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 March 31, 2021
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
Commission File Number 1-09397
(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 April 16, 2021, 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 Holdings LLC
Table of Contents
Page No. | ||||||||
Baker Hughes Holdings LLC 2021 First Quarter FORM 10-Q | i
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Baker Hughes Holdings LLC
Condensed Consolidated Statements of Income (Loss)
(Unaudited)
| Three Months Ended March 31, | ||||||||
| (In millions, except per unit amounts) | 2021 | 2020 | ||||||
| Revenue: | ||||||||
| Sales of goods | $ | $ | ||||||
| Sales of services | ||||||||
| Total revenue | ||||||||
| Costs and expenses: | ||||||||
| Cost of goods sold | ||||||||
| Cost of services sold | ||||||||
| Selling, general and administrative | ||||||||
| Goodwill impairment | ||||||||
| Restructuring, impairment and other | ||||||||
| Separation related | ||||||||
| Total costs and expenses | ||||||||
| Operating income (loss) | ( | |||||||
| Other non-operating income (loss), net | ( | |||||||
| Interest expense, net | ( | ( | ||||||
| Loss before income taxes | ( | ( | ||||||
| Provision for income taxes | ( | ( | ||||||
| Net loss | ( | ( | ||||||
| Less: Net income attributable to noncontrolling interests | ||||||||
| Net loss attributable to Baker Hughes Holdings LLC | $ | ( | $ | ( | ||||
| Cash distribution per common unit | $ | $ | ||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Baker Hughes Holdings LLC 2021 First Quarter FORM 10-Q | 1
Baker Hughes Holdings LLC
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
| Three Months Ended March 31, | ||||||||
| (In millions) | 2021 | 2020 | ||||||
| Net loss | $ | ( | $ | ( | ||||
| Less: Net loss attributable to noncontrolling interests | ||||||||
| Net loss attributable to Baker Hughes Holdings LLC | ( | ( | ||||||
| Other comprehensive income (loss): | ||||||||
| Investment securities | ( | |||||||
| Foreign currency translation adjustments | ( | ( | ||||||
| Cash flow hedges | ( | |||||||
| Benefit plans | ||||||||
| Other comprehensive loss | ( | ( | ||||||
| Less: Other comprehensive loss attributable to noncontrolling interests | ||||||||
| Other comprehensive loss attributable to Baker Hughes Holdings LLC | ( | ( | ||||||
| Comprehensive loss | ( | ( | ||||||
| Less: Comprehensive loss attributable to noncontrolling interests | ||||||||
| Comprehensive loss attributable to Baker Hughes Holdings LLC | $ | ( | $ | ( | ||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Baker Hughes Holdings LLC 2021 First Quarter FORM 10-Q | 2
Baker Hughes Holdings LLC
Condensed Consolidated Statements of Financial Position
(Unaudited)
(In millions) | March 31, 2021 | December 31, 2020 | ||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Current receivables, net | ||||||||
| Inventories, net | ||||||||
| All other current assets | ||||||||
| Total current assets | ||||||||
Property, plant and equipment (net of accumulated depreciation of $ | ||||||||
| Goodwill | ||||||||
| Other intangible assets, net | ||||||||
| Contract and other deferred assets | ||||||||
| All other assets | ||||||||
| Deferred income taxes | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Short-term debt and current portion of long-term debt | ||||||||
| 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 | ||||||||
| Retained loss | ( | ( | ||||||
| Accumulated other comprehensive loss | ( | ( | ||||||
| Baker Hughes Holdings LLC equity | ||||||||
| Noncontrolling interests | ||||||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Baker Hughes Holdings LLC 2021 First Quarter FORM 10-Q | 3
Baker Hughes Holdings LLC
Condensed Consolidated Statements of Changes in Members' Equity
(Unaudited)
(In millions, except per unit amounts) | Members' Capital | Retained Loss | Accumulated Other Comprehensive Loss | Non- controlling Interests | Total Equity | ||||||||||||
| Balance at December 31, 2020 | $ | $ | ( | $ | ( | $ | $ | ||||||||||
| Comprehensive loss: | |||||||||||||||||
| Net loss | ( | ( | |||||||||||||||
| Other comprehensive loss | ( | ( | |||||||||||||||
Regular cash distribution to members ($ | ( | ( | |||||||||||||||
| Baker Hughes stock-based compensation cost | |||||||||||||||||
| Other | ( | ( | |||||||||||||||
| Balance at March 31, 2021 | $ | $ | ( | $ | ( | $ | $ | ||||||||||
