NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
Baker Hughes, a GE company, LLC, a Delaware limited liability company (the Company, BHGE LLC, we, us, or our), and the successor to Baker Hughes Incorporated, a Delaware corporation (Baker Hughes) 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 approximately
64,000
employees.
On
July 3, 2017
, we completed the combination of the oil and gas business (GE O&G) of General Electric Company (GE) and Baker Hughes (the Transactions). GE owns approximately
62.5%
of our common units and Baker Hughes, a GE company (BHGE) owns approximately
37.5%
of our common units indirectly through two wholly owned subsidiaries.
BASIS OF PRESENTATION
In connection with the Transactions, we entered into and are governed by an Amended & Restated Limited Liability Company Agreement, dated as of July 3, 2017 (the BHGE LLC Agreement). Under the BHGE LLC Agreement, EHHC Newco, LLC (EHHC), a wholly owned subsidiary of BHGE, is our sole managing member and BHGE is the sole managing member of EHHC. As our managing member, EHHC conducts, directs and exercises full control over all our activities, including our day-to-day business affairs and decision-making, without the approval of any other member. As such, EHHC is responsible for all our operational and administrative decisions and the day-to-day management of our business.
The Transactions were treated as a "reverse acquisition" for accounting purposes and, as such, the historical financial statements of the accounting acquirer, GE O&G, are the historical financial statements of the Company.
The accompanying unaudited condensed 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 interim financial information. All intercompany accounts and transactions have been eliminated. In the opinion of management, the condensed consolidated and combined financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of operations, financial position and cash flows of the Company and its subsidiaries for the periods presented and are not indicative of the results that may be expected for a full year.
The Company's financial statements have been prepared on a consolidated basis, effective
July 3, 2017
, following consummation of the Transactions. 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 (refer to "Note 3. Business Acquisition" for further details on 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 condensed 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. See "Note 15. Related Party Transactions" for further information on expenses allocated by GE. The historical financial results in the condensed 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 condensed 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
BHGE LLC 2018 Second Quarter FORM 10-Q |
6
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
presentation of the combined businesses. Merger and related costs includes all costs associated with the Transactions. Refer to "Note 3. Business Acquisition" for further details.
In the notes to unaudited condensed consolidated and combined financial statements, all dollar and unit amounts in tabulations are in millions of dollars and units, respectively, unless otherwise indicated. Certain columns and rows in our financial statements and notes thereto may not add due to the use of rounded numbers.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Please refer to "Note 1. Basis of Presentation and Summary of Significant Accounting Policies," to our consolidated and combined financial statements from our Annual Report on Form 10-K for the year ended
December 31, 2017
(2017 Annual Report) for the discussion of our significant accounting policies. Please refer to the 'New Accounting Standards Adopted' section of this Note for changes to our accounting policies.
Cash, Cash Equivalents and Restricted Cash
As of
June 30, 2018
, and
December 31, 2017
, we had
$975 million
and
$1,190 million
, respectively, of cash held in bank accounts that cannot be released, transferred or otherwise converted into a currency that is regularly transacted internationally, due to lack of market liquidity, capital controls or similar monetary or exchange limitations limiting the flow of capital out of the jurisdiction. These funds are available to fund operations and growth in these jurisdictions and we do not currently anticipate a need to transfer these funds to the U.S. Included in these amounts is
$604 million
and
$764 million
, as of
June 30, 2018
and
December 31, 2017
, respectively, held on behalf of GE.
Cash, cash equivalents and restricted cash includes a total of
$783 million
and
$997 million
of cash at
June 30, 2018
and
December 31, 2017
, respectively, held on behalf of GE, and a corresponding liability is reported in short-term borrowings. See "Note 15. Related Party Transactions" for further details.
As a result of adopting Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-18,
Statement of Cash Flows: Restricted Cash
, we reclassified our restricted cash of
$7 million
from ‘all other assets’ to cash, cash equivalents and restricted cash as of December 31, 2017. At
June 30, 2018
, such cash is
no
longer considered restricted in nature.
NEW ACCOUNTING STANDARDS ADOPTED
On January 1, 2018, we adopted the FASB ASU No. 2014-09,
Revenue from Contracts with Customers,
and the related amendments (ASC 606). We elected to adopt the new standard using the full retrospective method, where the standard was applied to each prior reporting period presented and the cumulative effect of applying the standard was recognized at January 1, 2016. This standard requires us 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 changed the presentation of our financial statements, including: (1) timing of revenue recognition, and (2) changes in classification between revenue and costs. The standard has no cash impact and, as such, does not affect the economics of our underlying customer contracts. Our policy on recognizing revenue is as follows:
Revenue from Sale of Equipment
Performance Obligations Satisfied Over Time
We recognize revenue on agreements for sales of goods manufactured to unique customer specifications, including long-term construction projects, on an over-time basis utilizing cost inputs as the measurement criteria in assessing the progress toward completion. Our estimate of costs to be incurred to fulfill our promise to a customer is based on our history of manufacturing or constructing similar assets for customers and is updated routinely to reflect changes in quantity or pricing of the inputs. We begin to recognize revenue on these contracts when the contract specific inventory becomes customized for a customer, which is reflective of our initial transfer of control of the incurred costs. We provide for potential losses on any of these agreements when it is probable that we will incur the loss.
BHGE LLC 2018 Second Quarter FORM 10-Q |
7
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
Our billing terms for these over-time contracts vary, but are generally based on achieving specified milestones. The differences between the timing of our revenue recognized (based on costs incurred) and customer billings (based on contractual terms) results in changes to our contract asset or contract liability positions.
Performance Obligations Satisfied at a Point In Time
We recognize revenue for non-customized equipment at the point in time that the customer obtains control of the good, which is no earlier than when the customer has physical possession of the product. Equipment for which we recognize revenue at a point in time include goods we manufacture on a standardized basis for sale to the market. We use proof of delivery for certain large equipment with more complex logistics associated with the shipment, whereas the delivery of other equipment is determined based on historical data of transit times between regions.
On occasion we sell products with a right of return. We use our accumulated experience to estimate and provide for such returns when we record the sale. In situations where arrangements include customer acceptance provisions based on seller or customer-specified objective criteria, we recognize revenue when we have concluded that the customer has control of the goods and that acceptance is likely to occur.
Our billing terms for these point in time equipment contracts vary, but are generally based on shipment of the goods to the customer.
Revenue from Sale of Services
Performance Obligations Satisfied Over Time
We sell product services under long-term product maintenance or extended warranty agreements in our Turbomachinery & Process Solutions and Oilfield Equipment segments. These agreements require us to maintain the customers' assets over the service agreement contract terms, which generally range from
10
to
20
years. In general, these are contractual arrangements to provide services, repairs, and maintenance of a covered unit (gas turbines for mechanical drive or power generation, primarily on LNG applications, drilling rigs). These services are performed at various times during the life of the contract, thus the costs of performing services are incurred on other than a straight-line basis. We recognize related sales based on the extent of our progress toward completion measured by actual costs incurred in relation to total expected costs. We provide for any loss that we expect to incur on any of these agreements when that loss is probable. BHGE utilizes historical customer data, prior product performance data, statistical analysis, third-party data, and internal management estimates to calculate contract-specific margins. In certain contracts, the total transaction price is variable based on customer utilization, which is excluded from the contract margin until the period that the customer has utilized to appropriately reflect the revenue activity in the period earned.
Our billing terms for these contracts are generally based on the occurrence of a major maintenance event within the contract or asset utilization (i.e. usage per hour). The differences between the timing of our revenue recognized (based on costs incurred) and customer billings (based on contractual terms) results in changes to our contract asset or contract liability positions.
Performance Obligations Satisfied at a Point In Time
We sell certain tangible products, largely spare equipment, through our services business. We recognize revenues for this equipment at the point in time that the customer obtains control of the good, which is at the point in time we deliver the spare part to the customer. Our billing terms for these point in time service contracts vary, but are generally based on shipment of the goods to the customer.
Impact of Adoption
As a result of the adoption of the standard, the timing of revenue recognition on our long-term product service agreements is affected. Although we continue to recognize revenue over time on these contracts, there are changes to how contract modifications, termination clauses and purchase options are accounted for by us. In
BHGE LLC 2018 Second Quarter FORM 10-Q |
8
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
particular, under the previous standard, the cumulative impact from a contract modification on revenue already recorded is recognized in the period in which the modification is agreed. Under the new standard, the impact from certain types of modifications is recognized over the remaining life of the contract.
