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, 2022
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 14, 2022, the registrant had outstanding 1,025,166,953 common units. None of the common units are publicly traded.
Baker Hughes Holdings LLC
Table of Contents
Page No. | ||||||||
Baker Hughes Holdings LLC 2022 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) | 2022 | 2021 | ||||||
| Revenue: | ||||||||
| Sales of goods | $ | $ | ||||||
| Sales of services | ||||||||
| Total revenue | ||||||||
| Costs and expenses: | ||||||||
| Cost of goods sold | ||||||||
| Cost of services sold | ||||||||
| Selling, general and administrative | ||||||||
| Restructuring, impairment and other | ||||||||
| Separation related | ||||||||
| Total costs and expenses | ||||||||
| Operating income | ||||||||
| Other non-operating loss, net | ( | ( | ||||||
| Interest expense, net | ( | ( | ||||||
| Income (loss) before income taxes | ( | |||||||
| Provision for income taxes | ( | ( | ||||||
| Net income (loss) | ( | |||||||
| Less: Net income attributable to noncontrolling interests | ||||||||
| Net income (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 2022 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) | 2022 | 2021 | ||||||
| Net income (loss) | $ | $ | ( | |||||
| Less: Net income attributable to noncontrolling interests | ||||||||
| Net income (loss) attributable to Baker Hughes Holdings LLC | ( | |||||||
| Other comprehensive income (loss): | ||||||||
| Foreign currency translation adjustments | ( | |||||||
| Cash flow hedges | ||||||||
| Benefit plans | ||||||||
| Other comprehensive income (loss) | ( | |||||||
| Less: Other comprehensive income (loss) attributable to noncontrolling interests | ( | |||||||
| Other comprehensive income (loss) attributable to Baker Hughes Holdings LLC | ( | |||||||
| Comprehensive income (loss) | ( | |||||||
| Less: Comprehensive income attributable to noncontrolling interests | ||||||||
| Comprehensive income (loss) attributable to Baker Hughes Holdings LLC | $ | $ | ( | |||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Baker Hughes Holdings LLC 2022 First Quarter Form 10-Q | 2
Baker Hughes Holdings LLC
Condensed Consolidated Statements of Financial Position
(Unaudited)
(In millions) | March 31, 2022 | December 31, 2021 | ||||||
| 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 | $ | $ | ||||||
| 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 2022 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, 2021 | $ | $ | ( | $ | ( | $ | $ | ||||||||||
| Comprehensive income: | |||||||||||||||||
| Net income | |||||||||||||||||
| Other comprehensive income (loss) | ( | ||||||||||||||||
Regular cash distribution to Members ($ | ( | ( | |||||||||||||||
| Repurchase and cancellation of common units | ( | ( | |||||||||||||||
| Baker Hughes stock-based compensation cost | |||||||||||||||||
| Other | ( | ||||||||||||||||
| Balance at March 31, 2022 | $ | $ | ( | $ | ( | $ | $ | ||||||||||
(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 income (loss): | |||||||||||||||||
| Net income (loss) | ( | ( | |||||||||||||||
| Other comprehensive loss | ( | ( | |||||||||||||||
Regular cash distribution to Members ($ | ( | ( | |||||||||||||||
| Baker Hughes stock-based compensation cost | |||||||||||||||||
| Other | ( | ( | |||||||||||||||
| Balance at March 31, 2021 | $ | $ | ( | $ | ( | $ | $ | ||||||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Baker Hughes Holdings LLC 2022 First Quarter Form 10-Q | 4
Baker Hughes Holdings LLC
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Three Months Ended March 31, | ||||||||
| (In millions) | 2022 | 2021 | ||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | $ | ( | |||||
| Adjustments to reconcile net income (loss) to net cash flows from operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| (Gain) loss on equity securities | ( | |||||||
| 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 | ( | ( | ||||||
| Repurchase of common units | ( | |||||||
| Other financing items, net | ( | ( | ||||||
| Net cash flows used in financing activities | ( | ( | ||||||
| Effect of currency exchange rate changes on cash and cash equivalents | ||||||||
| 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 2022 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 ("BHI"), is an energy technology company with a diversified portfolio of technologies and services that span the energy and industrial value chain. As of March 31, 2022, General Electric ("GE") owns 4 % of our common units and Baker Hughes Company ("Baker Hughes") owns directly or indirectly 96 % of our common units (collectively, "the Members"). 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, 2021 ("2021 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. The condensed consolidated financial statements include the accounts of BHH LLC and all of its subsidiaries and affiliates which it controls or variable interest entities for which we have determined that we are the primary beneficiary. All intercompany accounts and transactions have been eliminated.
In the Company's financial statements and notes, certain prior year amounts have been reclassified to conform to the current year presentation. In the notes to the 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.
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 2021 Annual Report for the discussion of our significant accounting policies.
Cash and Cash Equivalents
As of March 31, 2022 and December 31, 2021, we had $619 million and $601 million, respectively, of cash held in bank accounts that cannot be readily 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.
NEW ACCOUNTING STANDARDS TO BE ADOPTED
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.
Baker Hughes Holdings LLC 2022 First Quarter Form 10-Q | 6
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 2. REVENUE RELATED TO CONTRACTS WITH CUSTOMERS
DISAGGREGATED REVENUE
We disaggregate our revenue from contracts with customers by primary geographic markets.
| Three Months Ended March 31, | ||||||||
| Total Revenue | 2022 | 2021 | ||||||
| U.S. | $ | $ | ||||||
| Non-U.S. | ||||||||
| Total | $ | $ | ||||||
REMAINING PERFORMANCE OBLIGATIONS
As of March 31, 2022 and 2021, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $25.8 billion and $23.2 billion, respectively. As of March 31, 2022, we expect to recognize revenue of approximately 53 %, 68 % and 87 % of the total remaining performance obligations within 2 , 5 , and 15 years, respectively, and the remaining thereafter. Contract modifications could affect both the timing to complete as well as the amount to be received as we fulfill the related remaining performance obligations.
NOTE 3. CURRENT RECEIVABLES
Current receivables are comprised of the following:
| March 31, 2022 | December 31, 2021 | |||||||
| 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 of amounts owed to us primarily by GE. The "Other" category consists primarily of indirect taxes, advance payments to suppliers, and customer retentions.
NOTE 4. INVENTORIES
Inventories, net of reserves of $384 million and $374 million as of March 31, 2022 and December 31, 2021, respectively, are comprised of the following:
| March 31, 2022 | December 31, 2021 | |||||||
| Finished goods | $ | $ | ||||||
| Work in process and raw materials | ||||||||
| Total inventories, net | $ | $ | ||||||
Baker Hughes Holdings LLC 2022 First Quarter Form 10-Q | 7
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
The changes in the carrying value of goodwill are detailed below by segment:
| Oilfield Services | Oilfield Equipment | Turbo- machinery & Process Solutions | Digital Solutions | Total | |||||||||||||
| Balance at December 31, 2020, gross | $ | $ | $ | $ | $ | ||||||||||||
| Accumulated impairment at December 31, 2020 | ( | ( | ( | ( | |||||||||||||
| Balance at December 31, 2020 | |||||||||||||||||
Currency exchange and others | ( | ( | ( | ||||||||||||||
| Balance at December 31, 2021 | |||||||||||||||||
| Currency exchange and others | ( | ||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | $ | ||||||||||||
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 2022, 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.
OTHER INTANGIBLE ASSETS
Intangible assets are comprised of the following:
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||
| 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 35 years. Amortization expense for the three months ended March 31, 2022 and 2021 was $55 million and $69 million, respectively.
Baker Hughes Holdings LLC 2022 First Quarter Form 10-Q | 8
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
Estimated amortization expense for the remainder of 2022 and each of the subsequent five fiscal years is expected to be as follows:
| Year | Estimated Amortization Expense | ||||
| Remainder of 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
NOTE 6. CONTRACT AND OTHER DEFERRED ASSETS
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, 2022 | December 31, 2021 | |||||||
| 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 | $ | $ | ||||||
(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 March 31, 2022 and 2021 from performance obligations satisfied (or partially satisfied) in previous periods related to our long-term service agreements was $(4 ) million and nil , 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, 2022 | December 31, 2021 | |||||||
| Progress collections | $ | $ | ||||||
| Deferred income | ||||||||
| Progress collections and deferred income (contract liabilities) | $ | $ | ||||||
Revenue recognized during the three months ended March 31, 2022 and 2021 that was included in the contract liabilities at the beginning of the period was $739 million and $878 million, respectively.
