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 (BHI) is an energy technology company with a diversified portfolio of technologies and services that span the energy and industrial value chain. We conduct business in more than 120 countries and employ approximately 68,000 employees.
On July 3, 2017, we completed the combination of the oil and gas business (GE O&G) of General Electric Company (GE) and BHI (the Transactions). As of December 31, 2019, GE owns approximately 36.7% of our common units (Units) and Baker Hughes Company (Baker Hughes) owns approximately 63.3% of our Units.
BASIS OF PRESENTATION
The accompanying consolidated and combined financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. and such principles, U.S. GAAP) and pursuant to the rules and regulations of the SEC for annual financial information. All intercompany accounts and transactions have been eliminated.
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 Baker Hughes, is our sole managing member and Baker Hughes 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 Company's financial statements have been prepared on a consolidated basis, effective July 3, 2017. Under this basis of presentation, our financial statements consolidate all of our subsidiaries (entities in which we have a controlling financial interest, most often because we hold a majority voting interest). For all periods prior to July 3, 2017, the Company's financial statements were prepared on a combined basis. The combined financial statements combine certain accounts of GE and its subsidiaries that were historically managed as part of its oil & gas business and contributed to BHGE LLC as part of the Transactions. Additionally, it also includes certain assets, liabilities and results of operations of other businesses of GE that were also contributed to BHGE LLC as part of the Transactions on a fully retrospective basis (in accordance with the guidance applicable to transactions between entities under common control) based on their carrying values, as reflected in the accounting records of GE. The consolidated and combined statements of income reflect intercompany expense allocations made to us by GE for certain corporate functions and for shared services provided by GE. Where possible, these allocations were made on a specific identification basis, and in other cases, these expenses were allocated by GE based on relative percentages of net operating costs or some other basis depending on the nature of the allocated cost. See "Note 17. Related Party Transactions" for further information on expenses allocated by GE. The historical financial results in the consolidated and combined financial statements presented may not be indicative of the results that would have been achieved had GE O&G operated as a separate, stand-alone entity during those periods.
In the Company's financial statements and notes, certain amounts have been reclassified to conform with the current year presentation. In the notes to the consolidated and combined financial statements, all dollar and common unit amounts in tabulations are in millions of dollars and units, respectively, unless otherwise indicated. Certain columns and rows in our financial statements and notes thereto may not add due to the use of rounded numbers.
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Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of any contingent assets or liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates and judgments on historical experience and on various other assumptions and information that we believe to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be perceived with certainty, and accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. While we believe that the estimates and assumptions used in the preparation of the consolidated and combined financial statements are appropriate, actual results could differ from those estimates. Estimates are used for, but are not limited to, determining the following: allowance for doubtful accounts and inventory valuation reserves; recoverability of long-lived assets, including revenue recognition on long-term contracts, valuation of goodwill; useful lives used in depreciation and amortization; income taxes and related valuation allowances; accruals for contingencies; actuarial assumptions to determine costs and liabilities related to employee benefit plans; stock-based compensation expense; valuation of derivatives and the fair value of assets acquired and liabilities assumed in acquisitions; and expense allocations for certain corporate functions and shared services provided by GE.
Foreign Currency
Assets and liabilities of non-U.S. operations with a functional currency other than the U.S. dollar have been translated into U.S. dollars using our period end exchange rates, and revenue, expenses, and cash flows have been translated at average rates for the respective periods. Any resulting translation gains and losses are included in other comprehensive income (loss).
Gains and losses from foreign currency transactions, such as those resulting from the settlement of receivables or payables in the non-functional currency and those resulting from remeasurements of monetary items, are included in the consolidated and combined statement of income (loss).
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 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.
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. 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 generally determined based on historical data of transit times between regions.
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Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
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. The Company 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. In addition, revenue for certain oilfield services is recognized on an over time basis as performed.
Our billing terms for these contracts are generally based on asset utilization (i.e. usage per hour) or the occurrence of a major maintenance event within the contract. 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.
Research and Development
Research and development costs are expensed as incurred and relate to the research and development of new products and services. These costs amounted to $687 million, $700 million and $501 million for the years ended December 31, 2019, 2018 and 2017, respectively. Research and development expenses were reported in cost of goods sold and cost of services sold.
Separation and Merger Related
Separation and merger related costs primarily include costs incurred in connection with the separation from GE and the finalization of the Master Agreement Framework and Omnibus Agreement. See "Note 17. Related Party Transactions" for further information on the Master Agreement Framework.
Prior to 2019, separation and merger related costs primarily include costs associated with the combination of BHI and GE O&G. Such costs include professional fees of advisors and integration and synergy costs related to the combination of BHI and GE O&G.
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Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
Cash and Cash Equivalents
Short-term investments with original maturities of three months or less are included in cash equivalents unless designated as available-for-sale and classified as investment securities.
As of December 31, 2019 and 2018, we had $1,102 million and $1,208 million, respectively, of cash held in bank accounts that cannot be released, transferred or otherwise converted into a currency that is regularly transacted internationally, due to lack of market liquidity, capital controls or similar monetary or exchange limitations limiting the flow of capital out of the jurisdiction. These funds are available to fund operations and growth in these jurisdictions and we do not currently anticipate a need to transfer these funds to the U.S. Included in these amounts are $142 million and $461 million, as of December 31, 2019 and 2018, respectively, held on behalf of GE.
Cash and cash equivalents includes a total of $162 million and $747 million of cash at December 31, 2019 and 2018, respectively, held on behalf of GE, and a corresponding liability is reported in short-term borrowings. See "Note 17. Related Party Transactions" for further details.
Allowance for Doubtful Accounts
We establish an allowance for doubtful accounts based on various factors including the payment history and financial condition of our debtors and the economic environment. Provisions for doubtful accounts are recorded based on the aging status of the debtor accounts or when it becomes evident that the debtor will not make the required payments at either contractual due dates or in the future.
Concentration of Credit Risk
We grant credit to our customers who primarily operate in the oil and natural gas industry. Although this concentration affects our overall exposure to credit risk, our current receivables are spread over a diverse group of customers across many countries, which mitigates this risk. We perform periodic credit evaluations of our customers' financial conditions, including monitoring our customers' payment history and current credit worthiness to manage this risk. We do not generally require collateral in support of our current receivables, but we may require payment in advance or security in the form of a letter of credit or a bank guarantee.
Inventories
All inventories are stated at the lower of cost or net realizable values and they are measured on a first-in, first-out (FIFO) basis or average cost basis. As necessary, we record provisions and maintain reserves for excess, slow moving and obsolete inventory. To determine these reserve amounts, we regularly review inventory quantities on hand and compare them to estimates of future product demand, market conditions, production requirements and technological developments.
Property, Plant and Equipment (PP&E)
Property, plant and equipment is initially stated at cost and is depreciated over its estimated economic life. Subsequently, property, plant and equipment is measured at cost less accumulated depreciation and impairment losses. We manufacture a substantial portion of our tools and equipment in our OFS segment and the cost of these items, which includes direct and indirect manufacturing costs, is capitalized and carried in inventory until it is completed.
Other Intangible Assets
We amortize the cost of other intangible assets over their estimated useful lives unless such lives are deemed indefinite. The cost of intangible assets is generally amortized on a straight-line basis over the asset's estimated economic life. Amortizable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. In these circumstances, they are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested annually for impairment
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Notes to Consolidated and Combined Financial Statements
and written down to fair value as required. Refer to the Impairment of Goodwill and Other Long-Lived Assets accounting policy.
Impairment of Goodwill and Other Long-lived Assets
We perform an annual impairment test of goodwill on a qualitative or quantitative basis for each of our reporting units as of July 1, or more frequently when circumstances indicate an impairment may exist at the reporting unit level. When performing the annual impairment test we have the option of first performing a qualitative assessment to determine the existence of events and circumstances that would lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If such a conclusion is reached, we would then be required to perform a quantitative impairment assessment of goodwill. However, if the assessment leads to a determination that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then no further assessments are required. A quantitative assessment for the determination of impairment is made by comparing the carrying amount of each reporting unit with its fair value, which is generally calculated using a combination of market, comparable transaction and discounted cash flow approaches. See "Note 7. Goodwill and Other Intangible Assets" for further information on valuation methodology and impairment of goodwill.
We review PP&E, intangible assets and certain other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable and at least annually for indefinite-lived intangible assets. When testing for impairment, we group our long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (or asset group). The determination of recoverability is made based upon the estimated undiscounted future net cash flows. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value of the related assets.
Financial Instruments
Our financial instruments include cash and equivalents, current receivables, investments, accounts payables, short and long-term debt, and derivative financial instruments.
We monitor our exposure to various business risks including commodity prices and foreign currency exchange rates and we regularly use derivative financial instruments to manage these risks. At the inception of a new derivative, we designate the derivative as a hedge or we determine the derivative to be undesignated as a hedging instrument. We document the relationships between the hedging instruments and the hedged items, as well as our risk management objectives and strategy for undertaking various hedge transactions. We assess whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged item at both the inception of the hedge and on an ongoing basis.
We have a program that utilizes foreign currency forward contracts to reduce the risks associated with the effects of certain foreign currency exposures. Under this program, our strategy is to have gains or losses on the foreign currency forward contracts mitigate the foreign currency transaction and translation gains or losses to the extent practical. These foreign currency exposures typically arise from changes in the value of assets (for example, current receivables) and liabilities (for example, current payables) which are denominated in currencies other than the functional currency of the respective entity. We record all derivatives as of the end of our reporting period in our consolidated statement of financial position at fair value. For the forward contracts held as undesignated hedging instruments, we record the changes in fair value of the forward contracts in our consolidated and combined statements of income (loss) along with the change in the fair value, related to foreign exchange movements, of the hedged item. Changes in the fair value of forward contracts designated as cash flow hedging instruments are recognized in other comprehensive income until the hedged item is recognized in earnings.
Fair Value Measurements
For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal
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Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
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Level 1 - Quoted prices for identical instruments in active markets.
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Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
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Level 3 - Significant inputs to the valuation model are unobservable.