The change in historical periods to our statements of income (loss) related to the adoption of the standard is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Year Ended
|
|
December 31, 2017
|
September 30, 2017
|
June 30, 2017
|
March 31, 2017
|
|
December 31, 2017
|
December 31, 2016
|
Revenue:
|
|
|
|
|
|
|
|
Sales of goods
|
$
|
86
|
|
$
|
13
|
|
$
|
37
|
|
$
|
27
|
|
|
$
|
163
|
|
$
|
(26
|
)
|
Sales of services
|
(50
|
)
|
(86
|
)
|
(33
|
)
|
(74
|
)
|
|
(243
|
)
|
(161
|
)
|
Total revenue
|
36
|
|
(73
|
)
|
4
|
|
(47
|
)
|
|
(80
|
)
|
(187
|
)
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
(14
|
)
|
(64
|
)
|
(6
|
)
|
(91
|
)
|
|
(175
|
)
|
(226
|
)
|
|
|
|
|
|
|
|
|
Net income (loss) and net income (loss) attributable to BHGE, LLC
|
1
|
|
(84
|
)
|
(10
|
)
|
(57
|
)
|
|
(150
|
)
|
(149
|
)
|
The increase (decrease) to our statement of financial position related to the adoption of the standard is summarized below:
|
|
|
|
|
|
December 31, 2017
|
ASSETS
|
|
Current receivables, net
|
$
|
1
|
|
Inventories, net
|
(83
|
)
|
Contract and other deferred assets
|
(701
|
)
|
Deferred income taxes
|
233
|
|
|
|
LIABILITIES AND EQUITY
|
|
Progress collections and deferred income
|
$
|
394
|
|
All other current liabilities
|
(64
|
)
|
Deferred income taxes
|
(34
|
)
|
All other liabilities
|
(83
|
)
|
Total equity
|
(763
|
)
|
The cumulative impact to our retained earnings (included in our net parent investment) as of January 1, 2016 was a reduction of
$432 million
.
On January 1, 2018, we adopted the FASB ASU No. 2016-16,
Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory
. The ASU eliminated 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 are recognized when the sale occurs even though the pre-tax effects of the transaction have not been recognized. The effect of the adoption of the standard was an increase to retained earnings of
$67 million
as of January 1, 2018 with no other impact to our financial statements. 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.
On January 1, 2018, we adopted the FASB ASU No. 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which changed the income statement presentation of net periodic benefit cost by requiring separation between the service cost component and all other components.
BHGE LLC 2018 Second Quarter FORM 10-Q |
9
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
The service cost component is 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 are presented outside of income from operations.
The change in historical periods to our statements of income (loss) related to the adoption of ASU No. 2017-07 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Year Ended
|
|
December 31, 2017
|
September 30, 2017
|
June 30, 2017
|
March 31, 2017
|
|
December 31, 2017
|
December 31, 2016
|
Operating income (loss)
|
(5
|
)
|
(7
|
)
|
9
|
|
2
|
|
|
(1
|
)
|
24
|
|
Non operating income (loss)
|
5
|
|
7
|
|
(9
|
)
|
(2
|
)
|
|
1
|
|
(24
|
)
|
NEW ACCOUNTING STANDARDS TO BE ADOPTED
In February 2018, the FASB issued ASU No. 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220)
:
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. The ASU provides that the stranded tax effects from the Tax Cuts and Jobs Act on the balance of other comprehensive earnings may be reclassified to retained earnings. The ASU is effective for periods beginning after December 15, 2018, with an election to adopt early. We are evaluating the effect of the standard on our financial statements.
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. In January 2018, the FASB issued a draft ASU that proposed an alternative transition method, which allows companies to apply the provisions of the new leasing standard on January 1, 2019 through recognition of a cumulative-effect adjustment to retained earnings as of January 1, 2019 (i.e. without retrospectively adjusting comparative periods). We will conclude on the transition method once this draft ASU is finalized. We are currently in the process of evaluating our existing lease portfolios, including accumulating all the necessary information required to properly account for the leases under the new standard. Additionally, we are implementing an enterprise-wide lease management system to assist in the accounting and are evaluating additional changes to our processes and internal controls to ensure we meet the standard’s reporting and disclosure requirements. While we continue to evaluate the effect of the standard on our ongoing financial reporting, we anticipate that the adoption of the ASU will result in the recognition of a material right of use asset and related liability with an immaterial effect to our retained earnings.
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.
BHGE LLC 2018 Second Quarter FORM 10-Q |
10
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
NOTE 2. REVENUE RELATED TO CONTRACTS WITH CUSTOMERS
DISAGGREGATED REVENUE
We disaggregate our revenue from contracts with customers by primary geographic markets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
Total Revenue
|
2018
|
2017
|
2018
|
2017
|
U.S.
|
$
|
1,560
|
|
$
|
700
|
|
$
|
3,043
|
|
$
|
1,421
|
|
Non-U.S.
|
3,988
|
|
2,315
|
|
7,904
|
|
4,658
|
|
Total
|
$
|
5,548
|
|
$
|
3,015
|
|
$
|
10,947
|
|
$
|
6,079
|
|
REMAINING PERFORMANCE OBLIGATIONS
As of
June 30, 2018
, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was
$20.9 billion
. We expect to recognize revenue of approximately
44%
,
62%
and
89%
of the total remaining performance obligations within
2
,
5
, and
15
years, respectively, and the remaining thereafter.
As part of our adoption of ASC 606, we elected to not disclose the amount of transaction price allocated to remaining performance obligations for the periods prior to adoption.
NOTE 3. BUSINESS ACQUISITION
On July 3, 2017, we closed the Transactions to combine GE O&G and Baker Hughes. The Transactions were executed using a partnership structure, pursuant to which GE O&G and Baker Hughes each contributed their operating assets to the Company. The fair value of the consideration exchanged was
$24,798 million
.
The tables below present 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 the fair value of assets and liabilities was concluded in the second quarter of 2018.
|
|
|
|
|
Identifiable assets acquired and liabilities assumed
|
Fair value at July 3, 2017
|
Assets
|
|
Cash and equivalents
|
$
|
4,133
|
|
Current receivables
|
2,342
|
|
Inventories
|
1,712
|
|
Property, plant and equipment
|
4,514
|
|
Intangible assets
(1)
|
4,005
|
|
Deferred income taxes
(2)
|
30
|
|
All other assets
|
1,335
|
|
Liabilities
|
|
Accounts payable
|
(1,213
|
)
|
Borrowings
|
(3,370
|
)
|
Liabilities for pension and other postretirement benefits
|
(654
|
)
|
All other liabilities
|
(1,670
|
)
|
Total identifiable net assets
|
$
|
11,164
|
|
Noncontrolling interest associated with net assets acquired
|
(35
|
)
|
Goodwill
(3)
|
13,669
|
|
Total purchase consideration
|
$
|
24,798
|
|
BHGE LLC 2018 Second Quarter FORM 10-Q |
11
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
|
|
(1)
|
Intangible assets, as provided in the table below, are recorded at fair value, as determined by management based on available information. 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.
|
|
|
|
|
|
|
|
Fair Value
|
Estimated Weighted
Average Life (Years)
|
Trade name - Baker Hughes
|
$
|
2,100
|
|
Indefinite life
|
Customer relationships
|
1,240
|
|
15
|
Patents and technology
|
465
|
|
10
|
In-process research and development
|
70
|
|
Indefinite life
|
Capitalized software
|
64
|
|
2
|
Trade names - other
|
45
|
|
10
|
Favorable lease contracts & others
|
21
|
|
10
|
Total
|
$
|
4,005
|
|
|
|
|
(2)
|
Includes approximately
$83 million
of net deferred tax liabilities related to the fair value of intangible assets included in the purchase consideration and approximately
$113 million
of other net deferred tax assets, including non-U.S. loss carryforwards net of valuation allowances partially offset by liabilities for unrecognized benefits.
|
|
|
(3)
|
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 primarily allocated to the Oilfield Services segment, of which
$67 million
is deductible for tax purposes. See "Note 6. Goodwill and Other Intangible Assets" for allocation of goodwill to all the segments.
|
During the six months ended June 30, 2018, the Company made measurement period adjustments to reflect facts and circumstances in existence as of the acquisition date. These adjustments resulted in an increase in goodwill from 2017 year end of
$891 million
primarily due to a reduction in the fair value of property, plant and equipment of
$362 million
, equity method investments of
$228 million
, intangible assets of
$123 million
and an increase in other liabilities of
$314 million
primarily related to uncertain tax positions, warranty, and other sundry liabilities. As a result of the decrease in property, plant and equipment and intangible assets during the six months ended June 30, 2018, we recorded a cumulative decrease to depreciation and amortization expense of
$33 million
. We reclassified certain balances to conform to our current presentation.
INCOME TAXES
BHGE LLC is treated as a partnership for U.S. federal income tax purposes. As such, we are not subject to U.S. federal income tax under current U.S. tax laws. BHGE LLC's foreign subsidiaries, however, have incurred current and deferred foreign income taxes. Our members are each required to take into account for U.S. federal income tax purposes their distributive share of the items of income, gain, loss and deduction, which generally includes our U.S. operations. BHGE and GE are each 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 us through subsidiaries, the taxes attributable to those subsidiaries will be reflected in our condensed consolidated and combined financial statements.
BHGE LLC 2018 Second Quarter FORM 10-Q |
12
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
MERGER AND RELATED COSTS
Acquisition costs of
$50 million
and
$85 million
, during the
three months ended June 30, 2018 and 2017
, respectively, and
$96 million
and
$151 million
during the
six months ended June 30, 2018 and 2017
, respectively, were expensed as incurred and were reported as merger and related costs. Such costs include professional fees of advisors and integration and synergy costs related to the combination of Baker Hughes and GE O&G.
UNAUDITED 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 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 periods 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.