Baker Hughes Holdings LLC 2022 First Quarter Form 10-Q | 9
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 8. LEASES
Our leasing activities primarily consist of operating leases for administrative offices, manufacturing facilities, research centers, service centers, sales offices and certain equipment.
| Three Months Ended March 31, | ||||||||
| Operating Lease Expense | 2022 | 2021 | ||||||
| Long-term fixed lease | $ | $ | ||||||
| Long-term variable lease | ||||||||
| Short-term lease | ||||||||
| Total operating lease expense | $ | $ | ||||||
Cash flows used in operating activities for operating leases approximates our expense for the three months ended March 31, 2022 and 2021.
The weighted-average remaining lease term as of March 31, 2022 and December 31, 2021 was approximately nine years 3.3
NOTE 9. BORROWINGS
The Company's borrowings are comprised of the following:
| March 31, 2022 | December 31, 2021 | |||||||
| Current borrowings | ||||||||
| Other borrowings | $ | $ | ||||||
| Long-term borrowings | ||||||||
| Other long-term borrowings | ||||||||
| Total long-term borrowings | ||||||||
| Total borrowings | $ | $ | ||||||
The estimated fair value of total borrowings at March 31, 2022 and December 31, 2021 was $6,732 million and $7,328 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. In addition, we have a commercial paper program with authorization up to $3 billion under which we may issue from time to time commercial paper with maturities of no
Baker Hughes Holdings LLC 2022 First Quarter Form 10-Q | 10
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
more than 397 days. At March 31, 2022 and December 31, 2021, there were no
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, 2022, Baker Hughes Co-Obligor, Inc. is a co-obligor of our long-term debt securities totaling $6,594 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 engaging in certain merger, consolidation and asset sale transactions in excess of specified limits. At March 31, 2022, we were in compliance with all debt covenants.
NOTE 10. INCOME TAXES
For the three months ended March 31, 2022, the provision for income taxes was $95 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 and earnings in jurisdictions with tax rates higher than the U.S., partially offset by tax benefits related to uncertain tax positions. In addition, since we are a partnership for U.S. federal tax purposes, any tax benefits associated with U.S. losses are recognized by our Members and not reflected in our tax expense.
For the three months ended March 31, 2021, the provision for income taxes was $83 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.
NOTE 11. 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 three months ended March 31, 2022 and 2021, we issued 7,730 thousand and 5,522 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.
In 2021, Baker Hughes' Board of Directors authorized us to repurchase up to $2 billion of our Units. We expect to fund the repurchase program from cash generated from operations, and we expect to make Unit repurchases from time to time subject to the Company's capital plan, market conditions, and other factors, including regulatory restrictions. The repurchase program may be suspended or discontinued at any time and does not have a specified expiration date. During the three months ended March 31, 2022, we repurchased and canceled 8.1 million Units for a total of $236 million, representing an average price per Unit of $28.96 . This includes 0.4 million Units totaling $11 million that were repurchased in December 2021 but not settled and cancelled until January 2022. At March 31, 2022, we had authorization remaining to repurchase up to approximately $1.3 billion of our Units.
Baker Hughes Holdings LLC 2022 First Quarter Form 10-Q | 11
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
The following table presents the changes in the number of Units outstanding (in thousands):
| Units Held by Baker Hughes | Units Held by GE | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||
| Balance at January 1 | ||||||||||||||
| Issue of Units to Baker Hughes under equity incentive plan | ||||||||||||||
Exchange of Units (1) | ( | ( | ||||||||||||
| Repurchase and cancellation of Units | ( | |||||||||||||
| Balance at March 31 | ||||||||||||||
(1)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, together with associated Units, are canceled.
ACCUMULATED OTHER COMPREHENSIVE LOSS (AOCL)
The following tables present the changes in accumulated other comprehensive loss, net of tax:
| Foreign Currency Translation Adjustments | Cash Flow Hedges | Benefit Plans | Accumulated Other Comprehensive Loss | |||||||||||
| Balance at December 31, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | ||||||||||||||
| Deferred taxes | ( | ( | ||||||||||||
| Other comprehensive income | ||||||||||||||
| Less: Other comprehensive loss attributable to noncontrolling interests | ( | ( | ||||||||||||
| Balance at March 31, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
| 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 loss | ( | |||||||||||||
| Deferred taxes | ( | |||||||||||||
| Other comprehensive income (loss) | ( | ( | ||||||||||||
| Less: Other comprehensive income (loss) attributable to noncontrolling interests | ||||||||||||||
| Balance at March 31, 2021 | $ | ( | $ | $ | ( | $ | ( | |||||||
The amounts reclassified from accumulated other comprehensive loss during the three months ended March 31, 2022 and 2021 represent (i) gains (losses) reclassified on cash flow hedges when the hedged transaction occurs, (ii) the amortization of net actuarial gain (loss), prior service credit, and curtailments which are included in the computation of net periodic pension cost and (iii) the release of foreign currency translation adjustments (see "Note 16. Restructuring, Impairment, and Other" for additional details).
Baker Hughes Holdings LLC 2022 First Quarter Form 10-Q | 12
Baker Hughes Holdings LLC
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 12. FINANCIAL INSTRUMENTS
RECURRING FAIR VALUE MEASUREMENTS
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| 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 to, or from, Level 3 during the three months ended March 31, 2022.
The following table provides a reconciliation of recurring Level 3 fair value measurements for investment securities:
| 2022 | 2021 | |||||||
| Balance at January 1 | $ | $ | ||||||
| Proceeds at maturity | ( | |||||||
| Balance at March 31 | $ | $ | ||||||
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| 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 one year
(2)Gains (losses) recorded to earnings related to these securities were $12 million and $(786 ) million for the three months ended March 31, 2022 and 2021, respectively.
As of March 31, 2022 and December 31, 2021, our equity securities with readily determinable fair values are comprised primarily of our investment in C3.ai, Inc. ("C3 AI") of $196 million and $270 million, respectively, and
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Notes to Unaudited Condensed Consolidated Financial Statements
ADNOC Drilling of $825 million and $741 million, respectively. We measured our investments to fair value based on quoted prices in active markets.
As of March 31, 2022 and December 31, 2021, our investment in C3 AI consists of 8,650,476 no C3 AI Shares sold during the three months ended March 31, 2022. For the three months ended March 31, 2022 and 2021, we recorded a loss of $74 million and $788 million, respectively, from the net change in fair value of our investment in C3 AI, which is reported in “Other non-operating loss, net” in our condensed consolidated statements of income (loss).
As of March 31, 2022 and December 31, 2021, our investment in ADNOC Drilling consists of 800,000,000 85 million from the net change in fair value of our investment in ADNOC Drilling, which is reported in “Other non-operating loss, net” in our condensed consolidated statements of income (loss).
As of March 31, 2022 and December 31, 2021, $1,050 million and $1,041 million of total investment securities are recorded in "All other current assets," respectively.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Our financial instruments include cash and 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, 2022 and December 31, 2021 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."
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, 2022 | December 31, 2021 | |||||||||||||
| 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 the condensed consolidated statements of financial position depending on their respective maturity date. As of March 31, 2022 and December 31, 2021, $36 million and $28 million of derivative assets are recorded in "All other current assets" and $1 million and $1 million are recorded in "All other assets" of the condensed consolidated statements of financial position, respectively. As of March 31, 2022 and December 31, 2021, $29 million and $39 million of derivative liabilities are recorded in "All other current liabilities" and $38 million and $10 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
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Notes to Unaudited Condensed Consolidated Financial Statements
currency exchange contracts. 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 11. Equity" for further information on activity in AOCI for cash flow hedges. As of March 31, 2022 and December 31, 2021, the maximum term of derivative instruments that hedge forecasted transactions was one year
Fair Value Hedges
All of our long-term debt is comprised of fixed rate instruments. We are subject to interest rate risk on our debt portfolio and may use interest rate swaps to manage the economic effect of fixed rate obligations associated with certain debt. Under these arrangements, we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount.
As of March 31, 2022 and December 31, 2021, we had interest rate swaps with a notional amount of $500 1,350 3.337
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.
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, | |||||||||
| 2022 | 2021 | ||||||||||
Currency exchange contracts (1) | Cost of goods sold | $ | ( | $ | |||||||
| Currency exchange contracts | Cost of services sold | ||||||||||
| Commodity derivatives | Cost of goods sold | ||||||||||
Total (2) | $ | $ | |||||||||
(1)Excludes gains of $1 million and $3 million on embedded derivatives for the three months ended March 31, 2022 and 2021, 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 $3.8 billion and $3.9 billion at March 31, 2022 and December 31, 2021, respectively, is related to hedges of anticipated sales and purchases in foreign currency, commodity purchases, changes in interest rates, and contractual terms in contracts that are considered embedded derivatives and for intercompany borrowings in foreign currencies. We generally disclose derivative notional amounts on a gross basis to indicate the total counterparty risk. Where we have gross purchase and sale derivative contracts for a particular currency, we look to execute these contracts with the same counterparty to reduce our exposure. The notional amount of these
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Notes to Unaudited Condensed Consolidated Financial Statements
derivative instruments do not generally represent cash amounts exchanged by us and the counterparties, but rather the nominal amount upon which changes in the value of the derivatives are measured.
