfield Services segment and the remainder to our other segments based on the expected benefit from the synergies of the acquisition. |
We test goodwill for impairment annually in the third quarter using data as of July 1 of that year. Our reporting units are the same as our four reportable segments. We also test goodwill for impairment between annual impairment testing dates whenever events or circumstances occur that, in our judgment, could more likely than not reduce the fair value of one or more reporting units below its carrying amount. In assessing the possibility that a reporting unit’s fair value has been reduced below its carrying amount due to the occurrence of events or circumstances between annual impairment testing dates, we consider all available evidence, including, but not limited to, (i) the results of our impairment testing at the prior annual impairment testing date, in particular the magnitude of the excess of fair value over carrying value observed, (ii) downward revisions to internal forecasts, and the magnitude thereof, if any, (iii) the impact of the separation from GE, if any, and (iv) declines in our market capitalization below our book value, and the magnitude and duration of those declines, if any. During the first quarter of 2019, we have not identified any events or circumstances that could more likely than not reduce the fair value of one or more of our reporting units below its carrying amount.
As of March 31, 2019, we believe that the goodwill is recoverable, however, there can be no assurances that sustained declines in macroeconomic or business conditions affecting our industry and business will not occur. The impairment testing involves significant management judgment and are based on assumptions about future commodity pricing, supply and demand for our goods and services, and market conditions, which are difficult to forecast in volatile economic environments. If actual results materially differ from the estimated assumptions utilized in our forecasts, we may need to record impairment charges in future periods.
BHGE 2019 First Quarter FORM 10-Q | 10
Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements
OTHER INTANGIBLE ASSETS
Intangible assets are comprised of the following:
|
| | | | | | | | | | | | | | | | | | |
| March 31, 2019 | December 31, 2018 |
| Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net |
Customer relationships | $ | 3,101 |
| $ | (983 | ) | $ | 2,118 |
| $ | 3,085 |
| $ | (944 | ) | $ | 2,141 |
|
Technology | 1,091 |
| (557 | ) | 534 |
| 1,107 |
| (526 | ) | 581 |
|
Trade names and trademarks | 703 |
| (237 | ) | 466 |
| 698 |
| (229 | ) | 469 |
|
Capitalized software | 1,169 |
| (866 | ) | 303 |
| 1,118 |
| (824 | ) | 294 |
|
Other | 1 |
| (1 | ) | — |
| 14 |
| (2 | ) | 12 |
|
Finite-lived intangible assets | 6,065 |
| (2,644 | ) | 3,421 |
| 6,022 |
| (2,525 | ) | 3,497 |
|
Indefinite-lived intangible assets (1) | 2,242 |
| — |
| 2,242 |
| 2,222 |
| — |
| 2,222 |
|
Total intangible assets | $ | 8,307 |
| $ | (2,644 | ) | $ | 5,663 |
| $ | 8,244 |
| $ | (2,525 | ) | $ | 5,719 |
|
| |
(1) | Indefinite-lived intangible assets are principally comprised of the Baker Hughes trade name. |
Intangible assets are generally amortized on a straight-line basis with estimated useful lives ranging from 1 to 30 years. Amortization expense for the three months ended March 31, 2019 and 2018 was $96 million and $139 million, respectively.
