SEC Filing | Baker Hughes

View:

Download DOC

Download PDF

Download XLS

Download XBRL

llc-20210630

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


☐						TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-09397


Baker Hughes Holdings LLC

(Exact name of registrant as specified in its charter)


Delaware		76-0207995
(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
Share 5.125% Senior Notes due 2040	-	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, 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.
PART I -	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Statements of Income (Loss) (Unaudited) - Three and six months ended June 30, 2021 and 2020	1

	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) - Three and six months ended June 30, 2021 and 2020	2

	Condensed Consolidated Statements of Financial Position (Unaudited) - June 30, 2021 and December 31, 2020	3

	Condensed Consolidated Statements of Changes in Members' Equity (Unaudited) - Three and six months ended June 30, 2021 and 2020	4

	Condensed Consolidated Statements of Cash Flows (Unaudited) - Six months ended June 30, 2021 and 2020	6

	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	39

PART II -	OTHER INFORMATION

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3.	Defaults Upon Senior Securities	40

Item 4.	Mine Safety Disclosures	40

Item 5.	Other Information	40

Item 6.	Exhibits	40

	Signatures	41

Baker Hughes Holdings LLC 2021 Second 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 June 30,				Six Months Ended June 30,
(In millions, except per unit 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	—		—		—		14,717
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		26,215
Operating income (loss)	194		(52)		358		(16,055)
Other non-operating loss, net	(63)		(244)		(689)		(219)
Interest expense, net	(65)		(69)		(138)		(128)
Income (loss) before income taxes	66		(365)		(469)		(16,402)
Provision for income taxes	(149)		(55)		(233)		(63)
Net loss	(83)		(420)		(702)		(16,465)
Less: Net income attributable to noncontrolling interests	10		6		19		14
Net loss attributable to Baker Hughes Holdings LLC	$	(93)	$	(426)	$	(721)	$	(16,479)


Cash distribution per common unit	$	0.18	$	0.18	$	0.36	$	0.36

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Baker Hughes Holdings LLC 2021 Second Quarter FORM 10-Q | 1

Baker Hughes Holdings LLC

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	$	(83)	$	(420)	$	(702)	$	(16,465)
Less: Net income attributable to noncontrolling interests	10		6		19		14
Net loss attributable to Baker Hughes Holdings LLC	(93)		(426)		(721)		(16,479)
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		31
Other comprehensive income (loss)	192		49		149		(215)
Less: Other comprehensive loss attributable to noncontrolling interests	—		(2)		—		(2)
Other comprehensive income (loss) attributable to Baker Hughes Holdings LLC	192		51		149		(213)
Comprehensive income (loss)	109		(371)		(553)		(16,680)
Less: Comprehensive income attributable to noncontrolling interests	10		4		19		12
Comprehensive income (loss) attributable to Baker Hughes Holdings LLC	$	99	$	(375)	$	(572)	$	(16,692)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Baker Hughes Holdings LLC 2021 Second Quarter FORM 10-Q | 2

Baker Hughes Holdings LLC

Condensed Consolidated Statements of Financial Position

(Unaudited)


(In millions)	June 30, 2021		December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	3,902	$	4,125
Current receivables, net	5,492		5,700
Inventories, net	4,212		4,421
All other current assets	1,980		2,280
Total current assets	15,586		16,526
Property, plant and equipment (net of accumulated depreciation of $5,079 and $5,115)	5,086		5,358
Goodwill	5,813		5,739
Other intangible assets, net	4,202		4,397
Contract and other deferred assets	1,836		2,001
All other assets	3,128		2,955
Deferred income taxes	991		953
Total assets	$	36,642	$	37,929
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	2,768		2,431
Total current liabilities	9,879		10,306
Long-term debt	6,722		6,744
Deferred income taxes	93		108
Liabilities for pensions and other postretirement benefits	1,163		1,217
All other liabilities	1,430		1,391
Members' equity:
Members' capital, common units 1,042 and 1,035 issued and outstanding as of June 30, 2021 and December 31, 2020, respectively	36,266		36,512
Retained loss	(16,660)		(15,939)
Accumulated other comprehensive loss	(2,393)		(2,542)
Baker Hughes Holdings LLC equity	17,213		18,031
Noncontrolling interests	142		132
Total equity	17,355		18,163
Total liabilities and equity	$	36,642	$	37,929