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.
NOTE 13. 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. These products and services operate across upstream oil and gas and broader energy and industrial markets.
OILFIELD SERVICES ("OFS")
Oilfield Services provides discrete products and services, as well as integrated well services for onshore and offshore operations across the lifecycle of a well, ranging from drilling, evaluation, completion, production and intervention. Products and services include drilling services, including directional drilling, measurement while drilling & logging while drilling, diamond and tri-cone drill bits, drilling and completions fluids, wireline services, downhole completion tools and systems, wellbore intervention tools and services, pressure pumping, oilfield and industrial chemicals and artificial lift technologies, including electrical submersible pumps and surface pumping systems.
OILFIELD EQUIPMENT ("OFE")
Oilfield Equipment provides a broad portfolio of products and services required to facilitate the safe and reliable control and 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 wellheads, pressure control and production systems and services, flexible pipe systems for offshore and onshore applications, and life-of-field solutions including well intervention and decommissioning solutions, covering the entire life cycle of a field.
TURBOMACHINERY & PROCESS SOLUTIONS ("TPS")
Turbomachinery & Process Solutions provides technology solutions and services for mechanical-drive, compression and power-generation applications across the energy industry, including oil and gas, liquefied natural gas ("LNG") operations, downstream refining and petrochemical segments, as well as lower carbon solutions to broader energy and industrial sectors. 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), turnkey solutions (industrial modules and waste heat recovery), pumps, valves, and compressed natural gas ("CNG") and small-scale LNG solutions.
DIGITAL SOLUTIONS ("DS")
Digital Solutions provides equipment, software, and services for a wide range of industries, including oil and gas, power generation, aerospace, metals, and transportation. The offerings include a number of products and solutions that provide industrial asset management capabilities, including sensor-based process measurement, machine health and condition monitoring, asset strategy and management, control systems, as well as non-destructive testing and inspection, and pipeline integrity solutions.
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Notes to Unaudited Condensed Consolidated Financial Statements
SEGMENT RESULTS
Segment revenue and profit are determined based on the internal performance measures used by the Company to assess the performance of each segment in a financial period. Summarized financial information is shown in the following tables. Consistent accounting policies have been applied by all segments within the Company, for all reporting periods.
| Three Months Ended March 31, | ||||||||
| Segment revenue | 2022 | 2021 | ||||||
| Oilfield Services | $ | $ | ||||||
| Oilfield Equipment | ||||||||
| Turbomachinery & Process Solutions | ||||||||
| Digital Solutions | ||||||||
| Total | $ | $ | ||||||
The performance of our operating segments is evaluated based on segment operating income (loss), which is defined as income (loss) before income taxes before the following: net interest expense, net other non-operating loss, corporate expenses, restructuring, impairment and other charges, separation related costs and certain gains and losses not allocated to the operating segments.
| Three Months Ended March 31, | ||||||||
| Segment income (loss) before income taxes | 2022 | 2021 | ||||||
| Oilfield Services | $ | $ | ||||||
| Oilfield Equipment | ( | |||||||
| Turbomachinery & Process Solutions | ||||||||
| Digital Solutions | ||||||||
| Total segment | ||||||||
| Corporate | ( | ( | ||||||
| Restructuring, impairment and other | ( | ( | ||||||
| Separation related | ( | ( | ||||||
| Other non-operating loss, net | ( | ( | ||||||
| Interest expense, net | ( | ( | ||||||
| Income (loss) before income taxes | $ | $ | ( | |||||
The following table presents depreciation and amortization by segment:
| Three Months Ended March 31, | ||||||||
| Segment depreciation and amortization | 2022 | 2021 | ||||||
| Oilfield Services | $ | $ | ||||||
| Oilfield Equipment | ||||||||
Turbomachinery & Process Solutions | ||||||||
Digital Solutions | ||||||||
| Total segment | ||||||||
| Corporate | ||||||||
| Total | $ | $ | ||||||
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Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 14. RELATED PARTY TRANSACTIONS
RELATED PARTY TRANSACTIONS WITH GE
Our most significant related party transactions are transactions that we have entered into with our Members and their affiliates. We have continuing involvement with GE primarily through their remaining interest in us, ongoing purchases and sales of products and services, and transition services that they provide. At March 31, 2022, GE's economic interest in us through their ownership of Class B common stock and associated LLC Units was 4 %. At March 31, 2022, GE owned Class A common stock in addition to their Class B common stock, which represents their overall Baker Hughes ownership of 11.4 %.
We had purchases with GE and its affiliates of $144 million and $155 million during the three months ended March 31, 2022 and 2021, respectively. In addition, we sold products and services to GE and its affiliates for $37 million and $49 million during the three months ended March 31, 2022 and 2021, respectively.
We have $180 million and $192 million of accounts payable and $463 million and $480 million of current receivables at March 31, 2022 and December 31, 2021, respectively, for goods and services provided by, or to, GE in the ordinary course of business and includes amounts owed to, or from, GE for certain tax matters indemnified pursuant to the Tax Matters Agreement. Additionally, the Company has $139 million and $67 million of current receivables at March 31, 2022 and December 31, 2021, respectively, from Baker Hughes.
OTHER RELATED PARTIES
We have an aeroderivative joint venture ("Aero JV") we formed with GE in 2019. The Aero JV is jointly controlled by GE and us, each with ownership interest of 50 108 million and $160 million during the three months ended March 31, 2022 and 2021, respectively. We have $59 million and $86 million of accounts payable at March 31, 2022 and December 31, 2021, respectively, for goods and services provided by the Aero JV in the ordinary course of business. Sales of products and services and related receivables with the Aero JV were immaterial for the three months ended March 31, 2022 and 2021.
NOTE 15. COMMITMENTS AND CONTINGENCIES
LITIGATION
We are subject to legal proceedings arising in the ordinary course of our business. Because legal proceedings are inherently uncertain, we are unable to predict the ultimate outcome of such matters. We record a liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated. Based on the opinion of management, we do not expect the ultimate outcome of currently pending legal proceedings to have a material adverse effect on our results of operations, financial position or cash flows. However, there can be no assurance as to the ultimate outcome of these matters.
In January 2013, INEOS and Naphtachimie initiated expertise proceedings in Aix-en-Provence, France arising out of a fire at a chemical plant owned by INEOS in Lavera, France, which resulted in a 15 -day plant shutdown and destruction of a steam turbine, which was part of a compressor train owned by Naphtachimie. The most recent quantification of the alleged damages is €250 million. Two of the Company's subsidiaries (and 17 other companies) were notified to participate in the proceedings. The proceedings are ongoing, and at this time, there is no indication that the Company's subsidiaries were involved in the incident. Although the outcome of the claims remains uncertain, our insurer has accepted coverage and is defending the Company in the expertise proceeding.
On July 31, 2018, International Engineering & Construction S.A. ("IEC") initiated arbitration proceedings in New York administered by the International Center for Dispute Resolution ("ICDR") against the Company and its subsidiaries arising out of a series of sales and service contracts entered between IEC and the Company’s subsidiaries for the sale and installation of LNG plants and related power generation equipment in Nigeria ("Contracts"). Prior to the filing of the IEC Arbitration, the Company’s subsidiaries made demands for payment due under the Contracts. On August 15, 2018, the Company’s subsidiaries initiated a separate demand for ICDR
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Notes to Unaudited Condensed Consolidated Financial Statements
arbitration against IEC for claims of additional costs and amounts due under the Contracts. On October 10, 2018, IEC filed a Petition to Compel Arbitration in the United States District Court for the Southern District of New York against the Company seeking to compel non-signatory Baker Hughes entities to participate in the arbitration filed by IEC. The complaint is captioned International Engineering & Construction S.A. et al. v. Baker Hughes, a GE company, LLC, et al. No. 18-cv-09241 ("S.D.N.Y 2018"); this action was dismissed by the Court on August 13, 2019. In the arbitration, IEC alleges breach of contract and other claims against the Company and its subsidiaries and seeks recovery of alleged compensatory damages, in addition to reasonable attorneys' fees, expenses and arbitration costs. On March 15, 2019, IEC amended its request for arbitration to alleged damages of $591 million of lost profits plus unspecified additional costs based on alleged non-performance of the contracts in dispute. The arbitration hearing was held from December 9, 2019 to December 20, 2019. On March 3, 2020, IEC amended their damages claim to $700 million of alleged loss cash flow or, in the alternative, $244.9 million of lost profits and various costs based on alleged non-performance of the contracts in dispute, and in addition $4.8 million of liquidated damages, $58.6 million in take-or-pay costs of feed gas, and unspecified additional costs of rectification and take-or-pay future obligations, plus unspecified interest and attorneys' fees. On May 3, 2020, the arbitration panel dismissed IEC's request for take-or-pay damages. On May 29, 2020, IEC quantified their claim for legal fees at $14.2 million and reduced their alternative claim from $244.9 million to approximately $235 million. The Company and its subsidiaries have contested IEC’s claims and are pursuing claims for compensation under the contracts. On October 31, 2020, the ICDR notified the arbitration panel’s final award, which dismissed the majority of IEC’s claims and awarded a portion of the Company’s claims. On January 27, 2021, IEC filed a petition to vacate the arbitral award in the Supreme Court of New York, County of New York. On March 5, 2021, the Company filed a petition to confirm the arbitral award, and on March 8, 2021, the Company removed the matter to the United States District Court for the Southern District of New York. On November 16, 2021, the court granted the Company's petition to confirm the award and denied IEC's petition to vacate. On February 3, 2022, IEC initiated another arbitration proceeding in New York administered by the ICDR against certain of the Company’s subsidiaries arising out of the same project which formed the basis of the first arbitration. On March 25, 2022, the Company's subsidiaries initiated a separate demand for ICDR arbitration against IEC for claims of additional costs and amounts due. At this time, we are not able to predict the outcome of this proceeding.