(In millions, except per share amounts) | Members' Capital | Retained Loss | Accumulated Other Comprehensive Loss | Non- controlling Interests | Total Equity | ||||||||||||
| Balance at December 31, 2019 | $ | $ | ( | $ | ( | $ | $ | ||||||||||
| Comprehensive loss: | |||||||||||||||||
| Net loss | ( | ( | |||||||||||||||
| Other comprehensive loss | ( | ( | |||||||||||||||
Regular cash distribution to members ($ | ( | ( | |||||||||||||||
| Baker Hughes stock-based compensation cost | |||||||||||||||||
| Other | ( | ||||||||||||||||
| Balance at March 31, 2020 | $ | $ | ( | $ | ( | $ | $ | ||||||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Baker Hughes Holdings LLC 2021 First Quarter FORM 10-Q | 4
Baker Hughes Holdings LLC
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Three Months Ended March 31, | ||||||||
| (In millions) | 2021 | 2020 | ||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | $ | ( | ||||
| Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Goodwill impairment | ||||||||
| Intangible assets impairment | ||||||||
| Property, plant and equipment impairment | ||||||||
| Inventory impairment | ||||||||
| Unrealized loss on equity security | ||||||||
| 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 | ||||||||
| Other investing items, net | ||||||||
| Net cash flows used in investing activities | ( | ( | ||||||
| Cash flows from financing activities: | ||||||||
| Net repayments of debt and other borrowings | ( | ( | ||||||
| Distributions to members | ( | ( | ||||||
| Other financing items, net | ( | ( | ||||||
| Net cash flows used in financing activities | ( | ( | ||||||
| Effect of currency exchange rate changes on cash and cash equivalents | ( | |||||||
| Increase (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, net of refunds | $ | $ | ||||||
| Interest paid | $ | $ | ||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Baker Hughes Holdings LLC 2021 First Quarter FORM 10-Q | 5
Baker Hughes Holdings 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 Holdings LLC, a Delaware limited liability company (the Company, BHH LLC, we, us, or our), and the successor to Baker Hughes Incorporated, a Delaware corporation (BHI) is an energy technology company with a diversified portfolio of technologies and services that span the entire energy value chain. The partnership was formed as the result of a combination between BHI and the oil and gas business (GE O&G) of General Electric Company (GE). As of March 31, 2021, GE owns approximately 25.7 % of our common units and Baker Hughes Company (Baker Hughes) owns approximately 74.3 % of our common units.
BASIS OF PRESENTATION
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 financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 (2020 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 to the current year presentation. In the notes to unaudited condensed consolidated financial statements, all dollar and common 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.
Separation related costs as reflected in our condensed consolidated statements of income (loss) include costs incurred in connection with the ongoing activities related to our separation from GE. See "Note 15. Related Party Transactions" for further information.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
As of March 31, 2021 and December 31, 2020, we had $606 million and $687 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 $15 million and $42 million, as of March 31, 2021 and December 31, 2020, respectively, held on behalf of GE.
Baker Hughes Holdings LLC 2021 First Quarter FORM 10-Q | 6
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
NEW ACCOUNTING STANDARDS TO BE ADOPTED
All 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
| Three Months Ended March 31, | ||||||||
| Total Revenue | 2021 | 2020 | ||||||
| U.S. | $ | $ | ||||||
| Non-U.S. | ||||||||
| Total | $ | $ | ||||||
REMAINING PERFORMANCE OBLIGATIONS
As of March 31, 2021 and 2020, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $23.2 billion and $22.7 billion, respectively. As of March 31, 2021, we expect to recognize revenue of approximately 51 %, 66 % and 90 % 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
| March 31, 2021 | December 31, 2020 | |||||||
| Customer receivables | $ | $ | ||||||
| Related parties | ||||||||
| Other | ||||||||
| Total current receivables | ||||||||
| Less: Allowance for credit losses | ( | ( | ||||||
| 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, advance payments to suppliers, other tax receivables and customer retentions.
