Item 2.02 Results of Operations and Financial Condition.
In accordance with General Instructions B.2.
of Form 8-K, the information furnished pursuant to this Item 2.02 shall not be deemed “filed” for purposes of Section 18
of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities
Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing.
INTRODUCTION
The information in this Current Report on
Form 8-K is being furnished by Baker Hughes, a GE company (“BHGE”) and Baker Hughes, a GE company, LLC (“BHGE
LLC”) to present the condensed combined financial statements of the oil and gas business of General Electric Company (“GE
O&G”) as of and for the three and six months ended June 30, 2017 and 2016, and a summary management’s discussion
and analysis on the financial condition and results of operations of GE O&G for such periods. This Current Report is not a
Quarterly Report on Form 10-Q, and does not contain all of the information, including segment information, notes to the financial
statements and detailed management’s discussion and analysis, that would be required in a Quarterly Report on Form 10-Q.
The GE O&G condensed combined financial
statements included in this Current Report were prepared on the same basis as the GE O&G combined financial statements for
the three months ended March 31, 2017 and for the three years ended December 31, 2016, included in BHGE’s Registration Statement
on Form S-4 (Registration No. 333-216991), as amended, initially filed with the U.S. Securities and Exchange Commission (“SEC”)
on March 29, 2017 and declared effective on May 30, 2017 (the “Registration Statement”), beginning on page FS-1.
GE O&G was comprised of assets, liabilities,
and results of operations of certain dedicated legal entities owned by General Electric Company (“GE”), a U.S. listed
company, as well as certain non-GE O&G legal entities, which were shared legal entities within GE.
Subsequent to the period ended June
30, 2017, we consummated our previously announced business combination (the “Transactions”) of GE O&G and Baker
Hughes Incorporated (“Baker Hughes”). The Transactions were completed on July 3, 2017 (the “Closing Date”)
pursuant to the Transaction Agreement and Plan of Merger, dated as of October 30, 2016, among GE, Baker Hughes, BHGE and Bear MergerSub,
Inc., as amended by the Amendment to Transaction Agreement and Plan of Merger, dated as of March 27, 2017, among GE, Baker Hughes,
BHGE, Bear MergerSub, Inc., BHI Newco, Inc. (“Newco 2”) and Bear MergerSub 2, Inc.
The Transactions included (i) the merger
of Baker Hughes with an indirect, wholly-owned subsidiary of Baker Hughes, with Baker Hughes surviving the merger as a direct wholly-owned subsidiary of Newco 2 (the “First Merger”), (ii) the conversion of the surviving corporation of the First Merger
into a Delaware limited liability company (which was originally named Newco LLC and then renamed Baker Hughes, a GE company, LLC)
(“BHGE LLC”) (the “Conversion”), (iii) the merger of Newco 2 with BHGE, with BHGE surviving the merger
(the “Second Merger” and collectively with the First Merger, the “Mergers”) and (iv) the transfer by GE
to BHGE LLC, following the Mergers and the Conversion, of (1) all of the equity interests of the GE O&G holding companies that
held directly or indirectly the assets and liabilities of GE O&G, including any GE O&G operating subsidiaries, and (2)
$7.4 billion in cash in exchange for approximately 62.5% of the membership interests in BHGE LLC.
The GE O&G condensed combined financial
statements included in this Current Report were prepared on a stand-alone basis derived from the consolidated financial statements
and accounting records of GE. The condensed combined financial statements are presented as carve-out financial statements and reflect
exclusively the combined historical results of operations, financial position and cash flows of GE O&G as they existed as of
and for the three and six months ended June 30, 2017, prior to the consummation of the Transactions. The condensed combined financial
statements do not reflect any impact of the Transactions.
