NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
Baker Hughes, a GE company (the Company, BHGE, we, us, or our), was formed on October 28, 2016, for the purpose of facilitating the combination of Baker Hughes and GE O&G. BHGE is a world-leading, fullstream oilfield technology provider that has a unique mix of equipment and service capabilities. We conduct business in more than
120
countries and employ over
64,000
employees.
BASIS OF PRESENTATION
On July 3, 2017, we closed our previously announced business combination (the Transactions) to combine GE O&G and Baker Hughes (refer to "Note 2. Business Acquisition" for further details on the Transactions). As a result of the Transactions, the Company became the holding company of the combined businesses of Baker Hughes and GE O&G. Substantially all of the business of GE O&G and of Baker Hughes were transferred to a subsidiary of the Company, Baker Hughes, a GE company, LLC (BHGE LLC), on
July 3, 2017
. GE has approximately
62.5%
of economic interest in BHGE LLC and the Company has approximately
37.5%
of the remaining economic interest in BHGE LLC, held indirectly through two wholly owned subsidiaries. One of these wholly owned subsidiaries of the Company is the sole managing member of BHGE LLC. Although we hold a minority economic interest in BHGE LLC, we conduct and exercise full control over all activities of BHGE LLC, without the approval of any other member, through this wholly owned subsidiary. Accordingly, we consolidate the financial results of BHGE LLC and report a noncontrolling interest in our consolidated and combined financial statements for the economic interest in BHGE LLC not held by us. We consider BHGE LLC to be a consolidated variable interest entity (VIE). We are a holding company and have no material assets other than our ownership interest in BHGE LLC and certain intercompany and tax related balances. BHGE 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. The current year results, and balances, may not be comparable to prior years as the current year includes the results of Baker Hughes from July 3, 2017.
The accompanying consolidated and combined 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 annual financial information. All intercompany accounts and transactions have been eliminated.
The Company's financial statements have been prepared on a consolidated basis, effective July 3, 2017. Under this basis of presentation, our financial statements consolidate all of our subsidiaries (entities in which we have a controlling financial interest, most often because we hold a majority voting interest). All subsequent periods will also be presented on a consolidated basis. For all periods prior to July 3, 2017, the Company's financial statements were prepared on a combined basis. The combined financial statements combine certain accounts of GE and its subsidiaries that were historically managed as part of its oil & gas business and contributed to BHGE LLC as part of the Transactions. Additionally, it also includes certain assets, liabilities and results of operations of other businesses of GE that were also contributed to BHGE LLC as part of the Transactions 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. The consolidated and combined statements of income reflect intercompany expense allocations made to us by GE for certain corporate functions and for shared services provided by GE. Where possible, these allocations were made on a specific identification basis, and in other cases, these expenses were allocated by GE based on relative percentages of net operating costs or some other basis depending on the nature of the allocated cost. See "Note 16. Related Party Transactions" for further information on expenses allocated by GE. The historical financial results in the consolidated and combined financial statements presented may not be indicative of the results that would have been achieved had GE O&G operated as a separate, stand-alone entity during those periods.
The GE O&G numbers in the consolidated and combined statements of income (loss) have been reclassed to conform to the current presentation. We believe that the current presentation is a more appropriate presentation of the combined businesses. Merger and related costs includes all costs associated with the Transactions described in Note 2. Refer to "Note 2. Business Acquisition" for further details.
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
In the notes to the consolidated and combined financial statements, all dollar and share amounts in tabulations are in millions of dollars and shares, respectively, unless otherwise indicated. Certain columns and rows may not add due to the use of rounded numbers.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of any contingent assets or liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates and judgments on historical experience and on various other assumptions and information that we believe to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be perceived with certainty, and accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. While we believe that the estimates and assumptions used in the preparation of the consolidated and combined financial statements are appropriate, actual results could differ from those estimates. Estimates are used for, but are not limited to, determining the following: allowance for doubtful accounts and inventory valuation reserves; recoverability of long-lived assets, including revenue recognition on long term contracts, valuation of goodwill; useful lives used in depreciation and amortization; income taxes and related valuation allowances; accruals for contingencies; actuarial assumptions to determine costs and liabilities related to employee benefit plans; stock-based compensation expense; valuation of derivatives and the fair value of assets acquired and liabilities assumed in acquisitions; and expense allocations for certain corporate functions and shared services provided by GE.
Foreign Currency
Assets and liabilities of non-U.S. operations with a functional currency other than the U.S. dollar have been translated into U.S. dollars at the quarterly exchange rates, and revenue, expenses, and cash flows have been translated at average rates for the respective periods. Any resulting translation gains and losses are included in other comprehensive income (loss).
Gains and losses from foreign currency transactions, such as those resulting from the settlement of receivables or payables in the non-functional currency and those resulting from remeasurements of monetary items, are included in the consolidated and combined statement of income (loss).
Cost and Equity Method Investment
Investments in privately held companies in which we do not have the ability to exercise significant influence, most often because we hold a voting interest of
0%
to
20%
are accounted for using the cost method.
Associated companies are entities in which we do not have a controlling financial interest, but over which we have significant influence, most often because we hold a voting interest of
20%
to
50%
. Associated companies are accounted for as equity method investments. Results of associated companies are presented on a one-line basis in the caption "Equity in loss of affiliate" in our consolidated and combined statements of income (loss). Investments in, and advances to, associated companies are presented on a one-line basis in the caption "All other assets" in our consolidated and combined statement of financial position.
Sales of Goods and Services
We record all sales of goods and services only when a firm sales agreement is in place, delivery has occurred or services have been rendered and collectability of the fixed or determinable sales price is reasonably assured.
Except for goods sold under long-term construction type contracts and service agreements, we recognize sales of goods under the provisions of SEC Staff Accounting Bulletin (SAB) 104,
Revenue Recognition
. In situations where arrangements include customer acceptance provisions based on seller or customer-specified objective
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
criteria, we recognize revenue when we have reliably demonstrated that all specified acceptance criteria have been met or when formal acceptance occurs, respectively. We do not provide for anticipated losses before we record sales.
We recognize revenue on larger construction and equipment contracts using long-term construction accounting. We estimate total long-term contract revenue net of price concessions as well as total contract costs. For larger construction and equipment contracts, we recognize sales based on our progress toward contract completion measured by actual costs incurred in relation to our estimate of total expected costs. We routinely update our estimates of future costs for agreements in process and report any cumulative effects of such adjustments in current operations. We provide for any loss that we expect to incur on these agreements when that loss is probable.
We sell product services under long-term product maintenance agreements, where costs of performing services are incurred on an other than straight-line basis. We recognize related sales based on the extent of our progress toward completion measured by actual costs incurred in relation to our estimate of total expected costs. We routinely update our estimates of future costs for agreements in process and report any cumulative effects of such adjustments in current operations.
For our long-term product maintenance agreements, we regularly assess customer credit risk inherent in the carrying amounts of receivables and contract costs and estimated earnings, including the risk that contractual penalties may not be sufficient to offset our accumulated costs in the event of customer termination. We gain insight into expected future utilization and cost trends, as well as credit risk, through our knowledge of the installed base of equipment and the close interaction with our customers that comes with supplying critical services and parts over extended periods. Revisions, after applying the cumulative catch up basis of accounting, may affect a product services agreement's total estimated profitability resulting in an adjustment of earnings. We provide for probable losses when they become evident.
Arrangements for the sale of goods and services sometimes include multiple components. Our arrangements with multiple components usually involve an upfront deliverable of equipment and future service deliverables such as installation, commissioning, training or the future delivery of ancillary products. In most cases, the relative values of the undelivered components are not significant to the overall arrangement and are typically delivered within three to six months after the core product has been delivered. In such agreements, selling price is determined for each component and any difference between the total of the separate selling prices and total contract consideration (i.e., discount) is allocated pro rata across each of the components in the arrangement. The value assigned to each component is objectively determined and obtained primarily from sources such as the separate selling price for that or a similar item or from competitor prices for similar items. If such evidence is not available, we use our best estimate of selling price, which is established consistent with the pricing strategy of the business and considers product configuration, geography, customer type, and other market specific factors.
Research and Development
Research and development costs are expensed as incurred and relate to the research and development of new products and services. These costs amounted to
$501 million
,
$352 million
and
$408 million
for the years ended
December 31, 2017
, 2016 and 2015, respectively. Research and development expenses were reported in cost of goods sold and cost of services sold.
Cash and Equivalents
Short-term investments with original maturities of three months or less are included in cash equivalents unless designated as available-for-sale and classified as investment securities.
As of
December 31, 2017
and December 31, 2016,
$1,190 million
and
$752 million
, respectively, of cash and equivalents were considered restricted as they 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 jurisdiction. Cash and equivalents includes
$997 million
of cash at
December 31, 2017
held on behalf of GE, of which
$764 million
is
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
restricted, and a corresponding liability is reported in short-term borrowings. See "Note 16. Related Party Transactions" for further details.
Allowance for Doubtful Accounts
We establish an allowance for doubtful accounts based on various factors including the payment history and financial condition of our debtors and the economic environment. Provisions for doubtful accounts are recorded based on the aging status of the debtor accounts or when it becomes evident that the debtor will not make the required payments at either contractual due dates or in the future.
Concentration of Credit Risk
We grant credit to our customers who primarily operate in the oil and natural gas industry. Although this concentration affects our overall exposure to credit risk, our current receivables are spread over a diverse group of customers across many countries, which mitigates this risk. We perform periodic credit evaluations of our customers' financial conditions, including monitoring our customers' payment history and current credit worthiness to manage this risk. We do not generally require collateral in support of our current receivables, but we may require payment in advance or security in the form of a letter of credit or a bank guarantee.
Inventories
All inventories are stated at the lower of cost or net realizable values and they are measured on a first-in, first-out (FIFO) basis or average cost basis. As necessary, we record provisions and maintain reserves for excess, slow moving and obsolete inventory. To determine these reserve amounts, we regularly review inventory quantities on hand and compare them to estimates of future product demand, market conditions, production requirements and technological developments.