Baker Hughes Holdings LLC 2021 First Quarter FORM 10-Q | 7
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 4. INVENTORIES
| March 31, 2021 | December 31, 2020 | |||||||
| Finished goods | $ | $ | ||||||
| Work in process and raw materials | ||||||||
| Total inventories, net | $ | $ | ||||||
We recorded inventory impairments of $160 million during the three months ended March 31, 2020, predominantly in our Oilfield Services segment as a result of certain restructuring activities initiated by the Company. Charges for inventory impairments are predominantly reported in the "Cost of goods sold" caption of the condensed consolidated statements of income (loss).
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
| Oilfield Services | Oilfield Equipment | Turbo- machinery & Process Solutions | Digital Solutions | Total | |||||||||||||
| Balance at December 31, 2019, gross | $ | $ | $ | $ | $ | ||||||||||||
| Accumulated impairment at December 31, 2019 | ( | ( | ( | ( | |||||||||||||
| Balance at December 31, 2019 | |||||||||||||||||
| Impairment | ( | ( | ( | ||||||||||||||
Currency exchange and others | ( | ( | |||||||||||||||
| Balance at December 31, 2020 | |||||||||||||||||
| Currency exchange and others | ( | ( | ( | ||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | $ | ||||||||||||
We perform our annual goodwill impairment test for each of our reporting units as of July 1 of each fiscal year, in conjunction with our annual strategic planning process. Our reporting units are the same as our four
During the first quarter of 2021, we completed a review to assess whether indicators of impairment existed. As a result of this assessment, we concluded that no indicators existed that would lead to a determination that it is more likely than not that the fair value of each reporting unit is less than its carrying value. There can be no assurances that future sustained declines in macroeconomic or business conditions affecting our industry will not occur, which could result in goodwill impairment charges in future periods.
During the first quarter of 2020, our market capitalization declined significantly compared to the fourth quarter of 2019. Baker Hughes Company's closing stock price fell to a historic low of $9.33 on March 23, 2020. Over the same period, the equity value of our peer group companies and the overall U.S. stock market also declined significantly amid market volatility. In addition, the Oilfield Services Index (OSX), an indicator of investors’ view of the earnings prospects and cost of capital of the oil and gas services industry, traded at prices that were the lowest
Baker Hughes Holdings LLC 2021 First Quarter FORM 10-Q | 8
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
in its history. These declines were driven by the uncertainty surrounding the outbreak of the coronavirus (COVID-19) and other macroeconomic events such as the geopolitical tensions between OPEC and Russia, which also resulted in a significant drop in oil prices. Based on these factors, we concluded that a triggering event occurred and, accordingly, an interim quantitative impairment test was performed as of March 31, 2020 (“testing date”).
In performing the interim quantitative impairment test and consistent with our prior practice, we determined the fair value of each of our reporting units using a combination of the income approach and the market approach by assessing each of these valuation methodologies based upon availability and relevance of comparable company data and determining the appropriate weighting.
Based upon the results of our interim quantitative impairment test performed during the first quarter of 2020, we concluded that the carrying value of the Oilfield Services (OFS) and Oilfield Equipment (OFE) reporting units exceeded their estimated fair value as of the testing date, which resulted in goodwill impairment charges of $11,428 million and $3,289 million, respectively. The goodwill impairment was calculated as the amount that the carrying value of the reporting unit, including any goodwill, exceeded its fair value.
OTHER INTANGIBLE ASSETS
| March 31, 2021 | December 31, 2020 | |||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||||
| Customer relationships | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||
| Technology | ( | ( | ||||||||||||||||||
| Trade names and trademarks | ( | ( | ||||||||||||||||||
| Capitalized software | ( | ( | ||||||||||||||||||
| Finite-lived intangible assets | ( | ( | ||||||||||||||||||
| Indefinite-lived intangible assets | — | — | ||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||
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, 2021 and 2020 was $69 million and $84 million, respectively.