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We maintain policies and procedures to value instruments using the best and most relevant data available. In addition, we perform reviews to assess the reasonableness of the valuations. With regard to Level 3 valuations (including instruments valued by third parties), we perform a variety of procedures to assess the reasonableness of the valuations. Such reviews include an evaluation of instruments whose fair value change exceeds predefined thresholds (and/or does not change) and consider the current interest rate, currency and credit environment, as well as other published data, such as rating agency market reports and current appraisals.
Recurring Fair Value Measurements
Derivatives
When we have Level 1 derivatives, which are traded either on exchanges or liquid over-the-counter markets, we use closing prices for valuation. The majority of our derivatives are valued using internal models and are included in Level 2. These internal models maximize the use of market observable inputs including interest rate curves and both forward and spot prices for currencies and commodities. Derivative assets and liabilities included in Level 2 primarily represent foreign currency and commodity forward contracts for the Company.
Investments in Debt and Equity Securities
When available, we use quoted market prices to determine the fair value of investment securities, and they are included in Level 1. Level 1 securities primarily include publicly traded equity securities.
For investment securities for which market prices are observable for identical or similar investment securities but not readily accessible for each of those investments individually (that is, it is difficult to obtain pricing information for each individual investment security at the measurement date), we use pricing models that are consistent with what other market participants would use. The inputs and assumptions to the models are derived from market observable sources including: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market-related data. Thus, certain securities may not be priced using quoted prices, but rather determined from market observable information. These investments are included in Level 2. When we use valuations that are based on significant unobservable inputs we classify the investment securities in Level 3.
Non-Recurring Fair Value Measurements
Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments only in certain circumstances. These assets can include long-lived assets that have been reduced to fair value when they are held for sale, equity securities without readily determinable fair value and equity method investments and long-lived assets that are written down to fair value when they are impaired and the remeasurement of retained investments in formerly consolidated subsidiaries upon a change in control that results in a deconsolidation of a subsidiary, if we sell a controlling interest
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Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
and retain a noncontrolling stake in the entity. Assets that are written down to fair value when impaired and retained investments are not subsequently adjusted to fair value unless further impairment occurs.
Investments in Equity Securities
Investments in equity securities (of entities in which we do not have either a controlling financial interest or significant influence, most often because we hold a voting interest of 0% to 20%) with readily determinable fair values are measured at fair value with changes in fair value recognized in earnings and reported in the "other non operating income, net" caption in the consolidated and combined statements of income (loss). Equity securities that do not have readily determinable fair values are recorded at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar equity securities of the same issuer.
Associated companies are entities in which we do not have a controlling financial interest, but over which we have significant influence, most often because we hold a voting interest of 20% to 50%. Associated companies are accounted for as equity method investments. The results of associated companies are presented in the consolidated and combined statements of income (loss) as follows: (i) if the associated company is integral to our operations, their results are included in "Selling, general and administrative," (ii) if the associated company is not integral to our operations, their results are included in "Other non operating income, net," and (iii) our equity method investment in BJ Services, which is a U.S. limited liability corporation, is presented in "Equity in loss of affiliate." Investments in, and advances to, associated companies are presented on a one-line basis in the caption "All other assets" in our consolidated statement of financial position.
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 will each be 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 will include the U.S. operations of both Baker Hughes and GE O&G. Baker Hughes and GE will each be taxed on their distributive share of income and gain, whether or not a corresponding amount of cash or other property is distributed to them. For assets held indirectly by us through subsidiaries, including both foreign and U.S., the taxes attributable to those subsidiaries will be reflected in our consolidated and combined financial statements.
We account for taxes under the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial statement and tax return bases of assets and liabilities as well as from net operating losses and tax credit carryforwards, based on enacted tax rates expected to be in effect when taxes actually are paid or recovered and other provisions of the tax law. The effect of a change in tax laws or rates on deferred tax assets and liabilities is recognized in income in the period in which such change is enacted. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not, and a valuation allowance is established for any portion of a deferred tax asset that management believes may not be realized.
Due to the enactment of U.S. tax reform, repatriations of foreign earnings will generally be free of U.S. federal tax but may incur other taxes, such as withholding or state taxes. Indefinite reinvestment is determined by management’s judgment about and intentions concerning the future operations of the Company. Most of these earnings have been reinvested in active non-U.S. business operations. It is not practicable to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.
Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. We operate in more than 120 countries and our tax filings are subject to audit by the tax authorities in the jurisdictions where we conduct business. These audits may result in assessments of additional taxes that are resolved with the tax authorities or through the courts. We have provided for the amounts that we believe will ultimately result from these proceedings. We recognize uncertain tax positions that are “more likely than not” to be sustained if the relevant tax authority were to audit the position with full knowledge of all the relevant facts
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Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
and other information. For those tax positions that meet this threshold, we measure the amount of tax benefit based on the largest amount of tax benefit that has a greater than 50% chance of being realized in a final settlement with the relevant authority. We classify interest and penalties associated with uncertain tax positions as income tax expense. The effects of tax adjustments and settlements from taxing authorities are presented in the combined financial statements in the period they are recorded.
Additionally, as part of U.S. tax reform, the U.S. has enacted a tax on "base eroding" payments from the U.S. and a minimum tax on foreign earnings (global intangible low-taxed income). In 2018, we made an accounting policy election to account for these taxes as period costs.
Environmental Liabilities
We are involved in numerous remediation actions to clean up hazardous waste as required by federal and state laws. Liabilities for remediation costs exclude possible insurance recoveries and, when dates and amounts of such costs are not known, are not discounted. When there appears to be a range of possible costs with equal likelihood, liabilities are based on the low end of such range. It is reasonably possible that our environmental remediation exposure will exceed amounts accrued. However, due to uncertainties about the status of laws, regulations, technology and information related to individual sites, such amounts are not reasonably estimable. The determination of the required accruals for remediation costs is subject to uncertainty, including the evolving nature of environmental regulations and the difficulty in estimating the extent and type of remediation activity that is necessary.
NEW ACCOUNTING STANDARDS ADOPTED
Leases
On January 1, 2019, we adopted Accounting Standards Update (ASU) No. 2016-02, Leases, and the related amendments (ASC 842). This ASU requires lessees to recognize an operating lease asset and a lease liability on the balance sheet, with the exception of short-term leases. We adopted the standard using the modified retrospective approach under which leases existing at, or entered into after January 1, 2019 were required to be recognized and measured. Prior period amounts have not been adjusted and continue to be reflected in accordance with our historical accounting. The Company has elected the practical expedients upon transition that allow entities not to reassess lease identification, classification and initial direct costs for leases that existed prior to adoption.
The most significant impact of the standard is the recognition of right-of-use (ROU) assets and operating lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We implemented internal controls and key system functionality to enable the preparation of financial information on adoption.
We determine if an arrangement is a lease at inception. ROU assets are included in "All other assets" and operating lease liabilities are included in "All other current liabilities" and "All other liabilities" on our consolidated statement of financial position. Finance lease assets are included in "Property, plant and equipment," and finance lease liabilities are included in "Short-term debt," and "Long-term debt" on our consolidated statement of financial position.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at the later of the lease commencement date or the effective date of adoption of ASC 842 on January 1, 2019, based on the present value of lease payments over the remaining lease term. Finance lease ROU assets and liabilities are recognized at commencement date. As most of our leases do not provide an implicit rate, we use our incremental collateralized borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Short-term leases under one year do not result in a ROU
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Notes to Consolidated and Combined Financial Statements
asset, but are recognized in the income statement only on a straight-line basis over the lease term. The Company has made an election to include within our operating lease liability future payments for both lease and non-lease components. See "Note 10. Leases" for additional information.
The adoption of this standard resulted in the recording of ROU assets and operating lease liabilities of $844 million as of January 1, 2019 on our consolidated statements of financial position with an immaterial impact on our consolidated and combined statements of equity and no related impact on our consolidated and combined statements of income (loss). Short-term leases have not been recorded on the consolidated statements of financial position. Our accounting for finance leases remained substantially unchanged.
Derivatives and Hedging
On January 1, 2019, we adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. Since there was no impact from the new guidance to our consolidated and combined financial statements, no transition adjustments were recorded. ASU 2017-12 simplifies the application of hedge accounting and expands the strategies that qualify for hedge accounting. In accordance with the ASU, both the effective and ineffective portion of a cash flow hedge are initially reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings when the forecasted transaction affects earnings. The ASU requires certain changes to the presentation of hedge accounting in the financial statements and some new or modified disclosures. See "Note 15. Financial Instruments" for additional information.
NEW ACCOUNTING STANDARDS TO BE ADOPTED
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-13, Financial Instruments - Credit Losses. The ASU introduced a new accounting model, the Current Expected Credit Losses model (CECL), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for loans and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current U.S. GAAP, which generally require that a loss be incurred before it is recognized. The new standard will also apply to financial assets arising from revenue transactions such as contract assets and accounts receivables and is effective for fiscal years beginning after December 15, 2019. Upon adoption, the new standard will not have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other -Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating the requirement to calculate the fair value of the individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the new ASU, an entity will perform its goodwill impairment test by comparing the fair value of the reporting unit with its carrying value and should recognize an impairment charge for the amount by which the carrying value exceeds the fair value of the reporting unit. The new standard is effective for goodwill impairment tests in annual reporting periods beginning after December 15, 2019, and should be applied on a prospective basis, with early adoption permitted. The Company adopted this ASU on January 1, 2020 on a prospective basis.
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.
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NOTE 2. REVENUE RELATED TO CONTRACTS WITH CUSTOMERS
DISAGGREGATED REVENUE
We disaggregate our revenue from contracts with customers by primary geographic markets.
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Total Revenue
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2019
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2018
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2017
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U.S.
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$
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6,188
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$
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6,576
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$
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4,409
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Non-U.S.
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17,650
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16,301
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12,770
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Total
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$
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23,838
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$
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22,877
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$
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17,179
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REMAINING PERFORMANCE OBLIGATIONS
As of December 31, 2019 and 2018, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $22.9 billion and $21.0 billion, respectively. As of December 31, 2019, we expect to recognize revenue of approximately 53%, 65% and 91% of the total remaining performance obligations within 2, 5, and 15 years, respectively, and the remaining thereafter. Contract modifications could affect both the timing to complete as well as the amount to be received as we fulfill the related remaining performance obligations.