Property, Plant and Equipment (PP&E)
Property, plant and equipment is initially stated at cost and is depreciated over its estimated economic life. Subsequently, property, plant and equipment is measured at cost less accumulated depreciation and impairment losses. We manufacture a substantial portion of our tools and equipment and the cost of these items, which includes direct and indirect manufacturing costs, is capitalized and carried in inventory until it is completed.
Other Intangible Assets
We amortize the cost of other intangible assets over their estimated useful lives unless such lives are deemed indefinite. The cost of intangible assets is generally amortized on a straight-line basis over the asset's estimated economic life. Amortizable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. In these circumstances, they are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested annually for impairment and written down to fair value as required. Refer to the
Impairment of Goodwill and Other Long-Lived Assets
accounting
policy.
Impairment of Goodwill and Other Long-lived Assets
We perform an annual impairment test of goodwill on a qualitative or quantitative basis for each of our reporting units as of July 1, or more frequently when circumstances indicate an impairment may exist at the reporting unit level. When performing the annual impairment test we have the option of first performing a qualitative assessment to determine the existence of events and circumstances that would lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If such a conclusion is reached, we would then be required to perform a quantitative impairment assessment of goodwill. However, if the assessment leads to a determination that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then no further assessments are required. A quantitative assessment for the determination of impairment is made by comparing the carrying amount of each reporting unit with its fair value, which is generally calculated using a
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
combination of market, comparable transaction and discounted cash flow approaches. See "Note 6. Goodwill and Other Intangible Assets" for further information on valuation methodology and impairment of goodwill.
We review PP&E, intangible assets and certain other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable and at least annually for indefinite-lived intangible assets. When testing for impairment, we group our long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (or asset group). The determination of recoverability is made based upon the estimated undiscounted future net cash flows. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value of the related assets.
Financial Instruments
Our financial instruments include cash and equivalents, current receivables, investments, accounts payables, short and long-term debt, and derivative financial instruments.
We monitor our exposure to various business risks including commodity prices and foreign currency exchange rates and we regularly use derivative financial instruments to manage these risks. At the inception of a new derivative, we designate the derivative as a hedge or we determine the derivative to be undesignated as a hedging instrument. We document the relationships between the hedging instruments and the hedged items, as well as our risk management objectives and strategy for undertaking various hedge transactions. We assess whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged item at both the inception of the hedge and on an ongoing basis.
We have a program that utilizes foreign currency forward contracts to reduce the risks associated with the effects of certain foreign currency exposures. Under this program, our strategy is to have gains or losses on the foreign currency forward contracts mitigate the foreign currency transaction and translation gains or losses to the extent practical. These foreign currency exposures typically arise from changes in the value of assets (for example, current receivables) and liabilities (for example, current payables) which are denominated in currencies other than the functional currency of the respective entity. We record all derivatives as of the end of our reporting period in our consolidated and combined statement of financial position at fair value. For the forward contracts held as undesignated hedging instruments, we record the changes in fair value of the forward contracts in our consolidated and combined statements of income along with the change in the fair value, related to foreign exchange movements, of the hedged item. Changes in the fair value of forward contracts designated as cash flow hedging instruments are recognized in other comprehensive income until the hedged item is recognized in earnings. If derivatives designated as a cash flow hedge are determined to be ineffective, the ineffective portion of that derivative's change in fair value is recognized in earnings.
Fair Value Measurements
For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
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Level 1 - Quoted prices for identical instruments in active markets.
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Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
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Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
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Level 3 - Significant inputs to the valuation model are unobservable.
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We maintain policies and procedures to value instruments using the best and most relevant data available. In addition, we perform reviews to assess the reasonableness of the valuations. With regard to Level 3 valuations (including instruments valued by third parties), we perform a variety of procedures to assess the reasonableness of the valuations. Such reviews include an evaluation of instruments whose fair value change exceeds predefined thresholds (and/or does not change) and consider the current interest rate, currency and credit environment, as well as other published data, such as rating agency market reports and current appraisals.
Recurring Fair Value Measurements
Derivatives
When we have Level 1 derivatives, which are traded either on exchanges or liquid over-the-counter markets, we use closing prices for valuation. The majority of our derivatives are valued using internal models and are included in Level 2. These internal models maximize the use of market observable inputs including interest rate curves and both forward and spot prices for currencies and commodities. Derivative assets and liabilities included in Level 2 primarily represent foreign currency and commodity forward contracts for the Company.
Investments in Debt and Equity Securities
When available, we use quoted market prices to determine the fair value of investment securities, and they are included in Level 1. Level 1 securities primarily include publicly traded equity securities.
For investment securities for which market prices are observable for identical or similar investment securities but not readily accessible for each of those investments individually (that is, it is difficult to obtain pricing information for each individual investment security at the measurement date), we use pricing models that are consistent with what other market participants would use. The inputs and assumptions to the models are derived from market observable sources including: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market-related data. Thus, certain securities may not be priced using quoted prices, but rather determined from market observable information. These investments are included in Level 2. When we use valuations that are based on significant unobservable inputs we classify the investment securities in Level 3.
Non-Recurring Fair Value Measurements
Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments only in certain circumstances. These assets can include long-lived assets that have been reduced to fair value when they are held for sale, cost and equity method investments and long-lived assets that are written down to fair value when they are impaired and the remeasurement of retained investments in formerly consolidated subsidiaries upon a change in control that results in a deconsolidation of a subsidiary, if we sell a controlling interest and retain a noncontrolling stake in the entity. Assets that are written down to fair value when impaired and retained investments are not subsequently adjusted to fair value unless further impairment occurs.
Cost and Equity Method Investments
Cost and equity method investments are valued using market observable data such as quoted prices when available. When market observable data is unavailable, investments are valued using a discounted cash flow model, comparative market multiples or a combination of both approaches as appropriate and other third-party pricing sources.
Long-lived Assets
Fair values of long-lived assets, including real estate, are primarily derived internally and are based on observed sales transactions for similar assets. In other instances, for example, collateral types for which
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
we do not have comparable observed sales transaction data, collateral values are developed internally and corroborated by external appraisal information. Adjustments to third-party valuations may be performed in circumstances where market comparables are not specific to the attributes of the specific collateral or appraisal information may not be reflective of current market conditions due to the passage of time and the occurrence of market events since receipt of the information.
Income Taxes
We file U.S. federal and state income tax returns which after the closing of the Transactions primarily includes our distributive share of items of income, gain, loss and deduction of BHGE LLC which is treated as a partnership for U.S. tax purposes. As such, BHGE LLC will not itself be subject to U.S. federal income tax under current U.S. tax laws. Non-U.S. current and deferred income taxes owed by the subsidiaries of BHGE LLC are reflected in the financial statements.
Prior to the closing of the Transactions, the business was included in the consolidated U.S. federal, foreign and state income tax returns of GE, where allowable by law. Our prior year current and deferred taxes were determined based upon the separate return method (i.e., as if we were a taxpayer separate from GE).
We account for taxes under the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial statement and tax return bases of assets and liabilities as well as from net operating losses and tax credit carryforwards, based on enacted tax rates expected to be in effect when taxes actually are paid or recovered and other provisions of the tax law. The effect of a change in tax laws or rates on deferred tax assets and liabilities is recognized in income in the period in which such change is enacted. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not, and a valuation allowance is established for any portion of a deferred tax asset that management believes may not be realized.
We provide U.S. deferred taxes on our outside basis difference in our investment in BHGE LLC. In determining the basis difference, we exclude non-deductible goodwill and the basis difference related to certain foreign corporations owned by BHGE LLC where the undistributed earnings of the foreign corporation have been, or will be, reinvested indefinitely.
Due to the enactment of U.S. tax reform, repatriations of foreign earnings will generally be free of U.S. federal tax but may incur other taxes, such as withholding or state taxes. Indefinite reinvestment is determined by management’s judgment about and intentions concerning the future operations of the Company. Most of these earnings have been reinvested in active non-U.S. business operations. At December 31, 2017, we have not changed our indefinite reinvestment decision as a result of U.S. tax reform but will reassess this during the course of 2018, accordingly, we have not provided income tax on such earnings. It is not practicable to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.
Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. We operate in more than
120
countries and our tax filings are subject to audit by the tax authorities in the jurisdictions where we conduct business. These audits may result in assessments of additional taxes that are resolved with the tax authorities or through the courts. We have provided for the amounts that we believe will ultimately result from these proceedings. We recognize uncertain tax positions that are “more likely than not” to be sustained if the relevant tax authority were to audit the position with full knowledge of all the relevant facts and other information. For those tax positions that meet this threshold, we measure the amount of tax benefit based on the largest amount of tax benefit that has a greater than
50%
chance of being realized in a final settlement with the relevant authority. We classify interest and penalties associated with uncertain tax positions as income tax expense. The effects of tax adjustments and settlements from taxing authorities are presented in the combined financial statements in the period they are recorded.
Additionally, as part of U.S. tax reform, the U.S. has enacted a tax on "base eroding" payments from the U.S. and a minimum tax on foreign earnings (global intangible low-taxed income). Because aspects of the new minimum tax and the effect on our operations is uncertain and because aspects of the accounting rules associated with this
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
provision have not been resolved, we have not made a provisional accrual for the deferred tax aspects of this provision and consequently have not made an accounting policy election on the deferred tax treatment of this tax.
Environmental Liabilities
We are involved in numerous remediation actions to clean up hazardous waste as required by federal and state laws. Liabilities for remediation costs exclude possible insurance recoveries and, when dates and amounts of such costs are not known, are not discounted. When there appears to be a range of possible costs with equal likelihood, liabilities are based on the low end of such range. It is reasonably possible that our environmental remediation exposure will exceed amounts accrued. However, due to uncertainties about the status of laws, regulations, technology and information related to individual sites, such amounts are not reasonably estimable. The determination of the required accruals for remediation costs is subject to uncertainty, including the evolving nature of environmental regulations and the difficulty in estimating the extent and type of remediation activity that is necessary.