| Year | Estimated Amortization Expense | ||||
| Remainder of 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
Baker Hughes Holdings LLC 2021 First Quarter FORM 10-Q | 9
Baker Hughes Holdings 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:
| March 31, 2021 | December 31, 2020 | |||||||
| Long-term product service agreements | $ | $ | ||||||
Long-term equipment contracts (1) | ||||||||
| Contract assets (total revenue in excess of billings) | ||||||||
| Deferred inventory costs | ||||||||
| Non-recurring engineering costs | ||||||||
| Contract and other deferred assets | $ | $ | ||||||
Revenue recognized during the three months ended March 31, 2021 and 2020 from performance obligations satisfied (or partially satisfied) in previous periods related to our long-term service agreements was nil and $6 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, 2021 | December 31, 2020 | |||||||
| Progress collections | $ | $ | ||||||
| Deferred income | ||||||||
| Progress collections and deferred income (contract liabilities) | $ | $ | ||||||
Revenue recognized during the three months ended March 31, 2021 and 2020 that was included in the contract liabilities at the beginning of the period was $878 million and $507 million, respectively.
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.
| Three Months Ended March 31, | ||||||||
| Operating Lease Expense | 2021 | 2020 | ||||||
| Long-term fixed lease | $ | $ | ||||||
| Long-term variable lease | ||||||||
Short-term lease (1) | ||||||||
| Total operating lease expense | $ | $ | ||||||
(1)Leases with a term of one year or less, including leases with a term of one month or less
Cash flows used in operating activities for operating leases approximates our expense for the three months ended March 31, 2021 and 2020.
Baker Hughes Holdings LLC 2021 First Quarter FORM 10-Q | 10
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 9. BORROWINGS
| March 31, 2021 | December 31, 2020 | |||||||
| Short-term borrowings | ||||||||
| Commercial paper | $ | $ | ||||||
| Short-term borrowings from GE | ||||||||
| Other borrowings | ||||||||
| Total short-term borrowings | ||||||||
| Long-term borrowings | ||||||||
| Other long-term borrowings | ||||||||
| Total long-term borrowings | ||||||||
| Total borrowings | $ | $ | ||||||
The estimated fair value of total borrowings at March 31, 2021 and December 31, 2020 was $8,123 million and $8,502 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.
BHH LLC has a $3 billion committed unsecured revolving credit facility (the Credit Agreement) with commercial banks maturing in December 2024. The Credit Agreement contains certain customary representations and warranties, certain customary affirmative covenants and certain customary negative covenants. Upon the occurrence of certain events of default, BHH LLC's obligations under the Credit Agreement may be accelerated. Such events of default include payment defaults to lenders under the Credit Agreement and other customary defaults. No such events of default have occurred. At March 31, 2021 and December 31, 2020, there were no 3.8 billion in commercial paper with maturities of no more than 397 days. Based on the expected repayment of our commercial paper that matures on April 30, 2021, our authorized commercial paper program would be reduced to $3 billion.
Baker Hughes Co-Obligor, Inc. is a co-obligor, jointly and severally with BHH LLC on our long-term debt securities. This co-obligor is a 100 %-owned finance subsidiary of BHH LLC that was incorporated for the sole purpose of serving as a corporate co-obligor of long-term debt securities and has no assets or operations other than those related to its sole purpose. As of March 31, 2021, Baker Hughes Co-Obligor, Inc. is a co-obligor of our long-term debt securities totaling $6,647 million.
Certain Senior Notes contain covenants that restrict BHH 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
Baker Hughes Holdings LLC 2021 First Quarter FORM 10-Q | 11
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
engaging in certain merger, consolidation and asset sale transactions in excess of specified limits. At March 31, 2021, we were in compliance with all debt covenants.
See "Note 15. Related Party Transactions" for additional information on the short-term borrowings from GE.
NOTE 10. EMPLOYEE BENEFIT PLANS
We have both funded and unfunded defined benefit plans which include four U.S. plans and seven 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, and generally provide benefits to employees based on formulas recognizing length of service and earnings.
| Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Service cost | $ | $ | ||||||
| Interest cost | ||||||||
| Expected return on plan assets | ( | ( | ||||||
| Amortization of net actuarial loss | ||||||||
| Net periodic cost | $ | $ | ||||||
The service cost component of the net periodic cost 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 three months ended March 31, 2021, the provision for income tax was $83 million. The difference between the U.S. statutory tax rate of 21% and the current effective tax rate is primarily related to losses with no tax benefit due to valuation allowances. We are a partnership for U.S. federal tax purposes, therefore, any tax effects associated with the U.S. are recognized by our members and not reflected in our tax expense.