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
Six Months Ended June 30, 2017
|
Revenue
|
$
|
5,417
|
|
$
|
10,741
|
|
Net loss
|
(241
|
)
|
(261
|
)
|
Net loss attributable to the Company
|
(247
|
)
|
(264
|
)
|
NOTE 4. CURRENT RECEIVABLES
Current receivables are comprised of the following:
|
|
|
|
|
|
|
|
|
June 30, 2018
|
December 31, 2017
|
Customer receivables
|
$
|
4,891
|
|
$
|
4,700
|
|
Related parties
|
873
|
|
914
|
|
Other
|
736
|
|
844
|
|
Total current receivables
|
6,500
|
|
6,458
|
|
Less: Allowance for doubtful accounts
|
(333
|
)
|
(330
|
)
|
Total current receivables, net
|
$
|
6,167
|
|
$
|
6,128
|
|
Customer receivables are recorded at the invoiced amount. Related parties primarily consists of amounts owed to us by GE. The "Other" category primarily consists of advance payments to suppliers, indirect taxes and other tax receivables.
BHGE LLC 2018 Second Quarter FORM 10-Q |
13
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
NOTE 5. INVENTORIES
Inventories, net of reserves of
$413 million
and
$360 million
as of
June 30, 2018
and
December 31, 2017
, respectively, are comprised of the following:
|
|
|
|
|
|
|
|
|
June 30, 2018
|
December 31, 2017
|
Finished goods
|
$
|
2,656
|
|
$
|
2,577
|
|
Work in process and raw material
|
2,019
|
|
1,930
|
|
Total inventories, net
|
$
|
4,675
|
|
$
|
4,507
|
|
We recorded
$15 million
and
$4 million
during the
three months ended June 30, 2018 and 2017
, respectively, and
$76 million
and
$19 million
during the
six months ended June 30, 2018 and 2017
, respectively, 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 condensed consolidated and combined statements of income (loss).
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
The changes in the carrying value of goodwill are detailed below by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oilfield Services
|
Oilfield Equipment
|
Turbo-machinery & Process Solutions
|
Digital Solutions
|
Total
|
Balance at December 31, 2016, gross
|
$
|
2,779
|
|
$
|
3,852
|
|
$
|
1,814
|
|
$
|
1,989
|
|
$
|
10,434
|
|
Accumulated impairment at December 31, 2016
|
(2,633
|
)
|
(867
|
)
|
—
|
|
(254
|
)
|
(3,754
|
)
|
Balance at December 31, 2016
|
146
|
|
2,985
|
|
1,814
|
|
1,735
|
|
6,680
|
|
Acquisition
(1)
|
12,778
|
|
—
|
|
—
|
|
—
|
|
12,778
|
|
Currency exchange and others
|
8
|
|
49
|
|
92
|
|
47
|
|
196
|
|
Balance at December 31, 2017
|
12,932
|
|
3,034
|
|
1,906
|
|
1,782
|
|
19,654
|
|
Purchase accounting adjustments
(1)
|
(174
|
)
|
242
|
|
394
|
|
429
|
|
891
|
|
Currency exchange and others
|
(18
|
)
|
(36
|
)
|
(23
|
)
|
(5
|
)
|
(82
|
)
|
Balance at June 30, 2018
|
$
|
12,740
|
|
$
|
3,240
|
|
$
|
2,277
|
|
$
|
2,206
|
|
$
|
20,463
|
|
|
|
(1)
|
Includes goodwill associated with the acquisition of Baker Hughes. The final determination of fair value of the assets and liabilities and the related goodwill associated with the acquisition of Baker Hughes was concluded in the second quarter of 2018. Of the total goodwill of
$13,669 million
resulting from the acquisition of Baker Hughes, $
12,604 million
is allocated to our Oilfield Services segment and the remainder to our other segments based on the expected benefit from the synergies of the acquisition.
|
In addition to our annual impairment testing on July 1 each year, 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.
BHGE LLC 2018 Second Quarter FORM 10-Q |
14
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
Since the merger with Baker Hughes, our Oilfield Equipment (OFE) reporting unit has had consecutive quarters of operating losses, which prompted the Company to evaluate whether circumstances had changed that would more likely than not reduce the fair value of the reporting unit below its carrying amount. While conducting this evaluation, the Company considered macroeconomic and industry conditions, overall financial performance of the reporting unit and preliminary long-term forecasts, among other factors, all of which require considerable judgment. After considering the totality of the events and circumstances, the Company concluded that an interim impairment test was not required. The Company will perform its annual goodwill impairment test during the third quarter of 2018 and there can be no assurance that the estimates and assumptions made for purposes of this qualitative evaluation will prove to be an accurate prediction of future results. Factors that could impact the final determination of fair value in connection with the completion of the annual goodwill impairment process include a sustained decline in market capitalization, changes in the estimated fair values of OFE’s assets and liabilities, changes in projected future earnings and net cash flows, changes in market related multiples, and changes in valuation related assumptions such as discount rates and perpetual growth rates.
As of
June 30, 2018
, we believe that the goodwill is recoverable for all four reporting units, however, there can be no assurances that the goodwill will not be impaired in future periods.
OTHER INTANGIBLE ASSETS
Intangible assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
December 31, 2017
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
|
Technology
|
$
|
1,102
|
|
$
|
(496
|
)
|
$
|
606
|
|
$
|
1,177
|
|
$
|
(440
|
)
|
$
|
737
|
|
Customer relationships
|
3,169
|
|
(899
|
)
|
2,270
|
|
3,202
|
|
(819
|
)
|
2,383
|
|
Capitalized software
|
1,114
|
|
(762
|
)
|
352
|
|
1,130
|
|
(697
|
)
|
433
|
|
Trade names and trademarks
|
726
|
|
(223
|
)
|
503
|
|
757
|
|
(159
|
)
|
598
|
|
Other
|
14
|
|
(1
|
)
|
13
|
|
10
|
|
—
|
|
10
|
|
Finite-lived intangible assets
|
6,125
|
|
(2,381
|
)
|
3,744
|
|
6,276
|
|
(2,115
|
)
|
4,161
|
|
Indefinite-lived intangible assets
(1)
|
2,229
|
|
—
|
|
2,229
|
|
2,197
|
|
—
|
|
2,197
|
|
Total intangible assets
|
$
|
8,354
|
|
$
|
(2,381
|
)
|
$
|
5,973
|
|
$
|
8,473
|
|
$
|
(2,115
|
)
|
$
|
6,358
|
|
|
|
(1)
|
Indefinite-lived intangible assets are principally comprised of the Baker Hughes trade name.
|
Intangible assets are generally amortized on a straight-line basis with estimated useful lives ranging from
1
to
30
years. Amortization expense for the
three months ended June 30, 2018 and 2017
was
$101 million
and
$86 million
, respectively, and
$240 million
and
$149 million
, respectively, for the
six months ended June 30, 2018 and 2017
. During the
six months ended June 30, 2018
, we incurred additional amortization expense of
$68 million
due to the acquisition of Baker Hughes. In addition, we incurred
$32 million
and
$69 million
of accelerated amortization during the
three and six months ended June 30, 2018
related to trade names and technology that we ceased to use during the second quarter of 2018 as a result of the combination of Baker Hughes and GE O&G.
BHGE LLC 2018 Second Quarter FORM 10-Q |
15
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
Estimated amortization expense for the remainder of 2018 and each of the subsequent five fiscal years is expected to be as follows:
|
|
|
|
|
Year
|
Estimated Amortization Expense
|
Remainder of 2018
|
$
|
185
|
|
2019
|
367
|
|
2020
|
331
|
|
2021
|
283
|
|
2022
|
247
|
|
2023
|
226
|
|
NOTE 7. CONTRACT AND OTHER DEFERRED ASSETS
A majority of our long-term product service agreements relate to our Turbomachinery & Process Solutions segment. Contract assets reflect revenue earned in excess of billings on our long-term contracts to construct technically complex equipment, long-term product maintenance or extended warranty arrangements and other deferred contract related costs. Contract assets are comprised of the following:
|
|
|
|
|
|
|
|
|
June 30, 2018
|
December 31, 2017
|
Long-term product service agreements
|
$
|
593
|
|
$
|
589
|
|
Long-term equipment contract revenue
(1)
|
1,059
|
|
1,095
|
|
Contract assets (total revenue in excess of billings)
(2)
|
1,652
|
|
1,684
|
|
Deferred inventory costs
(3)
|
245
|
|
360
|
|
Non-recurring engineering costs
|
14
|
|
—
|
|
Contract and other deferred assets
|
$
|
1,911
|
|
$
|
2,044
|
|
|
|
(1)
|
Reflects revenue earned in excess of billings on our long-term contracts to construct technically complex equipment.
|
|
|
(2)
|
Contract assets (total revenue in excess of billings) were
$1,233 million
as of January 1, 2017.
|
|
|
(3)
|
Deferred inventory costs were
$276 million
as of January 1, 2017, which represents cost deferral for shipped goods and other costs where the criteria for revenue recognition has not yet been met.
|
Revenue recognized during the
three months ended June 30, 2018 and 2017
from performance obligations satisfied (or partially satisfied) in previous periods related to our long-term service agreements was
$12 million
and
$10 million
, respectively, and
$22 million
and
$40 million
during the
six months ended June 30, 2018 and 2017
, respectively. This includes revenue recognized from revisions to cost or billing estimates that may affect a contract’s total estimated profitability resulting in an adjustment of earnings.
