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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, 2021
OR | | | | | | | | |
☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-38143 (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) | (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 |
Class A Common Stock, par value $0.0001 per share | BKR | New York Stock Exchange |
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 ☑ No ☐
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 ☑ No ☐
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 | ☐ | | Non-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 16, 2021, the registrant had outstanding 828,487,126 shares of Class A Common Stock, $0.0001 par value per share and 214,026,897 shares of Class B Common Stock, $0.0001 par value per share.
Baker Hughes Company
Table of Contents
Baker Hughes Company 2021 Second Quarter FORM 10-Q | i
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Baker Hughes Company
Condensed Consolidated Statements of Income (Loss)
(Unaudited)
| | | | | | | | | | | | | | |
| Three Months Ended June 30, | Six Months Ended June 30, |
(In millions, except per share amounts) | 2021 | 2020 | 2021 | 2020 |
Revenue: | | | | |
Sales of goods | $ | 3,078 | | $ | 2,868 | | $ | 6,014 | | $ | 5,949 | |
Sales of services | 2,064 | | 1,868 | | 3,910 | | 4,211 | |
Total revenue | 5,142 | | 4,736 | | 9,924 | | 10,160 | |
| | | | |
Costs and expenses: | | | | |
Cost of goods sold | 2,674 | | 2,531 | | 5,208 | | 5,376 | |
Cost of services sold | 1,492 | | 1,527 | | 2,882 | | 3,351 | |
Selling, general and administrative | 642 | | 590 | | 1,229 | | 1,265 | |
Goodwill impairment | — | | — | | — | | 14,773 | |
Restructuring, impairment and other | 125 | | 103 | | 205 | | 1,429 | |
Separation related | 15 | | 37 | | 42 | | 77 | |
Total costs and expenses | 4,948 | | 4,788 | | 9,566 | | 26,271 | |
Operating income (loss) | 194 | | (52) | | 358 | | (16,111) | |
Other non-operating loss, net | (63) | | (244) | | (689) | | (219) | |
Interest expense, net | (65) | | (69) | | (138) | | (128) | |
Income (loss) before income taxes | 66 | | (365) | | (469) | | (16,458) | |
Benefit (provision) for income taxes | (143) | | 21 | | (213) | | 16 | |
Net loss | (77) | | (344) | | (682) | | (16,442) | |
Less: Net loss attributable to noncontrolling interests | (9) | | (149) | | (162) | | (6,020) | |
Net loss attributable to Baker Hughes Company | $ | (68) | | $ | (195) | | $ | (520) | | $ | (10,422) | |
| | | | |
Per share amounts: | | | |
Basic and diluted loss per Class A common stock | $ | (0.08) | | $ | (0.30) | | $ | (0.67) | | $ | (15.93) | |
| | | | |
Cash dividend per Class A common stock | $ | 0.18 | | $ | 0.18 | | $ | 0.36 | | $ | 0.36 | |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
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Baker Hughes Company
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
| | | | | | | | | | | | | | |
| Three Months Ended June 30, | Six Months Ended June 30, |
(In millions) | 2021 | 2020 | 2021 | 2020 |
Net loss | $ | (77) | | $ | (344) | | $ | (682) | | $ | (16,442) | |
Less: Net loss attributable to noncontrolling interests | (9) | | (149) | | (162) | | (6,020) | |
Net loss attributable to Baker Hughes Company | (68) | | (195) | | (520) | | (10,422) | |
Other comprehensive income (loss): | | | | |
Investment securities | — | | — | | — | | (2) | |
Foreign currency translation adjustments | 158 | | 41 | | 107 | | (236) | |
Cash flow hedges | (16) | | — | | (11) | | (8) | |
Benefit plans | 50 | | 8 | | 53 | | 30 | |
Other comprehensive income (loss) | 192 | | 49 | | 149 | | (216) | |
Less: Other comprehensive income (loss) attributable to noncontrolling interests | 39 | | 16 | | 28 | | (81) | |
Other comprehensive income (loss) attributable to Baker Hughes Company | 153 | | 33 | | 121 | | (135) | |
Comprehensive income (loss) | 115 | | (295) | | (533) | | (16,658) | |