NEW ACCOUNTING STANDARDS TO BE ADOPTED
ASU No. 2014-09, Revenue from Contracts with Customers
Background
In May 2014, the Financial Accounting Standards Board (FASB) issued a new comprehensive set of revenue recognition principles, Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, that supersedes most existing U.S. GAAP revenue recognition guidance (including ASC 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts). The new standard will become effective for annual reporting periods beginning after December 15, 2017. We adopted the standard on January 1, 2018 and will apply it retrospectively to all periods presented and will elect the practical expedient for contract modifications. Since the issuance of the new standard by the FASB, we have engaged in a collaborative process with our industry peers and worked with standard setters on important interpretive matters with the objective of ensuring consistency in the application of the standard.
Change in Timing and Presentation, No Impact to Cash or Economics
The new standard requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time based on when control of goods and services transfer to a customer. As a result, we expect changes in the presentation of our financial statements, including: (1) timing of revenue recognition, and (2) changes in classification between revenue and costs. The new standard will have no cash impact and, as such, does not affect the economics of our underlying customer contracts. The effect of applying the new guidance to our existing book of contracts will result in lower reported earnings in 2018 (and comparative periods previously reported) and in the early years after adoption. However, we expect to experience an increase in reported earnings, on that existing book of contracts, as they mature.
Current Estimate of Financial Statement Effect
We adopted the new standard on January 1, 2018. When we report our 2018 results, the comparative results for 2017 and 2016 will be updated to reflect the application of the requirements of the new standard to these periods. Based on our assessment and best estimates to date, we expect an after-tax reduction to our January 1, 2016 retained earnings balance of approximately
$0.4 billion
, with an estimated after-tax reduction of
$0.1 billion
and
$0.1 billion
on our 2016 and 2017 earnings, respectively. These adjustments primarily relate to the timing of revenue recognition on our long-term product service agreements. Beyond those effects, we expect application of the new guidance will result in increases and decreases in revenue within our segments, which will largely offset and will be immaterial at a total Company level. Following adoption in 2018, our books and records will only reflect the results as required under the new standard limiting our ability to estimate the effect of the standard on our earnings. Given the inherent difficulty in this ongoing estimation of the effect of the standard on any future periods, we do not plan to continue to assess the effect on 2018.
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
As discussed above, we anticipate a dilutive effect of the new standard in the year of adoption consistent with the effect to the restated 2016 and 2017 results and the effect will be less dilutive for years after initial adoption. However, this expectation is based on many variables, including underlying business performance, which are subject to change, making the effect of the standard on future periods difficult to estimate. Importantly, application of the new guidance has no effect on the cash we expect to receive nor the economics of these contracts.
ASU No. 2016-02, Leases
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. Similarly, lessors will be required to classify leases as sales-type, finance or operating, with classification affecting the pattern of income recognition. Classification for both lessees and lessors will be based on an assessment of whether risks and rewards as well as substantive control have been transferred through a lease contract. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While we continue to evaluate the effect of the standard on our ongoing financial reporting, we anticipate that the adoption of the ASU may materially affect our consolidated and combined financial statements.
ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory
In October 2016, the FASB issued ASU No. 2016-16,
Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory
. The ASU eliminates the deferral of tax effects of intra-entity asset transfers other than inventory. As a result, the tax expense from the intercompany sale of assets, other than inventory, and associated changes to deferred taxes will be recognized when the sale occurs even though the pre-tax effects of the transaction have not been recognized. The new standard is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The effect of the adoption of the standard will depend on the nature and amount of future transactions but is currently expected as an increase to retained earnings of approximately
$0.3 billion
. Future earnings will be reduced in total by this amount. The effect of the change on future transactions will depend on the nature and amount of future transactions as it will affect the timing of recognition of both tax expenses and tax benefits, with no change in the associated cash flows.
ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued ASU No. 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which changes the income statement presentation of net periodic benefit cost by requiring separation between the service cost component and all other components. The service cost component is required to be presented as an operating expense with other similar compensation costs arising for services rendered by the pertinent employees during the period. The non-operating components must be presented outside of income from operations. This pronouncement is effective for annual reporting periods beginning after December 15, 2017, and the presentation disclosure should be applied using a retrospective approach. Early adoption is permitted. We adopted this standard on January 1, 2018. The effect of the adoption of this standard will not have a material impact on our consolidated and combined financial statement.
All other new accounting pronouncements that have been issued but not yet effective are currently being evaluated and at this time are not expected to have a material impact on our financial position or results of operations.
NOTE 2. BUSINESS ACQUISITION
On July 3, 2017, we closed the Transactions to combine GE O&G and Baker Hughes, creating a world-leading, fullstream oilfield technology provider that has a unique mix of equipment and service capabilities. The Transactions were executed using a partnership structure, pursuant to which GE O&G and Baker Hughes each
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
contributed their operating assets to a newly formed partnership, BHGE LLC. As a partnership, BHGE LLC
will not itself be subject to U.S. federal income tax under current U.S. tax laws. BHGE LLC's foreign subsidiaries, however, are expected to incur current and deferred foreign income taxes. GE holds an approximate
62.5%
controlling interest in this partnership and former Baker Hughes stockholders hold an approximate
37.5%
interest through the ownership of
100%
of our Class A common stock. GE holds its voting interest through our Class B common stock and its economic interest through a corresponding number of common units of BHGE LLC. Former Baker Hughes stockholders immediately after the completion of the Transactions also received a special dividend of
$17.50
per share paid by the Company to holders of record of the Company's Class A common stock. GE contributed
$7.4 billion
to BHGE LLC to fund substantially all of the special dividend.
Prior to the Transactions, shares of Baker Hughes common stock were registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act) and listed on the New York Stock Exchange and the SIX Swiss Exchange. Shares of Baker Hughes common stock were suspended from trading on the New York Stock Exchange and the SIX Swiss Exchange prior to the open of trading on July 5, 2017. The New York Stock Exchange filed a Form 25 on Baker Hughes' behalf to provide notice to the SEC regarding the withdrawal of shares of Baker Hughes common stock from listing and to terminate the registration of such shares under Section 12(b) of the Exchange Act.
As a result of the Transactions, on July 3, 2017, the Company issued
428 million
shares of Class A common stock to the former stockholders of Baker Hughes and
717 million
shares of Class B common stock to GE. The issuance of the Company's Class A common stock in connection with the Transactions was registered under the Securities Act of 1933, as amended (the Securities Act), pursuant to BHGE's registration statement on Form S-4 (File No. 333-216991), as amended, filed with the SEC by BHGE and declared effective on May 30, 2017. Pursuant to Rule 12g-3(a) under the Exchange Act, BHGE is the successor issuer to Baker Hughes with respect to the common stock of Baker Hughes. Therefore, the Class A common stock is deemed to be registered under Section 12(b) of the Exchange Act, and BHGE is subject to the requirements of the Exchange Act.
Based on the relative voting rights of former Baker Hughes stockholders and GE immediately following completion of the Transactions, and after taking into consideration all relevant facts, GE O&G is considered to be the "acquirer" for accounting purposes. As a result, the Transactions are reported as a business combination using the acquisition method of accounting with GE O&G treated as the "acquirer" and Baker Hughes treated as the "acquired" company.
The tables below present the fair value of the consideration exchanged and the preliminary estimates of the fair value of assets acquired and liabilities assumed and the associated fair value of the noncontrolling interest related to the acquired net assets of Baker Hughes. The final determination of fair value for certain assets and liabilities will be completed as soon as the information necessary to complete the analysis is obtained. These amounts, which may differ materially from these preliminary estimates, will continue to be refined and will be finalized as soon as possible, but no later than one year from the acquisition date. The primary areas of the preliminary estimates that are not yet finalized relate to inventory, property, plant and equipment, identifiable intangible assets, equity-method investments, deferred income taxes, uncertain tax positions and contingencies.
|
|
|
|
|
Purchase consideration
|
|
(In millions, except share and per share amounts)
|
July 3, 2017
|
Baker Hughes shares outstanding
|
426,097,407
|
|
Restricted stock units vested upon closing
|
1,611,566
|
|
Total Baker Hughes shares outstanding for purchase consideration
|
427,708,973
|
|
Baker Hughes share price on July 3, 2017 per share
|
$
|
57.68
|
|
Purchase consideration
|
$
|
24,670
|
|
Rollover of outstanding options into options to purchase Class A shares (fair value)
|
$
|
114
|
|
Precombination service of restricted stock units (fair value)
|
$
|
14
|
|
Total purchase consideration
|
$
|
24,798
|
|
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
|
|
|
|
|
Preliminary identifiable assets acquired and liabilities assumed
|
Estimated fair value at July 3, 2017
|
Assets
|
|
Cash and equivalents
|
$
|
4,133
|
|
Current receivables
|
2,383
|
|
Inventories
(1)
|
1,695
|
|
Property, plant and equipment
|
4,868
|
|
Intangible assets
(2)
|
4,123
|
|
All other assets
|
1,544
|
|
Liabilities
|
|
Accounts payable
|
$
|
(1,106
|
)
|
Borrowings
|
(3,370
|
)
|
Deferred income taxes
(3)
|
(317
|
)
|
Liabilities for pension and other postretirement benefits
|
(655
|
)
|
All other liabilities
|
(1,476
|
)
|
Total identifiable net assets
|
$
|
11,822
|
|
Noncontrolling interest associated with net assets acquired
|
(76
|
)
|
Goodwill
(4)
|
13,052
|
|
Total purchase consideration
|
$
|
24,798
|
|
|
|
(1)
|
Includes
$87 million
of adjustments to write-up the acquired inventory to its estimated fair value. Cost of goods sold in 2017 reflects this increased valuation as this inventory was used or sold in the period from July 3, 2017 to December 31, 2017.