NOTE 3. BUSINESS ACQUISITION AND DISPOSITIONS
BUSINESS ACQUISITION
On July 3, 2017, we closed the Transactions to combine GE O&G and BHI. The Transactions were executed using a partnership structure, pursuant to which GE O&G and BHI each contributed their operating assets to the Company. The fair value of the consideration exchanged was $24,798 million.
The tables below present the final fair value of assets acquired and liabilities assumed and the associated fair value of the noncontrolling interest related to the acquired net assets of BHI. The final determination of the fair value of assets and liabilities was concluded in the second quarter of 2018.
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|
|
|
Preliminary 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
|
|
|
|
(1)
|
Intangible assets, as provided in the table below, are recorded at fair value, as determined by management based on available information. The useful lives for intangible assets were determined based upon the remaining useful
|
BHGE LLC 2019 FORM 10-K | 58
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
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
|
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 resulting from the Transactions has been primarily allocated to the Oilfield Services segment, of which $67 million is deductible for tax purposes.
|
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 BHI. The unaudited pro forma combined financial data 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 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 amortization associated with an estimate of the acquired intangible assets and reduction of interest expense for fair value adjustments to debt. Excluded from the proforma information below are non-recurring direct incremental acquisition costs from 2017.
|
|
|
|
|
|
2017
|
Revenue
|
$
|
21,841
|
|
Net loss
|
(586
|
)
|
Net loss attributable to the Company
|
(592
|
)
|
BUSINESS DISPOSITIONS
In July 2019, the Company completed the sale of its high-speed reciprocating compression (Recip) business for a total consideration of $77 million. Recip, based in Houston, Texas, was part of our TPS segment and provided high-speed reciprocating compression equipment and aftermarket parts and services for oil and gas production, gas processing, gas distribution and independent power industries. The sale resulted in a loss before income tax of $138 million reported in the "Other non operating income (loss), net" caption of the consolidated and combined statements of income (loss).
BHGE LLC 2019 FORM 10-K | 59
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
In October 2018, the Company completed the sale of its Natural Gas Solution (NGS) business for a sales price of $375 million. NGS was part of our TPS segment and provided commercial and industrial products such as gas meters, chemical injection pumps, pipeline repair products and electric actuators. The sale resulted in a gain before income tax of $171 million reported in the "Other non operating income (loss), net" caption of the consolidated and combined statements of income (loss).
NOTE 4. CURRENT RECEIVABLES
Current receivables are comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
2019
|
2018
|
Customer receivables
|
$
|
5,448
|
|
$
|
4,974
|
|
Related parties
|
570
|
|
746
|
|
Other
|
796
|
|
669
|
|
Total current receivables
|
6,814
|
|
6,389
|
|
Less: Allowance for doubtful accounts
|
(323
|
)
|
(327
|
)
|
Total current receivables, net
|
$
|
6,491
|
|
$
|
6,062
|
|
Customer receivables are recorded at the invoiced amount. Related parties consists primarily of amounts owed to us by GE. The "Other" category consists primarily of indirect taxes, advance payments to suppliers and customer retentions.
NOTE 5. INVENTORIES
Inventories, net of reserves of $429 million and $430 million in 2019 and 2018, respectively, are comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
2019
|
2018
|
Finished goods
|
$
|
2,546
|
|
$
|
2,575
|
|
Work in process and raw materials
|
2,062
|
|
2,045
|
|
Total inventories, net
|
$
|
4,608
|
|
$
|
4,620
|
|
See "Note 16. Segment Information" for additional information on inventory impairments.
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
|
Useful Life
|
2019
|
2018
|
Land and improvements (1)
|
8 - 20 years (1)
|
$
|
430
|
|
$
|
432
|
|
Buildings, structures and related equipment
|
5 - 40 years
|
2,870
|
|
2,854
|
|
Machinery, equipment and other
|
2 - 20 years
|
7,324
|
|
6,567
|
|
Total cost
|
|
10,624
|
|
9,853
|
|
Less: Accumulated depreciation
|
|
(4,384
|
)
|
(3,625
|
)
|
Property, plant and equipment, less accumulated depreciation
|
|
$
|
6,240
|
|
$
|
6,228
|
|
|
|
(1)
|
Useful life excludes land.
|
Depreciation expense relating to property, plant and equipment was $1,053 million, $1,031 million and $716 million in 2019, 2018 and 2017, respectively. See "Note 19. Restructuring, Impairment and Other" for additional information on property, plant and equipment impairments.
BHGE LLC 2019 FORM 10-K | 60
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
GOODWILL
The changes in the carrying value of goodwill are detailed below by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oilfield Services
|
Oilfield Equipment
|
Turbo-machinery & Process Solutions
|
Digital Solutions
|
Total
|
Balance at December 31, 2017, gross
|
$
|
15,565
|
|
$
|
3,901
|
|
$
|
1,906
|
|
$
|
2,036
|
|
$
|
23,408
|
|
Accumulated impairment at December 31, 2017
|
(2,633
|
)
|
(867
|
)
|
—
|
|
(254
|
)
|
(3,754
|
)
|
Balance at December 31, 2017
|
12,932
|
|
3,034
|
|
1,906
|
|
1,782
|
|
19,654
|
|
Purchase accounting adjustments (1)
|
(157
|
)
|
293
|
|
394
|
|
429
|
|
959
|
|
Currency exchange and others
|
(26
|
)
|
(17
|
)
|
(114
|
)
|
(33
|
)
|
(190
|
)
|
Balance at December 31, 2018
|
12,749
|
|
3,310
|
|
2,186
|
|
2,178
|
|
20,423
|
|
Currency exchange and others
|
—
|
|
9
|
|
(15
|
)
|
(21
|
)
|
(27
|
)
|
Balance at December 31, 2019
|
$
|
12,749
|
|
$
|
3,319
|
|
$
|
2,171
|
|
$
|
2,157
|
|
$
|
20,396
|
|
|
|
(1)
|
Includes goodwill associated with the acquisition of BHI. The final determination of fair value of the assets and liabilities and the related goodwill associated with the acquisition of BHI was concluded in the second quarter of 2018. Of the total goodwill of $13,669 million resulting from the acquisition of BHI, $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.
|
During the third quarter of each fiscal year, in conjunction with our annual strategic planning process, we perform a quantitative goodwill impairment test for each of our reporting units. Our reporting units are the same as our four reportable segments. In performing this quantitative assessment, we determine fair value of each of our reporting units using a combination of the income approach and market approach by assessing each of these valuation methodologies based upon availability and relevance of comparable company data and determining appropriate weighting.
Under the income approach, the fair value for each of our reporting units was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We used our internal forecasts to estimate future cash flows, including an estimate of long-term future growth rates, based on our most recent views of the long-term outlook for each reporting unit, which includes assumptions about future commodity pricing and expected demand for our goods and services. Due to the inherent uncertainties involved in making estimates and assumptions, actual results may differ from those assumed in our forecasts.
We derived our discount rates using a capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the cost of equity financing. We used discount rates that are commensurate with the risks and uncertainties inherent in the respective businesses and in our internally developed forecasts. Discount rates used in our reporting unit valuations ranged from 10.0% to 11.5% as of our testing date and these rates may change in future periods based on changes in the U.S. Treasury rate, inflation or other factors.
Valuations using the market approach were derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses was based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services.
After quantifying the fair value, the carrying value of each reporting unit is then compared to its fair value and if the carrying value is more than its fair value, a step two analysis is performed. In the step two analysis, the amount of goodwill impairment, if any, is derived by deducting the fair value of the reporting unit’s assets and liabilities from the fair value of its equity, and comparing that amount with the carrying amount of goodwill.
BHGE LLC 2019 FORM 10-K | 61
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
We completed our annual impairment test of goodwill as of July 1, 2019 for all four of our reporting units. The step one impairment test performed included key assumptions related to macroeconomic and industry conditions, overall financial performance of the reporting unit, short and long-term forecasts, the impact, if any, of the separation from GE, among other factors, all of which require considerable judgment. In addition, we also considered the declines in the market capitalization of Baker Hughes below its book value including the magnitude and duration of those declines.
Based on the results of our step one testing, the fair values of each of the four reporting units exceeded their carrying values; therefore, the second step of the impairment test was not required to be performed for any of our reporting units and no goodwill impairment was recognized. The Turbomachinery & Process Solutions and Digital Solutions reporting units had fair values that were substantially in excess of their carrying values. The Oilfield Services (OFS) and Oilfield Equipment (OFE) reporting units had fair values that exceeded their carrying values by 8.0% and 10.0%, respectively. As part of our annual impairment test of goodwill, we performed sensitivity analyses for two key assumptions, discount rate and long-term growth rate for the OFS and OFE reporting units. We assumed a hypothetical 100-basis-point decrease in the expected long-term growth rate or a hypothetical 100-basis-point increase in the discount rate. Both scenarios independently yielded an estimated fair value for both the OFS and OFE reporting units below their carrying value.
In addition to our annual impairment testing, we also test goodwill for impairment between annual impairment testing dates whenever events or circumstances occur that, in our judgment, could more likely than not reduce the fair value of one or more reporting units below its carrying amount. In assessing the possibility that a reporting unit’s fair value has been reduced below its carrying amount due to the occurrence of events or circumstances between annual impairment testing dates, we consider all available evidence, including, but not limited to, (i) the results of our most recent annual impairment testing, in particular the magnitude of the excess of fair value over carrying value observed, (ii) downward revisions to internal forecasts, and the magnitude thereof, if any, (iii) any negative impact as a result of any additional secondary offerings of Baker Hughes' Class A common stock by GE (iv) declines in Baker Hughes market capitalization below its book value, and the magnitude and duration of those declines, if any. Between July 1, 2019 and December 31, 2019, we have not identified any events or circumstances that could more likely than not reduce the fair value of one or more of our reporting units below its carrying amount.
As of December 31, 2019, the OFS and OFE reporting units remain at-risk for future goodwill impairments as it is reasonably possible that judgments and estimates of certain key assumptions could change in future periods and may result in a reduction in fair value. Any significant adverse changes in future periods to our internal forecasts or the external market conditions, if any, could reasonably be expected to negatively affect our key assumptions and may result in future goodwill impairment charges which could be material.