Less: Comprehensive income (loss) attributable to noncontrolling interests | 30 | | (133) | | (134) | | (6,101) | |
Comprehensive income (loss) attributable to Baker Hughes Company | $ | 85 | | $ | (162) | | $ | (399) | | $ | (10,557) | |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
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Baker Hughes Company
Condensed Consolidated Statements of Financial Position
(Unaudited) | | | | | | | | |
(In millions, except par value) | June 30, 2021 | December 31, 2020 |
ASSETS |
Current assets: | | |
Cash and cash equivalents | $ | 3,913 | | $ | 4,132 | |
Current receivables, net | 5,407 | | 5,622 | |
Inventories, net | 4,212 | | 4,421 | |
All other current assets | 1,980 | | 2,280 | |
Total current assets | 15,512 | | 16,455 | |
Property, plant and equipment (net of accumulated depreciation of $5,079 and $5,115) | 5,086 | | 5,358 | |
Goodwill | 6,052 | | 5,977 | |
Other intangible assets, net | 4,202 | | 4,397 | |
Contract and other deferred assets | 1,836 | | 2,001 | |
All other assets | 2,990 | | 2,866 | |
Deferred income taxes | 991 | | 953 | |
Total assets | $ | 36,669 | | $ | 38,007 | |
LIABILITIES AND EQUITY |
Current liabilities: | | |
Accounts payable | $ | 3,593 | | $ | 3,532 | |
Short-term debt and current portion of long-term debt | 51 | | 889 | |
Progress collections and deferred income | 3,467 | | 3,454 | |
All other current liabilities | 2,694 | | 2,352 | |
Total current liabilities | 9,805 | | 10,227 | |
Long-term debt | 6,722 | | 6,744 | |
Deferred income taxes | 149 | | 186 | |
Liabilities for pensions and other postretirement benefits | 1,163 | | 1,217 | |
All other liabilities | 1,430 | | 1,391 | |
Equity: | | |
Class A Common Stock, $0.0001 par value - 2,000 authorized, 828 and 724 issued and outstanding as of June 30, 2021 and December 31, 2020, respectively | — | | — | |
Class B Common Stock, $0.0001 par value - 1,250 authorized, 214 and 311 issued and outstanding as of June 30, 2021 and December 31, 2020, respectively | — | | — | |
Capital in excess of par value | 26,253 | | 24,613 | |
Retained loss | (10,462) | | (9,942) | |
Accumulated other comprehensive loss | (1,901) | | (1,778) | |
Baker Hughes Company equity | 13,890 | | 12,893 | |
Noncontrolling interests | 3,510 | | 5,349 | |
Total equity | 17,400 | | 18,242 | |
Total liabilities and equity | $ | 36,669 | | $ | 38,007 | |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
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Baker Hughes Company
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | |
(In millions, except per share amounts) | Class A and 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, 2020 | $ | — | | $ | 24,613 | | $ | (9,942) | | $ | (1,778) | | $ | 5,349 | | $ | 18,242 | |
Comprehensive loss: | | | | | | |
Net loss | | | (520) | | | (162) | | (682) | |
Other comprehensive income | | | | 121 | | 28 | | 149 | |
Dividends on Class A common stock ($0.36 per share) | | (280) | | | | | (280) | |
Distributions to GE | | | | | (95) | | (95) | |
Effect of exchange of Class B common stock and associated BHH LLC Units for Class A common stock | | 1,845 | | | (245) | | (1,600) | | — | |
Stock-based compensation cost | | 102 | | | | | 102 | |
| | | | | | |
Other | | (27) | | | 1 | | (10) | | (36) | |
Balance at June 30, 2021 | $ | — | | $ | 26,253 | | $ | (10,462) | | $ | (1,901) | | $ | 3,510 | | $ | 17,400 | |
| | | | | | | | | | | | | | | | | | | | |
(In millions, except per share amounts) | Class A and Class B Common Stock | Capital in Excess of Par Value | Retained Loss | Accumulated Other Comprehensive Loss | Non- controlling Interests | Total Equity |
Balance at March 31, 2021 | $ | — | | $ | 25,357 | | $ | (10,394) | | $ | (1,920) | | $ | 4,381 | | $ | 17,424 | |
Comprehensive loss: | | | | | | |
Net loss | | | (68) | | | (9) | | (77) | |
Other comprehensive income | | | | 153 | | 39 | | 192 | |