Estimated amortization expense for the remainder of 2019 and each of the subsequent five fiscal years is expected to be as follows:
|
| | | |
Year | Estimated Amortization Expense |
Remainder of 2019 | $ | 261 |
|
2020 | 329 |
|
2021 | 280 |
|
2022 | 237 |
|
2023 | 225 |
|
2024 | 218 |
|
BHGE 2019 First Quarter FORM 10-Q | 11
Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 6. CONTRACT AND OTHER DEFERRED ASSETS
A majority of our long-term product service agreements relate to our Turbomachinery & Process Solutions segment. Contract assets reflect revenue earned in excess of billings on our long-term contracts to construct technically complex equipment, long-term product maintenance or extended warranty arrangements and other deferred contract related costs. Contract assets are comprised of the following:
|
| | | | | | |
| March 31, 2019 | December 31, 2018 |
Long-term product service agreements | $ | 576 |
| $ | 609 |
|
Long-term equipment contracts (1) | 1,040 |
| 1,085 |
|
Contract assets (total revenue in excess of billings) (2) | 1,616 |
| 1,694 |
|
Deferred inventory costs (3) | 144 |
| 179 |
|
Non-recurring engineering costs | 48 |
| 21 |
|
Contract and other deferred assets | $ | 1,808 |
| $ | 1,894 |
|
| |
(1) | Reflects revenue earned in excess of billings on our long-term contracts to construct technically complex equipment and certain other service agreements. |
| |
(2) | Contract assets (total revenue in excess of billings) were $1,684 million as of January 1, 2018. |
| |
(3) | Deferred inventory costs were $360 million as of January 1, 2018, which represents cost deferral for shipped goods and other costs where the criteria for revenue recognition has not yet been met. |
Revenue recognized during the three months ended March 31, 2019 and 2018 from performance obligations satisfied (or partially satisfied) in previous periods related to our long-term service agreements was $7 million and $10 million, respectively. This includes revenue recognized from revisions to cost or billing estimates that may affect a contract’s total estimated profitability resulting in an adjustment of earnings.
NOTE 7. PROGRESS COLLECTIONS AND DEFERRED INCOME
Contract liabilities include progress collections, which reflects billings in excess of revenue, and deferred income on our long-term contracts to construct technically complex equipment, long-term product maintenance or extended warranty arrangements. Contract liabilities are comprised of the following:
|
| | | | | | |
| March 31, 2019 | December 31, 2018 |
Progress collections | $ | 1,790 |
| $ | 1,600 |
|
Deferred income | 133 |
| 165 |
|
Progress collections and deferred income (contract liabilities) (1) | $ | 1,923 |
| $ | 1,765 |
|
| |
(1) | Progress collections and deferred income (contract liabilities) were $1,775 million at January 1, 2018. |
Revenue recognized during the three months ended March 31, 2019 and 2018 that was included in the contract liabilities at the beginning of the period was $553 million and $602 million, respectively.
BHGE 2019 First Quarter FORM 10-Q | 12
Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 8. LEASES
Our leasing activities primarily consist of operating leases for administrative offices, manufacturing facilities, research centers, service centers, sales offices and certain equipment.
|
| | | |
Operating Lease Expense | Three Months Ended March 31, 2019 |
Long-term fixed lease | $ | 48 |
|
Long-term variable lease | 11 |
|
Short-term lease | 123 |
|
Total operating lease expense | $ | 182 |
|
For the three months ended March 31, 2018, total operating lease expense was $147 million. Cash flows used in operating activities for operating leases approximates our expense for the three months ended March 31, 2019 and 2018.
As of March 31, 2019, maturities of our operating lease liabilities are as follows: |
| | | |
Year | Operating leases |
Remainder of 2019 | $ | 165 |
|
2020 | 194 |
|
2021 | 140 |
|
2022 | 113 |
|
2023 | 80 |
|
Thereafter | 386 |
|
Total lease payments | 1,078 |
|
Less: imputed interest | 209 |
|
Total | $ | 869 |
|
|
| | | |
Amounts recognized in the condensed consolidated statement of financial position as of March 31, 2019: |
| Operating leases |
All other current liabilities | $ | 194 |
|
All other liabilities | 675 |
|
Total | $ | 869 |
|
ROU assets of $860 million as of March 31, 2019 were included in "All other assets" in our condensed consolidated statements of financial position.
The weighted-average remaining lease term as of March 31, 2019 was approximately nine years for our operating leases. The weighted-average discount rate used to determine the operating lease liability as of March 31, 2019 was 4.4%.