Baker Hughes' stock price has historically experienced volatility as a result of industry-wide and macroeconomic factors, including global oil prices. In addition, more recently, we believe that Baker Hughes' stock price has been subject to increased volatility resulting from, among other things, uncertainty around the impact of any additional secondary offerings of Baker Hughes' Class A common stock by GE. While we believe that Baker Hughes' stock price reflects transitory circumstances/conditions as described above, any future sustained declines in its stock price could be a triggering event which may require us to perform a quantitative test at that time.
BHGE LLC 2019 FORM 10-K | 62
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
OTHER INTANGIBLE ASSETS
Intangible assets are comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
2018
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
|
Technology
|
$
|
1,075
|
|
$
|
(626
|
)
|
$
|
449
|
|
$
|
1,107
|
|
$
|
(526
|
)
|
$
|
581
|
|
Customer relationships
|
3,027
|
|
(1,045
|
)
|
1,982
|
|
3,085
|
|
(944
|
)
|
2,141
|
|
Capitalized software
|
1,193
|
|
(928
|
)
|
265
|
|
1,118
|
|
(824
|
)
|
294
|
|
Trade names and trademarks
|
696
|
|
(254
|
)
|
442
|
|
698
|
|
(229
|
)
|
469
|
|
Other
|
3
|
|
(2
|
)
|
1
|
|
14
|
|
(2
|
)
|
12
|
|
Finite-lived intangible assets
|
5,994
|
|
(2,855
|
)
|
3,139
|
|
6,022
|
|
(2,525
|
)
|
3,497
|
|
Indefinite-lived intangible assets (1)
|
2,242
|
|
—
|
|
2,242
|
|
2,222
|
|
—
|
|
2,222
|
|
Total intangible assets
|
$
|
8,236
|
|
$
|
(2,855
|
)
|
$
|
5,381
|
|
$
|
8,244
|
|
$
|
(2,525
|
)
|
$
|
5,719
|
|
|
|
(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 one to 30 years. Amortization expense for the years ended December 31, 2019, 2018 and 2017 was $365 million, $455 million and $387 million, respectively.
Estimated amortization expense for each of the subsequent five fiscal years is expected to be as follows:
|
|
|
|
|
Year
|
Estimated Amortization Expense
|
2020
|
$
|
335
|
|
2021
|
287
|
|
2022
|
243
|
|
2023
|
226
|
|
2024
|
216
|
|
BHGE LLC 2019 FORM 10-K | 63
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
NOTE 8. 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 at December 31:
|
|
|
|
|
|
|
|
|
2019
|
2018
|
Long-term product service agreements
|
$
|
603
|
|
$
|
609
|
|
Long-term equipment contracts (1)
|
1,097
|
|
1,085
|
|
Contract assets (total revenue in excess of billings)
|
1,700
|
|
1,694
|
|
Deferred inventory costs
|
130
|
|
179
|
|
Non-recurring engineering costs
|
51
|
|
21
|
|
Contract and other deferred assets
|
$
|
1,881
|
|
$
|
1,894
|
|
|
|
(1)
|
Reflects revenue earned in excess of billings on our long-term contracts to construct technically complex equipment and certain other service agreements.
|
Revenue recognized during the year ended December 31, 2019 and 2018 from performance obligations satisfied (or partially satisfied) in previous years related to our long-term service agreements was $(1) million and $26 million, respectively. This includes revenue recognized from revisions to cost or billing estimates that may affect a contract’s total estimated profitability resulting in an adjustment of earnings.
NOTE 9. 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 at December 31:
|
|
|
|
|
|
|
|
|
2019
|
2018
|
Progress collections
|
$
|
2,760
|
|
$
|
1,600
|
|
Deferred income
|
110
|
|
165
|
|
Progress collections and deferred income (contract liabilities)
|
$
|
2,870
|
|
$
|
1,765
|
|
Revenue recognized during the year ended December 31, 2019 and 2018 that was included in the contract liabilities at the beginning of the year was $1,690 million and $1,392 million, respectively.
BHGE LLC 2019 FORM 10-K | 64
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
NOTE 10. LEASES
Our leasing activities primarily consist of operating leases for administrative offices, manufacturing facilities, research centers, service centers, sales offices and certain equipment.
The following table presents operating lease expense for the year ended December 31:
|
|
|
|
|
Operating Lease Expense
|
2019
|
Long-term fixed lease
|
$
|
233
|
|
Long-term variable lease
|
48
|
|
Short-term lease (1)
|
706
|
|
Total operating lease expense
|
$
|
987
|
|
|
|
(1)
|
Leases with a term of one year or less, including leases with a term of one month or less
|
For the years ended December 31, 2018 and 2017, total operating lease expense was $783 million and $439 million, respectively. Cash flows used in operating activities for operating leases approximates our expense for the years ended December 31, 2019, 2018 and 2017.
As of December 31, 2019, maturities of our operating lease liabilities are as follows:
|
|
|
|
|
Year
|
Operating Leases
|
2020
|
$
|
230
|
|
2021
|
173
|
|
2022
|
139
|
|
2023
|
95
|
|
2024
|
65
|
|
Thereafter
|
318
|
|
Total lease payments
|
1,020
|
|
Less: imputed interest
|
178
|
|
Total
|
$
|
842
|
|
As of December 31, 2018, the minimum annual rental commitments, net of amounts due under subleases, for each of the five years in the period ending December 31, 2023 are $186 million, $154 million, $108 million, $77 million and $55 million, respectively, and $266 million in the aggregate thereafter.
Amounts recognized in the consolidated statement of financial position as of December 31, 2019:
|
|
|
|
|
|
Operating Leases
|
All other current liabilities
|
$
|
201
|
|
All other liabilities
|
641
|
|
Total
|
$
|
842
|
|
Right-of-use assets of $829 million as of December 31, 2019 were included in "All other assets" in our consolidated statements of financial position.
The weighted-average remaining lease term as of December 31, 2019 was approximately eight years for our operating leases. The weighted-average discount rate used to determine the operating lease liability as of December 31, 2019 was 4.1%.
BHGE LLC 2019 FORM 10-K | 65
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
NOTE 11. BORROWINGS
Short-term and long-term borrowings are comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
2018
|
|
Amount
|
Weighted Average Rate(1)
|
Amount
|
Weighted Average Rate(1)
|
Short-term borrowings
|
|
|
|
|
Short-term borrowings from GE
|
$
|
273
|
|
n/a
|
|
$
|
896
|
|
n/a
|
|
Other short-term borrowings
|
48
|
|
4.8
|
%
|
46
|
|
9.9
|
%
|
Total short-term borrowings
|
321
|
|
|
|
942
|
|
|
|
|
|
|
|
Long-term borrowings
|
|
|
|
|
3.2% Senior Notes due August 2021 (2)
|
—
|
|
n/a
|
|
523
|
|
2.5
|
%
|
2.773% Senior Notes due December 2022
|
1,246
|
|
2.9
|
%
|
1,245
|
|
2.9
|
%
|
8.55% Debentures due June 2024 (2)
|
127
|
|
4.1
|
%
|
131
|
|
4.1
|
%
|
3.337% Senior Notes due December 2027
|
1,343
|
|
3.4
|
%
|
1,343
|
|
3.4
|
%
|
6.875% Notes due January 2029 (2)
|
289
|
|
3.9
|
%
|
294
|
|
3.9
|
%
|
3.138% Senior Notes due November 2029
|
522
|
|
3.2
|
%
|
—
|
|
n/a
|
|
5.125% Notes due September 2040 (2)
|
1,301
|
|
4.2
|
%
|
1,306
|
|
4.2
|
%
|
4.080% Senior Notes due December 2047
|
1,337
|
|
4.1
|
%
|
1,336
|
|
4.1
|
%
|
Other long-term borrowings
|
136
|
|
3.4
|
%
|
107
|
|
5.3
|
%
|
Total long-term borrowings
|
6,301
|
|
|
6,285
|
|
|
Total borrowings
|
$
|
6,622
|
|
|
|
$
|
7,227
|
|
|
|
|
|
(1)
|
Weighted average effective interest rate is based on the carrying value including step-up adjustments, as applicable, recorded upon the acquisition of BHI.
|
|
|
(2)
|
Represents long-term fixed rate debt obligations assumed in connection with the acquisition of BHI, net of amounts repurchased subsequent to the closing of the Transactions.
|
In November 2019, BHGE LLC issued $525 million of 3.138% Senior Notes due November 2029. These Senior Notes are presented net of issuance costs of $3 million in our consolidated statements of financial position. We used the proceeds from this offering to repurchase all of our outstanding 3.2% Senior Notes due August 2021. The total cash consideration paid for this repurchase excluding interest was $526 million, resulting in a loss of $7 million which was recorded in the "Interest expense, net" caption of the consolidated and combined statements of income (loss).
The estimated fair value of total borrowings at December 31, 2019 and 2018 was $6,847 million and $6,629 million, respectively. For a majority of our borrowings the fair value was determined using quoted period-end market prices. Where market prices are not available, we estimate fair values based on valuation methodologies using current market interest rate data adjusted for our non-performance risk.
Maturities of debt for each of the five years in the period ending December 31, 2024, and in the aggregate thereafter, are listed in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2021
|
2022
|
2023
|
2024
|
Thereafter
|
Total debt
|
$
|
321
|
|
$
|
40
|
|
$
|
1,275
|
|
$
|
28
|
|
$
|
148
|
|
$
|
4,810
|
|
In December 2019, BHGE LLC entered into a $3 billion committed unsecured revolving credit facility (the 2019 Credit Agreement) with commercial banks maturing in December 2024. The 2019 Credit Agreement contains
BHGE LLC 2019 FORM 10-K | 66
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
certain customary representations and warranties, certain customary affirmative covenants and certain customary negative covenants. Upon the occurrence of certain events of default, BHGE LLC's obligations under the 2019 Credit Agreement may be accelerated. Such events of default include payment defaults to lenders under the 2019 Credit Agreement and other customary defaults. No such events of default have occurred. In connection with BHGE LLC’s entry into the 2019 Credit Agreement, BHGE LLC terminated its then-existing five-year committed $3 billion revolving credit agreement dated as of July 3, 2017 (the 2017 Credit Agreement). During 2019 and 2018, there were no borrowings under the 2019 or 2017 Credit Agreement.