On March 15, 2019 and March 18, 2019, the City of Riviera Beach Pension Fund and Richard Schippnick, respectively, filed in the Delaware Court of Chancery shareholder derivative lawsuits for and on Baker Hughes' behalf against GE, the then-current members of the Board of Directors of Baker Hughes and Baker Hughes as a nominal defendant, related to the decision to (i) terminate the contractual prohibition barring GE from selling any of Baker Hughes' shares before July 3, 2019; (ii) repurchase $1.5 billion in Baker Hughes' stock from GE; (iii) permit GE to sell approximately $2.5 billion in Baker Hughes' stock through a secondary offering; and (iv) enter into a series of other agreements and amendments that will govern the ongoing relationship between Baker Hughes and GE (collectively, the “2018 Transactions”). The complaints in both lawsuits allege, among other things, that GE, as Baker Hughes' controlling stockholder, and the members of Baker Hughes' Board of Directors breached their fiduciary duties by entering into the 2018 Transactions. The relief sought in the complaints includes a request for a declaration that the defendants breached their fiduciary duties, that GE was unjustly enriched, disgorgement of profits, an award of damages sustained by Baker Hughes, pre- and post-judgment interest, and attorneys’ fees and costs. On March 21, 2019, the Chancery Court entered an order consolidating the Schippnick and City of Riviera Beach complaints under consolidated C.A. No. 2019-0201-AGB, styled in re Baker Hughes, a GE company derivative litigation. On May 10, 2019, Plaintiffs voluntarily dismissed their claims against the members of Baker Hughes' Conflicts Committee, and on May 15, 2019, Plaintiffs voluntarily dismissed their claims against former Baker Hughes director Martin Craighead. On June 7, 2019, the defendants and nominal defendant filed a motion to dismiss the lawsuit on the ground that the derivative plaintiffs failed to make a demand on Baker Hughes' Board of Directors to pursue the claims itself, and GE and Baker Hughes' Board of Directors filed a motion to dismiss the lawsuit on the ground that the complaint failed to state a claim on which relief can be granted. The Chancery Court denied the motions on October 8, 2019, except granted GE’s motion to dismiss the unjust enrichment claim against it. On October 31, 2019, Baker Hughes' Board of Directors designated a Special Litigation Committee and empowered it with full authority to investigate and evaluate the allegations and issues raised in the derivative litigation. The Special Litigation Committee filed a motion to stay the derivative litigation during its investigation. On December 3, 2019, the Chancery Court granted the motion and stayed the derivative litigation until June 1, 2020. On May 20, 2020, the Chancery Court granted an extension of the stay to October 1, 2020, and on September 29, 2020, the Court granted a further extension of the stay to October 15, 2020. On October 13, 2020, the Special
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Notes to Unaudited Condensed Consolidated Financial Statements
Litigation Committee filed its report with the Court. At this time, we are not able to predict the outcome of these claims.
On August 13, 2019, Tri-State Joint Fund filed in the Delaware Court of Chancery, a shareholder class action lawsuit for and on the behalf of itself and all similarly situated public stockholders of Baker Hughes Incorporated ("BHI") against the General Electric Company ("GE"), the former members of the Board of Directors of BHI, and certain former BHI Officers alleging breaches of fiduciary duty, aiding and abetting, and other claims in connection with the combination of BHI and the oil and gas business ("GE O&G") of GE ("the Transactions"). On October 28, 2019, City of Providence filed in the Delaware Court of Chancery a shareholder class action lawsuit for and on behalf of itself and all similarly situated public shareholders of BHI against GE, the former members of the Board of Directors of BHI, and certain former BHI Officers alleging substantially the same claims in connection with the Transactions. The relief sought in these complaints include a request for a declaration that Defendants breached their fiduciary duties, an award of damages, pre- and post-judgment interest, and attorneys’ fees and costs. The lawsuits have been consolidated, and plaintiffs filed a consolidated class action complaint on December 17, 2019 against certain former BHI officers alleging breaches of fiduciary duty and against GE for aiding and abetting those breaches. The December 2019 complaint omitted the former members of the Board of Directors of BHI, except for Mr. Craighead who also served as President and CEO of BHI. Mr. Craighead and Ms. Ross, who served as Senior Vice President and Chief Financial Officer of BHI, remain named in the December 2019 complaint along with GE. The relief sought in the consolidated complaint includes a declaration that the former BHI officers breached their fiduciary duties and that GE aided and abetted those breaches, an award of damages, pre- and post-judgment interest, and attorneys’ fees and costs. On or around February 12, 2020, the defendants filed motions to dismiss the lawsuit on the grounds that the complaint failed to state a claim on which relief could be granted. On or around October 27, 2020, the Chancery Court granted GE’s motion to dismiss, and granted in part the motion to dismiss filed by Mr. Craighead and Ms. Ross, thereby dismissing all of the claims against GE and Ms. Ross, and all but one of the claims against Mr. Craighead. At this time, we are not able to predict the outcome of the remaining claim.
On December 11, 2019, BMC Software, Inc. (“BMC”) filed a lawsuit in federal court in the Southern District of Texas against Baker Hughes, a GE company, LLC alleging trademark infringement, unfair competition, and unjust enrichment, arising out of the Company’s use of its new logo and affiliated branding. On January 1, 2020, BMC amended its complaint to add Baker Hughes Company. The relief sought in the complaint includes a request for injunctive relief, an award of damages (including punitive damages), pre- and post-judgment interest, and attorneys’ fees and costs. At this time, we are not able to predict the outcome of these claims.
In December 2020, Baker Hughes received notice that the SEC is conducting a formal investigation that Baker Hughes understands is related to its books and records and internal controls regarding sales of its products and services in projects impacted by U.S. sanctions. Baker Hughes is cooperating with the SEC and providing requested information. Baker Hughes has also initiated an internal review with the assistance of external legal counsel regarding internal controls and compliance related to U.S. sanctions requirements. While Baker Hughes' review remains ongoing, in September 2021, Baker Hughes voluntarily informed the Office of Foreign Assets Control ("OFAC") that non-U.S. Baker Hughes affiliates in two foreign countries appear to have received payments, involving U.S. touchpoints, that are subject to debt restrictions pursuant to applicable U.S. sanctions laws. In February 2022, OFAC informed Baker Hughes that it has issued a cautionary letter and that it will not pursue a civil monetary penalty or further enforcement action. The cautionary letter reflects OFAC’s final enforcement response to Baker Hughes' voluntary self-disclosure. Baker Hughes provided copies of its correspondence with OFAC to the SEC. As the SEC investigation is ongoing, Baker Hughes cannot anticipate the timing, outcome or possible impact of the SEC investigation or review, financial or otherwise.
We insure against risks arising from our business to the extent deemed prudent by our management and to the extent insurance is available, but no assurance can be given that the nature and amount of that insurance will be sufficient to fully indemnify us against liabilities arising out of pending or future legal proceedings or other claims. Most of our insurance policies contain deductibles or self-insured retentions in amounts we deem prudent and for which we are responsible for payment. In determining the amount of self-insurance, it is our policy to self-insure those losses that are predictable, measurable and recurring in nature, such as claims for automobile liability, general liability and workers compensation.