The condensed combined financial statements
are unaudited. The results reported in these condensed combined financial statements should not be regarded as necessarily indicative
of results that GE O&G would have achieved if GE O&G had operated as a separate stand-alone entity during the periods presented,
or of results that may be expected in future periods or for the entire fiscal year. These condensed combined financial statements
should be read in conjunction with the audited GE O&G combined financial statements for the three years ended December 31,
2016 and GE O&G unaudited condensed combined financial statements for the three months ended March 31, 2017, in each case together
with the notes thereto, included in the Registration Statement beginning on page FS-1.
Our first report that will present
the financial condition and results of operations of BHGE, reflecting the combined business of GE O&G and Baker Hughes
following the Transactions, will be the Quarterly Report on Form 10-Q as of and for the three and nine months
ending September 30, 2017. For accounting purposes GE O&G will be treated as the accounting “acquirer,” and,
as such, in future filings, including our Quarterly Report on Form 10-Q as of and for the three and nine months ending
September 30, 2017, the historical financial statements of the accounting acquirer, GE O&G, will be the historical
financial statements of BHGE. The results of operations of the legacy Baker Hughes business will be reflected in the
financial statements of BHGE only from the Closing Date.
NOTES TO THE CONDENSED
COMBINED FINANCIAL STATEMENTS
NOTE
1. DESCRIPTION OF THE BUSINESS
GE
Oil and Gas (the “Business,” “GE O&G,” “we,” “our,” or “us”)
offers its customers a leading portfolio of advanced technology and optimization support across the oil and gas value chain. With
its operational headquarters in London, United Kingdom, the Business is comprised of assets, liabilities, and results of operations
of certain dedicated legal entities within General Electric Company (“GE”), a U.S. listed company, as well as certain
non-GE O&G legal entities, which are shared legal entities within GE.
We
have global operations with a presence in North America, Europe, Asia, Africa, Australia and Latin America.. The Business has
approximately 34,000 employees in more than 120 countries and has three reportable segments: Turbomachinery
& Downstream Technology Solutions (“TMDTS”), Surface, Subsea & Drilling (“SS&D”) and Digital
Solutions (“DS”).
NOTE
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS
OF PRESENTATION
These
condensed combined financial statements were prepared on a stand-alone basis derived from the consolidated financial statements
and accounting records of GE. These combined financial statements as of June 30, 2017 and December 31, 2016, and for the
three and six months ended June 30, 2017 and 2016 are presented as carve-out financial statements and reflect the combined
historical results of operations, financial position and cash flows of GE O&G, in conformity with U.S. generally accepted
accounting principles (“GAAP”).
All
significant intercompany balances and transactions within the Business have been eliminated in these condensed combined financial
statements.
The
condensed combined financial statements reflect the attribution of the specifically identifiable assets and liabilities of the
Business, including goodwill and other identifiable intangible assets arising from the historical acquisitions of businesses comprising
GE O&G. Where a business included within the scope of GE O&G as of June 30, 2017 was historically acquired and operated
within another GE business unit, the condensed combined financial statements reflect the assets, liabilities and results of operations
of those businesses on a fully retrospective basis (in accordance with the guidance applicable to transactions between entities
under common control) based on their carrying values, as reflected in the accounting records of GE.
GE
uses a centralized approach to cash management and financing of its operations. This arrangement is not reflective of the manner
in which the Business would have financed its operations had it been a stand-alone business separate from GE during the periods
presented. Long-term intercompany financing, including strategic financing, and cash pooling arrangements, which are used to fund
expansion or certain working capital needs, are excluded from the asset and liability balances in the Condensed Combined Statement
of Financial Position. These amounts have instead been reported as “Net parent investment” as a component of equity.
GE
and its affiliates provide a variety of services to the Business. Certain services, such as employee payroll, administering employee
benefits plans and paying related claims, provision of voice and data networking, facility rent, outsourcing of certain functions,
and other corporate services and overhead (including costs for executive compensation and stock options), are charged to the Business.