BHGE LLC has a commercial paper program under which it may issue from time to time up to $3 billion in commercial paper with maturities of no more than 397 days. At December 31, 2019 and 2018, we had no borrowings outstanding under the commercial paper program.
Concurrent with the Transactions associated with the acquisition of BHI on July 3, 2017, Baker Hughes Co-Obligor, Inc. became a co-obligor, jointly and severally with BHGE LLC, on our registered debt securities. This co-obligor is a 100%-owned finance subsidiary of BHGE LLC that was incorporated for the sole purpose of serving as a co-obligor of debt securities and has no assets or operations other than those related to its sole purpose. Baker Hughes Co-Obligor, Inc. is also a co-obligor of the $3,950 million senior notes issued in December 2017 by BHGE LLC in a private placement and subsequently registered in January 2018.
Certain Senior Notes contain covenants that restrict BHGE LLC's ability to take certain actions, including, but not limited to, the creation of certain liens securing debt, the entry into certain sale-leaseback transactions and engaging in certain merger, consolidation and asset sale transactions in excess of specified limits.
See "Note 17. Related Party Transactions" for additional information on the short-term borrowings from GE, and see "Note 15. Financial Instruments" for additional information about borrowings and associated swaps.
NOTE 12. EMPLOYEE BENEFIT PLANS
GE MULTI-EMPLOYER PLANS
Historically, we were allocated relevant participation costs for certain employees who participated in GE employee benefit plans as part of multi-employer plans. Certain of our U.S. employees were covered under various U.S. GE employee benefit plans, including GE's retirement plans (pension, retiree health and life insurance, and savings benefit plans). From January 1, 2019, these U.S. employees ceased to participate in the GE U.S. plans. In addition, certain United Kingdom (UK) employees participated in the GE UK Pension Plan. From May 1, 2019, these UK employees ceased to participate in the GE UK Pension Plan. Expenses associated with our participation in these plans were $3 million, $158 million and $132 million in the years ended December 31, 2019, 2018 and 2017, respectively. In 2019, the assets and liabilities of the GE UK Pension Plan related to the oil & gas businesses were transferred to us on a fully funded basis.
DEFINED BENEFIT PLANS
In addition to these GE plans, certain of our employees are also covered by company sponsored pension plans. Our primary pension plans in 2019 included four U.S. plans and seven non-U.S. pension plans, primarily in the UK, Germany, and Canada, all with pension assets or obligations greater than $20 million. We use a December 31 measurement date for these plans. These defined benefit plans generally provide benefits to employees based on formulas recognizing length of service and earnings; however, over half of these plans are either frozen or closed to new entrants. We also provide certain postretirement health care benefits (Other Postretirement Benefits), through an unfunded plan, to a closed group of U.S. employees who retire and meet certain age and service requirements.
Funded Status
The funded status position represents the difference between the benefit obligation and the plan assets. The projected benefit obligation (PBO) for pension benefits represents the actuarial present value of benefits attributed to employee services and compensation and includes an assumption about future compensation levels. The accumulated benefit obligation (ABO) is the actuarial present value of pension benefits attributed to employee
BHGE LLC 2019 FORM 10-K | 67
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
service to date at present compensation levels. The ABO differs from the PBO in that the ABO does not include any assumptions about future compensation levels. Below is the reconciliation of the beginning and ending balances of benefit obligations, fair value of plan assets and the funded status of our plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2019
|
2018
|
2019
|
2018
|
Change in benefit obligation:
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
2,261
|
|
$
|
2,418
|
|
$
|
107
|
|
$
|
187
|
|
Service cost
|
21
|
|
21
|
|
1
|
|
2
|
|
Interest cost
|
90
|
|
71
|
|
4
|
|
5
|
|
Plan amendment
|
—
|
|
20
|
|
—
|
|
1
|
|
Actuarial loss (gain)
|
301
|
|
(93
|
)
|
(16
|
)
|
(23
|
)
|
Benefits paid
|
(102
|
)
|
(67
|
)
|
(16
|
)
|
(21
|
)
|
Curtailments
|
(21
|
)
|
(7
|
)
|
—
|
|
(5
|
)
|
Settlements
|
(36
|
)
|
(59
|
)
|
—
|
|
—
|
|
Transfer from GE - UK Plan
|
837
|
|
—
|
|
—
|
|
—
|
|
Other
|
15
|
|
16
|
|
—
|
|
(39
|
)
|
Foreign currency translation adjustments
|
85
|
|
(59
|
)
|
—
|
|
—
|
|
Benefit obligation at end of year
|
3,451
|
|
2,261
|
|
80
|
|
107
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
Fair value of plan assets at beginning of year
|
1,866
|
|
2,059
|
|
—
|
|
—
|
|
Actual return on plan assets
|
314
|
|
(60
|
)
|
—
|
|
—
|
|
Employer contributions
|
23
|
|
51
|
|
16
|
|
21
|
|
Benefits paid
|
(102
|
)
|
(67
|
)
|
(16
|
)
|
(21
|
)
|
Settlements
|
(36
|
)
|
(59
|
)
|
—
|
|
—
|
|
Transfer from GE - UK Plan
|
851
|
|
—
|
|
—
|
|
—
|
|
Other
|
—
|
|
(9
|
)
|
—
|
|
—
|
|
Foreign currency translation adjustments
|
88
|
|
(49
|
)
|
—
|
|
—
|
|
Fair value of plan assets at end of year
|
3,004
|
|
1,866
|
|
—
|
|
—
|
|
|
|
|
|
|
Funded status - underfunded at end of year
|
$
|
(447
|
)
|
$
|
(395
|
)
|
$
|
(80
|
)
|
$
|
(107
|
)
|
|
|
|
|
|
Accumulated benefit obligation
|
$
|
3,401
|
|
$
|
2,225
|
|
$
|
80
|
|
$
|
107
|
|
The amounts recognized in the consolidated and combined statements of financial position consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2019
|
2018
|
2019
|
2018
|
Noncurrent assets
|
$
|
78
|
|
$
|
47
|
|
$
|
—
|
|
$
|
—
|
|
Current liabilities
|
(17
|
)
|
(13
|
)
|
(11
|
)
|
(19
|
)
|
Noncurrent liabilities
|
(508
|
)
|
(429
|
)
|
(69
|
)
|
(88
|
)
|
Net amount recognized
|
$
|
(447
|
)
|
$
|
(395
|
)
|
$
|
(80
|
)
|
$
|
(107
|
)
|
BHGE LLC 2019 FORM 10-K | 68
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
Information for the plans with ABOs in excess of plan assets is as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2019
|
2018
|
2019
|
2018
|
Projected benefit obligation
|
$
|
1,814
|
|
$
|
1,621
|
|
n/a
|
|
n/a
|
|
Accumulated benefit obligation
|
$
|
1,763
|
|
$
|
1,585
|
|
$
|
80
|
|
$
|
107
|
|
Fair value of plan assets
|
$
|
1,288
|
|
$
|
1,179
|
|
n/a
|
|
n/a
|
|
Net Periodic Cost (Income)
The components of net periodic cost (income) are as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Service cost
|
$
|
21
|
|
|
$
|
21
|
|
|
$
|
37
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Interest cost
|
90
|
|
|
71
|
|
|
51
|
|
|
4
|
|
|
5
|
|
|
6
|
|
Expected return on plan assets
|
(122
|
)
|
|
(121
|
)
|
|
(81
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
1
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(5
|
)
|
|
(3
|
)
|
Amortization of net actuarial loss (gain)
|
17
|
|
|
10
|
|
|
12
|
|
|
(7
|
)
|
|
(2
|
)
|
|
(2
|
)
|
Curtailment / settlement loss (gain)
|
9
|
|
|
2
|
|
|
(45
|
)
|
(1)
|
—
|
|
|
(5
|
)
|
|
2
|
|
Net periodic cost (income)
|
$
|
16
|
|
|
$
|
(17
|
)
|
|
$
|
(26
|
)
|
|
$
|
(5
|
)
|
|
$
|
(5
|
)
|
|
$
|
5
|
|
|
|
(1)
|
As a result of the acquisition of BHI, we obtained a non-contributory pension plan (the Baker Hughes Incorporated Pension Plan or BHIPP). In 2017, the Compensation Committee of the Board of Directors approved amendments to the BHIPP to close the plan to new participants and freeze accruals of future service-related benefits effective as of December 31, 2017. As a result of these actions, the Company recorded a curtailment gain of $45 million. The curtailment was recorded by the Company during the fourth quarter of 2017 and included in the “Other non operating income (loss), net” caption of the consolidated and combined statements of income (loss).
|
The service cost component of the net periodic cost (benefit) is included in "operating income (loss)" and all other components are included in "Other non operating income, net" caption of the consolidated and combined statements of income (loss).
Assumptions Used in Benefit Calculations
Accounting requirements necessitate the use of assumptions to reflect the uncertainties and the length of time over which the pension obligations will be paid. The actual amount of future benefit payments will depend upon when participants retire, the amount of their benefit at retirement and how long they live. To reflect the obligation in today’s dollars, we discount the future payments using a rate that matches the time frame over which the payments will be made. We also need to assume a long-term rate of return that will be earned on investments used to fund these payments.
Weighted average assumptions used to determine benefit obligations for these plans are as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2019
|
2018
|
2019
|
2018
|
Discount rate
|
2.34
|
%
|
3.43
|
%
|
2.89
|
%
|
3.92
|
%
|
Rate of compensation increase
|
3.11
|
%
|
3.78
|
%
|
n/a
|
|
n/a
|
|
BHGE LLC 2019 FORM 10-K | 69
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
Weighted average assumptions used to determine net periodic cost for these plans are as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2019
|
2018
|
2017
|
2019
|
2018
|
2017
|
Discount rate
|
3.43
|
%
|
2.99
|
%
|
3.24
|
%
|
3.92
|
%
|
3.32
|
%
|
3.72
|
%
|
Expected long-term return on plan assets
|
5.48
|
%
|
5.94
|
%
|
6.26
|
%
|
n/a
|
|
n/a
|
|
n/a
|
|
We determine the discount rate using a bond matching model, whereby the weighted average yields on high-quality fixed-income securities have maturities consistent with the timing of benefit payments. Lower discount rates increase the size of the benefit obligations and pension expense in the following year; higher discount rates reduce the size of the benefit obligation and subsequent-year pension expense. The compensation assumption is used in our active plans to estimate the annual rate at which the pay for plan participants will grow. If the rate of growth assumed increases, the size of the pension obligations will increase.