For the three months ended March 31, 2020, the provision for income tax was $8 million. The difference between the U.S. statutory tax rate of 21% and the current effective tax rate is primarily related to non-deductible goodwill impairment and losses with no tax benefit due to valuation allowances.
In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. These measures may include deferring the due dates of tax payments or other changes to their income and non-income-based tax laws. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020 in the U.S., includes measures to assist companies, including temporary changes to income and non-income-based tax laws.
Baker Hughes Holdings LLC 2021 First Quarter FORM 10-Q | 12
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 12. MEMBERS' EQUITY
COMMON UNITS
The BHH LLC Agreement provides that initially there is one class of common units (Units), which are currently held directly or indirectly by Baker Hughes and GE (collectively, the Members). If Baker Hughes issues a share of Class A common stock, including in connection with an equity incentive or similar plan, we will also issue a corresponding Unit to Baker Hughes or one of its direct subsidiaries. For the three months ended March 31, 2021 and 2020, we issued 5,522 thousand and 3,684 thousand Units, respectively, to Baker Hughes or one of its direct subsidiaries in connection with the issuance of its Class A common stock. The Members are entitled through their Units to receive distributions on an equal amount of any dividend paid by Baker Hughes to its Class A shareholders.
During the three months ended March 31, 2021, GE's economic interest in us was reduced to approximately 25.7 % primarily as a result of the exchange of 43.7 million shares of Class B common stock, and associated Units.
The following table presents the changes in the number of Units outstanding (in thousands):
| Common Units Held by Baker Hughes | Common Units Held by GE | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||
| Balance at January 1 | ||||||||||||||
| Issue of units to Baker Hughes under equity incentive plan | ||||||||||||||
Exchange of common units (1) | ( | |||||||||||||
| Balance at March 31 | ||||||||||||||
(1)In March 2021, GE exchanged 43.7 million shares of Class B common stock and paired Units for Class A common stock. When shares of Class B common stock, together with associated Units, are exchanged for shares of Class A common stock pursuant to the Exchange Agreement, such shares of Class B common stock are canceled.
ACCUMULATED OTHER COMPREHENSIVE LOSS (AOCL)
| Investment Securities | Foreign Currency Translation Adjustments | Cash Flow Hedges | Benefit Plans | Accumulated Other Comprehensive Loss | |||||||||||||
| Balance at December 31, 2020 | $ | $ | ( | $ | $ | ( | $ | ( | |||||||||
Other comprehensive income (loss) before reclassifications | ( | ( | ( | ||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | ( | ||||||||||||||||
| Deferred taxes | ( | ||||||||||||||||
| Other comprehensive income (loss) | ( | ( | |||||||||||||||
Less: Other comprehensive income (loss) attributable to noncontrolling interests | |||||||||||||||||
| Balance at March 31, 2021 | $ | $ | ( | $ | $ | ( | $ | ( | |||||||||
Baker Hughes Holdings LLC 2021 First Quarter FORM 10-Q | 13
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
| Investment Securities | Foreign Currency Translation Adjustments | Cash Flow Hedges | Benefit Plans | Accumulated Other Comprehensive Loss | |||||||||||||
| Balance at December 31, 2019 | $ | $ | ( | $ | $ | ( | $ | ( | |||||||||
Other comprehensive income (loss) before reclassifications | ( | ( | ( | ( | |||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | |||||||||||||||||
| Deferred taxes | ( | ( | |||||||||||||||
| Other comprehensive income (loss) | ( | ( | ( | ( | |||||||||||||
Less: Other comprehensive income (loss) attributable to noncontrolling interests | |||||||||||||||||
| Balance at March 31, 2020 | $ | $ | ( | $ | $ | ( | $ | ( | |||||||||
The amounts reclassified from accumulated other comprehensive loss during the three months ended March 31, 2021 and 2020 for benefit plans 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).