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Notes to Unaudited Condensed Consolidated Financial Statements
OTHER
In the normal course of business with customers, vendors and others, we have entered into off-balance sheet arrangements, such as surety bonds for performance, letters of credit and other bank issued guarantees. We also provide guarantees to GE Capital on behalf of a customer who has entered into financing arrangements with GE Capital. Total off-balance sheet arrangements were approximately $4.5 billion at March 31, 2022. It is not practicable to estimate the fair value of these financial instruments. As of March 31, 2022, none of the off-balance sheet arrangements either has, or is likely to have, a material effect on our financial position, results of operations or cash flows.
We sometimes enter into consortium or similar arrangements for certain projects primarily in our Oilfield Equipment segment. Under such arrangements, each party is responsible for performing a certain scope of work within the total scope of the contracted work, and the obligations expire when all contractual obligations are completed. The failure or inability, financially or otherwise, of any of the parties to perform their obligations could impose additional costs and obligations on us. These factors could result in unanticipated costs to complete the project, liquidated damages or contract disputes.
NOTE 16. RESTRUCTURING, IMPAIRMENT AND OTHER
We recorded restructuring, impairment and other charges of $61 million for the three months ended March 31, 2022. These charges were predominately in our TPS segment for a write-off of an equity method investment and the release of foreign currency translation adjustments.
We recorded restructuring, impairment and other charges of $80 million for the three months ended March 31, 2021. These charges were predominately in our OFS and TPS segments and related primarily to employee termination expenses from reducing our headcount in certain geographical locations, partially offset by the gain on the dispositions of certain property, plant and equipment previously impaired as a consequence of exit activities.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the condensed consolidated financial statements and the related notes included in Item 1 thereto.
EXECUTIVE SUMMARY
We are an energy technology company with a broad and diversified portfolio of technologies and services that span the energy and industrial value chain. We conduct business in more than 120 countries and employ approximately 55,000 employees. We operate through our four business segments: Oilfield Services ("OFS"), Oilfield Equipment ("OFE"), Turbomachinery & Process Solutions ("TPS"), and Digital Solutions ("DS"). We sell products and services primarily in the global oil and gas markets, within the upstream, midstream and downstream segments.
As we look at 2022, we see a favorable oil and gas price backdrop and also a dynamic operating environment. The recent and unfortunate geopolitical events are exacerbating several trends, including broad-based inflation and supply pressure for key materials, commodities, and labor. These events are also driving changes on the economic front, where the world is transitioning from an era of strong economic growth to an environment that is more tenuous and likely to feature diverging economic conditions regionally.
In the oil and gas markets, we expect global supply to remain constrained in the coming years, which should support higher commodity prices and multiple years of spending growth from our customers. Recent geopolitical events have severely constrained what was already a tight global natural gas market and have re-focused the world on the importance of energy security, diversity, and reliability. As the world reacts to the rapid changes in the global commodity market, governments are prioritizing natural gas and Liquefied Natural Gas ("LNG") as a key transition and destination fuel and prioritizing LNG from stable, lower-cost markets and locations that can provide “cleaner” LNG.
In the first quarter, we announced an agreement to acquire Altus Intervention, a leading international provider of well intervention services and downhole technology. The acquisition complements OFS' existing portfolio by enhancing our life-of-well capabilities as operators look to improve efficiencies from mature fields. The transaction is expected to close in the second half of 2022.
Outside of the oil and gas industry, the focus on cleaner energy sources and technology to lower carbon emissions from resource-intensive industries continues to accelerate. We made progress in the first quarter and recently in April further strategically positioning the Company for the energy transition, with new partnerships and investments:
•Invested in a strategic partnership with NET Power to advance the technical and commercial deployment of NET Power’s low-cost, electrical power system that generates no atmospheric emissions and inherently capture all carbon dioxide ("CO2").
•In April, we invested in HIF Global, a world leader in eFuels development, to help fund expansion of HIF’s decarbonization business. Baker Hughes’ equity investment will be used to develop carbon-neutral eFuels projects in the U.S., Chile and Australia.
•Also in April, we acquired Mosaic Materials, a growth stage technology company. Mosaic is focused on developing a proprietary direct air capture technology using Metal-Organic Framework (MOF) materials that can be used to separate CO2 from gas mixtures across a variety of applications.
In the first quarter of 2022, we generated revenue of $4,835 million compared to $4,782 million in the first quarter of 2021. The increase in revenue was driven primarily by higher volume in the OFS segment, partially offset by lower activity in the TPS and OFE segments. Income before income taxes was $187 million for the first quarter of 2022, which included restructuring, impairment and other charges of $61 million and separation related costs of $9 million. In the first quarter of 2021, loss before income taxes was $536 million, which included restructuring, impairment and other charges of $80 million, separation related costs of $27 million, and also included a $788 million loss from the change in fair value on our investment in C3 AI, recorded as other non-operating loss.
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Recent Events
The invasion of Ukraine by Russia and the sanctions imposed in response to this crisis have increased the level of economic and political uncertainty. As we announced on March 19, 2022, we suspended any new investments for our Russia operations. We continue to fulfill current contractual obligations while complying with all applicable laws and regulations. Russia represented approximately 4% of our total revenue in the first quarter of 2022, the majority within our OFS segment. Additionally, sanctions from the U.S., UK, and the EU continue to evolve and are making ongoing operations increasingly complex and significantly more difficult. Additionally, the pace and magnitude of this impact on operations is difficult to predict given the dynamic nature of the situation. We are closely monitoring the developments in Ukraine and Russia, and if there are changes in laws and regulations resulting in our inability to fulfill our contractual obligations, this could have a material adverse effect on our results of operations.
Outlook
Our business is exposed to a number of macro factors, which influence our outlook and expectations given the current volatile conditions in the industry. All of our outlook expectations are purely based on the market as we see it today, and are subject to changing conditions in the industry.
•North America onshore activity: We expect North American onshore activity to experience strong growth in 2022, as compared to 2021 should commodity prices remain at current levels.
•International onshore activity: We expect onshore spending outside of North America to continue to improve in 2022 as compared to 2021 in all regions, excluding Russia Caspian, should commodity prices remain at current levels.
•Offshore projects: We expect a recovery in offshore activity and the number of subsea tree awards to grow in 2022 as compared to 2021.
•LNG projects: We remain optimistic on the LNG market long term and view natural gas as both a transition and a destination fuel. We continue to view the long-term economics of the LNG industry as positive.
We have other segments in our portfolio that are more correlated with various industrial metrics, including global GDP growth, such as our Digital Solutions segment.
We also have businesses within our portfolio that are exposed to new energy solutions, specifically focused around reducing carbon emissions of energy and broader industry, including hydrogen, geothermal, carbon capture, utilization and storage ("CCUS"), and energy storage. We expect to see continued growth in these businesses as new energy solutions become a more prevalent part of the broader energy mix.
Overall, we believe our portfolio is well positioned to compete across the energy value chain and deliver comprehensive solutions for our customers. We remain optimistic about the long-term economics of the oil and gas industry, but we are continuing to operate with flexibility. Over time, we believe the world’s demand for energy will continue to rise, and that hydrocarbons will play a major role in meeting the world's energy needs for the foreseeable future. As such, we remain focused on delivering innovative, low-emission, and cost-effective solutions that deliver step changes in operating and economic performance for our customers.
BUSINESS ENVIRONMENT
The following discussion and analysis summarizes the significant factors affecting our results of operations, financial condition and liquidity position as of and for the three months ended March 31, 2022 and 2021, and should be read in conjunction with the condensed consolidated financial statements and related notes of the Company.
Our revenue is predominately generated from the sale of products and services to major, national, and independent oil and natural gas companies worldwide, and is dependent on spending by our customers for oil and natural gas exploration, field development and production. This spending is driven by a number of factors, including our customers' forecasts of future energy demand and supply, their access to resources to develop and produce oil and natural gas, their ability to fund their capital programs, the impact of new government regulations and most importantly, their expectations for oil and natural gas prices as a key driver of their cash flows.
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Oil and Natural Gas Prices
Oil and natural gas prices are summarized in the table below as averages of the daily closing prices during each of the periods indicated.
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
Brent oil price ($/Bbl) (1) | $ | 100.87 | $ | 61.04 | ||||
WTI oil price ($/Bbl) (2) | 95.18 | 58.09 | ||||||
Natural gas price ($/mmBtu) (3) | 4.67 | 3.50 | ||||||
(1)Energy Information Administration (EIA) Europe Brent Spot Price per Barrel
(2)EIA Cushing, OK WTI (West Texas Intermediate) spot price
(3)EIA Henry Hub Natural Gas Spot Price per million British Thermal Unit
Oil and natural gas prices increased during the three months ended March 31, 2022 largely driven by increased demand and weak supply which has also been amplified as a result of recent geopolitical events.
Outside North America, customer spending is most heavily influenced by Brent oil prices, which increased from the same quarter last year, ranging from a low of $78.25/Bbl in January 2022 to a high of $133.18/Bbl in March 2022. For the three months ended March 31, 2022, Brent oil prices averaged $100.87/Bbl, which represented an increase of $39.83/Bbl from the same period last year.