The expected return on plan assets is the estimated long-term rate of return that will be earned on the investments used to fund the pension obligations. To determine this rate, we consider the current and target composition of plan investments, our historical returns earned, and our expectations about the future.
Assumed health care cost trend rates can have a significant effect on the amounts reported for Other Postretirement Benefits. As of December 31, 2019, the health care cost trend rate was 6.50%, declining gradually each successive year until it reaches 4.50%. A one percentage point change in assumed health care cost trend rates would have been immaterial in 2019.
Accumulated Other Comprehensive Loss
The amount recorded before-tax in accumulated other comprehensive loss related to employee benefit plans consists of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2019
|
2018
|
2019
|
2018
|
Net actuarial loss (gain)
|
$
|
395
|
|
$
|
177
|
|
$
|
(38
|
)
|
$
|
(29
|
)
|
Net prior service cost (credit)
|
19
|
|
20
|
|
(15
|
)
|
(18
|
)
|
Total
|
$
|
414
|
|
$
|
197
|
|
$
|
(53
|
)
|
$
|
(47
|
)
|
The estimated net actuarial loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss and included in net periodic benefit cost in 2020 is $32 million and $1 million, respectively. The estimated net actuarial gain and prior service credit for the other postretirement benefits that will be amortized from accumulated other comprehensive loss and included in net periodic benefit cost in 2020 is $3 million and $3 million, respectively.
Plan Assets
We have investment committees that meet regularly to review the portfolio returns and to determine asset-mix targets based on asset/liability studies. Third-party investment consultants assist such committees in developing asset allocation strategies to determine our expected rates of return and expected risk for various investment portfolios. The investment committees considered these strategies in the formal establishment of the current asset-mix targets based on the projected risk and return levels for all major asset classes.
BHGE LLC 2019 FORM 10-K | 70
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
The table below presents the fair value of the pension assets at December 31:
|
|
|
|
|
|
|
|
|
2019
|
2018
|
Equity securities
|
|
|
U.S. equity securities (1)
|
$
|
258
|
|
$
|
215
|
|
Global equity securities (1)
|
333
|
|
338
|
|
Debt securities
|
|
|
Fixed income and cash investment funds
|
1,858
|
|
937
|
|
Other debt securities
|
3
|
|
4
|
|
Private equities
|
51
|
|
60
|
|
Real estate
|
84
|
|
35
|
|
Other investments (2)
|
417
|
|
277
|
|
Total plan assets
|
$
|
3,004
|
|
$
|
1,866
|
|
|
|
(1)
|
Include direct investments and investment funds.
|
|
|
(2)
|
Consists primarily of asset allocation fund investments.
|
Plan assets valued using Net Asset Value (NAV) as a practical expedient amounted to $2,988 million and $1,802 million as of December 31, 2019 and 2018, respectively. The percentages of plan assets valued using NAV by investment fund type for equity securities, fixed income and cash, and alternative investments were 20%, 62%, and 18% as of December 31, 2019, respectively, and 30%, 48%, and 19% as of December 31, 2018, respectively. Those investments that were measured at fair value using NAV as practical expedient were excluded from the fair value hierarchy. The practical expedient was not applied for investments with a fair value of $14 million and $64 million as of December 31, 2019 and 2018, respectively. There were no investments classified within Level 3 in 2019 and 2018. The remaining investments were considered Level 1 and 2.
Funding Policy
The funding policy for our Pension Benefits is to contribute amounts sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws plus such additional amounts as we may determine to be appropriate. In 2019, we contributed approximately $23 million. We expect to contribute approximately $21 million to our pension plans in 2020.
We fund our Other Postretirement Benefits on a pay-as-you-go basis. In 2019, we funded $16 million and in 2020, we expect to fund approximately $11 million to such benefits.
The following table presents the expected benefit payments over the next 10 years. The U.S. and non-U.S. pension benefit payments are made by the respective pension trust funds.
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
Pension
Benefits
|
Other Postretirement
Benefits
|
2020
|
|
$
|
136
|
|
|
|
$
|
11
|
|
|
2021
|
|
134
|
|
|
|
9
|
|
|
2022
|
|
136
|
|
|
|
7
|
|
|
2023
|
|
137
|
|
|
|
6
|
|
|
2024
|
|
142
|
|
|
|
6
|
|
|
2025-2029
|
|
749
|
|
|
|
24
|
|
|
BHGE LLC 2019 FORM 10-K | 71
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
Defined Contribution Plans
Our primary defined contribution plan during 2019 was the Company sponsored U.S. 401(k) plan (401(k) Plan). The 401(k) Plan allows eligible employees to elect to contribute portions of their eligible compensation to an investment trust. Employee contributions are matched by the Company in cash at the rate of $1.00 per $1.00 employee contribution for the first 5% of the employee's eligible compensation, and such contributions vest immediately. In addition, we make cash contributions for all eligible employees of 4% of their eligible compensation and such contributions are fully vested to the employee after three years of employment. During 2018, the legacy BHI employees participated in the 401(k) Plan whereas the legacy GE O&G employees continued to participate in the GE sponsored plan. Beginning in 2019, certain legacy GE O&G employees were eligible to participate in our defined contribution plans, including our 401(k) Plan. Legacy BHI employees continued to participate in the 401(k) Plan during 2019. The 401(k) Plan provides several investment options, for which the employee has sole investment discretion, however, the 401(k) Plan does not offer Baker Hughes' common stock as an investment option. Our costs for the 401(k) Plan and several other U.S. and non-U.S. defined contribution plans amounted to $235 million and $137 million, in 2019 and 2018, respectively.
Other
We have two non-qualified defined contribution plans that are invested through trusts. The assets and corresponding liabilities were $276 million and $233 million at December 31, 2019 and 2018, respectively, and are included in "All other assets" and "Liabilities for pensions and other employee benefits" captions in our consolidated and combined statements of financial position.
NOTE 13. 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 will each be 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 will include the U.S. operations of both Baker Hughes and GE O&G. Baker Hughes and GE will each be taxed on their distributive share of income and gain, whether or not a corresponding amount of cash or other property is distributed to them. For assets held indirectly by us through subsidiaries, including both foreign and U.S., the taxes attributable to those subsidiaries will be reflected in our 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 initially recorded on a provisional basis as the legislation provided for additional guidance to be issued by the U.S. Department of the Treasury on several provisions including the computation of the transition tax. Based on guidance received to date, finalization of purchase accounting for the BHI acquisition, and finalization of our 2017 U.S. income tax returns, we have recorded a $25 million tax expense in 2018.
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. We have made an accounting policy election to account for these taxes as period costs.
BHGE LLC 2019 FORM 10-K | 72
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
The provision or benefit for income taxes is comprised of the following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
2018
|
2017
|
Current:
|
|
|
|
U.S.
|
$
|
(18
|
)
|
$
|
55
|
|
$
|
(75
|
)
|
Foreign
|
443
|
|
445
|
|
453
|
|
Total current
|
425
|
|
500
|
|
378
|
|
Deferred:
|
|
|
|
U.S.
|
(12
|
)
|
(60
|
)
|
(49
|
)
|
Foreign
|
63
|
|
(38
|
)
|
(183
|
)
|
Total deferred
|
51
|
|
(98
|
)
|
(232
|
)
|
Provision for income taxes
|
$
|
476
|
|
$
|
402
|
|
$
|
146
|
|
The geographic sources of income (loss) before income taxes, inclusive of equity in loss of affiliate are as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
2018
|
2017
|
U.S.
|
$
|
(693
|
)
|
$
|
(672
|
)
|
$
|
(1,189
|
)
|
Foreign
|
1,446
|
|
1,213
|
|
843
|
|
Income (loss) before income taxes, inclusive of equity in loss of affiliate
|
$
|
753
|
|
$
|
541
|
|
$
|
(346
|
)
|
The provision for income taxes differs from the amount computed by applying the U.S. statutory income tax rate to the loss or income before income taxes for the reasons set forth below for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
2018
|
2017
|
Income (loss) before income taxes, inclusive of equity in loss of affiliate
|
$
|
753
|
|
$
|
541
|
|
$
|
(346
|
)
|
Taxes at the U.S. federal statutory income tax rate
|
158
|
|
114
|
|
(121
|
)
|
Effect of foreign operations
|
85
|
|
103
|
|
(23
|
)
|
Tax impact of partnership structure
|
124
|
|
109
|
|
275
|
|
Change in valuation allowances
|
135
|
|
59
|
|
69
|
|
Tax Cuts and Jobs Act enactment
|
—
|
|
25
|
|
(32
|
)
|
Other - net
|
(26
|
)
|
(8
|
)
|
(22
|
)
|
Provision for income taxes
|
$
|
476
|
|
$
|
402
|
|
$
|
146
|
|
Actual income tax rate
|
63.2
|
%
|
74.3
|
%
|
(42.2
|
)%
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss and tax credit carryforwards.
BHGE LLC 2019 FORM 10-K | 73
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
The tax effects of our temporary differences and carryforwards are as follows at December 31:
|
|
|
|
|
|
|
|
|
2019
|
2018
|
Deferred tax assets:
|
|
|
Receivables
|
$
|
79
|
|
$
|
117
|
|
Inventory
|
91
|
|
79
|
|
Property
|
137
|
|
191
|
|
Goodwill and other intangibles
|
117
|
|
132
|
|
Employee benefits
|
98
|
|
97
|
|
Other accrued expenses
|
47
|
|
74
|
|
Operating loss carryforwards
|
1,591
|
|
1,500
|
|
Tax credit carryforwards
|
398
|
|
173
|
|
Other
|
270
|
|
233
|
|
Total deferred income tax asset
|
2,828
|
|
2,596
|
|
Valuation allowances
|
(1,835
|
)
|
(1,591
|
)
|
Total deferred income tax asset after valuation allowance
|
993
|
|
1,005
|
|
Deferred tax liabilities:
|
|
|
|
|
Undistributed earnings of foreign subsidiaries
|
—
|
|
(9
|
)
|
Other
|
(29
|
)
|
(18
|
)
|
Total deferred income tax liability
|
(29
|
)
|
(27
|
)
|
Net deferred tax asset
|
$
|
964
|
|
$
|
978
|
|
At December 31, 2019, we had approximately $366 million of non-U.S. tax credits which may be carried forward indefinitely under applicable foreign law and $32 million of other credits, which will begin to expire after tax year 2033 under U.S. tax law. Additionally, we had $1,591 million of net operating loss carryforwards, of which approximately $331 million will expire within five years, $326 million will expire between 6 years and 20 years, and the remainder can be carried forward indefinitely.