BHGE LLC 2018 Second Quarter FORM 10-Q |
16
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
NOTE 8. PROGRESS COLLECTIONS AND DEFERRED INCOME
Contract liabilities include progress collections, which reflects billings in excess of revenue, and deferred income on our long-term contracts to construct technically complex equipment, long-term product maintenance or extended warranty arrangements. Contract liabilities are comprised of the following:
|
|
|
|
|
|
|
|
|
June 30, 2018
|
December 31, 2017
|
Progress collections
|
$
|
1,466
|
|
$
|
1,456
|
|
Deferred income
|
164
|
|
319
|
|
Progress collections and deferred income (contract liabilities)
(1)
|
$
|
1,630
|
|
$
|
1,775
|
|
|
|
(1)
|
Progress collections and deferred income (contract liabilities) were
$2,038 million
at January 1, 2017.
|
Revenue recognized during the
three months ended June 30, 2018 and 2017
that was included in the contract liabilities at the beginning of the period was
$404 million
and
$506 million
, respectively, and
$1,006 million
and
$1,035 million
, respectively, during the
six months ended June 30, 2018 and 2017
.
NOTE 9. BORROWINGS
Short-term and long-term borrowings are comprised of the following:
|
|
|
|
|
|
|
|
|
June 30, 2018
|
December 31, 2017
|
Short-term borrowings
|
|
|
Short-term bank borrowings
|
$
|
55
|
|
$
|
171
|
|
Current portion of long-term borrowings
|
—
|
|
639
|
|
Short-term borrowings from GE
|
939
|
|
1,124
|
|
Other borrowings
|
73
|
|
103
|
|
Total short-term borrowings
|
$
|
1,067
|
|
$
|
2,037
|
|
|
|
|
Long-term borrowings
|
|
|
3.2% Senior Notes due August 2021
|
$
|
525
|
|
$
|
526
|
|
2.773% Senior Notes due December 2022
|
1,244
|
|
1,244
|
|
8.55% Debentures due June 2024
|
133
|
|
135
|
|
3.337% Senior Notes due December 2027
|
1,342
|
|
1,342
|
|
6.875% Notes due January 2029
|
302
|
|
308
|
|
5.125% Notes due September 2040
|
1,309
|
|
1,311
|
|
4.08% Senior Notes due December 2047
|
1,336
|
|
1,337
|
|
Capital leases
|
111
|
|
87
|
|
Other long-term borrowings
|
17
|
|
22
|
|
Total long-term borrowings
|
6,319
|
|
6,312
|
|
Total borrowings
|
$
|
7,386
|
|
$
|
8,349
|
|
We have a
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
six months ended June 30, 2018
, there were no borrowings under the 2017 Credit Agreement.
We have 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
June 30, 2018
, 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
.
BHGE LLC 2018 Second Quarter FORM 10-Q |
17
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
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 us, on our registered debt securities. This co-obligor is a
100%
-owned finance subsidiary of us 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 in December 2017 by us in a private placement and subsequently registered in January 2018.
The estimated fair value of total borrowings at
June 30, 2018
and
December 31, 2017
was
$7,061 million
and
$8,466 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.
See "Note 15. Related Party Transactions" for additional information on the short-term borrowings from GE.
NOTE 10. EMPLOYEE BENEFIT 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
$43 million
and
$45 million
in the
three months ended June 30, 2018 and 2017
, respectively, and
$80 million
and
$71 million
in the
six months ended June 30, 2018 and 2017
, respectively.
In addition to these GE plans, certain of our employees are also covered by company sponsored employee defined benefit plans. These defined benefit plans include
seven
U.S. plans and
six
non-U.S. plans, primarily in the UK, Germany, and Canada, all with plan assets or obligations greater than
$20 million
. We use a December 31 measurement date for these plans. These defined benefit plans generally provide benefits to employees based on formulas recognizing length of service and earnings.
The components of net periodic cost (benefit) of plans sponsored by us are as follows for the
three and six months ended June 30, 2018 and 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|
2018
|
2017
|
2018
|
2017
|
Service cost
|
$
|
5
|
|
$
|
5
|
|
$
|
10
|
|
$
|
8
|
|
Interest cost
|
18
|
|
7
|
|
36
|
|
14
|
|
Expected return on plan assets
|
(30
|
)
|
(10
|
)
|
(60
|
)
|
(20
|
)
|
Amortization of net actuarial loss
|
2
|
|
2
|
|
4
|
|
5
|
|
Net periodic cost (benefit)
|
$
|
(5
|
)
|
$
|
4
|
|
$
|
(10
|
)
|
$
|
7
|
|
The service cost component of the net periodic cost (benefit) is included in operating income (loss) and all other components are included in non operating income (loss) in our condensed consolidated and combined statements of income (loss).
NOTE 11. INCOME TAXES
We are treated as a partnership for U.S. federal income tax purposes. As such, except for certain U.S. corporations owned by the Company, we are not subject to U.S. federal income tax under current U.S. tax laws. Our members are each required to take into account for U.S. federal income tax purposes their distributive share of our items of income, gain, loss and deduction, which generally includes the U.S. operations of both Baker Hughes and GE O&G. BHGE and GE are each taxed on their distributive share of income and gain, whether or not a
BHGE LLC 2018 Second Quarter FORM 10-Q |
18
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
corresponding amount of cash or other property is distributed to them. For assets held indirectly by us through subsidiaries, including both foreign and U.S., the taxes attributable to those subsidiaries are reflected in our condensed consolidated and combined financial statements.
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 transition tax associated with our non-U.S. operations will be borne by our members. The impact of U.S. tax reform was 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 which could impact the calculation of the transition tax charge and 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.
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) that would be borne by our members. Due to the fact certain aspects of the new law and the effect on our operations are uncertain and the accounting rules associated with this provision have not been resolved, our members have not made a provisional accrual for the deferred tax aspects of this provision and have not yet made an accounting policy election on the deferred tax treatment of this tax.
For the quarter ended
June 30, 2018
, income tax expense was
$62 million
compared to a tax benefit of
$10 million
in the second quarter of 2017. The difference between the U.S. statutory tax rate of
21%
and the current effective rate is primarily due to
$46 million
related to losses with no tax benefit due to valuation allowances and
$10 million
of withholding taxes in certain jurisdictions. Since we are a partnership for U.S. federal tax purposes, any tax benefits associated with U.S. losses are recognized by our members and not reflected in our tax expense. The prior year quarter reflects
100%
of the taxes associated with U.S. and non-U.S. earnings of the GE O&G business.
For the
six
months ended
June 30, 2018
, income tax expense was
$100 million
compared to a tax benefit of
$2 million
for the
six
months ended
June 30, 2017
. The difference between the U.S. statutory tax rate of
21%
and the current effective rate is primarily due to
$96 million
related to losses with no tax benefit due to valuation allowances and
$17 million
of withholding taxes in certain jurisdictions. Since we are a partnership for U.S. federal tax purposes, any tax benefits associated with U.S. losses are recognized by our members and not reflected in our tax expense. The prior year period reflects
100%
of the taxes associated with U.S. and non-U.S. earnings of the GE O&G business.
NOTE 12. MEMBERS' EQUITY
COMMON UNITS
The BHGE LLC Agreement provides that initially there is one class of common units, which are currently held by BHGE, indirectly through EHHC and CFC Holdings, LLC (CFC Holdings), and by GE and certain indirectly wholly-owned subsidiaries of GE. If BHGE issues a share of Class A common stock, including in connection with an equity incentive or similar plan, we will also issue a corresponding common unit to BHGE or one of its direct subsidiaries. For the three and six months ended June 30, 2018, we issued
542 thousand
and
924 thousand
, respectively, of common units to BHGE in connection with the issuance of Class A common stock by BHGE. As of June 30, 2018, GE owns approximately
62.5%
of our common units and BHGE owns approximately
37.5%
of the common units.
BHGE LLC 2018 Second Quarter FORM 10-Q |
19
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
The following table presents the changes in number of common units outstanding (in thousands):
|
|
|
|
|
|
|
Common Units Held by BHGE
|
Common Units Held by GE
|
Balance at December 31, 2017
|
422,208
|
|
706,985
|
|
Issue of units to BHGE under equity incentive plan
|
924
|
|
—
|
|
Repurchase of common units
(1)
|
(11,501
|
)
|
(19,241
|
)
|
Balance at June 30, 2018
|
411,631
|
|
687,743
|
|
|
|
(1)
|
On November 2, 2017, BHGE's board of directors authorized us to repurchase up to
$3 billion
of our common units from BHGE and GE. During the three months and
six
months ended
June 30, 2018
, we repurchased and canceled
13,927,859
and
30,742,152
units for a total of
$500 million
and
$1 billion
, respectively. At June 30, 2018, we had authorization remaining to repurchase up to approximately
$1.5 billion
of common units from BHGE and GE.