In circumstances where charges were not historically billed to the Business by GE (or charges billed were not reflective of the
full costs of doing business), those charges have been allocated to the Business and are reflected as Selling, general and administrative
expenses in the Condensed Combined Statement of Earnings. Where specific identification of charges was not practicable, a reasonable
method of allocation was applied to those charges based on either a proportional share of operating revenues, headcount, personnel
costs, or estimates of use and the resulting allocation to the Business is recorded in Selling, general and administrative expenses
in the Condensed Combined Statement of Earnings. The Business believes the allocations of these amounts were determined on a reasonable
basis and the methods were applied consistently for the periods presented and reflect all of the costs of GE O&G. These allocated
amounts, however, are not necessarily indicative of the actual amounts that might have been incurred or realized had GE O&G
operated as a separate stand-alone entity during the periods presented. Consequently, the condensed combined financial statements
do not necessarily represent the results the Business would have achieved if the Business had operated as a separate stand-alone
entity during the periods presented.
Certain
columns may not add due to the use of rounded numbers. Percentages presented are calculated from the underlying numbers in millions.
Unless otherwise indicated, information in these notes to the consolidated financial statements relates to continuing operations.
INTERIM
PERIOD PRESENTATION
The
condensed combined financial statements and notes thereto are unaudited. These statements include all adjustments (consisting
of normal recurring accruals) that we considered necessary to present a fair statement of our results of operations, financial
position and cash flows. The results reported in these condensed combined financial statements should not be regarded as necessarily
indicative of results that may be expected for the entire year.
ACCOUNTING
POLICIES
Please
refer to Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to the annual 2016 combined financial statements
included in the Registration Statement on Form S-4 (File No. 333-216991), as amended, filed with the SEC by Baker Hughes, a GE
company and declared effective on May 30, 2017 for the discussion of our significant accounting policies.
SUMMARY MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following summary discussion and analysis summarizes certain significant factors affecting the results of operations, financial
condition and liquidity position of GE O&G as of and for the three and six months ended June 30, 2017 and 2016, and should
be read in conjunction with the financial information of GE O&G provided in this report. Neither the following summary discussion
and analysis nor the financial information of GE O&G represent the financial position or results of operations of the Oil &
Gas operating segment of GE. The following summary discussion and analysis covers periods prior to the consummation of the
business combination of GE O&G and Baker Hughes on July 3, 2017, described in the Current Report on Form 8-K filed by BHGE
in connection with the closing of the Transactions (as defined herein) on July 3, 2017, and does not reflect this combination
or its effect on future periods. The business combination will result in financial results that are materially different from
those reflected in the financial information of GE O&G presented herein. The following summary discussion and analysis contain
forward-looking statements that reflect GE O&G’s plans, estimates and beliefs. Actual results could differ materially
from those discussed in the forward-looking statements.
Executive
Summary
GE
O&G operates in more than 120 countries, offering its customers a leading portfolio of advanced technology and optimization
support. GE O&G is active in all segments of the oil and gas industry; upstream to downstream, greenfield to brownfield, onshore
and offshore. GE O&G also delivers pipeline integrity solutions, a wide range of sensing, inspection and monitoring technologies
and industrial power generation and compression solutions for the midstream liquefied natural gas and pipeline segments and downstream
refining and petro-chemical segments.
For
the three and six months ended June 30, 2017, the oil and gas industry dynamics continued to be challenging. The number of contract
awards and rig count usage in U.S. onshore rigs are increasing period over period; however, the industry’s continued focus
on both cost and capital spending reductions is impacting the overall profitability for suppliers and partners within the industry.
While the financial performance of GE O&G continued to be adversely impacted, contract orders increased for the three months
ended June 30, 2017 compared to the three months ended June 30, 2016 as evidenced by the strong book-to-bill ratio for the three
months ended June 30, 2017. Over these periods, GE O&G continued to experience a reduction in sales volume across most of
its product lines and continued to partially offset this trend through cost rationalization and reduction.