|
|
|
(2)
|
Intangible assets, as provided in the table below, are recorded at estimated fair value, as determined by management based on available information which includes a preliminary valuation. The estimated useful lives for intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows. We consider the Baker Hughes trade name to be an indefinite life intangible asset, which will not be amortized and will be subject to an annual impairment test.
|
|
|
|
|
|
|
|
Estimated Fair Value
|
Estimated Weighted
Average Life (Years)
|
Trademarks - Baker Hughes
|
$
|
2,100
|
|
Indefinite life
|
Customer-related
|
1,260
|
|
15
|
Patents and technology
|
550
|
|
10
|
Trademarks - Other
|
70
|
|
10
|
Capitalized software
|
90
|
|
3-7
|
In-process research and development
|
45
|
|
Indefinite life
|
Favorable lease contracts
|
8
|
|
10
|
Total
|
$
|
4,123
|
|
|
|
|
(3)
|
Includes approximately
$560 million
of net deferred tax liabilities related to the estimated fair value of intangible assets included in the preliminary purchase consideration and approximately
$243 million
of other net deferred tax assets, including non-U.S. loss carryforwards net of valuation allowances and offsetting liabilities for unrecognized benefits.
|
|
|
(4)
|
Goodwill represents the excess of the total purchase consideration over fair value of the net assets recognized and represents the future economic benefits that we believe will result from combining the operations of GE O&G and Baker Hughes, including expected future synergies and operating efficiencies. Goodwill resulting from the Transactions has been preliminarily allocated to the Oilfield Services segment, of which
$67 million
is deductible for tax purposes.
|
During the fourth quarter of 2017, the Company made measurement period adjustments to reflect facts and circumstances in existence as of the acquisition date. These adjustments resulted in a decrease in goodwill of approximately
$401 million
mostly due to the step-up to fair value of property, plant and equipment of
$682 million
partially offset by a reduction in intangible assets of
$367 million
. As a result of the increase in property, plant and equipment and the reduction of intangible assets during the fourth quarter of 2017, we recorded a net increase to
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
depreciation and amortization expense of
$63 million
, which adjusts the depreciation and amortization expense to the amount that would have been recorded in previous interim reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. In addition, we reclassified certain balances to conform to our current presentation. Additionally, approximately
$343 million
of foreign tax credit carryforwards offset with a valuation allowance were recorded related to foreign earnings that were not considered to be permanently reinvested. The acquisition of Baker Hughes contributed revenue of approximately
$5,184 million
and pretax segment operating income of approximately
$256 million
for the period from July 3, 2017 through December 31, 2017.
INCOME TAXES
BHGE LLC is treated as a partnership for U.S. federal income tax purposes. As such, BHGE LLC will not itself be subject to U.S. federal income tax under current U.S. tax laws. The members of BHGE LLC will each be required to take into account for U.S. federal income tax purposes their distributive share of the items of income, gain, loss and deduction of BHGE LLC, which generally will include the U.S. operations of both Baker Hughes and GE O&G. BHGE and GE will each be taxed on their distributive share of income and gain, whether or not a corresponding amount of cash or other property is distributed to them. For assets held indirectly by BHGE LLC through subsidiaries, the taxes attributable to those subsidiaries will be reflected in our consolidated and combined financial statements.
MERGER AND RELATED COSTS
During 2017, 2016 and 2015, acquisition costs of
$373 million
,
$33 million
and
$27 million
, respectively, were expensed as incurred and were reported as merger and related costs. Costs in 2017 include severance and other separation payments made to certain executive officers of Baker Hughes related to change-in-control with double trigger provisions in their existing employment agreements, professional fees of advisors, and integration and synergy costs related to the combination of Baker Hughes and GE O&G. The double-trigger provisions resulted in payments to executives of Baker Hughes following two events: a change-in-control and termination or reduction in the responsibilities of the executives. BHGE terminated the employment of certain executives following the business combination.
UNAUDITED ACTUAL AND PRO FORMA INFORMATION
The following unaudited pro forma information has been presented as if the Transactions occurred on January 1, 2016. This information has been prepared by combining the historical results of GE O&G and historical results of Baker Hughes. The unaudited pro forma combined financial data for all periods presented were adjusted to give effect to pro forma events that 1) are directly attributable to the aforementioned Transactions, 2) factually supportable, and 3) expected to have a continuing impact on the consolidated results of operations. The adjustments are based on information available to the Company at this time. Accordingly, the adjustments are subject to change and the impact of such changes may be material. The unaudited pro forma results do not include any incremental cost savings that may result from the integration.
The unaudited combined pro forma information is for informational purposes only and is not necessarily indicative of what the combined company's results actually would have been had the acquisition been completed as of the beginning of the periods as indicated. In addition, the unaudited pro forma information does not purport to project the future results of the combined company.
Significant adjustments to the pro forma information below include recognition of non-recurring direct incremental acquisition costs in 2016 and exclusion of those costs from all other years presented; amortization associated with an estimate of the acquired intangible assets; depreciation associated with an estimate of the fair value step-up of property, plant and equipment; and reduction of interest expense for fair value adjustments to debt. A non-recurring contractually obligated termination fee of
$3,500 million
(
$3,301 million
net of related costs incurred) received by Baker Hughes due to an inability to obtain antitrust related approvals from a prior merger agreement is recognized in 2016.
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
|
|
|
|
|
|
|
|
|
2017
|
2016
|
Revenue
|
$
|
21,921
|
|
$
|
23,102
|
|
Net loss
|
(335
|
)
|
(2,734
|
)
|
Net loss attributable to the Company
|
(92
|
)
|
(998
|
)
|
Loss per Class A share - basic and diluted
(1)
|
(0.22
|
)
|
(2.33
|
)
|
|
|
(1)
|
The calculation of diluted loss per Class A share excludes shares potentially issuable under stock-based incentive compensation plans and the exchange of Class B shares with Class A shares under the Exchange Agreement, as their effect, if included, would be antidilutive.
|
NOTE 3. CURRENT RECEIVABLES
Current receivables are comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
2017
|
2016
|
Customer receivables
|
$
|
4,699
|
|
$
|
1,699
|
|
Related parties
|
801
|
|
392
|
|
Other
|
844
|
|
658
|
|
Total current receivables
|
6,344
|
|
2,749
|
|
Less: Allowance for doubtful accounts
|
(330
|
)
|
(186
|
)
|
Total current receivables, net
|
$
|
6,014
|
|
$
|
2,563
|
|
Customer receivables are recorded at the invoiced amount. The "Other" category primarily consists of advance payments to suppliers, indirect taxes and other tax receivables.
NOTE 4. INVENTORIES
Inventories, net of reserves of
$360 million
and
$260 million
in
2017
and
2016
, respectively, are comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
2017
|
2016
|
Finished goods
|
$
|
2,597
|
|
$
|
1,585
|
|
Work in process and raw materials
|
1,993
|
|
1,639
|
|
Total inventories, net
|
$
|
4,590
|
|
$
|
3,224
|
|
During
2017
and
2016
, we recorded
$157 million
and
$138 million
of inventory impairments as a result of certain restructuring activities initiated by the Company. Charges for inventory impairments are reported in the "Cost of goods sold" caption of the consolidated and combined statements of income (loss).
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
|
Useful Life
|
2017
|
2016
|
Land and improvements
(1)
|
8 - 20 years
(1)
|
$
|
413
|
|
$
|
130
|
|
Buildings, structures and related equipment
|
5 - 40 years
|
3,168
|
|
1,344
|
|
Machinery, equipment and other
|
2 - 20 years
|
6,195
|
|
2,916
|
|
Total cost
|
|
9,776
|
|
4,390
|
|
Less: Accumulated depreciation
|
|
2,817
|
|
2,065
|
|
Property, plant and equipment, less accumulated depreciation
|
|
$
|
6,959
|
|
$
|
2,325
|
|
|
|
(1)
|
Useful life excludes land.
|
Depreciation expense relating to property, plant and equipment was
$716 million
,
$311 million
and
$351 million
in
2017
,
2016
and
2015
, respectively. See "Note 18. Restructuring, impairment and other" for additional information on property, plant and equipment impairments.
NOTE 6. GOODWILL AND 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, 2015, gross
|
$
|
2,885
|
|
$
|
3,840
|
|
$
|
1,853
|
|
$
|
2,043
|
|
$
|
10,621
|
|
Accumulated impairment at December 31, 2015
|
(2,633
|
)
|
(867
|
)
|
—
|
|
(254
|
)
|
(3,754
|
)
|
Balance at December 31, 2015
|
252
|
|
2,973
|
|
1,853
|
|
1,789
|
|
6,867
|
|
Acquisitions and purchase accounting adjustments
|
|
19
|
|
(1
|
)
|
|
18
|
|
Currency exchange and others
|
(106
|
)
|
(7
|
)
|
(38
|
)
|
(54
|
)
|
(205
|
)
|
Balance at December 31, 2016
|
146
|
|
2,985
|
|
1,814
|
|
1,735
|
|
6,680
|
|
Acquisition
(1)
|
13,052
|
|
—
|
|
—
|
|
—
|
|
13,052
|
|
Currency exchange and others
|
7
|
|
49
|
|
92
|
|
47
|
|
195
|
|
Balance at December 31, 2017
|
$
|
13,205
|
|
$
|
3,034
|
|
$
|
1,906
|
|
$
|
1,782
|
|
$
|
19,927
|
|
|
|
(1)
|
Includes goodwill associated with the acquisition of Baker Hughes. This amount and its allocations to segments are preliminary.
|
Subsequent to the close of the acquisition of Baker Hughes, we realigned our reporting units to Oilfield Services (OFS), Oilfield Equipment (OFE), Turbomachinery & Process Solutions (TPS) and Digital Solutions (DS) (refer to "Note 15. Segment Information") and reallocated the goodwill that existed as of June 30, 2017 to the new reportable segments for all historical periods presented. The majority of Baker Hughes business was combined with the GE O&G Surface business to create the new Oilfield Services reporting segment. Our reporting units are the same as our
four
reportable segments.