Dividends on Class A common stock ($0.18 per share) | | (149) | | | | | (149) | |
Distributions to GE | | | | | (39) | | (39) | |
Effect of exchange of Class B common stock and associated BHH LLC Units for Class A common stock | | 988 | | | (134) | | (854) | | — | |
Stock-based compensation cost | | 52 | | | | | 52 | |
| | | | | | |
Other | | 5 | | | | (8) | | (3) | |
Balance at June 30, 2021 | $ | — | | $ | 26,253 | | $ | (10,462) | | $ | (1,901) | | $ | 3,510 | | $ | 17,400 | |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
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Baker Hughes Company
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | |
(In millions, except per share amounts) | Class A and 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, 2019 | $ | — | | $ | 23,565 | | $ | — | | $ | (1,636) | | $ | 12,570 | | $ | 34,499 | |
Comprehensive loss: | | | | | | |
Net loss | | | (10,422) | | | (6,020) | | (16,442) | |
Other comprehensive loss | | | | (135) | | (81) | | (216) | |
Dividends on Class A common stock ($0.36 per share) | | (236) | | | | | (236) | |
Distributions to GE | | | | | (136) | | (136) | |
| | | | | | |
| | | | | | |
Stock-based compensation cost | | 112 | | | | | 112 | |
Other | | (9) | | (2) | | | (5) | | (16) | |
Balance at June 30, 2020 | $ | — | | $ | 23,432 | | $ | (10,424) | | $ | (1,771) | | $ | 6,328 | | $ | 17,565 | |
| | | | | | | | | | | | | | | | | | | | |
(In millions, except per share amounts) | Class A and Class B Common Stock | Capital in Excess of Par Value | Retained Loss | Accumulated Other Comprehensive Loss | Non- controlling Interests | Total Equity |
Balance at March 31, 2020 | $ | — | | $ | 23,486 | | $ | (10,229) | | $ | (1,804) | | $ | 6,532 | | $ | 17,985 | |
Comprehensive loss: | | | | | | |
Net loss | | | (195) | | | (149) | | (344) | |
Other comprehensive income | | | | 33 | | 16 | | 49 | |
Dividends on Class A common stock ($0.18 per share) | | (118) | | | | | (118) | |
Distributions to GE | | | | | (68) | | (68) | |
| | | | | | |
| | | | | | |
Stock-based compensation cost | | 56 | | | | | 56 | |
Other | | 8 | | | | (3) | | 5 | |
Balance at June 30, 2020 | $ | — | | $ | 23,432 | | $ | (10,424) | | $ | (1,771) | | $ | 6,328 | | $ | 17,565 | |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
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Baker Hughes Company
Condensed Consolidated Statements of Cash Flows
(Unaudited) | | | | | | | | |
| Six Months Ended June 30, |
(In millions) | 2021 | 2020 |
Cash flows from operating activities: | | |
Net loss | $ | (682) | | $ | (16,442) | |
Adjustments to reconcile net loss to net cash flows from operating activities: | | |
Depreciation and amortization | 570 | | 694 | |
Goodwill impairment | — | | 14,773 | |
Intangible assets impairment | — | | 725 | |
Property, plant and equipment impairment | 22 | | 226 | |
Inventory impairment | — | | 176 | |
Loss on equity securities | 815 | | — | |
Loss on sale of business | — | | 217 | |
| | |
| | |
Changes in operating assets and liabilities: | | |
Current receivables | 267 | | 598 | |
Inventories | 119 | | (275) | |
Accounts payable | 71 | | (490) | |
Progress collections and deferred income | 2 | | 593 | |
Contract and other deferred assets | 112 | | (38) | |
Other operating items, net | (112) | | (49) | |
Net cash flows from operating activities | 1,184 | | 708 | |
Cash flows from investing activities: | | |
Expenditures for capital assets | (392) | | (602) | |
Proceeds from disposal of assets | 91 | | 109 | |
| | |
| | |
Other investing items, net | 171 | | 56 | |
Net cash flows used in investing activities | (130) | | (437) | |
Cash flows from financing activities: | | |
Net repayments of debt and other borrowings | (45) | | (149) | |
Proceeds from (repayment of) commercial paper | (832) | | 737 | |
Proceeds from issuance of long-term debt | — | | 500 | |
Dividends paid | (280) | | (236) | |