Factors
Affecting Results of Operations
Oil
and Gas Prices
The
sharp decline experienced in oil and gas prices since 2014 and the prospect of a continuation of prevailing low oil and gas prices
have caused GE O&G’s business to experience declines in orders, some project commencement delays and pricing pressures
as capital spending by customers has been diminished, deferred or cancelled. Outside North America, customer spending is most
heavily influenced by Brent oil prices and by regional or oil-linked natural gas prices, while in North America, customer spending
is highly driven by WTI oil prices and natural gas prices, as measured by the Henry Hub Natural Gas Spot Price. In response to
this uncertain industry outlook, GE O&G continues to realize benefits from cost saving actions with an increased focus on
execution and productivity.
Results
of Operations
Three
Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
Revenue
GE
O&G’s revenue for the three months ended June 30, 2017 was $3,010 million, a decrease of $311 million, or 9.4%,
from the three months ended June 30, 2016 primarily due to the continued decline in customer activity across most product lines,
which reduced volume and prices, the combined effect of which totaled $281 million as well as a $30 million decline due to
foreign exchange. The declines in volume and prices were primarily driven by the continued weakness in the global oil and gas
industry.
Earnings
before tax including gain/(loss) on noncontrolling interests
For
the three months ended June 30, 2017, GE O&G's loss before income taxes was $24 million and the net gain attributable to noncontrolling
interests was $6 million, for a total of $30 million loss before income taxes including the net gain on noncontrolling interests,
a decrease of $68 million compared to the three months ended June 30, 2016. This decrease was primarily driven by the combined
impact of lower volume and pricing headwinds of $100 million and lower cost productivity of $211 million. These were partially
offset by cost deflation of $53 million. In addition, the business recorded $44 million in restructuring charges, which was
a decrease of $193 million from the prior year. Foreign currency devaluation charges decreased by $36 million. Transactional,
integration, and deal related costs were $55 million, which represents an increase of $52 million from the second quarter of 2016
due primarily to costs relating to preparations for closing the combination with Baker Hughes.
Income
Tax
For
the three months ended June 30, 2017, the GE O&G income tax benefit was $14 million compared to income tax expense of
$20 million for the three months ended June 30, 2016. The effective tax rate for the three months ended June 30, 2017 was 44.6%
as compared to 52.3% for the three months ended June 30, 2016. The decrease in the effective tax rate for the three months ended
June 30, 2017 resulted from a higher benefit from income earned in foreign jurisdictions taxed at lower rates and from a lower
level of non-deductible expenses and return to accrual adjustments.
Six
months ended June 30, 2017 Compared to Six months ended June 30, 2016
Revenue
GE
O&G’s revenue for the six months ended June 30, 2017 was $6,122 million, a decrease of $607 million, or 9.0%,
from the six months ended June 30, 2016 primarily due to the continued decline in customer activity across most product lines,
which reduced volume and prices, the combined effect of which totaled $536 million as well as negative impact from foreign
exchange of $71 million. These declines are primarily driven by the continued weakness in the global oil and gas industry.
Earnings
before tax including gain/(loss) on noncontrolling interests
For
the six months ended June 30, 2017, GE O&G's earnings before income taxes were $143 million and the net gain attributable
to noncontrolling interests w
as
$4 million, for a total of $139 million earnings before income
taxes including the net gain on noncontrolling interests
.
For the six months ended June 30,
2016, GE O&G's earnings before income taxes were $158 million and the net loss attributable to noncontrolling interests was
$63 million, for a total of $221 million earnings before income taxes including the net loss on noncontrolling interests. The
year over year comparison of earnings before income taxes including the impact from noncontrolling interests resulted in a decline
of $82 million. This decrease was primarily driven by the combined impact of lower volume and pricing headwinds of $206 million.