BHGE 2019 First Quarter FORM 10-Q | 13
Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 9. BORROWINGS
Short-term and long-term borrowings are comprised of the following:
|
| | | | | | |
| March 31, 2019 | December 31, 2018 |
Short-term borrowings | | |
Short-term borrowings from GE | $ | 861 |
| $ | 896 |
|
Other borrowings | 45 |
| 46 |
|
Total short-term borrowings | 906 |
| 942 |
|
| | |
Long-term borrowings | | |
3.2% Senior Notes due August 2021 | 522 |
| 523 |
|
2.773% Senior Notes due December 2022 | 1,245 |
| 1,245 |
|
8.55% Debentures due June 2024 | 130 |
| 131 |
|
3.337% Senior Notes due December 2027 | 1,343 |
| 1,343 |
|
6.875% Notes due January 2029 | 292 |
| 294 |
|
5.125% Senior Notes due September 2040 | 1,305 |
| 1,306 |
|
4.08% Senior Notes due December 2047 | 1,336 |
| 1,336 |
|
Other long-term borrowings | 97 |
| 107 |
|
Total long-term borrowings | 6,270 |
| 6,285 |
|
Total borrowings | $ | 7,176 |
| $ | 7,227 |
|
BHGE LLC has a $3 billion committed unsecured revolving credit facility (the 2017 Credit Agreement) with commercial banks maturing in July 2022. The 2017 Credit Agreement contains certain customary representations and warranties, certain affirmative covenants and no negative covenants. Upon the occurrence of certain events of default, our obligations under the 2017 Credit Agreement may be accelerated. Such events of default include payment defaults to lenders under the 2017 Credit Agreement, and other customary defaults. No such events of default have occurred. At March 31, 2019 and December 31, 2018, there were no borrowings under the 2017 Credit Agreement.
BHGE LLC has a commercial paper program under which it may issue from time to time up to $3 billion in commercial paper with maturities of no more than 397 days. At March 31, 2019 and December 31, 2018, there were no borrowings outstanding under the commercial paper program. The maximum combined borrowing at any time under both the 2017 Credit Agreement and the commercial paper program is $3 billion.
Concurrent with the Transactions associated with the acquisition of Baker Hughes on July 3, 2017, Baker Hughes Co-Obligor, Inc. became a co-obligor, jointly and severally with BHGE LLC, on our registered debt securities. This co-obligor is a 100%-owned finance subsidiary of BHGE LLC that was incorporated for the sole purpose of serving as a co-obligor of debt securities and has no assets or operations other than those related to its sole purpose. Baker Hughes Co-Obligor, Inc. is also a co-obligor of the $3,950 million senior notes issued in December 2017 by BHGE LLC in a private placement and subsequently registered in January 2018.
Certain Senior Notes contain covenants that restrict BHGE LLC's ability to take certain actions, including, but not limited to, the creation of certain liens securing debt, the entry into certain sale-leaseback transactions and engaging in certain merger, consolidation and asset sale transactions in excess of specified limits.
The estimated fair value of total borrowings at March 31, 2019 and December 31, 2018 was $6,966 million and $6,629 million, respectively. For a majority of our borrowings the fair value was determined using quoted period-end market prices. Where market prices are not available, we estimate fair values based on valuation methodologies using current market interest rate data adjusted for our non-performance risk.
See "Note 16. Related Party Transactions" for additional information on the short-term borrowings from GE.
BHGE 2019 First Quarter FORM 10-Q | 14
Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 10. EMPLOYEE BENEFIT PLANS
In 2018, certain of our U.S. employees were covered under various U.S. GE employee benefit plans, including GE's retirement plans (pension, retiree health and life insurance, and savings benefit plans). Beginning in 2019, such employees ceased to participate in these GE U.S. plans. In addition, certain United Kingdom (UK) employees participate in the GE UK Pension Plan. We are allocated relevant participation costs for these GE employee benefit plans as part of multi-employer plans. As such, we have not recorded any liabilities associated with our participation in these plans. Expenses associated with our participation in these plans was $2 million and $37 million in the three months ended March 31, 2019 and 2018, respectively. In November 2018, the Company entered into an agreement with GE whereby GE will transfer the assets and liabilities of the GE UK Pension Plan related to the oil & gas businesses to BHGE on what is intended to be a fully funded basis. Subsequent to this transfer, BHGE employees shall cease to participate in the GE UK Pension Plan. This transfer is expected to close in 2019.