Distributions to GE | (95) | | (136) | |
| | |
| | |
Other financing items, net | (33) | | (21) | |
Net cash flows from (used in) financing activities | (1,285) | | 695 | |
Effect of currency exchange rate changes on cash and cash equivalents | 12 | | (83) | |
Increase (decrease) in cash and cash equivalents | (219) | | 883 | |
Cash and cash equivalents, beginning of period | 4,132 | | 3,249 | |
Cash and cash equivalents, end of period | $ | 3,913 | | $ | 4,132 | |
Supplemental cash flows disclosures: | | |
Income taxes paid, net of refunds | $ | 48 | | $ | 211 | |
Interest paid | $ | 157 | | $ | 141 | |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
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Baker Hughes 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 Company (Baker Hughes, the Company, we, us, or our) is an energy technology company with a diversified portfolio of technologies and services that span the entire energy value chain. We are a holding company and have no material assets other than our 79.5% ownership interest in Baker Hughes Holdings LLC (BHH LLC) and certain intercompany and tax related balances. BHH 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.
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).
We hold a majority economic interest in BHH LLC and conduct and exercise full control over all activities of BHH LLC without the approval of any other member. Accordingly, we consolidate the financial results of BHH LLC and report a noncontrolling interest in our condensed consolidated financial statements for the economic interest held by General Electric (GE). As of June 30, 2021, GE's interest in BHH LLC was 20.5%. See "Note 12. Equity" for further information.
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 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.
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 16. Related Party Transactions" for further information.
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 2020 Annual Report for the discussion of our significant accounting policies.
Cash and Cash Equivalents
As of June 30, 2021 and December 31, 2020, we had $639 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
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Baker Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
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 June 30, 2021 and December 31, 2020, respectively, held on behalf of GE.
Cash and cash equivalents includes a total of $16 million and $44 million of cash at June 30, 2021 and December 31, 2020, respectively, held on behalf of GE, and a corresponding liability is reported in short-term debt. See "Note 16. Related Party Transactions" for further details.
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
We disaggregate our revenue from contracts with customers by primary geographic markets. | | | | | | | | | | | | | | |
| Three Months Ended June 30, | Six Months Ended June 30, |
Total Revenue | 2021 | 2020 | 2021 | 2020 |
U.S. | $ | 1,085 | | $ | 983 | | $ | 2,138 | | $ | 2,298 | |
Non-U.S. | 4,057 | | 3,753 | | 7,786 | | 7,862 | |
Total | $ | 5,142 | | $ | 4,736 | | $ | 9,924 | | $ | 10,160 | |
REMAINING PERFORMANCE OBLIGATIONS
As of June 30, 2021 and 2020, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $23.8 billion and $22.9 billion, respectively. As of June 30, 2021, we expect to recognize revenue of approximately 49%, 66% and 88% 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, 2021 | December 31, 2020 |
Customer receivables | $ | 4,655 | | $ | 4,676 | |
Related parties | 343 | | 429 | |
Other | 785 | | 890 | |
Total current receivables | 5,783 | | 5,995 | |
Less: Allowance for credit losses | (376) | | (373) | |
Total current receivables, net | $ | 5,407 | | $ | 5,622 | |
Customer receivables are recorded at the invoiced amount. Related parties consists 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.