In North America, customer spending is highly driven by WTI oil prices, which increased from the same quarter last year. Overall, WTI oil prices ranged from a low of $75.99/Bbl in January 2022 to a high of $123.64/Bbl in March 2022. For the three months ended March 31, 2022, WTI oil prices averaged $95.18/Bbl, which represented an increase of $37.09/Bbl from the same period last year.
In North America, natural gas prices, as measured by the Henry Hub Natural Gas Spot Price, averaged $4.67/mmBtu in the first quarter of 2022, representing a 33% increase from the same quarter in the prior year. Throughout the quarter, Henry Hub Natural Gas Spot Prices ranged from a low of $3.73/mmBtu in January 2022 to a high of $6.70/mmBtu in February 2022.
Baker Hughes Rig Count
The Baker Hughes rig counts are an important business barometer for the drilling industry and its suppliers. When drilling rigs are active they consume products and services produced by the oil service industry. Rig count trends are driven by the exploration and development spending by oil and natural gas companies, which in turn is influenced by current and future price expectations for oil and natural gas. The counts may reflect the relative strength and stability of energy prices and overall market activity; however, these counts should not be solely relied on as other specific and pervasive conditions may exist that affect overall energy prices and market activity.
We have been providing rig counts to the public since 1944. We gather all relevant data through our field service personnel, who obtain the necessary data from routine visits to the various rigs, customers, contractors and other outside sources as necessary. We base the classification of a well as either oil or natural gas primarily upon filings made by operators in the relevant jurisdiction. This data is then compiled and distributed to various wire services and trade associations and is published on our website. We believe the counting process and resulting data is reliable; however, it is subject to our ability to obtain accurate and timely information. Rig counts are compiled weekly for the U.S. and Canada and monthly for all international rigs. Published international rig counts do not include rigs drilling in certain locations, such as the Russia Caspian region, and onshore China because this information is not readily available.
Rigs in the U.S. and Canada are counted as active if, on the day the count is taken, the well being drilled has been started but drilling has not been completed and the well is anticipated to be of sufficient depth to be a potential consumer of our drill bits. In international areas, rigs are counted on a weekly basis and deemed active if drilling activities occurred during the majority of the week. The weekly results are then averaged for the month and published accordingly. The rig count does not include rigs that are in transit from one location to another, rigging up,
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being used in non-drilling activities including production testing, completion and workover, and are not expected to be significant consumers of drill bits.
The rig counts are summarized in the table below as averages for each of the periods indicated.
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | % Change | |||||||||
| North America | 831 | 538 | 54 | % | |||||||
| International | 823 | 698 | 18 | % | |||||||
| Worldwide | 1,654 | 1,236 | 34 | % | |||||||
The worldwide rig count was 1,654 for the first quarter of 2022, an increase of 34% as compared to the same period last year primarily due to an increase in North America.
Within North America, the increase was primarily driven by the U.S. rig count, which was up 61% when compared to the same period last year, and an increase in the Canada rig count, which was up 37% when compared to the same period last year. Internationally, the rig count increase was driven primarily by increases in the Africa and Latin America regions of 52% and 28%, respectively.
RESULTS OF OPERATIONS
The discussions below relating to significant line items from our condensed consolidated statements of income (loss) are based on available information and represent our analysis of significant changes or events that impact the comparability of reported amounts. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where reasonably practicable, have quantified the impact of such items. All dollar amounts in tabulations in this section are in millions of dollars, unless otherwise stated. Certain columns and rows may not add due to the use of rounded numbers.
Our condensed consolidated statement of income (loss) displays sales and costs of sales in accordance with SEC regulations under which "goods" is required to include all sales of tangible products and "services" must include all other sales, including other service activities. For the amounts shown below, we distinguish between "equipment" and "product services", where product services refer to sales under product services agreements, including sales of both goods (such as spare parts and equipment upgrades) and related services (such as monitoring, maintenance and repairs), which is an important part of our operations. We refer to "product services" simply as "services" within the Business Environment section of Management's Discussion and Analysis.
The performance of our operating segments is evaluated based on segment operating income (loss), which is defined as income (loss) before income taxes and before the following: net interest expense, net other non-operating loss, corporate expenses, restructuring, impairment and other charges, goodwill and inventory impairments, separation-related costs, and certain gains and losses not allocated to the operating segments.
In evaluating the segment performance, the Company primarily uses the following:
Volume: Volume is the increase or decrease in products and/or services sold period-over-period excluding the impact of foreign exchange and price. The volume impact on profit is calculated by multiplying the prior period profit rate by the change in revenue volume between the current and prior period. It also includes price, defined as the change in sales price for a comparable product or service period-over-period and is calculated as the period-over-period change in sales prices of comparable products and services.
Foreign Exchange ("FX"): FX measures the translational foreign exchange impact, or the translation impact of the period-over-period change on sales and costs directly attributable to change in the foreign exchange rate compared to the U.S. dollar. FX impact is calculated by multiplying the functional currency amounts (revenue or profit) with the period-over-period FX rate variance, using the average exchange rate for the respective period.
(Inflation)/Deflation: (Inflation)/deflation is defined as the increase or decrease in direct and indirect costs of the same type for an equal amount of volume. It is calculated as the year-over-year change in cost (i.e. price paid) of direct material, compensation and benefits and overhead costs.
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Productivity: Productivity is measured by the remaining variance in profit, after adjusting for the period-over-period impact of volume and price, foreign exchange and (inflation)/deflation as defined above. Improved or lower period-over-period cost productivity is the result of cost efficiencies or inefficiencies, such as cost decreasing or increasing more than volume, or cost increasing or decreasing less than volume, or changes in sales mix among segments. This also includes the period-over-period variance of transactional foreign exchange, aside from those foreign currency devaluations that are reported separately for business evaluation purposes.
Orders and Remaining Performance Obligations
Orders: For the three months ended March 31, 2022, we recognized orders of $6.8 billion, an increase of $2.3 billion, or 51%, from the three months ended March 31, 2021. Equipment orders were up $2 billion, and service orders were up $0.3 billion, or 10%. The increase in orders was driven by higher order intake in all segments.
Remaining Performance Obligations (RPO): As of March 31, 2022, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $25.8 billion.
Revenue and Operating Income (Loss)
Revenue and operating income (loss) for each of our four operating segments is provided below.
| Three Months Ended March 31, | $ Change | ||||||||||
| 2022 | 2021 | ||||||||||
| Segment revenue: | |||||||||||
| Oilfield Services | $ | 2,489 | $ | 2,200 | $ | 289 | |||||
| Oilfield Equipment | 528 | 628 | (100) | ||||||||
| Turbomachinery & Process Solutions | 1,345 | 1,485 | (140) | ||||||||
| Digital Solutions | 474 | 470 | 4 | ||||||||
| Total | $ | 4,835 | $ | 4,782 | $ | 53 | |||||
| Three Months Ended March 31, | $ Change | ||||||||||
| 2022 | 2021 | ||||||||||
| Segment operating income (loss): | |||||||||||
| Oilfield Services | $ | 221 | $ | 143 | $ | 78 | |||||
| Oilfield Equipment | (8) | 4 | (12) | ||||||||
| Turbomachinery & Process Solutions | 226 | 207 | 19 | ||||||||
| Digital Solutions | 15 | 24 | (9) | ||||||||
| Total segment operating income | 453 | 379 | 74 | ||||||||
| Corporate | (105) | (109) | 4 | ||||||||
| Restructuring, impairment and other | (61) | (80) | 19 | ||||||||
| Separation related | (9) | (27) | 18 | ||||||||
| Operating income | 279 | 164 | 115 | ||||||||
| Other non-operating loss, net | (28) | (626) | 598 | ||||||||
| Interest expense, net | (64) | (74) | 10 | ||||||||
| Income (loss) before income taxes | 187 | (536) | 723 | ||||||||
| Provision for income taxes | (95) | (83) | (12) | ||||||||
| Net income (loss) | $ | 92 | $ | (619) | $ | 711 | |||||
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Segment Revenues and Segment Operating Income (Loss)
First Quarter of 2022 Compared to the First Quarter of 2021
Revenue increased $53 million, or 1%, driven by higher volume in OFS and DS, partially offset by lower volume in TPS and OFE. OFS increased $289 million and DS increased $4 million, partially offset by TPS which decreased $140 million and OFE which decreased $100 million.
Total segment operating income increased $74 million. The increase was driven by OFS which increased $78 million and TPS which increased $19 million, partially offset by OFE which decreased $12 million and DS which decreased $9 million.