In addition to these GE plans, certain of our employees are also covered by company sponsored employee defined benefit plans. These defined benefit plans include four U.S. plans and six non-U.S. plans, primarily in the UK, Germany, and Canada, all with plan assets or obligations greater than $20 million. We use a December 31 measurement date for these plans. These defined benefit plans generally provide benefits to employees based on formulas recognizing length of service and earnings.
The components of net periodic cost (benefit) of plans sponsored by us are as follows for the three months ended March 31:
|
| | | | | | |
| 2019 | 2018 |
Service cost | $ | 4 |
| $ | 5 |
|
Interest cost | 19 |
| 18 |
|
Expected return on plan assets | (25 | ) | (30 | ) |
Amortization of net actuarial loss | 4 |
| 2 |
|
Net periodic cost (benefit) | $ | 2 |
| $ | (5 | ) |
The service cost component of the net periodic cost (benefit) is included in operating income (loss) and all other components are included in non operating income (loss) in our condensed consolidated statements of income (loss).
NOTE 11. INCOME TAXES
For the quarter ended March 31, 2019, income tax expense was $67 million compared to a tax benefit of $86 million for the prior year quarter. The difference between the U.S. statutory tax rate of 21% and the current effective tax rate is primarily related to the geographical mix of earnings and losses, coupled with $21 million related to losses with no tax benefit due to valuation allowances.
NOTE 12. EQUITY
COMMON STOCK
We are authorized to issue 2 billion shares of Class A common stock, 1.25 billion shares of Class B common stock and 50 million shares of preferred stock each of which have a par value of $0.0001 per share. The number of Class A common stock and Class B common stock shares outstanding as of March 31, 2019 is 515 million and 522 million, respectively. We have not issued any preferred stock. GE owns all the issued and outstanding Class B common stock. Each share of Class A and Class B common stock and the associated membership interest in BHGE LLC form a paired interest. While each share of Class B common stock has equal voting rights to a share of Class A common stock, it has no economic rights, meaning holders of Class B common stock have no right to dividends or any assets in the event of liquidation of the Company. GE is entitled through BHGE LLC to receive distributions on an equal amount of any dividend paid by the Company.
BHGE 2019 First Quarter FORM 10-Q | 15
Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements
During the three months ended March 31, 2019 and 2018, the Company declared and paid a regular dividend of $0.18 per share to holders of record of the Company's Class A common stock.