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Baker Hughes Holdings LLC 2021 Second 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	$	36,512	$	(15,939)	$	(2,542)	$	132	$	18,163
Comprehensive loss:
Net income (loss)			(721)				19		(702)
Other comprehensive income					149				149
Regular cash distribution to Members ($0.36 per unit)	(375)								(375)


Baker Hughes stock-based compensation cost	102								102

Other	27						(9)		18
Balance at June 30, 2021	$	36,266	$	(16,660)	$	(2,393)	$	142	$	17,355


(In millions, except per unit amounts)	Members' Capital		Retained Loss		Accumulated Other Comprehensive Loss		Non- controlling Interests		Total Equity
Balance at March 31, 2021	$	36,392	$	(16,567)	$	(2,585)	$	140	$	17,380
Comprehensive loss:
Net income (loss)			(93)				10		(83)
Other comprehensive income					192				192
Regular cash distribution to Members ($0.18 per unit)	(188)								(188)


Baker Hughes stock-based compensation cost	52								52

Other	10						(8)		2
Balance at June 30, 2021	$	36,266	$	(16,660)	$	(2,393)	$	142	$	17,355

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Baker Hughes Holdings LLC 2021 Second Quarter FORM 10-Q | 4

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, 2019	$	36,998	$	(110)	$	(2,589)	$	115	$	34,414
Comprehensive loss:
Net income (loss)			(16,479)				14		(16,465)
Other comprehensive loss					(213)		(2)		(215)
Regular cash distribution to Members ($0.36 per unit)	(371)								(371)



Baker Hughes stock-based compensation cost	112								112
Other	23		(4)				(1)		18
Balance at June 30, 2020	$	36,762	$	(16,593)	$	(2,802)	$	126	$	17,493


(In millions, except per unit amounts)	Members' Capital		Retained Loss		Accumulated Other Comprehensive Loss		Non- controlling Interests		Total Equity
Balance at March 31, 2020	$	36,882	$	(16,167)	$	(2,853)	$	123	$	17,985
Comprehensive loss:
Net income (loss)			(426)				6		(420)
Other comprehensive income (loss)					51		(2)		49
Regular cash distribution to Members ($0.18 per unit)	(186)								(186)



Baker Hughes stock-based compensation cost	56								56
Other	10						(1)		9
Balance at June 30, 2020	$	36,762	$	(16,593)	$	(2,802)	$	126	$	17,493

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Baker Hughes Holdings LLC 2021 Second Quarter FORM 10-Q | 5

Baker Hughes Holdings LLC

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended June 30,
(In millions)	2021		2020
Cash flows from operating activities:
Net loss	$	(702)	$	(16,465)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization	570		694
Goodwill impairment	—		14,717
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	260		598
Inventories	119		(275)
Accounts payable	71		(491)
Progress collections and deferred income	2		593
Contract and other deferred assets	112		(38)
Other operating items, net	(89)		28
Net cash flows from operating activities	1,180		705
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

Distributions to Members	(375)		(372)


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	(223)		880
Cash and cash equivalents, beginning of period	4,125		3,245
Cash and cash equivalents, end of period	$	3,902	$	4,125
Supplemental cash flows disclosures:
Income taxes paid, net of refunds	$	48	$	214
Interest paid	$	157	$	141

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Baker Hughes Holdings LLC 2021 Second Quarter FORM 10-Q | 6

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 (BHI), is an energy technology company with a diversified portfolio of technologies and services that span the entire energy value chain. As of June 30, 2021, General Electric (GE) owns approximately 20.5% of our common units and Baker Hughes Company (Baker Hughes) owns directly or indirectly approximately 79.5% of our common units (collectively, the Members).

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

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 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.