NOTE 13. FINANCIAL INSTRUMENTS
RECURRING FAIR VALUE MEASUREMENTS
| March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Net Balance | Level 1 | Level 2 | Level 3 | Net Balance | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
Derivatives | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Investment securities | ||||||||||||||||||||||||||
| Total assets | ||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
| Derivatives | ( | ( | ( | ( | ||||||||||||||||||||||
| Total liabilities | $ | $ | ( | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||
There were no transfers between Level 1, 2 and 3 during the three months ended March 31, 2021.
| 2021 | 2020 | |||||||
| Balance at January 1 | $ | $ | ||||||
| Proceeds at maturity | ( | ( | ||||||
| Unrealized gains (losses) recognized in accumulated other comprehensive income (loss) | ( | |||||||
| Balance at March 31 | $ | $ | ||||||
Baker Hughes Holdings LLC 2021 First Quarter FORM 10-Q | 14
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
| March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||
| 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) | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Equity securities (2) | ( | ( | ||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | $ | $ | $ | ( | $ | ||||||||||||||||
(1)All of our investment securities are classified as available for sale instruments. Non-U.S. debt securities mature within two years .
(2)Gains (losses) recorded to earnings related to these securities were $(786 ) million and $(13 ) million for the three months ended March 31, 2021 and 2020, respectively.
As of March 31, 2021 and December 31, 2020, our equity securities consist primarily of our investment in C3.ai, which consists of 10,813,095 11 713 million and $1,500 million, respectively. For the three months ended March 31, 2021, we recorded a mark-to-market unrealized loss of $788 million on our investment in C3.ai, which is reported in the “Other non-operating income (loss)” caption in our condensed consolidated statement of income (loss). See “Note 15. Related Party Transactions” for further details on our agreements with C3.ai.
As of March 31, 2021 and December 31, 2020, $718 million and $1,514 million of total investment securities are recorded in "All other current assets" and $11 million and $18 million are recorded in "All other assets" of the condensed consolidated statements of financial position, respectively.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Our financial instruments include cash, cash equivalents, current receivables, certain investments, accounts payable, short and long-term debt, and derivative financial instruments. Except for long-term debt, the estimated fair value of these financial instruments as of March 31, 2021 and December 31, 2020 approximates their carrying value as reflected in our condensed consolidated financial statements. For further information on the fair value of our debt, see "Note 9. Borrowings."
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Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
DERIVATIVES AND HEDGING
We use derivatives to manage our risks and do not use derivatives for speculation. The table below summarizes the fair value of all derivatives, including hedging instruments and embedded derivatives.
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||
| Derivatives accounted for as hedges | ||||||||||||||
| Currency exchange contracts | $ | $ | $ | $ | ||||||||||
| Interest rate swap contracts | ||||||||||||||
| Derivatives not accounted for as hedges | ||||||||||||||
| Currency exchange contracts and other | ( | ( | ||||||||||||
| Total derivatives | $ | $ | ( | $ | $ | ( | ||||||||
Derivatives are classified in condensed consolidated statements of financial position depending on their respective maturity date. As of March 31, 2021 and December 31, 2020, $135 million and $115 million of derivative assets are recorded in "All other current assets" and $1 million and $3 million are recorded in "All other assets" of the condensed consolidated statements of financial position, respectively. As of March 31, 2021 and December 31, 2020, $34 million and $48 million of derivative liabilities are recorded in "All other current liabilities" and nil and $4 million are recorded in "All other liabilities" of the condensed consolidated statements of financial position, respectively.
FORMS OF HEDGING
Cash Flow Hedges
We use cash flow hedging primarily to reduce or eliminate the effects of foreign exchange rate changes on purchase and sale contracts. Accordingly, the vast majority of our derivative activity in this category consists of currency exchange contracts. In addition, we are exposed to interest rate risk fluctuations in connection with the planned issuance of long-term debt. During the three months ended March 31, 2021, the Company executed interest rate swap contracts designated as cash flow hedges. These contracts are expected to mitigate interest rate risk associated with the anticipated refinancing of certain portions of long-term debt.
Changes in the fair value of cash flow hedges are recorded in a separate component of equity (referred to as Accumulated Other Comprehensive Income, or AOCI) and are recorded in earnings in the period in which the hedged transaction occurs. See "Note 12. Members' Equity" for further information on activity in AOCI for cash flow hedges.