|
ACCUMULATED OTHER COMPREHENSIVE LOSS (AOCL)
The following tables present the changes in accumulated other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities
|
Foreign Currency Translation Adjustments
|
Cash Flow Hedges
|
Benefit Plans
|
Accumulated Other Comprehensive Loss
|
Balance at December 31, 2017
|
$
|
1
|
|
$
|
(1,824
|
)
|
$
|
2
|
|
$
|
(60
|
)
|
$
|
(1,881
|
)
|
Other comprehensive income (loss) before reclassifications
|
(1
|
)
|
(224
|
)
|
1
|
|
4
|
|
(220
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Deferred taxes
|
(1
|
)
|
—
|
|
—
|
|
(2
|
)
|
(3
|
)
|
Other comprehensive income (loss)
|
(2
|
)
|
(224
|
)
|
1
|
|
2
|
|
(223
|
)
|
Less: Other comprehensive income (loss) attributable to noncontrolling interests
|
—
|
|
(1
|
)
|
|
—
|
|
(1
|
)
|
Balance at June 30, 2018
|
$
|
(1
|
)
|
$
|
(2,047
|
)
|
$
|
3
|
|
$
|
(58
|
)
|
$
|
(2,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities
|
Foreign Currency Translation Adjustments
|
Cash Flow Hedges
|
Benefit Plans
|
Accumulated Other Comprehensive Loss
|
Balance at December 31, 2016
|
$
|
—
|
|
$
|
(1,795
|
)
|
$
|
(10
|
)
|
$
|
(83
|
)
|
$
|
(1,888
|
)
|
Other comprehensive income (loss) before reclassifications
|
39
|
|
(63
|
)
|
2
|
|
(5
|
)
|
(27
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(38
|
)
|
—
|
|
9
|
|
(2
|
)
|
(31
|
)
|
Deferred taxes
|
—
|
|
(10
|
)
|
(2
|
)
|
4
|
|
(8
|
)
|
Other comprehensive income (loss)
|
1
|
|
(73
|
)
|
9
|
|
(3
|
)
|
(66
|
)
|
Less: Other comprehensive income attributable to noncontrolling interests
|
1
|
|
1
|
|
—
|
|
1
|
|
3
|
|
Balance at June 30, 2017
|
$
|
—
|
|
$
|
(1,869
|
)
|
$
|
(1
|
)
|
$
|
(87
|
)
|
$
|
(1,957
|
)
|
The amounts reclassified from accumulated other comprehensive loss during the
six months ended June 30, 2018 and 2017
represent realized gains on investment securities, foreign exchange contracts on our cash flow hedges (see "Note 13. Financial Instruments" for additional details) and amortization of net actuarial gain (loss) and prior service credit, which are included in the computation of net periodic pension cost (see "Note 10. Employee Benefit Plans" for additional details). These reclassifications are recorded across the various cost and expense line items within the condensed consolidated and combined statements of income (loss).
BHGE LLC 2018 Second Quarter FORM 10-Q |
20
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
NOTE 13. FINANCIAL INSTRUMENTS
RECURRING FAIR VALUE MEASUREMENTS
Our assets and liabilities measured at fair value on a recurring basis consists of derivative instruments and investment securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
December 31, 2017
|
|
Level 1
|
Level 2
|
Level 3
|
Net Balance
|
Level 1
|
Level 2
|
Level 3
|
Net Balance
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
$
|
—
|
|
$
|
221
|
|
$
|
—
|
|
$
|
221
|
|
$
|
—
|
|
$
|
150
|
|
$
|
—
|
|
$
|
150
|
|
Investment securities
|
66
|
|
—
|
|
310
|
|
376
|
|
81
|
|
8
|
|
304
|
|
393
|
|
Total assets
|
66
|
|
221
|
|
310
|
|
597
|
|
81
|
|
158
|
|
304
|
|
543
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivatives
|
—
|
|
(248
|
)
|
—
|
|
(248
|
)
|
—
|
|
(95
|
)
|
—
|
|
(95
|
)
|
Total liabilities
|
$
|
—
|
|
$
|
(248
|
)
|
$
|
—
|
|
$
|
(248
|
)
|
$
|
—
|
|
$
|
(95
|
)
|
$
|
—
|
|
$
|
(95
|
)
|
There were no transfers between Level 1, 2 and 3 during the
six months ended June 30, 2018
.
The following table provides a reconciliation of recurring Level 3 fair value measurements for investment securities:
|
|
|
|
|
Balance at December 31, 2017
|
$
|
304
|
|
Purchases
|
36
|
|
Proceeds at maturity
|
(30
|
)
|
Balance at June 30, 2018
|
$
|
310
|
|
The most significant unobservable input used in the valuation of our Level 3 instruments is the discount rate. Discount rates are determined based on inputs that market participants would use when pricing investments, including credit and liquidity risk. An increase in the discount rate would result in a decrease in the fair value of our investment securities. There are no unrealized gains or losses recognized in the condensed consolidated and combined statement of income (loss) on account of any Level 3 instrument still held at the reporting date. At
June 30, 2018
and December 31, 2017, we held
$156 million
and
$127 million
, respectively, of these investment securities on behalf of GE.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
December 31, 2017
|
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Estimated Fair Value
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Estimated Fair Value
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. debt securities
|
$
|
309
|
|
$
|
1
|
|
$
|
—
|
|
$
|
310
|
|
$
|
310
|
|
$
|
2
|
|
$
|
—
|
|
$
|
312
|
|
Equity securities
|
66
|
|
—
|
|
—
|
|
66
|
|
81
|
|
—
|
|
—
|
|
81
|
|
Total
|
$
|
375
|
|
$
|
1
|
|
$
|
—
|
|
$
|
376
|
|
$
|
391
|
|
$
|
2
|
|
$
|
—
|
|
$
|
393
|
|
All of our non-U.S. debt securities are classified as available for sale instruments and mature within
three
years.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Our financial instruments include cash, cash equivalents and restricted cash, current receivables, investments, accounts payable, short and long-term debt, and derivative financial instruments. Except for long-term debt, the estimated fair value of these financial instruments at
June 30, 2018
and
December 31, 2017
approximates their carrying value as reflected in our condensed consolidated and combined financial statements. For further
BHGE LLC 2018 Second Quarter FORM 10-Q |
21
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
information on the fair value of our debt, see "Note 9. Borrowings."
DERIVATIVES AND HEDGING
We use derivatives to manage our risks and do not use derivatives for speculation.
The table below summarizes the fair value of all derivatives, including hedging instruments and embedded derivatives.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
December 31, 2017
|
|
Assets
|
(Liabilities)
|
Assets
|
(Liabilities)
|
Derivatives accounted for as hedges
|
|
|
|
|
Currency exchange contracts
|
$
|
2
|
|
$
|
(1
|
)
|
$
|
6
|
|
$
|
—
|
|
|
|
|
|
|
Derivatives not accounted for as hedges
|
|
|
|
|
Currency exchange contracts
|
219
|
|
(247
|
)
|
144
|
|
(95
|
)
|
Total derivatives
|
$
|
221
|
|
$
|
(248
|
)
|
$
|
150
|
|
$
|
(95
|
)
|
Derivatives are classified in the captions "All other current assets," "All other assets," "All other current liabilities," and "All other liabilities" depending on their respective maturity date.
RISK MANAGEMENT STRATEGY
We buy, manufacture and sell components and products as well as provide services across global markets. These activities expose us to changes in foreign currency exchange rates and commodity prices, which can adversely affect revenues earned and costs of operating our business. When the currency in which we sell equipment differs from the primary currency (known as its functional currency) and the exchange rate fluctuates, it will affect the revenue we earn on the sale. These sales and purchase transactions also create receivables and payables denominated in foreign currencies, along with other monetary assets and liabilities, which expose us to foreign currency gains and losses based on changes in exchange rates. Changes in the price of a raw material that we use in manufacturing can affect the cost of manufacturing. We use derivatives to mitigate or eliminate these exposures.
FORMS OF HEDGING
Cash Flow Hedges
We use cash flow hedging primarily to reduce or eliminate the effects of foreign exchange rate changes on purchase and sale contracts. Accordingly, the vast majority of our derivative activity in this category consists of currency exchange contracts. We also use commodity derivatives to reduce or eliminate price risk on raw materials purchased for use in manufacturing.
Economic Hedges
These derivatives are not designated as hedges from an accounting standpoint (and therefore we do not apply hedge accounting to the relationship) but otherwise serve the same economic purpose as other hedging arrangements. Some economic hedges are used when changes in the carrying amount of the hedged item are already recorded in earnings in the same period as the derivative, making hedge accounting unnecessary. For some other types of economic hedges, changes in the fair value of the derivative are recorded in earnings currently but changes in the value of the forecasted foreign currency cash flows are only recognized in earnings when they occur. As a result, even though the derivative is an effective economic hedge, there is a net effect on earnings in each period due to differences in the timing of earnings recognition between the derivative and the hedged item. These derivatives are marked to fair value through earnings each period.
BHGE LLC 2018 Second Quarter FORM 10-Q |
22
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
NOTIONAL AMOUNT OF DERIVATIVES
The notional amount of a derivative is the number of units of the underlying (for example, the notional principal amount of the debt in an interest rate swap). A substantial majority of the outstanding notional amount of
$10.5 billion
and
$10.2 billion
at
June 30, 2018
and
December 31, 2017
, respectively, is related to hedges of anticipated sales and purchases in foreign currency, commodity purchases, and contractual terms in contracts that are considered embedded derivatives and for intercompany borrowings in foreign currencies. We generally disclose derivative notional amounts on a gross basis to indicate the total counterparty risk. Where we have gross purchase and sale derivative contracts for a particular currency, we look to execute these contracts with the same counterparty to reduce our exposure. The corresponding net notional amounts were
$2.8 billion
and
$3.3 billion
at
June 30, 2018
and
December 31, 2017
, respectively.