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
We test goodwill for impairment annually in the third quarter of each year using data as of July 1 of that year, which would include consideration of any segment realignment. The impairment test consists of two steps: in step one, the carrying value of the reporting unit is compared with its fair value; in step two, which is applied only when the carrying value is more than its fair value, the amount of goodwill impairment, if any, is derived by deducting the fair value of the reporting unit's assets and liabilities from the fair value of its equity, and comparing that amount with the carrying amount of goodwill. We determined fair values for each of the reporting units using a combination of the market approach and the income approach. We assessed the valuation methodologies based upon the relevance and available data and have weighted the results appropriately.
Valuations using the market approach were derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses was based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services. A market approach is limited to reporting units for which there are publicly traded companies that have the characteristics similar to our businesses.
Under the income approach, fair value was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We used our internal forecasts to estimate future cash flows and included an estimate of long-term future growth rates based on our most recent views of the long-term outlook for each business. Actual results may differ from those assumed in our forecasts. We derived our discount rates using a capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the cost of equity financing. We used discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. Discount rates used in our reporting unit valuations ranged from
10%
to
11%
. Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. It is reasonably possible that the judgments and estimates described above could change in future periods.
In performing the annual impairment test for goodwill in the third quarter of 2015 using data as of July 1 of that year, we determined that a step two test was required for a reporting unit within our OFS operating segment. As a consequence of the continued pressure on oil prices, the revised expected cash flows for this reporting unit resulted in a goodwill impairment charge of
$2,080 million
. The impairment charge has been included as part of “Impairment of goodwill” in the consolidated and combined statement of income (loss).
We performed our annual impairment test of goodwill as of July 1, 2017 and July 1, 2016 for all of our reporting units. Based on the results of our step one testing, the fair values of each of the reporting units exceeded their carrying values; therefore, the second step of the impairment test was not required to be performed for any of our reporting units and no goodwill impairment was recognized.
In addition to our annual impairment testing, we also test goodwill for impairment between annual impairment testing dates whenever events or circumstances occur that, in our judgment, could more likely than not reduce the fair value of one or more reporting units below its carrying amount. In assessing the possibility that a reporting unit’s fair value has been reduced below its carrying amount due to the occurrence of events or circumstances between annual impairment testing dates, we consider all available evidence, including (but not limited to) (i) the results of our impairment testing at the prior annual impairment testing date (in particular, the magnitude of the excess of fair value over carrying value observed), (ii) downward revisions to internal forecasts (and the magnitude thereof), if any, and (iii) declines in our market capitalization below our book value (and the magnitude and duration of those declines), if any. Between July 1, 2017 and December 31, 2017, we have not identified any events or circumstances that could more likely than not reduce the fair value of one or more of our reporting units below its carrying amount. However, there can be no assurances that further sustained declines in macroeconomic or business conditions affecting our industry and businesses (i) will not occur and, (ii) were they to occur, that those further sustained declines will not result in additional impairments in future periods.
As of
December 31, 2017
, we believe that the goodwill is recoverable for all the reporting units, however, there can be no assurances that the goodwill will not be impaired in future periods.
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
OTHER INTANGIBLE ASSETS
Intangible assets are comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
|
Technology
|
$
|
1,177
|
|
$
|
(440
|
)
|
$
|
737
|
|
$
|
596
|
|
$
|
(371
|
)
|
$
|
225
|
|
Customer relationships
|
3,202
|
|
(819
|
)
|
2,383
|
|
1,920
|
|
(660
|
)
|
1,260
|
|
Capitalized software
|
1,130
|
|
(697
|
)
|
433
|
|
896
|
|
(535
|
)
|
361
|
|
Trade names and trademarks
|
757
|
|
(159
|
)
|
598
|
|
681
|
|
(130
|
)
|
551
|
|
Other
|
10
|
|
—
|
|
10
|
|
1
|
|
(1
|
)
|
—
|
|
Finite-lived intangible assets
|
6,276
|
|
(2,115
|
)
|
4,161
|
|
4,094
|
|
(1,697
|
)
|
2,397
|
|
Indefinite-lived intangible assets
(1)
|
2,197
|
|
—
|
|
2,197
|
|
52
|
|
—
|
|
52
|
|
Total intangible assets
|
$
|
8,473
|
|
$
|
(2,115
|
)
|
$
|
6,358
|
|
$
|
4,146
|
|
$
|
(1,697
|
)
|
$
|
2,449
|
|
|
|
(1)
|
Indefinite-lived intangible assets principally comprise trade names and trademarks acquired in business combinations.
|
Finite-lived intangible assets increased by
$1,764 million
for the
year ended December 31, 2017
, primarily as a result of the acquired Baker Hughes intangible assets offset by amortization during the periods (refer to "Note 2. Business Acquisition").
Indefinite-lived intangible assets increased during the year ended
December 31, 2017
as a result of the acquisition of the Baker Hughes trade name which was preliminarily valued at
$2,100 million
using the relief-from-royalty method. Indefinite-lived intangible assets as of
December 31, 2016
comprise trademarks acquired in previous years (Vetco and Bently Nevada trademarks for
$42 million
and
$10 million
, respectively).
Intangible assets are generally amortized on a straight-line basis with estimated useful lives ranging from
one
to
30
years. Amortization expense for the years ended
December 31, 2017
,
2016
and
2015
was
$387 million
,
$239 million
and
$179 million
,
respectively. We incurred additional amortization expense of
$75 million
during the
year ended December 31, 2017
due to the acquisition of Baker Hughes.
Estimated amortization expense for each of the subsequent five fiscal years is expected to be as follows:
|
|
|
|
|
Year
|
Estimated Amortization Expense
|
2018
|
$
|
432
|
|
2019
|
398
|
|
2020
|
372
|
|
2021
|
326
|
|
2022
|
293
|
|
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
NOTE 7. CONTRACT ASSETS
A majority of our long-term product service agreements relate to our Turbomachinery & Process Solutions segment. Contract assets are comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
2017
|
2016
|
Long-term product service agreements
(1)
|
$
|
1,410
|
|
$
|
1,046
|
|
Long-term equipment contract revenue
(2)
|
997
|
|
703
|
|
Total revenue in excess of billings
|
2,407
|
|
1,749
|
|
Deferred inventory costs
(3)
|
338
|
|
218
|
|
Contract assets
|
$
|
2,745
|
|
$
|
1,967
|
|
|
|
(1)
|
Reflects revenue earned in excess of billings on our long-term product service agreements.
|
|
|
(2)
|
Reflects revenue earned in excess of billings on our long-term contracts to construct technically complex equipment.
|
|
|
(3)
|
Represents cost deferral for shipped goods and other costs for which the criteria for revenue recognition has not yet been met.
|
NOTE 8. BORROWINGS
Short-term and long-term borrowings are comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
|
Amount
|
Weighted average rate
(1)
|
Amount
|
Weighted average rate
(1)
|
Short-term borrowings
|
|
|
|
|
Short-term bank borrowings
|
$
|
171
|
|
12.6
|
%
|
$
|
79
|
|
9.1
|
%
|
Current portion of long-term borrowings
|
639
|
|
2.1
|
%
|
34
|
|
1.3
|
%
|
Short-term borrowings from GE
|
1,124
|
|
|
|
121
|
|
|
|
Other short-term borrowings
|
103
|
|
7.6
|
%
|
5
|
|
1.3
|
%
|
Total short-term borrowings
|
2,037
|
|
|
|
239
|
|
|
|
|
|
|
|
Long-term borrowings
|
|
|
|
|
3.2% Senior Notes due August 2021
(2)
|
526
|
|
2.5
|
%
|
—
|
|
—
|
|
2.773% Senior Notes due December 2022
|
1,244
|
|
2.9
|
%
|
—
|
|
—
|
|
8.55% Debentures due June 2024
(2)
|
135
|
|
3.9
|
%
|
—
|
|
—
|
|
3.337% Senior Notes due December 2027
|
1,342
|
|
3.4
|
%
|
—
|
|
—
|
|
6.875% Notes due January 2029
(2)
|
308
|
|
3.9
|
%
|
—
|
|
—
|
|
5.125% Notes due September 2040
(2)
|
1,311
|
|
4.1
|
%
|
—
|
|
—
|
|
4.080% Senior Notes due December 2047
|
1,337
|
|
4.1
|
%
|
—
|
|
—
|
|
Capital leases
|
87
|
|
7.0
|
%
|
1
|
|
4.5
|
%
|
Other long-term borrowings
|
22
|
|
1.9
|
%
|
37
|
|
1.2
|
%
|
Total long-term borrowings
|
6,312
|
|
|
38
|
|
|
Total borrowings
|
$
|
8,349
|
|
|
|
$
|
277
|
|
|
|
|
|
(1)
|
Weighted average effective interest rate is based on carrying value including step-up adjustment recorded upon the acquisition of Baker Hughes.
|
|
|
(2)
|
Represents long-term fixed rate debt obligations assumed in connection with the acquisition of Baker Hughes, net of amounts repurchased subsequent to the closing of the Transactions.
|
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
On July 3, 2017, in connection with the Transactions, BHGE LLC entered into a new
five
-year
$3 billion
committed unsecured revolving credit facility (the 2017 Credit Agreement) with commercial banks maturing in July 2022. The 2017 Credit Agreement contains certain customary representations and warranties, certain affirmative covenants and no negative covenants. Upon the occurrence of certain events of default, our obligations under the 2017 Credit Agreement may be accelerated. Such events of default include payment defaults to lenders under the 2017 Credit Agreement, and other customary defaults. No such events of default have occurred. During the year ended
December 31, 2017
, there were no borrowings under the 2017 Credit Agreement.