In addition, the business recorded $93 million in restructuring charges, a decrease of $220 million from the six months ended
June 30, 2016. Cost deflation partially offset lower productivity with a combined effect of $106 million lower than the first
half of 2016. Foreign currency devaluation charges decreased by $87 million, primarily due to currency devaluations in Angola
and Nigeria in the first half of 2016, which did not recur in the first half of 2017. Transactional, integration, and deal related
costs were $120 million which represents an increase of $112 million from the first half of 2016 due primarily to costs relating
to the closing of the Baker Hughes business combination.
Income
Tax
For
the six months ended June 30, 2017, GE O&G income tax expense was $29 million compared to income tax expense of $62 million
in the first half of 2016. The effective tax rates for the six months ended June 30, 2017 and 2016 were 20.4% and 39.2% respectively.
The decrease in the effective tax rate for the six months ended June 30, 2017 resulted from a higher benefit from income earned
in foreign jurisdictions taxed at lower rates, as well as a lower level of non-deductible expenses and return to accrual adjustments.
Financial
Resources and Liquidity
GE
O&G’s objective is to maintain sufficient liquidity and financial flexibility to fund its business operations.
As of June 30, 2017, GE O&G had $2,021 million of cash and equivalents, compared to $981 million at December 31,
2016. The increase was mainly driven by the settlement of intercompany financing positions with GE in anticipation of
the closing of the combination with Baker Hughes. As of June 30, 2017, these cash flows have generally been recorded as
financing activity with the parent in the Condensed Combined Statement of Cash Flows. The business combination with Baker
Hughes is designed to be debt free with GE O&G retaining only $100 million of net cash upon completion of the
transaction. For cash that is retained by GE O&G due to regulatory or other reasons at the completion of the Baker Hughes
business combination, GE has the legal right to receive cash payment when the applicable restriction is lifted or, with
respect to unrestricted cash, upon GE’s demand, in each case, net of certain costs incurred in transferring or
repatriating the cash. As such, GE O&G will have liability to GE preliminarily estimated to be approximately $1.7
billion, which is not reflected in the financial resources section above as the business combination did not close until July
3, 2017, after the period covered by this report.
GE
O&G mainly generates its cash from its operating activities. Historically GE O&G has participated in GE’s cash pooling
arrangements to access liquidity and fund its operations, the effect of which is treated as net parent investment for carve out
financial statement purposes. GE O&G has also accessed third party bank debt when needed to fill its short-term cash needs.
GE O&G has not borrowed material amounts from third party banks or the capital markets to fund its operations.
As
of June 30, 2017, approximately $1.0 billion of cash and equivalents were held in bank accounts and cannot be released, transferred
or otherwise converted into a currency that is regularly transacted internationally, due to lack of market liquidity, capital
controls or similar monetary or exchange limitations limiting the flow of capital out of the relevant jurisdiction.
Cash
Flows
The
following summarizes cash flows generated from (used in) each type of activity for each period:
Operating
Activities
GE
O&G’s largest source of operating cash is payments from customers, of which the largest component is collecting cash
related to product or services sales including advance payments or progress collections for work to be performed. The primary
use of operating cash is to pay GE O&G’s suppliers, employees, tax authorities and others for a wide range of material
and services.
Cash
flows from operating activities used $389 million and $236 million for the six months ended June 30, 2017 and 2016,
respectively. Cash flows from operating activities decreased $153 million in the first six months of 2017 versus the first
six months of 2016 primarily due to lower net earnings and increase in tax assets on U.S. losses. This cash usage was partially
offset by lower inventory due to increased liquidation.
Investing
Activities
Cash
flows from investing activities used $130 million and $216 million for the six months ended June 30, 2017 and 2016,
respectively. GE O&G’s principal recurring investing activity is the funding of capital expenditures, including property,
plant and equipment and software, to support operations. Expenditures for capital assets were $114 million and $164 million
for the six months ended June 30, 2017 and 2016, respectively, partially offset by cash flows from the sale of property, plant
and equipment of $12 million and $2 million for the six months ended June 30, 2017 and 2016, respectively. In addition, approximately
$25 million of investing cash flows were generated due to a business disposition in the second quarter of 2017 with no corresponding
sale during the same period in the prior year.