As of March 31, 2021 and December 31, 2020, the maximum term of derivative instruments that hedge forecasted transactions was two years and one year , respectively.
Economic Hedges
These derivatives are not designated as hedges from an accounting standpoint (and therefore we do not apply hedge accounting to the relationship) but otherwise serve the same economic purpose as other hedging arrangements. Economic hedges are marked to fair value through earnings each period.
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Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
The following table summarizes the gains (losses) from derivatives not designated as hedges in the condensed consolidated statements of income (loss).
| Derivatives not designated as hedging instruments | Condensed consolidated statement of income caption | Three Months Ended March 31, | |||||||||
| 2021 | 2020 | ||||||||||
Currency exchange contracts (1) | Cost of goods sold | $ | $ | ||||||||
| Currency exchange contracts | Cost of services sold | ||||||||||
| Commodity derivatives | Cost of goods sold | ( | |||||||||
| Other derivatives | Other non-operating income (loss), net | ||||||||||
Total (2) | $ | $ | |||||||||
(1)Excludes gains of $3 million and $7 million on embedded derivatives for the three months ended March 31, 2021 and 2020, respectively, as embedded derivatives are not considered to be hedging instruments in our economic hedges.
(2)The effect on earnings of derivatives not designated as hedges is substantially offset by the change in fair value of the economically hedged items in the current and future periods.
NOTIONAL AMOUNT OF DERIVATIVES
The notional amount of a derivative is the number of units of the underlying. A substantial majority of the outstanding notional amount of $7.0
COUNTERPARTY CREDIT RISK
Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our agreements) on an individual counterparty basis.
OTHER EQUITY INVESTMENTS
As of March 31, 2021 and December 31, 2020, the carrying amount of equity securities without readily determinable fair values was $554
NOTE 14. SEGMENT INFORMATION
Our reportable segments, which are the same as our operating segments, are organized based on the nature of markets and customers. We report our operating results through our four operating segments that consist of similar products and services within each segment as described below.
OILFIELD SERVICES (OFS)
Oilfield Services provides products and services for onshore and offshore operations across the lifecycle of a well, ranging from drilling, evaluation, completion, production and intervention. Products and services include diamond and tri-cone drill bits, drilling services, including directional drilling technology, measurement while drilling & logging while drilling, downhole completion tools and systems, wellbore intervention tools and services, wireline
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Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
services, drilling and completions fluids, oilfield and industrial chemicals, pressure pumping, and artificial lift technologies, including electrical submersible pumps.
OILFIELD EQUIPMENT (OFE)
Oilfield Equipment provides a broad portfolio of products and services required to facilitate the safe and reliable flow of hydrocarbons from the wellhead to the production facilities. The Oilfield Equipment portfolio has solutions for the subsea, offshore surface, and onshore operating environments. Products and services include subsea and surface pressure control and production systems and services, capital drilling equipment and services, flexible pipe systems for offshore and onshore applications, and life-of-field solutions including well intervention, covering the entire life cycle of a field.
TURBOMACHINERY & PROCESS SOLUTIONS (TPS)
Turbomachinery & Process Solutions provides equipment and related services for mechanical-drive, compression and power-generation applications across the oil and gas industry as well as products and services to serve the downstream segments of the industry including refining, petrochemical, distributed gas, flow and process control and other industrial applications. The Turbomachinery & Process Solutions portfolio includes drivers (aero-derivative gas turbines, heavy-duty gas turbines and synchronous and induction electric motors), compressors (centrifugal and axial, direct drive high speed, integrated, subsea compressors, turbo expanders and reciprocating), turn-key solutions (industrial modules and waste heat recovery), pumps, valves, and compressed natural gas (CNG) and small-scale liquefied natural gas (LNG) solutions used primarily for shale oil and gas field development.
DIGITAL SOLUTIONS (DS)
Digital Solutions provides equipment, software, and services for a wide range of industries, including oil & gas, power generation, aerospace, metals, and transportation. The offerings include sensor-based process measurement, non-destructive testing and inspection, turbine, generator and plant controls and condition monitoring, as well as pipeline integrity solutions.
SEGMENT RESULTS