On November 3, 2017, BHGE LLC entered into a commercial paper program under which it may issue from time to time up to
$3 billion
in commercial paper with maturities of no more than
397
days. At
December 31, 2017
, we had no borrowings outstanding under the commercial paper program. The maximum combined borrowing at any time under both the 2017 Credit Agreement and the commercial paper program is
$3 billion
.
On December 11, 2017, BHGE LLC completed a private placement offering
$3,950 million
aggregate principal amount of Senior Notes, consisting of
$1,250 million
aggregate principal amount of
2.773%
Senior Notes due 2022,
$1,350 million
aggregate principal amount of
3.337%
Senior Notes due 2027 and
$1,350 million
aggregate principal amount of
4.080%
Senior Notes due 2047. These Senior Notes are presented net of issuance costs of
$26 million
in our consolidated and combined statement of financial position. BHGE LLC will pay interest on each series of Exchange Notes on June 15 and December 15 of each year, beginning on June 15, 2018. The Notes are senior unsecured obligations and rank equal in right of payment to all of BHGE LLC's existing and future senior indebtedness; senior in right of payment to any future subordinated indebtedness; and effectively junior to BHGE LLC's future secured indebtedness, if any, and to all existing and future indebtedness of its subsidiaries. BHGE LLC may redeem, at its option, all or part of the Notes at any time, at the applicable make-whole redemption prices plus accrued and unpaid interest to the date of redemption. The Senior Notes contain covenants that restrict BHGE 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.
BHGE LLC used a portion of the net proceeds from the private placement of the Senior Notes to fund the purchase of
$82 million
of
7.5%
senior notes due 2018,
$25 million
of
6.0%
senior notes due 2018,
$6 million
of
8.55%
debentures due 2024 and
$62 million
of
6.875%
notes due 2029 that were validly tendered in connection with the cash tender offers commenced by BHGE LLC on December 4, 2017. Under the cash tender offer BHGE LLC purchased a further
$3 million
of
6.875%
notes due 2029 in January 2018. BHGE LLC also redeemed in January 2018 all remaining aggregate principal amount of the 2018 Senior Notes of
$615 million
that were not tendered for purchase in accordance with the relevant indentures. The above transactions resulted in total repurchase of our Senior Notes of
$793 million
.
BHGE LLC intends to use the remaining net proceeds from the offering of the Senior Notes for general corporate purposes, which may include purchases of BHGE LLC’s common units from us and GE in connection with the share repurchase authorization announced by us on November 6, 2017.
On January 2, 2018, BHGE LLC commenced an offering to exchange
$3,950 million
of all the outstanding, unregistered senior notes that were issued in a private offering on December 11, 2017, for identical, registered
2.773%
Senior Notes due 2022,
3.337%
Senior Notes due 2027 and
4.080%
Senior Notes due 2047. The exchange offer was completed on January 31, 2018.
Concurrent with the Transactions associated with the acquisition of Baker Hughes on July 3, 2017, Baker Hughes Co-Obligor, Inc. became a co-obligor, jointly and severally with BHGE LLC, on our registered debt securities. This co-obligor is a
100%
-owned finance subsidiary of BHGE LLC that was incorporated for the sole purpose of serving as a co-obligor of debt securities and has no assets or operations other than those related to its sole purpose. Baker Hughes Co-Obligor, Inc. is also a co-obligor of the
$3,950 million
senior notes issued on December 11, 2017 by BHGE LLC in a private placement.
In connection with our acquisition of Baker Hughes we assumed all the outstanding borrowings including all notes, senior notes, and debentures of Baker Hughes. A step-up adjustment of
$364 million
was recorded upon the acquisition of Baker Hughes to present these borrowings at fair value.
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
The estimated fair value of total borrowings at
December 31, 2017
and
December 31, 2016
was
$8,466 million
and
$303 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.
Maturities of debt for each of the five years in the period ended December 31, 2022, and in the aggregate thereafter, are listed in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
2019
|
2020
|
2021
|
2022
|
Thereafter
|
Total debt
|
$
|
2,037
|
|
$
|
43
|
|
$
|
13
|
|
$
|
540
|
|
$
|
1,255
|
|
$
|
4,461
|
|
See "Note 16. Related Party Transactions" for additional information on the short-term borrowings from GE, and see "Note 14. Financial Instruments" for additional information about borrowings and associated swaps.
NOTE 9. EMPLOYEE BENEFIT PLANS
GE MULTI-EMPLOYER PLANS
Certain of our U.S. employees are covered under various U.S. GE employee benefit plans, including GE's retirement plans (pension, retiree health and life insurance, and savings benefit plans). In addition, certain United Kingdom (UK) employees participate in the GE UK Pension Plan. We are allocated relevant participation costs for these GE employee benefit plans as part of multi-employer plans. As such, we have not recorded any liabilities associated with our participation in these plans. Expenses associated with our participation in these plans was
$132 million
,
$140 million
and
$148 million
in the years ended December 31, 2017, 2016 and 2015, respectively.
During 2016,
two
UK pension plans sponsored by us, the 1987 Vetco Gray Hughes Pension Plan and the UK Dresser Pension Scheme, were merged into the GE UK Pension Plan. We agreed to pay deficit contributions for the next
10
years. The estimated present value of these payments is approximately
$15 million
and is recorded in the consolidated and combined Statement of Financial Position in “All other liabilities.” Subsequent to that merger, plan participants in these respective plans participate in the GE UK Pension Plan.
DEFINED BENEFIT PLANS
In addition to these GE plans, certain of our employees are also covered by company sponsored pension plans. Our pension plans in 2017 included
seven
U.S. plans and
six
non-U.S. pension plans, primarily in the UK, Germany, and Canada, all with pension assets or obligations greater than
$20 million
. We use a December 31 measurement date for these plans. These defined benefit plans generally provide benefits to employees based on formulas recognizing length of service and earnings. We also provide certain postretirement health care benefits ("Other Postretirement Benefits"), through an unfunded plan, to a closed group of U.S. employees who retire and have met certain age and service requirements.
Funded Status
The funded status position represents the difference between the benefit obligation and the plan assets. The projected benefit obligation (PBO) for pension benefits represents the actuarial present value of benefits attributed to employee services and compensation and includes an assumption about future compensation levels. The accumulated benefit obligation (ABO) is the actuarial present value of pension benefits attributed to employee service to date and present compensation levels. The ABO differs from the PBO in that the ABO does not include any assumptions about future compensation levels.
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
Below is the reconciliation of the beginning and ending balances of benefit obligations, fair value of plan assets and the funded status of our plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2017
|
2016
|
2017
|
2016
|
Change in benefit obligation:
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
820
|
|
$
|
1,290
|
|
$
|
117
|
|
$
|
136
|
|
Service cost
|
37
|
|
18
|
|
2
|
|
2
|
|
Interest cost
|
51
|
|
34
|
|
6
|
|
5
|
|
Plan amendment
|
—
|
|
—
|
|
(23
|
)
|
(5
|
)
|
Actuarial loss (gain)
|
41
|
|
39
|
|
—
|
|
(14
|
)
|
Benefits paid
|
(65
|
)
|
(39
|
)
|
(13
|
)
|
(6
|
)
|
Curtailments
|
(45
|
)
|
—
|
|
5
|
|
(1
|
)
|
Settlements
|
(10
|
)
|
—
|
|
—
|
|
—
|
|
Business acquisition
(1)
|
1,546
|
|
—
|
|
93
|
|
—
|
|
Other
(2)
|
(2
|
)
|
(460
|
)
|
—
|
|
—
|
|
Foreign currency translation adjustments
|
45
|
|
(62
|
)
|
—
|
|
—
|
|
Benefit obligation at end of year
|
2,418
|
|
820
|
|
187
|
|
117
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
Fair value of plan assets at beginning of year
|
567
|
|
915
|
|
—
|
|
—
|
|
Actual return on plan assets
|
152
|
|
43
|
|
—
|
|
—
|
|
Employer contributions
|
50
|
|
50
|
|
13
|
|
6
|
|
Benefits paid
|
(65
|
)
|
(39
|
)
|
(13
|
)
|
(6
|
)
|
Settlements
|
(10
|
)
|
—
|
|
—
|
|
—
|
|
Business acquisition
(1)
|
1,342
|
|
—
|
|
—
|
|
—
|
|
Other
(2)
|
(2
|
)
|
(358
|
)
|
—
|
|
—
|
|
Foreign currency translation adjustments
|
25
|
|
(44
|
)
|
—
|
|
—
|
|
Fair value of plan assets at end of year
|
2,059
|
|
567
|
|
—
|
|
—
|
|
|
|
|
|
|
Funded status - underfunded at end of year
|
$
|
(359
|
)
|
$
|
(253
|
)
|
$
|
(187
|
)
|
$
|
(117
|
)
|
|
|
|
|
|
Accumulated benefit obligation
|
$
|
2,373
|
|
$
|
803
|
|
$
|
187
|
|
$
|
117
|
|
|
|
(1)
|
Relates to the acquisition of Baker Hughes on July 3, 2017.
|
|
|
(2)
|
Two
UK pension plans merged into the GE UK pension plan in 2016.