The table below provides additional information about how derivatives are reflected in our condensed consolidated and combined financial statements.
|
|
|
|
|
|
|
|
Carrying amount related to derivatives
|
June 30, 2018
|
December 31, 2017
|
Derivative assets
|
$
|
221
|
|
$
|
150
|
|
Derivative liabilities
|
(248
|
)
|
(95
|
)
|
Net derivatives
|
$
|
(27
|
)
|
$
|
55
|
|
EFFECTS OF DERIVATIVES ON EARNINGS
All derivatives are marked to fair value on our condensed consolidated and combined statement of financial position, whether they are designated in a hedging relationship for accounting purposes or are used as economic hedges. As discussed in the previous sections, each type of hedge affects the financial statements differently. In some economic hedges, both the hedged item and the hedging derivative offset in earnings in the same period. In other economic hedges, the hedged item and the hedging derivative offset in earnings in different periods. In cash flow, the effective portion of the hedging derivative is offset in separate components of equity and ineffectiveness is recognized in earnings. The table below summarizes these offsets and the net effect on pre-tax earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|
Cash Flow Hedges
|
Economic Hedges
|
Cash Flow Hedges
|
Economic Hedges
|
|
2018
|
2017
|
2018
|
2017
|
2018
|
2017
|
2018
|
2017
|
Effect on hedging instrument
|
$
|
(7
|
)
|
$
|
4
|
|
$
|
(10
|
)
|
$
|
9
|
|
$
|
1
|
|
$
|
2
|
|
$
|
7
|
|
$
|
1
|
|
Effect on underlying
|
7
|
|
(4
|
)
|
(9
|
)
|
(9
|
)
|
(1
|
)
|
(2
|
)
|
(24
|
)
|
—
|
|
Effect on earnings
(1)
|
$
|
—
|
|
$
|
—
|
|
$
|
(19
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(17
|
)
|
$
|
1
|
|
|
|
(1)
|
For cash flow hedges, the effect on earnings, if any, is primarily related to ineffectiveness. For economic hedges on forecasted transactions, the effect on earnings is substantially offset by future earnings on economically hedged items.
|
Changes in the fair value of cash flow hedges are recorded in a separate component of equity (referred to below as Accumulated Other Comprehensive Income, or AOCI) and are recorded in earnings in the period in which the hedged transaction occurs. The table below summarizes this activity by hedging instrument.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|
Gain (Loss) Recognized in AOCI
|
Gain (Loss) Reclassified from AOCI to Earnings
|
Gain (Loss) Recognized in AOCI
|
Gain (Loss) Reclassified from AOCI to Earnings
|
|
2018
|
2017
|
2018
|
2017
|
2018
|
2017
|
2018
|
2017
|
Currency exchange contracts
|
$
|
(7
|
)
|
$
|
4
|
|
$
|
—
|
|
$
|
(2
|
)
|
$
|
1
|
|
$
|
2
|
|
$
|
—
|
|
$
|
(8
|
)
|
We expect to transfer
$2 million
to earnings as an expense in the next 12 months contemporaneously with the earnings effects of the related forecast transactions. At
June 30, 2018
and
December 31, 2017
, the maximum term
BHGE LLC 2018 Second Quarter FORM 10-Q |
23
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
of derivative instruments that hedge forecast transactions was
two
-years and
three
-years, respectively. See "Note 12. Members' Equity" for additional information about reclassification out of accumulated other comprehensive income.
For cash flow hedges, the amount of ineffectiveness in the hedging relationship and amount of the changes in fair value of the derivatives that are not included in the measurement of ineffectiveness were insignificant for each reporting period.
COUNTERPARTY CREDIT RISK
Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our agreements) on an individual counterparty basis.
NOTE 14. SEGMENT INFORMATION
Our operating segments are organized based on the nature of markets and customers. We report our operating results through
four
operating segments as described below.
OILFIELD SERVICES
Oilfield Services provides products and services for onshore and offshore operations across the lifecycle of a well, ranging from drilling, evaluation, completion, production and intervention. Products and services include diamond and tri-cone drill bits, drilling services, including directional drilling technology, measurement while drilling & logging while drilling, downhole completion tools and systems, wellbore intervention tools and services, wireline services, drilling and completions fluids, oilfield and industrial chemicals, pressure pumping, and artificial lift technologies, including electrical submersible pumps.
OILFIELD EQUIPMENT
Oilfield Equipment provides a broad portfolio of products and services required to facilitate the safe and reliable flow of hydrocarbons from the subsea wellhead to the surface. Products and services include pressure control equipment and services, subsea production systems and services, drilling equipment, and flexible pipeline systems. Oilfield Equipment designs and manufactures onshore and offshore drilling and production systems and equipment for floating production platforms and provides a full range of services related to onshore and offshore drilling activities.
TURBOMACHINERY & PROCESS SOLUTIONS
Turbomachinery & Process Solutions provides equipment and related services for mechanical-drive, compression and power-generation applications across the oil and gas industry as well as products and services to serve the downstream segments of the industry including refining, petrochemical, distributed gas, flow and process control and other industrial applications. The Turbomachinery & Process Solutions portfolio includes drivers (aero-derivative gas turbines, heavy-duty gas turbines and synchronous and induction electric motors), compressors (centrifugal and axial, direct drive high speed, integrated, subsea compressors, turbo expanders and reciprocating), turn-key solutions (industrial modules and waste heat recovery), pumps, valves, and compressed natural gas (CNG) and small-scale liquefied natural gas (LNG) solutions used primarily for shale oil and gas field development.
DIGITAL SOLUTIONS
Digital Solutions provides equipment and services for a wide range of industries, including oil & gas, power generation, aerospace, metals, and transportation. The offerings include sensor-based measurement, non-destructive testing and inspection, turbine, generator and plant controls and condition monitoring, as well as pipeline integrity solutions.
BHGE LLC 2018 Second Quarter FORM 10-Q |
24
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
SEGMENT RESULTS
Summarized financial information is shown in the following tables. Consistent accounting policies have been applied by all segments within the Company, for all reporting periods. The current period results may not be comparable to prior periods as the current period includes the results of Baker Hughes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
Segments revenue
|
2018
|
2017
|
2018
|
2017
|
Oilfield Services
|
$
|
2,884
|
|
$
|
228
|
|
$
|
5,562
|
|
$
|
440
|
|
Oilfield Equipment
|
617
|
|
681
|
|
1,281
|
|
1,397
|
|
Turbomachinery & Process Solutions
|
1,385
|
|
1,586
|
|
2,845
|
|
3,230
|
|
Digital Solutions
|
662
|
|
520
|
|
1,260
|
|
1,011
|
|
Total
|
$
|
5,548
|
|
$
|
3,015
|
|
$
|
10,947
|
|
$
|
6,079
|
|
The performance of our operating segments is evaluated based on segment operating income (loss), which is defined as income (loss) before income taxes and equity in loss of affiliate and before the following: net interest expense, net other non operating income (loss), corporate expenses, restructuring, impairment and other charges, inventory impairments, merger and related costs and certain gains and losses not allocated to the operating segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
Segment income (loss) before income taxes
|
2018
|
2017
|
2018
|
2017
|
Oilfield Services
|
$
|
189
|
|
$
|
(66
|
)
|
$
|
330
|
|
$
|
(123
|
)
|
Oilfield Equipment
|
(12
|
)
|
17
|
|
(18
|
)
|
67
|
|
Turbomachinery & Process Solutions
|
113
|
|
122
|
|
232
|
|
374
|
|
Digital Solutions
|
96
|
|
79
|
|
169
|
|
163
|
|
Total segment
|
387
|
|
152
|
|
714
|
|
481
|
|
Corporate
|
(98
|
)
|
(70
|
)
|
(196
|
)
|
(190
|
)
|
Inventory impairment
(1)
|
(15
|
)
|
(4
|
)
|
(76
|
)
|
(19
|
)
|
Restructuring, impairment and other
|
(146
|
)
|
(59
|
)
|
(308
|
)
|
(101
|
)
|
Merger and related costs
|
(50
|
)
|
(85
|
)
|
(96
|
)
|
(151
|
)
|
Other non operating income, net
|
43
|
|
50
|
|
45
|
|
58
|
|
Interest expense, net
|
(63
|
)
|
(14
|
)
|
(109
|
)
|
(34
|
)
|
Total
|
$
|
58
|
|
$
|
(30
|
)
|
$
|
(27
|
)
|
$
|
44
|
|
|
|
(1)
|
Charges for inventory impairments are reported in the "Cost of goods sold" caption of the condensed consolidated and combined statements of income (loss).
|
NOTE 15. RELATED PARTY TRANSACTIONS
Following the Transactions, GE and its affiliates have provided and continue to provide a variety of services to us.
In connection with the Transactions on
July 3, 2017
, we entered into various agreements with GE and its affiliates that govern our relationship with GE following the Transactions including an Intercompany Services Agreement pursuant to which GE and its affiliates and the Company provide certain services to each other. GE provides certain administrative services, GE proprietary technology and use of certain GE trademarks in consideration for a payment of
$55 million
per year. Costs of
$14 million
and
$28 million
, respectively, related to the Intercompany Services Agreement were incurred during the
three and six months ended June 30, 2018
. GE may
BHGE LLC 2018 Second Quarter FORM 10-Q |
25
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
also provide us with certain additional administrative services under the Intercompany Services Agreement, not included as consideration for the
$55 million
per year payment, and the fees for such services are based on actual usage of such services and historical GE intercompany pricing. In addition, we provide GE and its affiliates with confidential access to certain of our proprietary technology and related developments and enhancements thereto related to GE's operations, products or service offerings.