The following table presents the changes in the number of shares outstanding (in thousands): |
| | | | |
| Class A Common Stock | Class B Common Stock |
Balance at December 31, 2018 | 513,399 |
| 521,543 |
|
Issue of shares upon vesting of restricted stock units (1) | 1,377 |
| — |
|
Issue of shares on exercises of stock options (1) | 164 |
| — |
|
Balance at March 31, 2019 | 514,940 |
| 521,543 |
|
| |
(1) | Share amounts reflected above are net of shares withheld to satisfy the employee's tax withholding obligation. |
ACCUMULATED OTHER COMPREHENSIVE LOSS (AOCL)
The following tables present the changes in accumulated other comprehensive loss, net of tax:
|
| | | | | | | | | | | | | | | |
| Investment Securities | Foreign Currency Translation Adjustments | Cash Flow Hedges | Benefit Plans | Accumulated Other Comprehensive Loss |
Balance at December 31, 2018 | $ | — |
| $ | (1,152 | ) | $ | (1 | ) | $ | (66 | ) | $ | (1,219 | ) |
Other comprehensive income (loss) before reclassifications | 2 |
| 166 |
| 5 |
| (2 | ) | 171 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | — |
| — |
| — |
| 1 |
| 1 |
|
Deferred taxes | — |
| — |
| (1 | ) | 1 |
| — |
|
Other comprehensive income | 2 |
| 166 |
| 4 |
| — |
| 172 |
|
Less: Other comprehensive income attributable to noncontrolling interests | 1 |
| 84 |
| 2 |
| — |
| 87 |
|
Balance at March 31, 2019 | $ | 1 |
| $ | (1,070 | ) | $ | 1 |
| $ | (66 | ) | $ | (1,134 | ) |
|
| | | | | | | | | | | | | | | |
| Investment Securities | Foreign Currency Translation Adjustments | Cash Flow Hedges | Benefit Plans | Accumulated Other Comprehensive Loss |
Balance at December 31, 2017 | $ | 1 |
| $ | (682 | ) | $ | 1 |
| $ | (23 | ) | $ | (703 | ) |
Other comprehensive income (loss) before reclassifications | — |
| 312 |
| 8 |
| (3 | ) | 317 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | — |
| — |
| — |
| — |
| — |
|
Deferred taxes | — |
| — |
| (1 | ) | — |
| (1 | ) |
Other comprehensive income (loss) | — |
| 312 |
| 7 |
| (3 | ) | 316 |
|
Less: Other comprehensive income (loss) attributable to noncontrolling interests | — |
| 196 |
| 4 |
| (2 | ) | 198 |
|
Balance at March 31, 2018 | $ | 1 |
| $ | (566 | ) | $ | 4 |
| $ | (24 | ) | $ | (585 | ) |
The amounts reclassified from accumulated other comprehensive loss during the three months ended March 31, 2019 represent amortization of net actuarial gain (loss) which are included in the computation of net periodic pension cost (see "Note 10. Employee Benefit Plans" for additional details). These reclassifications are recorded across the various cost and expense line items within the condensed consolidated statements of income (loss).
BHGE 2019 First Quarter FORM 10-Q | 16
Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements
NONCONTROLLING INTEREST
Noncontrolling interests represent the portion of net assets in consolidated entities that are not owned by the Company. As of March 31, 2019 and December 31, 2018, GE owned approximately 50.3% and 50.4%, respectively, of BHGE LLC and this represents the majority of the noncontrolling interest balance reported within equity.
|
| | | | | | |
| March 31, 2019 | December 31, 2018 |
GE's interest in BHGE LLC | $ | 17,461 |
| $ | 17,438 |
|
Other noncontrolling interests | 113 |
| 110 |
|
Total noncontrolling interests | $ | 17,574 |
| $ | 17,548 |
|
NOTE 13. EARNINGS PER SHARE
Basic and diluted net income (loss) per share of Class A common stock is presented below:
|
| | | | | | |
| Three Months Ended March 31, |
(In millions, except per share amounts) | 2019 | 2018 |
Net income (loss) | $ | 71 |
| $ | (19 | ) |
Less: Net income (loss) attributable to noncontrolling interests | 39 |
| (89 | ) |
Net income attributable to BHGE | $ | 32 |
| $ | 70 |
|
| | |
Weighted average shares outstanding: | | |
Class A basic | 515 |
| 421 |
|
Class A diluted | 516 |
| 422 |
|
Net income per share attributable to common stockholders: | | |
Class A basic | $ | 0.06 |
| $ | 0.17 |
|
Class A diluted | $ | 0.06 |
| $ | 0.17 |
|
As of July 3, 2017, GE, BHGE and BHGE LLC entered into an Exchange Agreement under which GE is entitled to exchange its holding in Class B common stock and units of BHGE LLC for Class A common stock on a one-for-one basis (subject to adjustment in accordance with the terms of the Exchange Agreement) or, at the option of BHGE, an amount of cash equal to the aggregate value (determined in accordance with the terms of the Exchange Agreement) of the shares of Class A common stock that would have otherwise been received by GE in the exchange. In computing the dilutive effect, if any, that the aforementioned exchange would have on net income (loss) per share, net income (loss) attributable to holders of Class A common stock would be adjusted due to the elimination of the noncontrolling interests associated with the Class B common stock (including any tax impact). For the three months ended March 31, 2019 and 2018, such exchange is not reflected in diluted net income (loss) per share as the assumed exchange is not dilutive.