Financing
Activities
Cash
provided from financing activities was $1,544 million for the six months ended June 30, 2017, an increase of $1,263 million
compared to the six months ended June 30, 2016. This was primarily driven by (i) the settlement of intercompany financing activity
in preparation for the business combination with Baker Hughes, (ii) a decrease in borrowing of $116 million and (iii) other financing
charges increase of $148 million
principally
due to
$102
million acquisition of the outstanding non-controlling interest in one of our consolidated subsidiaries during the first half
of 2016.
Off
Balance Sheet Commitments
GE
O&G has contractual commitments and other commitments that are not necessarily reflected in GE O&G’s consolidated
statement of financial position. There have been no material changes from those amounts disclosed in the Registration Statement.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This
Current Report on Form 8-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (each a “forward-looking statement”).
The words “anticipate,” “believe,” “ensure,” “expect,” “if,” “intend,”
“estimate,” “project,” “foresee,” “forecasts,” “predict,” “outlook,”
“aim,” “will,” “could,” “should,” “potential,” “would,”
“may,” “probable,” “likely,” and similar expressions, and the negative thereof, are intended
to identify forward-looking statements. There are many risks and uncertainties that could cause actual results to differ materially
from our forward-looking statements. These forward-looking statements are also affected by the risk factors described in
BHGE’s Registration Statement on Form S-4 (File No. 333-216991), filed on May 25, 2017; and those set forth from
time-to-time in other filings with the SEC. The documents are available through BHGE’s website at: www.investors.bhge.com
or through the SEC’s Electronic Data Gathering and Analysis Retrieval (“EDGAR”) system at: www.sec.gov. Any
forward-looking statements speak only as of the date of this Current Report on Form 8-K. We undertake no 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.
Our
expectations regarding our business outlook and business plans; the business plans of our customers; oil and natural gas market
conditions; cost and availability of resources; economic, legal and regulatory conditions, and other matters are only our forecasts
regarding these matters.
These
forward looking statements, including forecasts, may be substantially different from actual results, which are affected by many
risks, along with the following risk factors and the timing of any of these risk factors: Integration activities - the ability
to successfully integrate Baker Hughes with GE Oil & Gas, including operations, technologies, products and services.
Economic
and political conditions - the impact of worldwide economic conditions; the effect that declines in credit availability may have
on worldwide economic growth and demand for hydrocarbons; foreign currency exchange fluctuations and changes in the capital markets
in locations where we operate; and the impact of government disruptions.
Dependence
on GE - we will be substantially dependent upon GE, which will be a significant supplier, and any failure by GE to supply us in
accordance with applicable contractual terms could have a material effect on our business.
Oil
and gas market conditions - the level of petroleum industry exploration, development and production expenditures; the price of,
volatility in pricing of, and the demand for crude oil and natural gas; drilling activity; drilling permits for and regulation
of the shelf and the deepwater drilling; excess productive capacity; crude and product inventories; liquefied natural gas supply
and demand; seasonal and other adverse weather conditions that affect the demand for energy; severe weather conditions, such as
tornadoes and hurricanes, that affect exploration and production activities.
Organization
of Petroleum Exporting Countries (“OPEC”) policy and the adherence by OPEC nations to their OPEC production quotas.
Terrorism
and geopolitical risks - war, military action, terrorist activities or extended periods of international conflict, particularly
involving any petroleum-producing or consuming regions; labor disruptions, civil unrest or security conditions where we operate;
potentially burdensome taxation, expropriation of assets by governmental action; cybersecurity risks and cyber incidents or attacks;
epidemic outbreaks.