Prior to the Transactions, GE and its affiliates provided a variety of services and funding to us. The cost of these services was either (a) recognized through our allocated portion of GE's corporate overhead; or (b) billed directly to us. Costs of
$38 million
and
$76 million
for the
three and six months ended June 30, 2017
were recorded in our condensed consolidated and combined statement of income (loss) in respect of services provided by GE and its affiliates prior to the close of the Transactions.
We sold
$84 million
and
$225 million
of products and services to GE and its affiliates during the
three months ended June 30, 2018 and 2017
respectively, and
$184 million
and
$374 million
, during the
six months ended June 30, 2018 and 2017
, respectively. Purchases from GE and its affiliates were
$523 million
and
$335 million
during the
three months ended June 30, 2018 and 2017
, respectively, and
$926 million
and
$681 million
during the
six months ended June 30, 2018 and 2017
, respectively.
EMPLOYEE BENEFITS
Certain of our employees are covered under various GE sponsored employee benefit plans, including GE's retirement plans (pension, retiree health and life insurance, and savings benefit plans) and active health and life insurance benefit plans. Further details are provided in "Note 10. Employee Benefit Plans."
RELATED PARTY BALANCES
In connection with the Transactions, we were required to repay any cash in excess of
$100 million
, net of any third-party debt in GE O&G, to GE. We continue to hold this cash on behalf of GE as such cash cannot be released, transferred or otherwise converted into a non-restricted market currency due to the lack of market liquidity, capital controls or similar monetary or exchange limitations by a Government entity of the jurisdiction in which such cash is situated. Accordingly, on July 3, 2017, we executed a promissory note with GE. There is no maturity date on the promissory note, but we remain obligated to repay GE such excess cash together with any income or loss we may incur on it, therefore, this obligation is reflected as short-term borrowings. As of
June 30, 2018
, of the amount due to GE of
$939 million
,
$783 million
was held in the form of cash and
$156 million
was held in the form of investment securities. A corresponding liability is reported in short-term borrowings in the condensed consolidated and combined statements of financial position.
Additionally, the Company has
$583 million
and
$575 million
of accounts payable at
June 30, 2018
and
December 31, 2017
, respectively, for services provided by GE in the ordinary course of business. The Company has
$128 million
of current receivables at June 30, 2018 from BHGE.
TRADE PAYABLES ACCELERATED PAYMENT PROGRAM
Our North American operations participate in accounts payable programs with GE Capital. Invoices are settled with vendors per our payment terms to obtain cash discounts. GE Capital provides funding for the period from the date at which an invoice is eligible for a cash discount through the final termination date for invoice settlement. Our liability associated with the funded participation in the accounts payable programs, which is presented as accounts payable within the condensed consolidated and combined statements of financial position, was
$417 million
and
$293 million
as of
June 30, 2018
and
December 31, 2017
, respectively.
PARENT'S NET INVESTMENT
At
June 30, 2017
, the remainder of GE's total investment, in excess of our debt from GE, is reflected as equity under the caption "Parent's net investment" in our condensed consolidated and combined statements of changes in equity. At
June 30, 2018
, GE's equity ownership is reflected in noncontrolling interest in our condensed consolidated and combined statements of changes in equity and financial position.
BHGE LLC 2018 Second Quarter FORM 10-Q |
26
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
OTHER
Prior to the Transactions, GE provided guarantees, letters of credit, and other support arrangements on our behalf. We provide guarantees to GE Capital on behalf of some customers who have entered into financing arrangements with GE Capital.
INCOME TAXES
At closing, BHGE, GE and BHGE LLC entered into a Tax Matters Agreement. The Tax Matters Agreement governs the administration and allocation between the parties of tax liabilities and benefits arising prior to, as a result of, and subsequent to the Transactions, including certain restructuring transactions in connection therewith, and the respective rights, responsibilities and obligations of GE and BHGE, with respect to various other tax matters. GE is responsible for certain taxes related to the formation of the transaction undertaken by GE and Baker Hughes and their respective subsidiaries. GE has assumed approximately
$33 million
of tax obligations of Baker Hughes related to the formation of the transaction.
Following the closing of the Transactions, BHGE or BHGE LLC (or their respective subsidiaries) may be included in group tax returns with GE. To the extent included in such group tax returns, (i) BHGE or BHGE LLC is required to make tax sharing payments to GE in an amount intended to approximate the amount that such entity would have paid if it had not been included in such group tax returns and had filed separate tax returns, and (ii) GE is required to pay BHGE or BHGE LLC to the extent such separate tax returns include net operating losses that are used to reduce taxes payable by GE with respect to the applicable group tax return.
The Tax Matters Agreement also provides for the sharing of certain tax benefits (i) arising from the Transactions, including restructuring transactions, and (ii) resulting from allocations of tax items by BHGE LLC. GE is entitled to
100%
of these tax benefits to the extent that GE has borne certain taxes related to the formation of the transaction. Thereafter, these tax benefits will be shared by GE and BHGE in accordance with their economic ownership of BHGE LLC, which will initially be approximately
62.5%
and approximately
37.5%
, respectively. The sharing of tax benefits generally is expected to result in cash payments by BHGE LLC to its members. Any such cash payments may be subject to adjustment based on certain subsequent events, including tax audits or other determinations as to the availability of the tax benefits with respect to which such cash payments were previously made.
NOTE 16. COMMITMENTS AND CONTINGENCIES
LITIGATION
We are subject to a number of lawsuits and claims arising out of the conduct of our business. The ability to predict the ultimate outcome of such matters involves judgments, estimates and inherent uncertainties. We record a liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, including accruals for self-insured losses which are calculated based on historical claim data, specific loss development factors and other information.
A range of total possible losses for all litigation matters cannot be reasonably estimated. Based on a consideration of all relevant facts and circumstances, we do not expect the ultimate outcome of currently pending lawsuits or claims against us, other than those discussed below, will have a material adverse effect on our financial position, results of operations or cash flows, however, there can be no assurance as to the ultimate outcome of these matters.
With respect to the litigation matters below, if there was an adverse outcome individually or collectively, there could be a material impact on our business, financial condition and results of operations expected for the year. These litigation matters are subject to inherent uncertainties and management's view of these matters may change in the future. Therefore, there can be no assurance as to the ultimate outcome of these matters.
During 2014, we received notification from a customer related to a possible equipment failure in a natural gas storage system in Northern Germany, which includes certain of our products. The customer initiated arbitral
BHGE LLC 2018 Second Quarter FORM 10-Q |
27
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
proceedings against us on June 19, 2015, under the rules of the German Institute of Arbitration e.V. (DIS). On August 3, 2016, the customer amended its claims and alleged damages of
€202 million
plus interest at an annual rate of prime +
5%
. Hearings before the arbitration panel were held January 16, 2017 through January 23, 2017, and March 20, 2017 through March 21, 2017. In addition, on September 21, 2015, TRIUVA Kapitalverwaltungsgesellschaft mbH filed a lawsuit in the United States District Court for the Southern District of Texas, Houston Division against the Company and Baker Hughes Oilfield Operations, Inc. alleging that the plaintiff is the owner of gas storage caverns in Etzel, Germany in which the Company provided certain equipment in connection with the development of the gas storage caverns. The plaintiff further alleges that the Company supplied equipment that was either defectively designed or failed to warn of risks that the equipment posed, and that these alleged defects caused damage to the plaintiff's property. The plaintiff seeks recovery of alleged compensatory and punitive damages of an unspecified amount, in addition to reasonable attorneys' fees, court costs and pre-judgment and post-judgment interest. The allegations in this lawsuit are related to the claims made in the June 19, 2015 German arbitration referenced above. On June 7, 2018, the DIS arbitration panel issued a confidential Arbitration Ruling which addressed all claims asserted by the customer. The financial impact of the Arbitration Ruling is not expected to have a material impact on the Company’s financial statements. The Company is vigorously contesting the claims made by TRIUVA in the Houston Federal Court. At this time, we are not able to predict the outcome of the claims asserted in the Houston Federal Court.
On July 31, 2015, Rapid Completions LLC filed a lawsuit in federal court in the Eastern District of Texas against Baker Hughes Incorporated, Baker Hughes Oilfield Operations, Inc., and others claiming infringement of U.S. Patent Nos. 6,907,936; 7,134,505; 7,543,634; 7,861,774; and 8,657,009. On August 6, 2015, Rapid Completions amended its complaint to allege infringement of U.S. Patent No. 9,074,451. On September 17, 2015, Rapid Completions and Packers Plus Energy Services Inc. sued Baker Hughes Canada Company in the Canada Federal Court on the related Canadian patent 2,412,072. On April 1, 2016, Rapid Completions removed U.S. Patent No. 6,907,936 from its claims in the lawsuit. On April 5, 2016, Rapid Completions filed a second lawsuit in federal court in the Eastern District of Texas against Baker Hughes Incorporated, Baker Hughes Oilfield Operations, Inc. and others claiming infringement of U.S. Patent No. 9,303,501. These patents relate primarily to certain specific downhole completions equipment. The plaintiff has requested a permanent injunction against further alleged infringement, damages in an unspecified amount, supplemental and enhanced damages, and additional relief such as attorney's fees and costs. During August and September 2016, the United States Patent and Trademark Office (USPTO) agreed to institute an inter-partes review of U.S. Patent Nos 7,861,774; 7,134,505; 7,543,634; 6,907,936; 8,657,009; and 9,074,451. On August 29, 2017, the USPTO issued its final written decisions in the inter-partes reviews of U.S. Patent Nos. 8,657,009 and 9,074,451 finding that all claims of those patents were unpatentable. On August 31, 2017, the USPTO issued its final written decision in the inter-partes review of U.S. Patent 6,907,936 - the patent dropped from the lawsuit by the plaintiffs - finding that all claims of this patent were patentable. On October 27, 2017, Rapid Completions filed its notices of appeal of the USPTO’s final written decision in the inter-partes review of U.S. Patent Nos. 8,657,009 and 9,074,451. Trial on the validity of asserted claims from Canada patent 2,412,072, was completed March 9, 2017. On December 7, 2017, the Canadian Court issued its judgment finding the patent claims asserted from Canada patent 2,412,072 against Baker Hughes Canada Company were invalid. On January 5, 2018, Rapid Completions filed its Notice of Appeal of the Canadian Court’s judgment of invalidity. At this time, we are not able to predict the outcome of these claims.
Following consummation of the Transactions, two purported holders of shares of Baker Hughes common stock, representing a total of
1,875,000
shares of common stock of Baker Hughes, filed petitions in the Court of Chancery of the State of Delaware seeking appraisal for their shares pursuant to Section 262 of the Delaware General Corporation Law. The action is captioned as follows:
GKC Strategic Value Master Fund, LP F/K/A GKC Appraisal Rights Master Fund, LP and Walleye Trading LLC v. Baker Hughes Incorporated
, Case No. 2017-0769. On July 12, 2018, the parties entered a Confidential Settlement Agreement and Release of all claims asserted by the two shareholders. The Settlement Agreement does not have a material impact on the Company's financial statements.
On February 17, 2017, GE Infrastructure Sensing, Inc. (now known as GE Infrastructure Sensing, LLC) (GEIS), a subsidiary of the Company, was served with a lawsuit filed in the Eastern District of New York by a company named Saniteq LLC claiming compensatory damages totaling
$500 million
plus punitive damages of an unspecified amount. The complaint is captioned
Saniteq LLC v. GE Infrastructure Sensing, Inc
., No. 17-cv-771 (E.D.N.Y 2017). The complaint generally alleges that GEIS breached a contract being negotiated between the parties and misappropriated unspecified trade secrets. At this time, we are not able to predict the outcome of these claims.
BHGE LLC 2018 Second Quarter FORM 10-Q |
28
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
In January 2013, INEOS and Naphtachimie initiated expertise proceedings in Aix-en-Provence, France arising out of a fire at a chemical plant owned by INEOS in Lavera, France, which resulted in a 15-day plant shutdown and destruction of a steam turbine, which was part of a compressor train owned by Naphtachimie. The most recent quantification of the alleged damages is
€250 million
. Two of the Company's subsidiaries (and 17 other companies) were notified to participate in the proceedings. The proceedings are ongoing, and at this time, there is no indication that the Company's subsidiaries were involved in the incident. Although the outcome of the claims remains uncertain, BHGE's insurer has accepted coverage and is defending the Company in the expertise proceeding.
In late November 2017, staff of the Boston office of the SEC notified GE that they are conducting an investigation of GE’s revenue recognition practices and internal controls over financial reporting related to long-term service agreements. The scope of the SEC’s request may include some BHGE contracts, expected to be mainly in our TPS business. We have provided documents to GE and are cooperating with them in their response to the SEC. At this time, we are not able to predict the outcome of this review.
We insure against risks arising from our business to the extent deemed prudent by our management and to the extent insurance is available, but no assurance can be given that the nature and amount of that insurance will be sufficient to fully indemnify us against liabilities arising out of pending or future legal proceedings or other claims. Most of our insurance policies contain deductibles or self-insured retentions in amounts we deem prudent and for which we are responsible for payment. In determining the amount of self-insurance, it is our policy to self-insure those losses that are predictable, measurable and recurring in nature, such as claims for automobile liability, general liability and workers compensation.
PRODUCT WARRANTIES
We provide for estimated product warranty expenses when we sell the related products. Because warranty estimates are forecasts that are based on the best available information, primarily historical claims experience, claims costs may differ from amounts provided. An analysis of changes in the liability for product warranties are as follows:
|
|
|
|
|
|
|
|
Balance at December 31, 2017, and 2016, respectively
|
$
|
164
|
|
$
|
74
|
|
Provisions
|
18
|
|
18
|
|
Expenditures
|
(15
|
)
|
(26
|
)
|
Other
(1)
|
119
|
|
1
|
|
Balance at June 30, 2018, and 2017, respectively
|
$
|
286
|
|
$
|
67
|
|
|
|
(1)
|
Primarily related to the acquisition of Baker Hughes.
|
OTHER
In the normal course of business with customers, vendors and others, we have entered into off-balance sheet arrangements, such as surety bonds for performance, letters of credit and other bank issued guarantees, which totaled approximately
$3.4 billion
at
June 30, 2018
. It is not practicable to estimate the fair value of these financial instruments. None of the off-balance sheet arrangements either has, or is likely to have, a material effect on our financial position, results of operations or cash flows.
NOTE 17. RESTRUCTURING, IMPAIRMENT AND OTHER
We recorded restructuring, impairment and other charges of
$146 million
and
$59 million
during the
three months ended June 30, 2018 and 2017
, respectively, and
$308 million
and
$101 million
during the
six months ended June 30, 2018 and 2017
. Details of these charges are discussed below.
RESTRUCTURING AND IMPAIRMENT CHARGES
In the current and prior periods, we approved various restructuring plans globally, mainly to consolidate manufacturing and service facilities, rationalize product lines and rooftops, and reduce headcount across various functions. As a result, we recognized a charge of
$68 million
and
$38 million
for the
three months
BHGE LLC 2018 Second Quarter FORM 10-Q |
29
Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
ended June 30, 2018 and 2017
, respectively, and
$193 million
and
$73 million
for the
six months ended June 30, 2018 and 2017
, respectively. These restructuring initiatives will generate charges post
June 30, 2018
, and the related estimated remaining charges are approximately
$151 million
.
The amount of costs not included in the reported segment results is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|
2018
|
2017
|
2018
|
2017
|
Oilfield Services
|
$
|
40
|
|
$
|
11
|
|
$
|
99
|
|
$
|
23
|
|
Oilfield Equipment
|
6
|
|
9
|
|
18
|
|
10
|
|
Turbomachinery & Process Solutions
|
11
|
|
12
|
|
39
|
|
22
|
|
Digital Solutions
|
7
|
|
4
|
|
16
|
|
14
|
|
Corporate
|
4
|
|
2
|
|
21
|
|
4
|
|
Total
|
$
|
68
|
|
$
|
38
|
|
$
|
193
|
|
$
|
73
|
|
These costs were primarily related to product line terminations, plant closures and related expenses such as property, plant and equipment impairments, contract terminations and costs of assets' and employees' relocation, employee-related termination benefits, and other incremental costs that were a direct result of the restructuring plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|
2018
|
2017
|
2018
|
2017
|
Property, plant & equipment, net
|
$
|
18
|
|
$
|
2
|
|
$
|
37
|
|
$
|
12
|
|
Employee-related termination expenses
|
16
|
|
24
|
|
99
|
|
39
|
|
Asset relocation costs
|
8
|
|
2
|
|
13
|
|
5
|
|
Environmental remediation costs
|
—
|
|
4
|
|
3
|
|
7
|
|
Contract termination fees
|
21
|
|
4
|
|
28
|
|
5
|
|
Other incremental costs
|
5
|
|
2
|
|
13
|
|
5
|
|
Total
|
$
|
68
|
|
$
|
38
|
|
$
|
193
|
|
$
|
73
|
|
OTHER CHARGES
Other charges included in "Restructuring, impairment and other" of the condensed consolidated and combined statements of income (loss) were
$78 million
and
$21 million
in the
three months ended June 30, 2018 and 2017
, respectively, and
$115 million
and
$28 million
in the
six months ended June 30, 2018 and 2017
, respectively. Other charges comprised of accelerated amortization of
$32 million
and
$69 million
for the
three and six months ended June 30, 2018
, respectively, related to trade names and technology in our Oilfield Services segment that we ceased to use at the end of the second quarter of 2018 as a result of the combination of Baker Hughes and GE O&G. During the three and six months ended June 30, 2018, other charges also includes
$25 million
related to litigation matters recorded at Corporate and costs of
$12 million
to exit certain operations that impacted our TPS and OFS segments. During the three and six months ended
June 30, 2017
, other charges include currency devaluation charges of
$6 million
and
$12 million
, respectively, largely driven by significant currency devaluations in Angola and Nigeria.
NOTE 18. SUBSEQUENT EVENTS
On July 18, 2018, the Company announced the agreement to sell its Natural Gas Solution (NGS) business to two separate entities for a combined sales price of
$375 million
. NGS is part of our TPS segment and provides commercial and industrial products such as gas meters, chemical injection pumps, pipeline repair products and electric actuators. The transactions are expected to close in the second half of 2018, subject to customary closing conditions and appropriate regulatory approvals.
BHGE LLC 2018 Second Quarter FORM 10-Q |
30