We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. At December 31, 2019, $1,835 million of valuation allowances are recorded against various deferred tax assets, including foreign net operating losses (NOL) of $1,257 million, foreign tax credit carryforwards of $366 million, other U.S. NOL's and tax credit carryforwards of $46 million, and certain other U.S. and foreign deferred tax assets of $166 million. There are $290 million of deferred tax assets related to foreign net operating loss carryforwards without a valuation allowance as we expect that the deferred tax assets will be realized within the carryforward period.
Substantially all of our undistributed earnings of our foreign subsidiaries are indefinitely reinvested. Indefinite reinvestment is determined by management’s intentions concerning the future operations of the Company. Most of these earnings have been reinvested in active non-U.S. business operations. As of December 31, 2019, the cumulative amount of indefinitely reinvested foreign earnings is approximately $6.7 billion. Computation of the potential deferred tax liability associated with these undistributed earnings and any other basis differences is not practicable.
At December 31, 2019, we had $451 million of tax liabilities for total gross unrecognized tax benefits related to uncertain tax positions. In addition to these uncertain tax positions, we had $93 million and $29 million related to interest and penalties, respectively, for total liabilities of $573 million for uncertain positions. If we were to prevail on all uncertain positions, the net effect would result in an income tax benefit of approximately $515 million. The remaining $58 million comprised of $21 million for deferred tax assets that represent tax benefits that would be received in different taxing jurisdictions in the event that we did not prevail on all uncertain tax positions and increased valuation allowances of $37 million.
BHGE LLC 2019 FORM 10-K | 74
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
The following table presents the changes in our gross unrecognized tax benefits included in the consolidated and combined statements of financial position.
|
|
|
|
|
|
|
|
Asset / (Liability)
|
2019
|
2018
|
Balance at beginning of year
|
$
|
(472
|
)
|
$
|
(395
|
)
|
Balance acquired from BHI
|
—
|
|
(142
|
)
|
Additions for tax positions of the current year
|
(25
|
)
|
(21
|
)
|
Additions for tax positions of prior years
|
(27
|
)
|
(95
|
)
|
Reductions for tax positions of prior years
|
55
|
|
101
|
|
Settlements with tax authorities
|
6
|
|
35
|
|
Lapse of statute of limitations
|
12
|
|
45
|
|
Balance at end of year
|
$
|
(451
|
)
|
$
|
(472
|
)
|
It is expected that the amount of unrecognized tax benefits will change in the next twelve months due to expiring statutes, audit activity, tax payments, and competent authority proceedings related to transfer pricing or final decisions in matters that are the subject of litigation in various taxing jurisdictions in which we operate. At December 31, 2019, we had approximately $67 million of tax liabilities related to uncertain tax positions, each of which are individually insignificant, and each of which are reasonably possible of being settled within the next twelve months.
We conduct business in more than 120 countries and are subject to income taxes in most taxing jurisdictions in which we operate. All Internal Revenue Service examinations have been completed and closed through year end 2016 for the most significant U.S. returns. We believe there are no other jurisdictions in which the outcome of unresolved issues or claims is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties.
NOTE 14. MEMBERS' EQUITY
The BHGE LLC Agreement provides that initially there is one class of Units, which are currently held by Baker Hughes and GE. If Baker Hughes issues a share of Class A common stock, including in connection with an equity incentive or similar plan, BHGE LLC will also issue a corresponding common unit to Baker Hughes or one of its direct subsidiaries. For the year ended December 31, 2019, we issued 4,416 thousand Units to Baker Hughes in connection with the issuance of Class A common stock by Baker Hughes.
The following table presents the changes in the number of Units outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2019
|
2018
|
|
Units Held by Baker Hughes
|
Units Held by GE
|
Units Held by Baker Hughes
|
Units Held by GE
|
Balance at beginning of year
|
513,399
|
|
521,543
|
|
422,208
|
|
706,985
|
|
Issue of Units to Baker Hughes under equity incentive plan
|
4,416
|
|
—
|
|
1,492
|
|
—
|
|
Exchange of Units (1)
|
132,250
|
|
(132,250
|
)
|
101,200
|
|
(101,200
|
)
|
Repurchase program (2)
|
—
|
|
(11,865
|
)
|
(11,501
|
)
|
(84,241
|
)
|
Balance at end of year
|
650,065
|
|
377,428
|
|
513,399
|
|
521,543
|
|
|
|
(1)
|
In September 2019 and November 2018, Baker Hughes completed underwritten secondary public offerings in which GE and its affiliates sold 132.3 million and 101.2 million shares of its Class A common stock, respectively. The offerings included the exchange by GE and its affiliates of our Units, together with the corresponding shares of Class B common stock of Baker Hughes, for Class A common stock of Baker Hughes.
|
|
|
(2)
|
In September 2019, we also repurchased and canceled 11,865,211 of our Units, from GE and its affiliates for an
|
BHGE LLC 2019 FORM 10-K | 75
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
aggregate of $250 million, or $21.07 per Unit, which is the same per share price paid by the underwriters to GE and its affiliates in the concurrent underwritten public offering. During 2018, we repurchased and canceled 30,742,152 of our Units for a total consideration of $1.0 billion. Additionally, in November 2018, we also repurchased 65 million of our Units from GE and its affiliates for an aggregate of $1,461 million, or $22.48 per Unit, which is the same per share price paid by the underwriters to GE and its affiliates in the concurrent underwritten public offering.
As a result of the exchange of shares in the secondary offering and the Class B common stock of Baker Hughes, together with our associated Units repurchased in September 2019, GE's ownership of our Units reduced during the third quarter of 2019 to approximately 36.8%.
As a result of the exchange of shares in the secondary offering and the Class B common stock of Baker Hughes, together with our associated Units repurchased in November 2018, GE's ownership of our Units reduced during the fourth quarter of 2018 from approximately 62.5% to approximately 50.4%.
ACCUMULATED OTHER COMPREHENSIVE LOSS (AOCL)
The following table presents 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
|
$
|
3
|
|
$
|
(1,825
|
)
|
$
|
2
|
|
$
|
(61
|
)
|
$
|
(1,881
|
)
|
Other comprehensive loss before reclassifications
|
(1
|
)
|
(502
|
)
|
(6
|
)
|
(70
|
)
|
(579
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
—
|
|
1
|
|
5
|
|
6
|
|
Deferred taxes
|
(2
|
)
|
—
|
|
1
|
|
1
|
|
—
|
|
Other comprehensive loss
|
(3
|
)
|
(502
|
)
|
(4
|
)
|
(64
|
)
|
(573
|
)
|
Less: Other adjustments
|
—
|
|
—
|
|
—
|
|
8
|
|
8
|
|
Balance at December 31, 2018
|
—
|
|
(2,327
|
)
|
(2
|
)
|
(133
|
)
|
(2,462
|
)
|
Other comprehensive income (loss) before reclassifications
|
2
|
|
53
|
|
13
|
|
(122
|
)
|
(54
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
—
|
|
1
|
|
26
|
|
27
|
|
Deferred taxes
|
—
|
|
—
|
|
(2
|
)
|
21
|
|
19
|
|
Other comprehensive income (loss)
|
2
|
|
53
|
|
12
|
|
(75
|
)
|
(8
|
)
|
Less: Other adjustments
|
—
|
|
—
|
|
—
|
|
119
|
|
119
|
|
Balance at December 31, 2019
|
$
|
2
|
|
$
|
(2,274
|
)
|
$
|
10
|
|
$
|
(327
|
)
|
$
|
(2,589
|
)
|
The amounts reclassified from accumulated other comprehensive loss during the years ended December 31, 2019 and 2018 represent (i) gains (losses) reclassified on cash flow hedges when the hedged transaction occurs and (ii) the amortization of net actuarial loss and prior service credit, and curtailments which are included in the computation of net periodic pension cost (see "Note 12. Employee Benefit Plans" for additional details). Net periodic pension cost is recorded across the various cost and expense line items in the consolidated and combined statements of income (loss).
BHGE LLC 2019 FORM 10-K | 76
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
NOTE 15. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
2018
|
|
Level 1
|
Level 2
|
Level 3
|
Net Balance
|
Level 1
|
Level 2
|
Level 3
|
Net Balance
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
$
|
—
|
|
$
|
58
|
|
$
|
—
|
|
$
|
58
|
|
$
|
—
|
|
$
|
74
|
|
$
|
—
|
|
$
|
74
|
|
Investment securities
|
24
|
|
—
|
|
259
|
|
283
|
|
39
|
|
—
|
|
288
|
|
327
|
|
Total assets
|
24
|
|
58
|
|
259
|
|
341
|
|
39
|
|
74
|
|
288
|
|
401
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
—
|
|
(27
|
)
|
—
|
|
(27
|
)
|
—
|
|
(82
|
)
|
—
|
|
(82
|
)
|
Total liabilities
|
$
|
—
|
|
$
|
(27
|
)
|
$
|
—
|
|
$
|
(27
|
)
|
$
|
—
|
|
$
|
(82
|
)
|
$
|
—
|
|
$
|
(82
|
)
|
There were no transfers between Level 1, 2 and 3 during 2019.