|
The amounts recognized in the consolidated and combined statements of financial position consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2017
|
2016
|
2017
|
2016
|
Noncurrent assets
|
$
|
46
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Current liabilities
|
(10
|
)
|
(4
|
)
|
(24
|
)
|
(6
|
)
|
Noncurrent liabilities
|
(395
|
)
|
(249
|
)
|
(163
|
)
|
(111
|
)
|
Net amount recognized
|
$
|
(359
|
)
|
$
|
(253
|
)
|
$
|
(187
|
)
|
$
|
(117
|
)
|
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
Information for the plans with ABOs in excess of plan assets is as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2017
|
2016
|
2017
|
2016
|
Projected benefit obligation
|
$
|
1,692
|
|
$
|
820
|
|
n/a
|
|
n/a
|
|
Accumulated benefit obligation
|
$
|
1,647
|
|
$
|
803
|
|
$
|
187
|
|
$
|
117
|
|
Fair value of plan assets
|
$
|
1,286
|
|
$
|
567
|
|
n/a
|
|
n/a
|
|
Net Periodic Cost
The components of net periodic cost are as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2017
|
|
2016
|
|
2015
|
2017
|
2016
|
2015
|
Service cost
|
$
|
37
|
|
|
$
|
18
|
|
|
$
|
24
|
|
$
|
2
|
|
$
|
2
|
|
$
|
3
|
|
Interest cost
|
51
|
|
|
34
|
|
|
49
|
|
6
|
|
5
|
|
6
|
|
Expected return on plan assets
|
(81
|
)
|
|
(46
|
)
|
|
(65
|
)
|
—
|
|
—
|
|
—
|
|
Amortization of prior service credit
|
—
|
|
|
—
|
|
|
—
|
|
(3
|
)
|
(2
|
)
|
(1
|
)
|
Amortization of net actuarial loss (gain)
|
12
|
|
|
14
|
|
|
21
|
|
(2
|
)
|
—
|
|
1
|
|
Curtailment / settlement loss (gain)
|
(45
|
)
|
(2)
|
(26
|
)
|
(1)
|
4
|
|
2
|
|
(2
|
)
|
(11
|
)
|
Net periodic cost
|
$
|
(26
|
)
|
|
$
|
(6
|
)
|
|
$
|
33
|
|
$
|
5
|
|
$
|
3
|
|
$
|
(2
|
)
|
|
|
(1)
|
Primarily associated with
two
UK plans merging into the GE UK Pension Plan.
|
|
|
(2)
|
As a result of the acquisition of Baker Hughes, we obtained a non-contributory pension plan (the Baker Hughes Incorporated Pension Plan or BHIPP). During the fourth quarter of 2017, the Compensation Committee of the Board of Directors approved amendments to the BHIPP to close the plan to new participants and freeze accruals of future service-related benefits effective as of December 31, 2017. As a result of these actions, the Company recorded a curtailment gain of
$45 million
. The curtailment was recorded by the Company during the fourth quarter of 2017 and included in “Other non-operating income (loss), net” in our consolidated and combined statement of income (loss).
|
Assumptions Used in Benefit Calculations
Accounting requirements necessitate the use of assumptions to reflect the uncertainties and the length of time over which the pension obligations will be paid. The actual amount of future benefit payments will depend upon when participants retire, the amount of their benefit at retirement and how long they live. To reflect the obligation in today’s dollars, we discount the future payments using a rate that matches the time frame over which the payments will be made. We also need to assume a long-term rate of return that will be earned on investments used to fund these payments.
Weighted average assumptions used to determine benefit obligations for these plans are as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2017
|
2016
|
2017
|
2016
|
Discount rate
|
2.99
|
%
|
3.41
|
%
|
3.32
|
%
|
4.00
|
%
|
Rate of compensation increase
|
3.82
|
%
|
4.09
|
%
|
n/a
|
|
n/a
|
|
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
Weighted average assumptions used to determine net periodic cost for these plans are as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2017
|
2016
|
2015
|
2017
|
2016
|
2015
|
Discount rate
|
3.24
|
%
|
3.83
|
%
|
3.69
|
%
|
3.72
|
%
|
4.25
|
%
|
4.00
|
%
|
Expected long-term return on plan assets
|
6.26
|
%
|
6.86
|
%
|
6.91
|
%
|
n/a
|
|
n/a
|
|
n/a
|
|
We determine the discount rate using a bond matching model, whereby the weighted average yields on high-quality fixed-income securities have maturities consistent with the timing of benefit payments. Lower discount rates increase the size of the benefit obligations and pension expense in the following year; higher discount rates reduce the size of the benefit obligation and subsequent-year pension expense.
The expected return on plan assets is the estimated long-term rate of return that will be earned on the investments used to fund the pension obligations. To determine this rate, we consider the current and target composition of plan investments, our historical returns earned, and our expectations about the future.
The compensation assumption is used to estimate the annual rate at which pay of plan participants will grow. If the rate of growth assumed increases, the size of the pension obligations will increase, as will the amount recorded in equity attributable to parent and amortized to income in subsequent periods.
Assumed health care cost trend rates can have a significant effect on the amounts reported for Other Postretirement Benefits. As of
December 31, 2017
, the health care cost trend rate was
6.81%
, declining gradually each successive year until it reaches
4.81%
. A one percentage point change in assumed health care cost trend rates would have had the following effects on
2017
:
|
|
|
|
|
|
|
|
|
One Percentage
Point Increase
|
One Percentage
Point Decrease
|
Effect on total of service and interest cost components (in thousands)
|
$
|
854
|
|
$
|
(685
|
)
|
Effect on postretirement welfare benefit obligation (in thousands)
|
$
|
15,460
|
|
$
|
(12,817
|
)
|
Accumulated Other Comprehensive Loss
The amount recorded before-tax in accumulated other comprehensive loss related to employee benefit plans consists of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2017
|
2016
|
2017
|
2016
|
Net actuarial loss (gain)
|
$
|
117
|
|
$
|
14
|
|
$
|
(16
|
)
|
$
|
(14
|
)
|
Net prior service credit
|
—
|
|
—
|
|
(25
|
)
|
(3
|
)
|
Total
|
$
|
117
|
|
$
|
14
|
|
$
|
(41
|
)
|
$
|
(17
|
)
|
The estimated net actuarial loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss and included in net periodic benefit cost in
2018
is
$9 million
. The estimated net actuarial gain and prior service credit for the other postretirement benefits that will be amortized from accumulated other comprehensive loss and included in net periodic benefit cost in
2018
is
$2 million
and
$5 million
, respectively.
Plan Assets
We have investment committees that meet regularly to review the portfolio returns and to determine asset-mix targets based on asset/liability studies. Third-party investment consultants assist such committees in developing asset allocation strategies to determine our expected rates of return and expected risk for various investment
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
portfolios. The investment committees considered these strategies in the formal establishment of the current asset-mix targets based on the projected risk and return levels for all major asset classes.
The table below presents the fair value of the pension assets by asset category at December 31:
|
|
|
|
|
|
|
|
|
2017
|
2016
|
Equity securities
|
|
|
U.S. equity securities
(1)
|
$
|
207
|
|
$
|
122
|
|
Global equity securities
(1)
|
551
|
|
149
|
|
Debt securities
|
|
|
Fixed income and cash investment funds
|
658
|
|
49
|
|
U.S. corporate
|
70
|
|
53
|
|
Other debt securities
|
55
|
|
99
|
|
Private equities
|
107
|
|
45
|
|
Real estate
|
44
|
|
32
|
|
Other investments
(2)
|
367
|
|
18
|
|
Total plan assets
|
$
|
2,059
|
|
$
|
567
|
|
|
|
(1)
|
Include direct investments and investment funds.
|
|
|
(2)
|
Substantially all represented hedge fund and asset allocation fund investments.
|
Plan assets valued using Net Asset Value (NAV) as a practical expedient amounted to
$1,684 million
and
$228 million
as of
December 31, 2017
and
2016
, respectively. The percentages of plan assets valued using NAV by investment fund type for equity securities, fixed income and cash, and alternative investments were
30%
,
28%
, and
24%
as of
December 31, 2017
, respectively, and
20%
,
7%
, and
13%
as of
December 31, 2016
, respectively. Those investments that were measured at fair value using NAV as practical expedient were excluded from the fair value hierarchy. The practical expedient was not applied for investments with a fair value of
$86 million
and
$25 million
in 2017 and 2016, respectively, and those investments were classified within Level 3. The remaining investments were considered Level 1 and 2.
Funding Policy
The funding policy for our Pension Benefits is to contribute amounts sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws plus such additional amounts as we may determine to be appropriate. In 2017, we contributed approximately
$50 million
. We expect to contribute approximately
$44 million
to our pension plans in 2018.
We fund our Other Postretirement Benefits on a pay-as-you-go basis. In 2017, we contributed
$13 million
to these plans. In 2018, we expect to contribute approximately
$24 million
to fund such benefits.
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
The following table presents the expected benefit payments over the next 10 years. The U.S. and non-U.S. pension benefit payments are made by the respective pension trust funds.
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
Pension
Benefits
|
Other Postretirement
Benefits
|
2018
|
|
$
|
105
|
|
|
|
$
|
24
|
|
|
2019
|
|
109
|
|
|
|
22
|
|
|
2020
|
|
107
|
|
|
|
17
|
|
|
2021
|
|
111
|
|
|
|
12
|
|
|
2022
|
|
112
|
|
|
|
10
|
|
|
2023-2027
|
|
593
|
|
|
|
47
|
|
|
Other
As part of the Baker Hughes acquisition, we obtained two non-qualified defined contribution plans that are invested through trusts. The assets and corresponding liabilities were
$278 million
at December 31, 2017 and are included in our consolidated and combined statement of financial position.
NOTE 10. INCOME TAXES
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (U.S. tax reform) that lowers the statutory tax rate on U.S. earnings, taxes historic foreign earnings previously deferred from U.S. taxation at a reduced rate of tax (transition tax), establishes a territorial tax system and enacts new taxes associated with global operations.
The impact of U.S. tax reform has been recorded on a provisional basis as the legislation provides for additional guidance to be issued by the U.S. Department of the Treasury on several provisions including the computation of the transition tax. Guidance in 2018 could impact the information required for and the calculation of the transition tax charge and could affect decisions that affect the tax on various U.S. and foreign items which would further impact the final amounts included in the transition tax charge and impact the revaluation of deferred taxes. In addition, analysis performed and conclusions reached as part of the tax return filing process and additional guidance on accounting for tax reform could affect the provisional amount. As part of purchase accounting for the Baker Hughes acquisition, we have made preliminary estimates of the fair value of assets acquired and liabilities assumed. Accordingly, changes to these estimates resulting from the finalization of the fair values may also require us to adjust the provisional impact of U.S. tax reform.