Baker Hughes Holdings LLC 2021 Second Quarter FORM 10-Q | 7

Baker Hughes Holdings LLC

Notes to Unaudited Condensed Consolidated Financial Statements

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 15. 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	428		507
Other	785		890
Total current receivables	5,868		6,073
Less: Allowance for credit losses	(376)		(373)
Total current receivables, net	$	5,492	$	5,700

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 Second Quarter FORM 10-Q | 8

Baker Hughes Holdings LLC

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	$	15,382	$	4,186	$	2,171	$	2,411	$	24,150
Accumulated impairment at December 31, 2019	(2,633)		(867)		—		(254)		(3,754)
Balance at December 31, 2019	12,749		3,319		2,171		2,157		20,396
Impairment	(11,428)		(3,289)		—		—		(14,717)
Currency exchange and others	(20)		(24)		63		41		60
Balance at December 31, 2020	1,301		6		2,234		2,198		5,739

Currency exchange and others	—		(3)		1		76		74
Balance at June 30, 2021	$	1,301	$	3	$	2,235	$	2,274	$	5,813

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 Baker Hughes' 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, Baker Hughes' market capitalization declined significantly. Baker Hughes' 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

Baker Hughes Holdings LLC 2021 Second Quarter FORM 10-Q | 9

Baker Hughes Holdings LLC

Notes to Unaudited Condensed Consolidated Financial Statements

capital of the oil and gas services 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 $11,428 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

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

Baker Hughes Holdings LLC 2021 Second Quarter FORM 10-Q | 10

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:


	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 Holdings LLC 2021 Second Quarter FORM 10-Q | 11

Baker Hughes Holdings LLC

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 Holdings LLC 2021 Second Quarter FORM 10-Q | 12

Baker Hughes Holdings LLC

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 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.

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

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 provision for income taxes. For the three and six months ended June 30, 2021, the provision for income taxes was $149 million and $233 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 provision for income taxes was $55 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.

For the six months ended June 30, 2020, the provision for income taxes was $63 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.

Baker Hughes Holdings LLC 2021 Second Quarter FORM 10-Q | 13

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 by 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 six months ended June 30, 2021 and 2020, we issued 6,458 thousand and 5,391 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 six months ended June 30, 2021, GE's economic interest in us 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 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	723,999	650,065	311,433	377,428
Issue of Units to Baker Hughes under equity incentive plan	6,458	5,391	—	—


Exchange of common units (1)	97,406	—	(97,406)	—

Balance at June 30	827,863	655,456	214,027	377,428

(1)During the six months ended June 30, 2021, GE exchanged 97.4 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)

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, 2020	$	—	$	(2,096)	$	5	$	(451)	$	(2,542)
Other comprehensive income (loss) before reclassifications	—		107		(5)		30		132
Amounts reclassified from accumulated other comprehensive income (loss)	—		—		(6)		21		15
Deferred taxes	—		—		—		2		2
Other comprehensive income (loss)	—		107		(11)		53		149
Less: Other comprehensive income (loss) attributable to noncontrolling interests	—		—		—		—		—


Balance at June 30, 2021	$	—	$	(1,989)	$	(6)	$	(398)	$	(2,393)

Baker Hughes Holdings LLC 2021 Second Quarter FORM 10-Q | 14

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	$	2	$	(2,274)	$	10	$	(327)	$	(2,589)
Other comprehensive income (loss) before reclassifications	(2)		(236)		(9)		14		(233)
Amounts reclassified from accumulated other comprehensive income (loss)	—		—		—		21		21
Deferred taxes	—		—		1		(4)		(3)
Other comprehensive income (loss)	(2)		(236)		(8)		31		(215)
Less: Other comprehensive income (loss) attributable to noncontrolling interests	—		(2)		—		—		(2)



Balance at June 30, 2020	$	—	$	(2,506)	$	2	$	(298)	$	(2,802)

The amounts reclassified from accumulated other comprehensive loss during the six months ended June 30, 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) and recorded in "Other non-operating loss, net" in our condensed consolidated statements of income (loss).

NOTE 13. FINANCIAL INSTRUMENTS

RECURRING FAIR VALUE MEASUREMENTS

Our assets and liabilities measured at fair value on a recurring basis consists of derivative instruments and investment securities.

June 30, 2021

December 31, 2020

Level 1

Level 2

Level 3

Net Balance

Level 1

Level 2

Level 3

Net Balance