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Baker Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 4. INVENTORIES
Inventories, net of reserves of $389 million and $421 million as of June 30, 2021 and December 31, 2020, respectively, are comprised of the following: | | | | | | | | |
| June 30, 2021 | December 31, 2020 |
Finished goods | $ | 2,338 | | $ | 2,337 | |
Work in process and raw materials | 1,874 | | 2,084 | |
| | |
Total inventories, net | $ | 4,212 | | $ | 4,421 | |
During the three and six months ended June 30, 2020, we recorded inventory impairments of $16 million, predominately in our Oilfield Equipment segment, and $176 million, predominately in our Oilfield Services segment, respectively, 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
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, 2019, gross | $ | 15,676 | | $ | 4,186 | | $ | 2,171 | | $ | 2,411 | | $ | 24,444 | |
Accumulated impairment at December 31, 2019 | (2,633) | | (867) | | — | | (254) | | (3,754) | |
Balance at December 31, 2019 | 13,043 | | 3,319 | | 2,171 | | 2,157 | | 20,690 | |
Impairment | (11,484) | | (3,289) | | — | | — | | (14,773) | |
Currency exchange and others | (20) | | (24) | | 63 | | 41 | | 60 | |
Balance at December 31, 2020 | 1,539 | | 6 | | 2,234 | | 2,198 | | 5,977 | |
| | | | | |
Currency exchange and others | 1 | | (3) | | 1 | | 76 | | 75 | |
Balance at June 30, 2021 | $ | 1,540 | | $ | 3 | | $ | 2,235 | | $ | 2,274 | | $ | 6,052 | |
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 reportable segments. We also test goodwill for impairment whenever events or circumstances occur which, in our judgment, could more likely than not reduce the fair value of one or more reporting units below its carrying value. Potential impairment indicators include, but are not limited to, (i) the results of our most recent annual or interim impairment testing, 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, and (iii) declines in our market capitalization below our book value, and the magnitude and duration of those declines, if any.
During the second 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. Our 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
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Baker Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
industry, traded at prices that were the lowest 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 the Organization of Petroleum Exporting Countries (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. Based upon the results of our interim quantitative impairment test, we concluded that the carrying value of the Oilfield Services and Oilfield Equipment reporting units exceeded their estimated fair value as of March 31, 2020, which resulted in goodwill impairment charges of $11,484 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
Intangible assets are comprised of the following: | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | December 31, 2020 |
| Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net |
Customer relationships | $ | 1,958 | | $ | (739) | | $ | 1,219 | | $ | 2,261 | | $ | (916) | | $ | 1,345 | |
Technology | 1,114 | | (728) | | 386 | | 1,127 | | (696) | | 431 | |
Trade names and trademarks | 294 | | (166) | | 128 | | 326 | | (181) | | 145 | |
Capitalized software | 1,299 | | (1,053) | | 246 | | 1,294 | | (1,041) | | 253 | |
| | | | | | |
| | | | | | |
Finite-lived intangible assets | 4,665 | | (2,686) | | 1,979 | | 5,008 | | (2,834) | | 2,174 | |
Indefinite-lived intangible assets | 2,223 | | — | | 2,223 | | 2,223 | | — | | 2,223 | |
Total intangible assets | $ | 6,888 | | $ | (2,686) | | $ | 4,202 | | $ | 7,231 | | $ | (2,834) | | $ | 4,397 | |
Intangible assets are generally amortized on a straight-line basis with estimated useful lives ranging from 1 to 35 years. Amortization expense for the three months ended June 30, 2021 and 2020 was $65 million and $72 million, respectively, and $134 million and $156 million for the six months ended June 30, 2021 and 2020, respectively.
Estimated amortization expense for the remainder of 2021 and each of the subsequent five fiscal years is expected to be as follows: | | | | | |
Year | Estimated Amortization Expense |
Remainder of 2021 | $ | 116 | |
2022 | 210 | |
2023 | 198 | |
2024 | 181 | |
2025 | 134 | |
2026 | 94 | |
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Baker Hughes 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: | | | | | | | | |
| June 30, 2021 | December 31, 2020 |
Long-term product service agreements | $ | 621 | | $ | 660 | |
Long-term equipment contracts (1) | 1,015 | | 1,160 | |
Contract assets (total revenue in excess of billings) | 1,636 | | 1,820 | |
Deferred inventory costs | 164 | | 138 | |
Non-recurring engineering costs | 36 | | 43 | |
| | |
Contract and other deferred assets | $ | 1,836 | | $ | 2,001 | |
(1)Reflects revenue earned in excess of billings on our long-term contracts to construct technically complex equipment and certain other service agreements.
Revenue recognized during the three months ended June 30, 2021 and 2020 from performance obligations satisfied (or partially satisfied) in previous periods related to our long-term service agreements was $9 million and $24 million, respectively, and $9 million and $30 million during the six months ended June 30, 2021 and 2020, 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, 2021 | December 31, 2020 |
Progress collections | $ | 3,345 | | $ | 3,352 | |
Deferred income | 122 | | 102 | |
Progress collections and deferred income (contract liabilities) | $ | 3,467 | | $ | 3,454 | |
Revenue recognized during the three months ended June 30, 2021 and 2020 that was included in the contract liabilities at the beginning of the period was $708 million and $320 million, respectively, and $1,585 million and $827 million during the six months ended June 30, 2021 and 2020, 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 June 30, | Six Months Ended June 30, |
Operating Lease Expense | 2021 | 2020 | 2021 | 2020 |
Long-term fixed lease | $ | 65 | | $ | 70 | | $ | 128 | | $ | 142 | |
Long-term variable lease | 8 | | 9 | | 16 | | 20 | |
Short-term lease | 110 | | 119 | | 210 | | 280 | |
Total operating lease expense | $ | 183 | | $ | 198 | | $ | 354 | | $ | 442 | |
Cash flows used in operating activities for operating leases approximates our expense for the three and six months ended June 30, 2021 and 2020.
Baker Hughes Company 2021 Second Quarter FORM 10-Q | 11
Baker Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
The weighted-average remaining lease term as of June 30, 2021 and December 31, 2020 was approximately nine years and eight years for our operating leases, respectively. The weighted-average discount rate used to determine the operating lease liability as of June 30, 2021 and December 31, 2020 was 3.6% and 3.7%, respectively.
NOTE 9. BORROWINGS
Short-term and long-term borrowings are comprised of the following: | | | | | | | | |
| June 30, 2021 | December 31, 2020 |
Short-term borrowings | | |
| | |
| | |
Commercial paper | $ | — | | $ | 801 | |
Short-term borrowings from GE | 16 | | 45 | |
Other borrowings | 35 | | 43 | |
Total short-term borrowings | 51 | | 889 | |
| | |
| | |
Long-term borrowings | | |
| | |
2.773% Senior Notes due December 2022 | 1,248 | | 1,247 | |
8.55% Debentures due June 2024 | 120 | | 123 | |
3.337% Senior Notes due December 2027 | 1,344 | | 1,344 | |
6.875% Notes due January 2029 | 281 | | 284 | |
3.138% Senior Notes due November 2029 | 522 | | 522 | |
4.486% Senior Notes due May 2030 | 497 | | 497 | |
5.125% Senior Notes due September 2040 | 1,294 | | 1,297 | |
4.08% Senior Notes due December 2047 | 1,337 | | 1,337 | |
Other long-term borrowings | 78 | | 93 | |
Total long-term borrowings | 6,722 | | 6,744 | |
Total borrowings | $ | 6,773 | | $ | 7,633 | |
The estimated fair value of total borrowings at June 30, 2021 and December 31, 2020 was $7,567 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 June 30, 2021 and December 31, 2020, there were no borrowings under the Credit Agreement. In addition, we have a commercial paper program under which we may issue from time to time commercial paper with maturities of no more than 397 days. As a result of the repayment of our commercial paper that matured on April 30, 2021, our authorized commercial paper program was reduced from $3.8 billion 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 June 30, 2021, Baker Hughes Co-Obligor, Inc. is a co-obligor of our long-term debt securities totaling $6,644 million.
Baker Hughes Company 2021 Second Quarter FORM 10-Q | 12
Baker Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
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 engaging in certain merger, consolidation and asset sale transactions in excess of specified limits. At June 30, 2021, we were in compliance with all debt covenants.
See "Note 16. 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.
The components of net periodic cost of plans sponsored by us are as follows: | | | | | | | | | | | | | | |
| Three Months Ended June 30, | Six Months Ended June 30, |
| 2021 | 2020 | 2021 | 2020 |
Service cost | $ | 7 | | $ | 7 | | $ | 14 | | $ | 14 | |
Interest cost | 16 | | 20 | | 32 | | 40 | |
Expected return on plan assets | (31) | | (31) | | (63) | | (62) | |
| | | | |
Amortization of net actuarial loss | 9 | | 8 | | 20 | | 16 | |
| | | | |
| | | | |
Net periodic cost | $ | 1 | | $ | 4 | | $ | 3 | | $ | 8 | |
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 and six months ended June 30, 2021, the provision for income taxes was $143 million and $213 million, respectively. The difference between the U.S. statutory tax rate of 21% and the effective tax rate is primarily related to losses with no tax benefit due to valuation allowances and changes in unrecognized tax benefits.
For the three months ended June 30, 2020, the income tax benefit was $21 million. The difference between the U.S. statutory tax rate of 21% and the effective tax rate is primarily related to losses with no tax benefit due to valuation allowances, partially offset by the impact of the U.S. Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
For the six months ended June 30, 2020, the income tax benefit was $16 million. The difference between the U.S. statutory tax rate of 21% and the effective tax rate is primarily related to non-deductible goodwill impairment, the geographical mix of earnings and losses, and 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 shares of Class A common stock and Class B common stock outstanding as of June 30, 2021 is 828 million and 214 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 BHH LLC form a paired interest. While each share of Class B common stock has equal voting rights to a share of Class
Baker Hughes Company 2021 Second Quarter FORM 10-Q | 13
Baker Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
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 BHH LLC Units (LLC Units) to receive distributions on an equal amount of any dividend paid by the Company. In July 2020, GE launched a program to divest of its ownership interest in us, at its discretion, in a series of transactions over approximately three years, subject to market conditions and other factors.
During the six months ended June 30, 2021, GE's economic interest in BHH LLC was reduced to approximately 20.5% primarily as a result of the exchange of 97.4 million shares of Class B common stock, and associated LLC Units.
The following table presents the changes in the number of shares outstanding (in thousands): | | | | | | | | | | | | | | |
| Class A Common Stock | Class B Common Stock |
| 2021 | 2020 | 2021 | 2020 |
Balance at January 1 | 723,999 | | 650,065 | | 311,433 | | 377,428 | |
Issue of shares upon vesting of restricted stock units (1) | 4,881 | | 3,107 | | — | | — | |
Issue of shares on exercises of stock options (1) | 261 | | 5 | | — | | |