Additionally, as part of U.S. tax reform, the U.S. has enacted a tax on "base eroding" payments from the U.S. and a minimum tax on foreign earnings (global intangible low-taxed income). Because aspects of the new law and the effect on our operations is uncertain and because aspects of the accounting rules associated with this provision have not been resolved, we have not made a provisional accrual for the deferred tax aspects of this provision and consequently have not made an accounting policy election on the deferred tax treatment of this tax.
As a result of enactment of U.S. tax reform, we have recorded a net tax benefit of
$132 million
in 2017 to reflect our provisional estimate of the revaluation of deferred taxes. We also recorded tax expense of
$271 million
to reflect our provisional estimate of the transition tax charge on historic foreign earnings. This transition tax charge is completely offset with a tax benefit from a valuation allowance release on foreign tax credits available to offset the tax.
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
The provision or benefit for income taxes is comprised of the following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Current:
|
|
|
|
U.S.
|
$
|
(33
|
)
|
$
|
(114
|
)
|
$
|
158
|
|
Foreign
|
408
|
|
325
|
|
411
|
|
Total current
|
375
|
|
211
|
|
569
|
|
Deferred:
|
|
|
|
U.S.
|
(257
|
)
|
13
|
|
(21
|
)
|
Foreign
|
(47
|
)
|
26
|
|
(75
|
)
|
Total deferred
|
(304
|
)
|
39
|
|
(96
|
)
|
Provision for income taxes
|
$
|
71
|
|
$
|
250
|
|
$
|
473
|
|
The geographic sources of income (loss) before income taxes, inclusive of equity in loss of affiliate are as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
U.S.
|
$
|
(1,153
|
)
|
$
|
(440
|
)
|
$
|
(2,006
|
)
|
Foreign
|
982
|
|
1,024
|
|
1,848
|
|
Income (loss) before income taxes, inclusive of equity in loss of affiliate
|
$
|
(171
|
)
|
$
|
584
|
|
$
|
(158
|
)
|
The benefit or provision for income taxes differs from the amount computed by applying the U.S. statutory income tax rate to the loss or income before income taxes for the reasons set forth below for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Income (loss) before income taxes, inclusive of equity in loss of affiliate
|
$
|
(171
|
)
|
$
|
584
|
|
$
|
(158
|
)
|
Taxes at the U.S. federal statutory income tax rate
|
(60
|
)
|
205
|
|
(55
|
)
|
Effect of foreign operations
|
(50
|
)
|
(5
|
)
|
(137
|
)
|
Tax impact of partnership structure
|
167
|
|
—
|
|
—
|
|
Tax impact of dispositions
|
—
|
|
1
|
|
(26
|
)
|
Nondeductible goodwill
|
—
|
|
—
|
|
713
|
|
Change in valuation allowances
|
169
|
|
28
|
|
9
|
|
Tax Cuts and Jobs Act enactment
|
(132
|
)
|
—
|
|
—
|
|
Other - net
|
(23
|
)
|
21
|
|
(31
|
)
|
Provision for income taxes
|
$
|
71
|
|
$
|
250
|
|
$
|
473
|
|
Actual income tax rate
|
(41.5
|
)%
|
42.8
|
%
|
(299.4
|
)%
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss and tax credit carryforwards.
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
The tax effects of our temporary differences and carryforwards are as follows at December 31:
|
|
|
|
|
|
|
|
|
2017
|
2016
|
Deferred tax assets:
|
|
|
Receivables
|
$
|
98
|
|
$
|
—
|
|
Inventory
|
41
|
|
71
|
|
Property
|
144
|
|
—
|
|
Employee benefits
|
64
|
|
154
|
|
Investment in partnership
|
74
|
|
—
|
|
Other accrued expenses
|
91
|
|
121
|
|
Operating loss carryforwards
|
1,376
|
|
142
|
|
Tax credit carryforwards
|
554
|
|
5
|
|
Other
|
243
|
|
—
|
|
Total deferred income tax asset
|
2,685
|
|
493
|
|
Valuation allowances
|
(2,474
|
)
|
(87
|
)
|
Total deferred income tax asset after valuation allowance
|
211
|
|
406
|
|
Deferred tax liabilities:
|
|
|
|
|
Goodwill and other intangibles
|
(202
|
)
|
(845
|
)
|
Property
|
—
|
|
(62
|
)
|
Undistributed earnings of foreign subsidiaries
|
—
|
|
(46
|
)
|
Other
|
(51
|
)
|
(9
|
)
|
Total deferred income tax liability
|
(253
|
)
|
(962
|
)
|
Net deferred tax liability
|
$
|
(42
|
)
|
$
|
(556
|
)
|
At
December 31, 2017
, we had approximately
$129 million
of non-U.S. tax credits which may be carried forward indefinitely under applicable foreign law,
$395 million
of foreign tax credits and
$30 million
of other credits, the majority of which will expire after tax year 2027 under U.S. tax law. The increase in tax credit carryforwards of approximately
$549 million
is primarily due to the generation of foreign tax credits under U.S. tax law related to the business acquisition referred to in Note 2 partially offset by the U.S. tax reform transition tax. Additionally, we had $
1,376 million
of net operating loss carryforwards, of which approximately $
319 million
will expire within
five
years, $
293 million
will expire between
six
and
20
years, and the remainder can be carried forward indefinitely.
We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. At
December 31, 2017
,
$2,474 million
of valuation allowances are recorded against various deferred tax assets, including foreign net operating losses (NOL) of
$1,125 million
, U.S. federal and foreign tax credit carryforwards of
$524 million
, other U.S. NOL's and tax credit carryforwards of
$57 million
, and certain other U.S. and foreign deferred tax assets of
$768 million
. The increase of
$2,387 million
in valuation allowances are primarily related to the business acquisition.
Due to cumulative losses in the U.S., we concluded that valuation allowances were required on the majority of our U.S. net deferred tax assets, including foreign tax credit carryforwards
.
Certain other U.S. tax reform provisions could impact the amount of our U.S. valuation allowance assessment. Our assessment is provisional and amounts may be updated as we finalize our accounting for U.S. tax reform in 2018. There are
$192 million
of deferred tax assets related to foreign net operating loss carryforwards without a valuation allowance as we expect that the deferred tax assets will be realized within the carryforward period.
Substantially all of our undistributed earnings of our foreign subsidiaries are indefinitely reinvested. Due to the enactment of U.S. tax reform, repatriations of foreign earnings will generally be free of U.S. federal tax but may incur other taxes such as withholding or state taxes. Indefinite reinvestment is determined by management’s intentions concerning the future operations of the Company. Most of these earnings have been reinvested in active
Baker Hughes, a GE company
Notes to Consolidated and Combined Financial Statements
non-U.S. business operations. However, as a result of U.S. tax reform, substantially all of our prior unrepatriated foreign earnings were subject to U.S. tax and accordingly we expect to have the ability to repatriate those earnings without incremental U.S. federal tax cost. We expect that any foreign withholding taxes on such a repatriation would generate a U.S. foreign tax credit.
We will update our analysis of investment of foreign earnings in 2018 as we consider the impact of U.S. tax reform. As of December 31, 2017, the cumulative amount of indefinitely reinvested foreign earnings is approximately
$8.0 billion
. Computation of the potential deferred tax liability associated with these undistributed earnings and any other basis differences is not practicable.
At December 31, 2017, we had
$395 million
of tax liabilities for total gross unrecognized tax benefits related to uncertain tax positions. In addition to these uncertain tax positions, we had
$95 million
and
$53 million
related to interest and penalties, respectively, for total liabilities of
$543 million
for uncertain positions. If we were to prevail on all uncertain positions, the net effect would result in an income tax benefit of approximately
$522 million
. The remaining
$21 million
is offset by deferred tax assets that represent tax benefits that would be received in different taxing jurisdictions in the event that we did not prevail on all uncertain tax positions.
We have not provided for any unrecognized tax benefits related to U.S. tax reform in our provisional estimate. The analysis performed and conclusions reached as part of the tax return filing process and additional guidance on accounting for U.S. tax reform could affect the provisional estimate.
The following table presents the changes in our gross unrecognized tax benefits included in the consolidated and combined statements of financial position.
|
|
|
|
|
|
|
|
Asset / (Liability)
|
2017
|
2016
|
Balance at January 1
|
$
|
(94
|
)
|
$
|
(100
|
)
|
Balance acquired from Baker Hughes
|
(326
|
)
|
—
|
|
Additions for tax positions of the current year
|
(13
|
)
|
(4
|
)
|
Additions for tax positions of prior years
|
(19
|
)
|
—
|
|
Reductions for tax positions of prior years
|
32
|
|
5
|
|
Settlements with tax authorities
|
14
|
|
—
|
|
Lapse of statute of limitations
|
11
|
|
5
|
|
Balance at December 31
|
$
|
(395
|
)
|
$
|
(94
|
)
|
It is expected that the amount of unrecognized tax benefits will change in the next twelve months due to expiring statutes, audit activity, tax payments, and competent authority proceedings related to transfer pricing or final decisions in matters that are the subject of litigation in various taxing jurisdictions in which we operate. At December 31, 2017, we had approximately
$105 million
of tax liabilities, net of
$2 million
of tax assets, related to uncertain tax positions, each of which are individually insignificant, and each of which are reasonably possible of being settled within the next twelve months.
At December 31, 2017, approximately
$288 million
of tax liabilities for total gross unrecognized tax benefits were included in the noncurrent portion of our income tax liabilities, for which the settlement period cannot be determined, however, it is not expected to be within the next twelve months.
We conduct business in more than
120
countries and are subject to income taxes in most taxing jurisdictions in which we operate. All Internal Revenue Service examinations have been completed and closed through year end 2015 for the most significant U.S. returns. We believe there are no other jurisdictions in which the outcome of unresolved issues or claims is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties.