UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
Commission File Number 1-09397
Baker Hughes, a GE company, LLC
(Exact name of registrant as specified in its charter)
(State or other jurisdiction | (I.R.S. Employer Identification No.) | ||
of incorporation or organization) | |||
(Address of principal executive offices) | (Zip Code) | ||
Registrant's telephone number, including area code: (713 ) 439-8600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
- | ||
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.
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).
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 | ☐ | Accelerated filer | ☐ | ☑ | Smaller reporting company | Emerging growth company | |||||||
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
As of July 22, 2019, all of the common units of the registrant are held by affiliates of the registrant. None of the common units are publicly traded.
Baker Hughes, a GE company, LLC
Table of Contents
Page No. | ||
BHGE LLC 2019 Second Quarter FORM 10-Q | i
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Baker Hughes, a GE company, LLC
Condensed Consolidated Statements of Income (Loss)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(In millions, except per unit amounts) | 2019 | 2018 | 2019 | 2018 | ||||||||
Revenue: | ||||||||||||
Sales of goods | $ | $ | $ | $ | ||||||||
Sales of services | ||||||||||||
Total revenue | ||||||||||||
Costs and expenses: | ||||||||||||
Cost of goods sold | ||||||||||||
Cost of services sold | ||||||||||||
Selling, general and administrative expenses | ||||||||||||
Restructuring, impairment and other | ||||||||||||
Separation and merger related costs | ||||||||||||
Total costs and expenses | ||||||||||||
Operating income | ||||||||||||
Other non operating income (loss), net | ( | ) | ( | ) | ||||||||
Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||
Income (loss) before income taxes and equity in loss of affiliate | ( | ) | ||||||||||
Equity in loss of affiliate | ( | ) | ( | ) | ||||||||
Provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||
Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||
Less: Net income attributable to noncontrolling interests | ||||||||||||
Net income (loss) attributable to Baker Hughes, a GE company, LLC | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||
Cash distribution per common unit | $ | $ | $ | $ | ||||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
BHGE LLC 2019 Second Quarter FORM 10-Q | 1
Baker Hughes, a GE company, LLC
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | ||||||||
Net income (loss) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||
Less: Net income attributable to noncontrolling interests | ||||||||||||
Net income (loss) attributable to Baker Hughes, a GE company, LLC | ( | ) | ( | ) | ( | ) | ||||||
Other comprehensive income (loss): | ||||||||||||
Investment securities | ( | ) | ( | ) | ( | ) | ||||||
Foreign currency translation adjustments | ( | ) | ( | ) | ( | ) | ||||||
Cash flow hedges | ( | ) | ( | ) | ||||||||
Benefit plans | ( | ) | ( | ) | ||||||||
Other comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ||||||
Less: Other comprehensive loss attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||
Other comprehensive income (loss) attributable to Baker Hughes, a GE company, LLC | ( | ) | ( | ) | ( | ) | ||||||
Comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ||||||
Less: Comprehensive income attributable to noncontrolling interests | ||||||||||||
Comprehensive income (loss) attributable to Baker Hughes, a GE company, LLC | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
BHGE LLC 2019 Second Quarter FORM 10-Q | 2
Baker Hughes, a GE company, LLC
Condensed Consolidated Statements of Financial Position
(Unaudited)
(In millions) | June 30, 2019 | December 31, 2018 | ||||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents (1) | $ | $ | ||||
Current receivables, net | ||||||
Inventories, net | ||||||
All other current assets | ||||||
Total current assets | ||||||
Property, plant and equipment (net of accumulated depreciation of $3,918 and $3,625) | ||||||
Goodwill | ||||||
Other intangible assets, net | ||||||
Contract and other deferred assets | ||||||
All other assets | ||||||
Deferred income taxes | ||||||
Total assets (1) | $ | $ | ||||
LIABILITIES AND EQUITY | ||||||
Current liabilities: | ||||||
Accounts payable | $ | $ | ||||
Short-term debt and current portion of long-term debt (1) | ||||||
Progress collections and deferred income | ||||||
All other current liabilities | ||||||
Total current liabilities | ||||||
Long-term debt | ||||||
Deferred income taxes | ||||||
Liabilities for pensions and other postretirement benefits | ||||||
All other liabilities | ||||||
Members' equity: | ||||||
Members' capital (common units 1,037 and 1,035 issued and outstanding as of June 30, 2019 and December 31, 2018, respectively) | ||||||
Retained loss | ( | ) | ( | ) | ||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||
Baker Hughes, a GE company, LLC members' equity | ||||||
Noncontrolling interests | ||||||
Total equity | ||||||
Total liabilities and equity | $ | $ | ||||
(1) | Total assets include $ |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
BHGE LLC 2019 Second Quarter FORM 10-Q | 3
Baker Hughes, a GE company, LLC
Condensed Consolidated Statements of Changes in Members' Equity
(Unaudited)
(In millions, except per unit amounts) | Common Unitholders | Retained Earnings (Loss) | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Equity | ||||||||||
Balance at December 31, 2018 | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||
Comprehensive income (loss): | |||||||||||||||
Net income | |||||||||||||||
Other comprehensive income (loss) | ( | ) | |||||||||||||
Regular cash distribution to members ($0.36 per unit) | ( | ) | ( | ) | |||||||||||
Other transactions with members | ( | ) | ( | ) | |||||||||||
BHGE stock-based compensation cost | |||||||||||||||
Other | ( | ) | |||||||||||||
Balance at June 30, 2019 | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||
(In millions, except per unit amounts) | Common Unitholders | Retained Loss | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Equity | ||||||||||
Balance at March 31, 2019 | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||
Comprehensive income (loss): | |||||||||||||||
Net income (loss) | ( | ) | ( | ) | |||||||||||
Other comprehensive loss | ( | ) | ( | ) | ( | ) | |||||||||
Regular cash distribution to members ($0.18 per unit) | ( | ) | ( | ) | |||||||||||
Other transactions with members | ( | ) | ( | ) | |||||||||||
BHGE stock-based compensation cost | |||||||||||||||
Other | ( | ) | |||||||||||||
Balance at June 30, 2019 | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
BHGE LLC 2019 Second Quarter FORM 10-Q | 4
Baker Hughes, a GE company, LLC
Condensed Consolidated Statements of Changes in Members' Equity
(Unaudited)
(In millions, except per unit amounts) | Common Unitholders | Retained Earnings (Loss) | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Equity | ||||||||||
Balance at December 31, 2017 | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||
Effect of adoption of ASU 2016-16 on taxes | |||||||||||||||
Comprehensive income (loss): | |||||||||||||||
Net income (loss) | ( | ) | ( | ) | |||||||||||
Other comprehensive loss | ( | ) | ( | ) | ( | ) | |||||||||
Regular cash distribution to members ($0.36 per unit) | ( | ) | ( | ) | |||||||||||
Repurchase and cancellation of common units | ( | ) | ( | ) | |||||||||||
BHGE stock-based compensation cost | |||||||||||||||
Other | ( | ) | ( | ) | |||||||||||
Balance at June 30, 2018 | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||
(In millions, except per unit amounts) | Common Unitholders | Retained Loss | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Equity | ||||||||||
Balance at March 31, 2018 | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||
Comprehensive income (loss): | |||||||||||||||
Net income (loss) | ( | ) | ( | ) | |||||||||||
Other comprehensive loss | ( | ) | ( | ) | ( | ) | |||||||||
Regular cash distribution to members ($0.18 per unit) | ( | ) | ( | ) | |||||||||||
Repurchase and cancellation of common units | ( | ) | ( | ) | |||||||||||
BHGE stock-based compensation cost | |||||||||||||||
Other | ( | ) | ( | ) | |||||||||||
Balance at June 30, 2018 | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
BHGE LLC 2019 Second Quarter FORM 10-Q | 5
Baker Hughes, a GE company, LLC
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, | ||||||
(In millions) | 2019 | 2018 | ||||
Cash flows from operating activities: | ||||||
Net income (loss) | $ | $ | ( | ) | ||
Adjustments to reconcile net income (loss) to net cash flows from operating activities: | ||||||
Depreciation and amortization | ||||||
Valuation allowance on disposal group | ||||||
Benefit for deferred income taxes | ( | ) | ( | ) | ||
Changes in operating assets and liabilities: | ||||||
Current receivables | ( | ) | ( | ) | ||
Inventories | ( | ) | ( | ) | ||
Accounts payable | ||||||
Progress collections and deferred income | ( | ) | ||||
Contract and other deferred assets | ( | ) | ||||
Other operating items, net | ( | ) | ||||
Net cash flows from operating activities | ||||||
Cash flows from investing activities: | ||||||
Expenditures for capital assets | ( | ) | ( | ) | ||
Proceeds from disposal of assets | ||||||
Net cash paid for business interests | ( | ) | ||||
Other investing items, net | ( | ) | ||||
Net cash flows used in investing activities | ( | ) | ( | ) | ||
Cash flows from financing activities: | ||||||
Net repayments of short-term debt and other borrowings | ( | ) | ( | ) | ||
Repayment of long-term debt | ( | ) | ( | ) | ||
Distribution to members | ( | ) | ( | ) | ||
Repurchase of common units | ( | ) | ||||
Other financing items, net | ( | ) | ||||
Net cash flows used in financing activities | ( | ) | ( | ) | ||
Effect of currency exchange rate changes on cash and cash equivalents | ( | ) | ( | ) | ||
Decrease in cash and cash equivalents | ( | ) | ( | ) | ||
Cash and cash equivalents, beginning of period | ||||||
Cash and cash equivalents, end of period | $ | $ | ||||
Supplemental cash flows disclosures: | ||||||
Income taxes paid | $ | $ | ||||
Interest paid | $ | $ | ||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
BHGE LLC 2019 Second Quarter FORM 10-Q | 6
Baker Hughes, a GE company, LLC
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, LLC, a Delaware limited liability company (the Company, BHGE LLC, we, us, or our), and the successor to Baker Hughes Incorporated, a Delaware corporation (Baker Hughes) 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.
On July 3, 2017, we completed the combination of the oil and gas business (GE O&G) of General Electric Company (GE) and Baker Hughes (the Transactions). As of June 30, 2019, GE owns approximately 50.3 % of our common units and Baker Hughes, a GE company (BHGE) owns approximately 49.7 % of our common units.
BASIS OF PRESENTATION
In connection with the Transactions, we entered into and are governed by an Amended & Restated Limited Liability Company Agreement, dated as of July 3, 2017 (the BHGE LLC Agreement). Under the BHGE LLC Agreement, EHHC Newco, LLC (EHHC), a wholly owned subsidiary of BHGE, is our sole managing member and BHGE is the sole managing member of EHHC. As our managing member, EHHC conducts, directs and exercises full control over all our activities, including our day-to-day business affairs and decision-making, without the approval of any other member. As such, EHHC is responsible for all our operational and administrative decisions and the day-to-day management of our business.
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 (2018 Annual Report).
In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary by management to fairly state our 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 unit amounts in tabulations are in millions of dollars and units, 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 and six months ended June 30, 2019, separation and merger related costs include primarily costs incurred in connection with the finalization of the Master Agreement Framework and costs related to the anticipated separation from GE. In the three and six months ended June 30, 2018, separation and merger related costs are comprised solely of costs associated with the Transactions. See "Note 15. Related Party Transactions" for further information on the Master Agreement Framework.
BHGE LLC 2019 Second Quarter FORM 10-Q | 7
Baker Hughes, a GE company, LLC
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 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 June 30, 2019 and December 31, 2018, we had $1,267 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 $429 million and $461 million, as of June 30, 2019 and December 31, 2018, respectively, held on behalf of GE.
Cash and cash equivalents includes a total of $739 million and $747 million of cash at June 30, 2019 and December 31, 2018, respectively, held on behalf of GE, and a corresponding liability is reported in short-term borrowings. See "Note 15. Related Party Transactions" for further details.
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 LLC 2019 Second Quarter FORM 10-Q | 8
Baker Hughes, a GE company, LLC
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 13. 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 June 30, | Six Months Ended June 30, | |||||||||||
Total Revenue | 2019 | 2018 | 2019 | 2018 | ||||||||
U.S. | $ | $ | $ | $ | ||||||||
Non-U.S. | ||||||||||||
Total | $ | $ | $ | $ | ||||||||
BHGE LLC 2019 Second Quarter FORM 10-Q | 9
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
REMAINING PERFORMANCE OBLIGATIONS
As of June 30, 2019 and 2018, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $20.6 billion and $20.9 billion, respectively. As of June 30, 2019, we expect to recognize revenue of approximately 47%, 63% 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:
June 30, 2019 | December 31, 2018 | |||||
Customer receivables | $ | $ | ||||
Related parties | ||||||
Other | ||||||
Total current receivables | ||||||
Less: Allowance for doubtful accounts | ( | ) | ( | ) | ||
Total current receivables, net | $ | $ | ||||
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 $416 million and $430 million as of June 30, 2019 and December 31, 2018, respectively, are comprised of the following:
June 30, 2019 | December 31, 2018 | |||||
Finished goods | $ | $ | ||||
Work in process and raw material | ||||||
Total inventories, net | $ | $ | ||||
BHGE LLC 2019 Second Quarter FORM 10-Q | 10
Baker Hughes, a GE company, LLC
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 | $ | $ | $ | $ | $ | ||||||||||
Accumulated impairment at December 31, 2017 | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Balance at December 31, 2017 | |||||||||||||||
Purchase accounting adjustments (1) | ( | ) | |||||||||||||
Currency exchange and others | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||
Balance at December 31, 2018 | |||||||||||||||
Currency exchange and others | ( | ) | ( | ) | |||||||||||
Balance at June 30, 2019 | $ | $ | $ | $ | $ | ||||||||||
(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 $ |
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) changes in market conditions, (iii) downward revisions to internal forecasts, and the magnitude thereof, if any, (iv) the impact of the separation from GE, if any, and (v) declines in the market capitalization of BHGE below its book value, and the magnitude and duration of those declines, if any.
BHGE's stock price has historically experienced volatility as a result of industry-wide and macroeconomic factors, including principally global oil prices. In addition, more recently, we believe that BHGE's share price has been subject to increased volatility resulting from, among other things, uncertainty around the impact, if any, of the announced intention of GE to pursue an orderly separation from BHGE over time, which prompted us to evaluate whether circumstances had changed that would more likely than not reduce the fair value of one or more of our reporting units below their carrying value as of June 30, 2019. While conducting this evaluation, we considered macroeconomic and industry conditions, the magnitude and duration of any declines in BHGE's market capitalization and overall financial performance of our reporting units. We also considered whether there were any changes in our long-term forecasts, which includes assumptions about future commodity pricing and supply and demand for our goods and services, all of which require considerable judgment in estimation. Through this qualitative review we did not identify any reporting units that required an interim impairment test. In connection with our most recent annual impairment test (as of July 1, 2018), two of our reporting units, Oilfield Services and Oilfield Equipment, had fair values that exceeded their carrying values by amounts ranging between 15 % and 20 %, while our other reporting units had substantially higher "headroom" calculations. While we believe that BHGE's share price reflects transitory circumstances/conditions as described above, there can be no assurances that further or sustained declines in its share price would not result in a material impairment of goodwill.
BHGE LLC 2019 Second Quarter FORM 10-Q | 11
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
OTHER INTANGIBLE ASSETS
Intangible assets are comprised of the following:
June 30, 2019 | December 31, 2018 | |||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||
Customer relationships | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||
Technology | ( | ) | ( | ) | ||||||||||||||
Trade names and trademarks | ( | ) | ( | ) | ||||||||||||||
Capitalized software | ( | ) | ( | ) | ||||||||||||||
Other | ( | ) | ( | ) | ||||||||||||||
Finite-lived intangible assets | ( | ) | ( | ) | ||||||||||||||
Indefinite-lived intangible assets (1) | — | — | ||||||||||||||||
Total intangible assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||
(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 June 30, 2019 and 2018 was $97 million and $101 million, respectively, and $193 million and $240 million, respectively, for the six months ended June 30, 2019 and 2018.
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 | $ | ||
2020 | |||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
BHGE LLC 2019 Second Quarter FORM 10-Q | 12
Baker Hughes, a GE company, LLC
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:
June 30, 2019 | December 31, 2018 | |||||
Long-term product service agreements | $ | $ | ||||
Long-term equipment contracts (1) | ||||||
Contract assets (total revenue in excess of billings) (2) | ||||||
Deferred inventory costs (3) | ||||||
Non-recurring engineering costs | ||||||
Contract and other deferred assets | $ | $ | ||||
(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 $ |
(3) | Deferred inventory costs were $ |
Revenue recognized during the three months ended June 30, 2019 and 2018 from performance obligations satisfied (or partially satisfied) in previous periods related to our long-term service agreements was $14 million and $12 million, respectively, and $21 million and $22 million during the six months ended June 30, 2019 and 2018, 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:
June 30, 2019 | December 31, 2018 | |||||
Progress collections | $ | $ | ||||
Deferred income | ||||||
Progress collections and deferred income (contract liabilities) (1) | $ | $ | ||||
(1) | Progress collections and deferred income (contract liabilities) were $ |
Revenue recognized during the three months ended June 30, 2019 and 2018 that was included in the contract liabilities at the beginning of the period was $295 million and $404 million, respectively, and $848 million and $1,006 million, respectively, during the six months ended June 30, 2019 and 2018.
BHGE LLC 2019 Second Quarter FORM 10-Q | 13
Baker Hughes, a GE company, LLC
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 June 30, 2019 | Six Months Ended June 30, 2019 | ||||
Long-term fixed lease | $ | $ | ||||
Long-term variable lease | ||||||
Short-term lease (1) | ||||||
Total operating lease expense | $ | $ | ||||
(1) | Includes leases with a term of one month or less |
For the three and six months ended June 30, 2018, total operating lease expense was $188 million and $375 million, respectively. Cash flows used in operating activities for operating leases approximates our expense for the three and six months ended June 30, 2019 and 2018.
As of June 30, 2019, maturities of our operating lease liabilities are as follows:
Year | Operating Leases | ||
Remainder of 2019 | $ | ||
2020 | |||
2021 | |||
2022 | |||
2023 | |||
Thereafter | |||
Total lease payments | |||
Less: imputed interest | |||
Total | $ | ||
Amounts recognized in the condensed consolidated statement of financial position as of June 30, 2019:
Operating Leases | |||
All other current liabilities | $ | ||
All other liabilities | |||
Total | $ | ||
ROU assets of $821 million as of June 30, 2019 were included in "All other assets" in our condensed consolidated statements of financial position.
The weighted-average remaining lease term as of June 30, 2019 was approximately nine years for our operating leases. The weighted-average discount rate used to determine the operating lease liability as of June 30, 2019 was 4.4 %.
BHGE LLC 2019 Second Quarter FORM 10-Q | 14
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 9. BORROWINGS
Short-term and long-term borrowings are comprised of the following:
June 30, 2019 | December 31, 2018 | |||||
Short-term borrowings | ||||||
Short-term borrowings from GE | $ | $ | ||||
Other borrowings | ||||||
Total short-term borrowings | ||||||
Long-term borrowings | ||||||
3.2% Senior Notes due August 2021 | ||||||
2.773% Senior Notes due December 2022 | ||||||
8.55% Debentures due June 2024 | ||||||
3.337% Senior Notes due December 2027 | ||||||
6.875% Notes due January 2029 | ||||||
5.125% Senior Notes due September 2040 | ||||||
4.08% Senior Notes due December 2047 | ||||||
Other long-term borrowings | ||||||
Total long-term borrowings | ||||||
Total borrowings | $ | $ | ||||
We have 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 June 30, 2019 and December 31, 2018, there were no borrowings under the 2017 Credit Agreement.
We have a commercial paper program under which we may issue from time to time up to $3 billion in commercial paper with maturities of no more than 397 days. At June 30, 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 us, on our registered debt securities. This co-obligor is a 100 %-owned finance subsidiary of the Company 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 us in a private placement and subsequently registered in January 2018.
Certain Senior Notes contain covenants that restrict our 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 June 30, 2019 and December 31, 2018 was $7,132 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 15. Related Party Transactions" for additional information on the short-term borrowings from GE.
BHGE LLC 2019 Second Quarter FORM 10-Q | 15
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 10. EMPLOYEE BENEFIT PLANS
Historically, 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). From January 1, 2019, these U.S. employees ceased to participate in the GE U.S. plans. In addition, certain United Kingdom (UK) employees participated in the GE UK Pension Plan. From May 1, 2019, these UK employees ceased to participate in the GE UK Pension Plan. We were allocated relevant participation costs for these GE employee benefit plans as part of multi-employer plans. Expenses associated with our participation in these plans was $1 million and $43 million in the three months ended June 30, 2019 and 2018, respectively, and $3 million and $80 million in the six months ended June 30, 2019 and 2018, respectively. During the second quarter of 2019, substantially, all of the assets and liabilities of the GE UK Pension Plan related to the oil & gas businesses have been transferred to BHGE on a fully funded basis.
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 and six months ended June 30:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
Service cost | $ | $ | $ | $ | ||||||||
Interest cost | ||||||||||||
Expected return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||
Amortization of net actuarial loss | ||||||||||||
Curtailment loss | ||||||||||||
Net periodic cost (benefit) | $ | $ | ( | ) | $ | $ | ( | ) | ||||
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 June 30, 2019, income tax expense was $95 million compared to a tax expense of $62 million for the prior year quarter. The difference between the U.S. statutory tax rate of 21 % and the current effective tax rate of 113 % is primarily related to the geographical mix of earnings and losses, coupled with $69 million related to losses with no tax benefit due to valuation allowances and tax effects of the U.S. partnership structure.
For the six months ended June 30, 2019, income tax expense was $162 million compared to a tax expense of $100 million for the six months ended June 30, 2018. The difference between the U.S. statutory tax rate of 21 % and the current effective tax rate of 73 % is primarily related to the geographical mix of earnings and losses, coupled with $90 million related to losses with no tax benefit due to valuation allowances and tax effects of the U.S. partnership structure.
BHGE LLC 2019 Second Quarter FORM 10-Q | 16
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 12. MEMBERS' EQUITY
COMMON UNITS
The BHGE LLC Agreement provides that initially there is one class of common units, which are currently held by BHGE and GE. If BHGE issues a share of Class A common stock, including in connection with an equity incentive or similar plan, we will also issue a corresponding common unit to BHGE or one of its direct subsidiaries. For the six months ended June 30, 2019 we issued 2,224 thousand common units to BHGE in connection with the issuance of Class A common stock by BHGE.
The following table presents the changes in the number of units outstanding (in thousands):
Common Units Held by BHGE | Common Units Held by GE | |||
Balance at December 31, 2018 | ||||
Issue of units to BHGE under equity incentive plan | ||||
Balance at June 30, 2019 | ||||
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 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||
Other comprehensive income (loss) before reclassifications | ( | ) | |||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | |||||||||||||||
Deferred taxes | |||||||||||||||
Other comprehensive income (loss) | ( | ) | |||||||||||||
Less: Other comprehensive loss attributable to noncontrolling interests | ( | ) | ( | ) | |||||||||||
Other adjustments | ( | ) | ( | ) | |||||||||||
Balance at June 30, 2019 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||