Oilfield Services
OFS revenue of $2,489 million increased $289 million, or 13%, in the first quarter of 2022 compared to the first quarter of 2021, as a result of increased activity in North America and internationally, as evidenced by an increase in the global rig count. North America revenue was $786 million in the first quarter of 2022, an increase of $161 million from the first quarter of 2021. International revenue was $1,703 million in the first quarter of 2022, an increase of $128 million from the first quarter of 2021, driven by the Latin America, Middle East, Sub-Sahara Africa and Asia Pacific regions, partially offset by declines in the Europe and Russia Caspian regions.
OFS segment operating income was $221 million in the first quarter of 2022 compared to $143 million in the first quarter of 2021. The increase in income was primarily driven by higher volume and price, partially offset by logistics and commodity cost inflation.
Oilfield Equipment
OFE revenue of $528 million decreased $100 million, or 16%, in the first quarter of 2022 compared to the first quarter of 2021. The decrease was primarily driven by lower volume in the subsea production systems and surface pressure control projects businesses, and from the removal of subsea drilling systems business from the consolidated OFE operations in the fourth quarter of 2021 due to the formation of a joint venture, partially offset by higher volume in the services and flexible pipe businesses.
OFE segment operating loss was $8 million in the first quarter of 2022 compared to segment operating income of $4 million in the first quarter of 2021. The decrease in income was primarily driven by lower volume.
Turbomachinery & Process Solutions
TPS revenue of $1,345 million decreased $140 million, or 9%, in the first quarter of 2022 compared to the first quarter of 2021. The decrease was driven by lower equipment and projects revenue, partially offset by higher volume in industrial valves, pumps and gears, and services. Equipment revenue was down 26% and service revenue was up 6% when compared to the prior year. Equipment revenue in the quarter represented 39% and service revenue represented 61% of total segment revenue.
TPS segment operating income was $226 million in the first quarter of 2022 compared to $207 million in the first quarter of 2021. The increase in income was primarily driven by favorable business mix and increased cost productivity.
Digital Solutions
DS revenue of $474 million increased $4 million, or 1%, in the first quarter of 2022 compared to the first quarter of 2021, mainly driven by higher volume in the Precision Sensors and Instrumentation and Waygate Technologies businesses, partially offset by declines in the Process and Pipeline Services, Nexus Control and Bently Nevada businesses. DS revenue growth continues to be affected by supply chain constraints that impacted product deliveries.
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DS segment operating income was $15 million in the first quarter of 2022 compared to $24 million in the first quarter of 2021. The decrease in profitability was primarily driven by lower cost productivity and inflationary pressure.
Corporate
In the first quarter of 2022, corporate expenses were $105 million compared to $109 million in the first quarter of 2021. The decrease of $4 million was primarily driven by cost efficiencies and past restructuring actions.
Restructuring, Impairment and Other
In the first quarter of 2022, we recognized $61 million of restructuring, impairment and other items, compared to $80 million in the first quarter of 2021. The charges in the first quarter of 2022 primarily relate to our TPS segment for a write-off of an equity method investment and the release of foreign currency translation adjustments for certain restructured product lines. The charges in the first quarter of 2021 primarily related to the continuation of activities from our 2020 restructuring plan.
Other Non-Operating Loss, Net
In the first quarter of 2022, we incurred $28 million of other non-operating losses. Included in this amount was a loss of $74 million related to marking our investment in C3 AI to fair value, and a gain of $85 million from marking our investment in ADNOC Drilling to fair value. For the first quarter of 2021, we incurred $626 million of other non-operating losses. Included in this amount was a loss of $788 million related to marking our investment in C3 AI to fair value, partially offset by the reversal of accruals of $121 million due to the settlement of certain legal matters.
Interest Expense, Net
In the first quarter of 2022, we incurred interest expense, net of interest income, of $64 million, which decreased $10 million compared to the first quarter of 2021. The reduction was driven by lower interest expense on a portion of our long-term borrowings, due to refinancing to lower interest rates, combined with higher interest income.
Income Taxes
In the first quarter of 2022, the provision for income taxes was $95 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 and earnings in jurisdictions with tax rates higher than the U.S., partially offset by tax benefits related to uncertain tax positions. In addition, since we are a partnership for U.S. federal tax purposes, any tax benefits associated with U.S. losses are recognized by our Members and not reflected in our tax expense.
In the first quarter of 2021, the provision for income tax was $83 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.
LIQUIDITY AND CAPITAL RESOURCES
Our objective in financing our business is to maintain sufficient liquidity, adequate financial resources and financial flexibility in order to fund the requirements of our business. We continue to maintain solid financial strength and liquidity. At March 31, 2022, we had cash and cash equivalents of $3.2 billion compared to $3.8 billion at December 31, 2021.
In the U.S. we held cash and cash equivalents of approximately $1.1 billion and $1.6 billion and outside the U.S. of approximately $2.1 billion and $2.2 billion as of March 31, 2022 and December 31, 2021, respectively. A substantial portion of the cash held outside the U.S. at March 31, 2022 has been reinvested in active non-U.S. business operations. If we decide at a later date to repatriate those funds to the U.S., we may incur other additional taxes that would not be significant to the total tax provision.
We have a $3 billion committed unsecured revolving credit facility ("the Credit Agreement") with commercial banks maturing in December 2024. In addition, we have a commercial paper program with authorization up to $3
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billion under which we may issue from time to time commercial paper with maturities of no more than 397 days. At March 31, 2022 and December 31, 2021, there were no borrowings under either the Credit Agreement or the commercial paper program.
Certain Senior Notes contain covenants that restrict our ability to take certain actions. See Note 9. "Borrowings" of the Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report for further details. At March 31, 2022, we were in compliance with all debt covenants. Our next debt maturity is December 2023.
We continuously review our liquidity and capital resources. If market conditions were to change, for instance due to the uncertainty created by geopolitical events, a global pandemic or a significant decline in oil and gas prices, and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be negatively impacted. Additionally, it could cause the rating agencies to lower our credit ratings. There are no ratings triggers that would accelerate the maturity of any borrowings under our committed credit facility; however, a downgrade in our credit ratings could increase the cost of borrowings under the credit facility and could also limit or preclude our ability to issue commercial paper. Should this occur, we could seek alternative sources of funding, including borrowing under the credit facility.
During the three months ended March 31, 2022, we dispersed cash to fund a variety of activities including certain working capital needs, capital expenditures, distributions to Members, and repurchases of our Units.
Cash Flows
Cash flows provided by (used in) each type of activity were as follows for the three months ended March 31:
| (In millions) | 2022 | 2021 | ||||||
| Operating activities | $ | 78 | $ | 662 | ||||
| Investing activities | (266) | (174) | ||||||
| Financing activities | (469) | (255) | ||||||
Operating Activities
Our largest source of operating cash is payments from customers, of which the largest component is collecting cash related to our sales of products and services including advance payments or progress collections for work to be performed. The primary use of operating cash is to pay our suppliers, employees, tax authorities, and others for a wide range of goods and services.
Cash flows from operating activities generated cash of $78 million and $662 million for the three months ended March 31, 2022 and 2021, respectively.
For the three months ended March 31, 2022, cash generated from operating activities were primarily driven by net income adjusted for certain noncash items (including depreciation, amortization, and gains and losses on equity securities). Net working capital cash usage was $153 million for the three months ended March 31, 2022, mainly due to receivables, driven primarily by lower collections, and inventory as we build for revenue growth, partially offset by strong progress collections on equipment contracts.
For the three months ended March 31, 2021, cash generated from operating activities were primarily driven by net losses adjusted for certain noncash items (including depreciation, amortization, and a loss on equity securities) and working capital, which includes contract and other deferred assets. Net working capital generation was $376 million for the three months ended March 31, 2021, mainly due to receivables and inventory.
Investing Activities
Cash flows from investing activities used cash of $266 million and $174 million for the three months ended March 31, 2022 and 2021, respectively.
Our principal recurring investing activity is the funding of capital expenditures including property, plant and equipment and software, to support and generate revenue from operations. Expenditures for capital assets were
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$268 million and $221 million for the three months ended March 31, 2022 and 2021, respectively. Proceeds from the sale of property, plant and equipment were $91 million and $41 million for the three months ended March 31, 2022 and 2021, respectively.
Financing Activities
Cash flows from financing activities used cash of $469 million and $255 million for the three months ended March 31, 2022 and 2021, respectively.
We had net repayments of debt and other borrowings of $11 million and $36 million for the three months ended March 31, 2022 and 2021, respectively.
We made distributions to our Members of $185 million and $187 million during the three months ended March 31, 2022 and 2021, respectively.
In 2021, Baker Hughes' Board of Directors authorized us to repurchase up to $2 billion of our Units. For the three months ended March 31, 2022, we repurchased and canceled 8.1 million Units for a total of $236 million.