Shares of our Class B common stock do not share in earnings or losses of the Company and are not considered in the calculation of basic or diluted earnings per share (EPS). As such, separate presentation of basic and diluted EPS of Class B under the two class method has not been presented.
For the three months ended March 31, 2019 and 2018, Class A diluted shares include the dilutive impact of equity awards. For the three months ended March 31, 2019 and 2018, there were approximately six million and five million options, respectively, that were excluded from our diluted EPS calculation because their effect is antidilutive. These options were outstanding but excluded from the calculation because the exercise price exceeded the average market price of the Class A common shares.
BHGE 2019 First Quarter FORM 10-Q | 17
Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 14. FINANCIAL INSTRUMENTS
RECURRING FAIR VALUE MEASUREMENTS
Our assets and liabilities measured at fair value on a recurring basis consists of derivative instruments and investment securities.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 | December 31, 2018 |
| Level 1 | Level 2 | Level 3 | | Net Balance | Level 1 | Level 2 | Level 3 | Net Balance |
Assets | |
| |
| |
| | | | | | |
Derivatives | $ | — |
| $ | 55 |
| $ | — |
| | $ | 55 |
| $ | — |
| $ | 74 |
| $ | — |
| $ | 74 |
|
Investment securities | 49 |
| — |
| 290 |
| | 339 |
| 39 |
| — |
| 288 |
| 327 |
|
Total assets | 49 |
| 55 |
| 290 |
| | 394 |
| 39 |
| 74 |
| 288 |
| 401 |
|
| | | | | | | | | |
Liabilities | | | | | | | | | |
Derivatives | — |
| (47 | ) | — |
| | (47 | ) | — |
| (82 | ) | — |
| (82 | ) |
Total liabilities | $ | — |
| $ | (47 | ) | $ | — |
| | $ | (47 | ) | $ | — |
| $ | (82 | ) | $ | — |
| $ | (82 | ) |
There were no transfers between Level 1, 2 and 3 during the three months ended March 31, 2019.
The following table provides a reconciliation of recurring Level 3 fair value measurements for investment securities: |
| | | | | | |
| 2019 | 2018 |
Balance at January 1 | $ | 288 |
| $ | 304 |
|
Purchases | 6 |
| 34 |
|
Proceeds at maturity | (6 | ) | (12 | ) |
Unrealized gains recognized in AOCI | 2 |
| — |
|
Balance at March 31 | $ | 290 |
| $ | 326 |
|
The most significant unobservable input used in the valuation of our Level 3 instruments is the discount rate. Discount rates are determined based on inputs that market participants would use when pricing investments, including credit and liquidity risk. An increase in the discount rate would result in a decrease in the fair value of our investment securities. There are no unrealized gains or losses recognized in the condensed consolidated statement of income (loss) on account of any Level 3 instrument still held at the reporting date. At March 31, 2019 and December 31, 2018, we held $144 million and $149 million, respectively, of these investment securities on behalf of GE. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 | December 31, 2018 |
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value |
Investment securities | |
| |
| |
| | |
| |
| |
| |
Non-U.S. debt securities (1) | $ | 288 |
| $ | 2 |
| $ | — |
| $ | 290 |
| $ | 288 |
| $ | — |
| $ | — |
| $ | 288 |
|
Equity securities (2) | 49 |
| — |
| — |
| 49 |
| 39 |
| — |
| — |
| 39 |
|
Total | $ | 337 |
| $ | 2 |
| $ | — |
| $ | 339 |
| $ | |