Cash Requirements
We believe cash on hand, cash flows from operating activities, the available revolving credit facility, access to both our commercial paper program or our uncommitted lines of credit, and availability under our existing shelf registrations of debt will provide us with sufficient capital resources and liquidity in the short-term and long-term to manage our working capital needs, meet contractual obligations, fund capital expenditures and distributions, repay debt, repurchase our common units, and support the development of our short-term and long-term operating strategies. When necessary, we issue commercial paper or other short-term debt to fund cash needs in the U.S. in excess of the cash generated in the U.S.
Our capital expenditures can be adjusted and managed by us to match market demand and activity levels. We continue to believe that based on current market conditions, capital expenditures in 2022 are expected to be made at a rate that would equal up to 5% of annual revenue. The expenditures are expected to be used primarily for normal, recurring items necessary to support our business. We currently anticipate making income tax payments in the range of $525 million to $625 million in 2022.
Other Factors Affecting Liquidity
Customer receivables: In line with industry practice, we may bill our customers for services provided in arrears dependent upon contractual terms. In a challenging economic environment, we may experience delays in the payment of our invoices due to customers' lower cash flow from operations or their more limited access to credit markets. While historically there have not been material non-payment events, we attempt to mitigate this risk through working with our customers to restructure their debts. A customer's failure or delay in payment could have a material adverse effect on our short-term liquidity and results of operations. Our gross customer receivables in the U.S. were 14% and 13% as of March 31, 2022 and December 31, 2021, respectively. In Mexico, our gross customer receivables were 12% as of March 31, 2022 and December 31, 2021. No other country accounted for more than 10% of our gross customer receivables at these dates.
International operations: Our cash that is held outside the U.S. is 66% of the total cash balance as of March 31, 2022. We may not be able to use this cash quickly and efficiently due to exchange or cash controls that could make it challenging. As a result, our cash balance may not represent our ability to quickly and efficiently use this cash.
Supply chain finance programs: Under supply chain finance programs, administered by a third party, our suppliers are given the opportunity to sell receivables from us to participating financial institutions at their sole discretion at a rate that leverages our credit rating and thus might be more beneficial to our suppliers. Our responsibility is limited to making payment on the terms originally negotiated with our supplier, regardless of whether the supplier sells its receivable to a financial institution. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the program. These liabilities continue to be presented as accounts payable in our condensed consolidated statements of financial position and reflected as
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cash flow from operating activities when settled. We do not believe that changes in the availability of supply chain financing programs would have a material impact on our liquidity.
CRITICAL ACCOUNTING ESTIMATES
Our critical accounting estimation processes are consistent with those described in Item 7 of Part II, "Management's discussion and analysis of financial condition and results of operations" of our 2021 Annual Report.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, (each a "forward-looking statement"). All statements, other than historical facts, including statements regarding the presentation of the Company's operations in future reports and any assumptions underlying any of the foregoing, are forward-looking statements. Forward-looking statements concern future circumstances and results and other statements that are not historical facts and are sometimes identified by the words "may," "will," "should," "potential," "intend," "expect," "would," "seek," "anticipate," "estimate," "overestimate," "underestimate," "believe," "could," "project," "predict," "continue," "target", "goal" or other similar words or expressions. Forward-looking statements are based upon current plans, estimates and expectations that are subject to risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. The inclusion of such statements should not be regarded as a representation that such plans, estimates or expectations will be achieved. Important factors that could cause actual results to differ materially from such plans, estimates or expectations include, among others, the risk factors identified in the "Risk Factors" section of Part II of Item 1A of this report and Part 1 of Item 1A of our 2021 Annual Report and those set forth from time-to-time in other filings by the Company with the SEC. These documents are available through our website or through the SEC's Electronic Data Gathering and Analysis Retrieval (EDGAR) system at http://www.sec.gov.
Any forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. The Company does not undertake any obligation to update any forward-looking statements, whether as a result of new information or developments, future events or otherwise, except as required by law. Readers are cautioned not to place undue reliance on any of these forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk affecting us, see Item 7A. “Quantitative and Qualitative Disclosures about Market Risk,” in our 2021 Annual Report. Our exposure to market risk has not changed materially since December 31, 2021.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (as defined in Rule 15d-15(e) of the Exchange Act) were effective at a reasonable assurance level.
There has been no change in our internal controls over financial reporting during the quarter ended March 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See discussion of legal proceedings in "Note 15. Commitments And Contingencies" of the Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report, Item 3 of Part I of our 2021 Annual Report and Note 17 of the Notes to Consolidated Financial Statements included in Item 8 of our 2021 Annual Report.
ITEM 1A. RISK FACTORS
As of the date of this filing, in addition to the risk factors contained in the 2021 Annual Report, the Company and its operations are subject to the following risk factor:
OPERATIONAL RISKS
The ongoing conflict between Russia and Ukraine may adversely affect our business and results of operations.
Given the nature of our business and our global operations, the current conflict between Russia and Ukraine may adversely affect our business and results of operations. We announced the suspension of any new investments for our Russia operations. Further, the broader consequences of this conflict, which may include further sanctions that prohibit our ability to do business in Russia, embargoes, supply chain disruptions, regional instability and geopolitical shifts, and the extent of the conflict’s effect on our business and results of operations as well as the global economy, cannot be predicted.
The current conflict between Russia and Ukraine may also have the effect of heightening many other risks disclosed in our public filings, any of which could materially and adversely affect our business and results of operations. Such risks include, but are not limited to, adverse effects on global macroeconomic conditions; increased volatility in the price and demand of oil and natural gas, increased exposure to cyberattacks; limitations in our ability to implement and execute our business strategy; risks to employees and contractors that we have in the region; disruptions in global supply chains; exposure to foreign currency fluctuations and potential nationalizations and assets seizures in Russia, constraints or disruption in the capital markets and our sources of liquidity; our potential inability to service our remaining performance obligations and potential contractual breaches and litigation.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
We have no mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K to report for the current quarter.
ITEM 5. OTHER INFORMATION
None.
Baker Hughes Holdings LLC 2022 First Quarter Form 10-Q | 32
ITEM 6. EXHIBITS
Each exhibit identified below is filed as a part of this report. Exhibits designated with an "*" are filed as an exhibit to this Quarterly Report on Form 10-Q and Exhibits designated with an "**" are furnished as an exhibit to this Quarterly Report on Form 10-Q. Exhibits designated with a "+" are identified as management contracts or compensatory plans or arrangements. Exhibits previously filed are incorporated by reference.
| 101.INS* | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH* | XBRL Schema Document | |||||||
| 101.CAL* | XBRL Calculation Linkbase Document | |||||||
| 101.DEF* | XBRL Definition Linkbase Document | |||||||
| 101.LAB* | XBRL Label Linkbase Document | |||||||
| 101.PRE* | XBRL Presentation Linkbase Document | |||||||
Baker Hughes Holdings LLC 2022 First Quarter Form 10-Q | 33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Baker Hughes Holdings LLC (Registrant) | |||||||||||
| Date: | April 20, 2022 | By: | /s/ BRIAN WORRELL | ||||||||
| Brian Worrell | |||||||||||
| Chief Financial Officer | |||||||||||
| Date: | April 20, 2022 | By: | /s/ KURT CAMILLERI | ||||||||
| Kurt Camilleri | |||||||||||
| Senior Vice President, Controller and Chief Accounting Officer | |||||||||||
Baker Hughes Holdings LLC 2022 First Quarter Form 10-Q | 34
Exhibit 31.1
CERTIFICATION
I, Lorenzo Simonelli, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Baker Hughes Holdings LLC;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | April 20, 2022 | By: | /s/ Lorenzo Simonelli | |||||||||||
| Lorenzo Simonelli | ||||||||||||||
| President and Chief Executive Officer | ||||||||||||||
Exhibit 31.2
CERTIFICATION
I, Brian Worrell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Baker Hughes Holdings LLC;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | April 20, 2022 | By: | /s/ Brian Worrell | |||||||||||
| Brian Worrell | ||||||||||||||
| Chief Financial Officer | ||||||||||||||
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Baker Hughes Holdings LLC (the “Company”) on Form 10-Q for the period ended March 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Lorenzo Simonelli, President and Chief Executive Officer of the Company, and Brian Worrell, the Chief Financial Officer of the Company, each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(i)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(ii)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.
The certification is given to the knowledge of the undersigned.
| /s/ Lorenzo Simonelli | ||||||||||||||
| Name: | Lorenzo Simonelli | |||||||||||||
| Title: | President and Chief Executive Officer | |||||||||||||
| Date: | April 20, 2022 | |||||||||||||
| /s/ Brian Worrell | ||||||||||||||
| Name: | Brian Worrell | |||||||||||||
| Title: | Chief Financial Officer | |||||||||||||
| Date: | April 20, 2022 | |||||||||||||