The following table provides a reconciliation of recurring Level 3 fair value measurements for investment securities:
|
|
|
|
|
|
|
|
|
2019
|
2018
|
Balance at beginning of year
|
$
|
288
|
|
$
|
304
|
|
Purchases
|
7
|
|
75
|
|
Proceeds at maturity
|
(38
|
)
|
(90
|
)
|
Unrealized gains (losses) recognized in accumulated other comprehensive income (loss)
|
2
|
|
(1
|
)
|
Balance at end of year
|
$
|
259
|
|
$
|
288
|
|
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 consolidated and combined statement of income (loss) on account of any Level 3 instrument still held at the reporting date. We hold $111 million and $149 million of these investment securities on behalf of GE at December 31, 2019 and 2018, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
2018
|
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Estimated Fair Value
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Estimated Fair Value
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. debt securities (1)
|
$
|
257
|
|
$
|
2
|
|
$
|
—
|
|
$
|
259
|
|
$
|
288
|
|
$
|
—
|
|
$
|
—
|
|
$
|
288
|
|
Equity securities (2)
|
24
|
|
—
|
|
—
|
|
24
|
|
39
|
|
—
|
|
—
|
|
39
|
|
Total
|
$
|
281
|
|
$
|
2
|
|
$
|
—
|
|
$
|
283
|
|
$
|
327
|
|
$
|
—
|
|
$
|
—
|
|
$
|
327
|
|
|
|
(1)
|
All of our investment securities are classified as available for sale instruments. Non-U.S. debt securities mature within three years.
|
|
|
(2)
|
Gains (losses) recorded to earnings related to these securities were $2 million, $(25) million and $30 million for the years ended December 31, 2019, 2018, and 2017, respectively.
|
BHGE LLC 2019 FORM 10-K | 77
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Our financial instruments include cash and equivalents, 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 December 31, 2019 and 2018 approximates their carrying value as reflected in our consolidated and combined financial statements. For further information on the fair value of our debt, see "Note 11. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
2018
|
|
Assets
|
(Liabilities)
|
Assets
|
(Liabilities)
|
Derivatives accounted for as hedges
|
|
|
|
|
Currency exchange contracts
|
$
|
11
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(7
|
)
|
|
|
|
|
|
Derivatives not accounted for as hedges
|
|
|
|
|
Currency exchange contracts and other
|
47
|
|
(27
|
)
|
74
|
|
(75
|
)
|
Total derivatives
|
$
|
58
|
|
$
|
(27
|
)
|
$
|
74
|
|
$
|
(82
|
)
|
Derivatives are classified in the consolidated statements of financial position captions "All other current assets," "All other assets," "All other current liabilities," and "All other liabilities" depending on their respective maturity date.
As of December 31, 2019 and 2018, $52 million and $67 million of derivative assets are recorded in "All other current assets" and $6 million and $7 million are recorded in "All other assets" of the consolidated statements of financial position, respectively. As of December 31, 2019 and 2018, $24 million and $79 million of derivative liabilities are recorded in "All other current liabilities" and $3 million and $3 million are recorded in "All other liabilities" of the consolidated statements of financial position, respectively.
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.
BHGE LLC 2019 FORM 10-K | 78
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in AOCI
|
Gain (Loss) Reclassified from AOCI to Earnings
|
|
2019
|
2018
|
2017
|
2019
|
2018
|
2017
|
Currency exchange contracts
|
$
|
13
|
|
$
|
(6
|
)
|
$
|
8
|
|
$
|
(1
|
)
|
$
|
(1
|
)
|
$
|
(7
|
)
|
We expect to transfer $10 million to earnings as a gain in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions. At December 31, 2019 and 2018, the maximum term of derivative instruments that hedge forecasted transactions was one year and two years, respectively.
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. The effects are reported in "Selling, general and administrative" in the consolidated and combined statement of income (loss). In general, the income (loss) effects of the hedged item are recorded in the same consolidated and combined financial statement line as the derivative. The income (loss) effect of economic hedges, after considering offsets related to income (loss) effects of hedged assets and liabilities, is substantially offset by changes in the fair value of forecasted transactions that have not yet affected income (loss).
The following table summarizes the gains (losses) from derivatives not designated as hedges on the consolidated and combined statements of income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
Consolidated and combined statement of income caption
|
2019
|
2018
|
2017
|
Currency exchange contracts (1)
|
Cost of goods sold
|
$
|
(6
|
)
|
$
|
(12
|
)
|
$
|
76
|
|
Currency exchange contracts
|
Selling, general and administrative
|
(22
|
)
|
9
|
|
45
|
|
Commodity derivatives
|
Cost of goods sold
|
2
|
|
(1
|
)
|
1
|
|
Other derivatives
|
Other non operating income (loss), net
|
2
|
|
—
|
|
—
|
|
Total (2)
|
|
$
|
(24
|
)
|
$
|
(4
|
)
|
$
|
122
|
|
|
|
(1)
|
Excludes losses on embedded derivatives of $7 million, $3 million and $76 million at December 31, 2019, 2018 and 2017, respectively, as embedded derivatives are not considered to be hedging instruments in our economic hedges.
|
BHGE LLC 2019 FORM 10-K | 79
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
|
|
(2)
|
The effect on earnings of derivatives not designated as hedges is substantially offset by change in fair value of the economically hedged items in the current and future periods.
|
NOTIONAL AMOUNT OF DERIVATIVES
The notional amount of a derivative is the number of units of the underlying (for example, the notional principal amount of the debt in an interest rate swap). A substantial majority of the outstanding notional amount of $5.7 billion and $6.4 billion at December 31, 2019 and 2018, 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 $1.8 billion at December 31, 2019 and $2.8 billion at December 31, 2018.
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.
OTHER EQUITY INVESTMENTS
As of December 31, 2019 and 2018, the carrying amount of equity securities without readily determinable fair values was $637 million and $542 million, respectively. In 2019, certain of these equity instruments were remeasured to fair value as of the date that an observable transaction occurred, which resulted in the Company recording an unrealized gain of $19 million.
NOTE 16. SEGMENT INFORMATION
Our reportable segments, which are the same as our operating segments, are organized based on the nature of markets and customers. We report our operating results through our four operating segments that consist of similar products and services within each segment as described below. Our operating results are reviewed regularly by the chief operating decision maker, who is our Chief Executive Officer, in deciding how to allocate resources and assess performance.
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.
BHGE LLC 2019 FORM 10-K | 80
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
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, software, and services for a wide range of industries, including oil & gas, power generation, aerospace, metals, and transportation. The offerings include sensor-based process measurement, non-destructive testing and inspection, turbine, generator and plant controls and condition monitoring, as well as pipeline integrity solutions.
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 year results, and balances, may not be comparable to prior years as the current year includes the results of BHI from July 3, 2017.
|
|
|
|
|
|
|
|
|
|
|
Segment revenue
|
2019
|
2018
|
2017
|
Oilfield Services
|
$
|
12,889
|
|
$
|
11,617
|
|
$
|
5,881
|
|
Oilfield Equipment
|
2,921
|
|
2,641
|
|
2,661
|
|
Turbomachinery & Process Solutions
|
5,536
|
|
6,015
|
|
6,295
|
|
Digital Solutions
|
2,492
|
|
2,604
|
|
2,342
|
|
Total
|
$
|
23,838
|
|
$
|
22,877
|
|
$
|
17,179
|
|
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, corporate expenses, restructuring, impairment and other charges, inventory impairments, separation and merger related costs, goodwill impairments and certain gains and losses not allocated to the operating segments.
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) before income taxes
|
2019
|
2018
|
2017
|
Oilfield Services
|
$
|
917
|
|
$
|
785
|
|
$
|
67
|
|
Oilfield Equipment
|
55
|
|
—
|
|
26
|
|
Turbomachinery & Process Solutions
|
719
|
|
621
|
|
665
|
|
Digital Solutions
|
343
|
|
390
|
|
357
|
|
Total segment
|
2,035
|
|
1,796
|
|
1,115
|
|
Corporate
|
(433
|
)
|
(405
|
)
|
(370
|
)
|
Inventory impairment and related charges (1)
|
—
|
|
(105
|
)
|
(244
|
)
|
Restructuring, impairment and other
|
(342
|
)
|
(433
|
)
|
(412
|
)
|
Separation and merger related
|
(184
|
)
|
(153
|
)
|
(373
|
)
|
Other non operating income, net
|
(84
|
)
|
202
|
|
80
|
|
Interest expense, net
|
(237
|
)
|
(223
|
)
|
(131
|
)
|
Total
|
$
|
753
|
|
$
|
680
|
|
$
|
(335
|
)
|
BHGE LLC 2019 FORM 10-K | 81
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
|
|
(1)
|
Inventory impairments and related charges are reported in the "Cost of goods sold" caption of the consolidated and combined statements of income (loss). 2017 includes $87 million of adjustments to write-up the acquired inventory to its estimated fair value on acquisition of BHI as this inventory was used or sold in the six months ended December 31, 2017.
|
The following table presents total assets by segment at December 31:
|
|
|
|
|
|
|
|
Segment assets
|
2019
|
2018
|
Oilfield Services
|
$
|
30,317
|
|
$
|
30,647
|
|
Oilfield Equipment
|
7,645
|
|
7,298
|
|
Turbomachinery & Process Solutions
|
8,365
|
|
8,529
|
|
Digital Solutions
|
3,983
|
|
4,063
|
|
Total segment
|
50,310
|
|
50,537
|
|
Corporate and eliminations (1)
|
2,903
|
|
1,697
|
|
Total
|
$
|
53,213
|
|
$
|
52,234
|
|
|
|
(1)
|
Corporate and eliminations in total segment assets includes adjustments of intercompany investments and receivables that are reflected within the total assets of the four reportable segments. During 2019, we transferred the $2.1 billion Baker Hughes trade name indefinite-lived intangible asset from Oilfield Services to Corporate due to the separation of GE, resulting in the re-branding of Baker Hughes.
|
The following table presents depreciation and amortization by segment for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
Segment depreciation and amortization
|
2019
|
2018
|
2017
|
Oilfield Services
|
$
|
985
|
|
$
|
1,003
|
|
$
|
613
|
|
Oilfield Equipment
|
175
|
|
173
|
|
187
|
|
Turbomachinery & Process Solutions
|
116
|
|
156
|
|
174
|
|
Digital Solutions
|
103
|
|
112
|
|
119
|
|
Total Segment
|
1,379
|
|
1,444
|
|
1,093
|
|
Corporate
|
39
|
|
42
|
|
10
|
|
Total
|
$
|
1,418
|
|
$
|
1,486
|
|
$
|
1,103
|
|
The following table presents net property, plant and equipment by its geographic location at December 31:
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment - net
|
2019
|
2018
|
2017
|
U.S.
|
$
|
2,594
|
|
$
|
2,654
|
|
$
|
3,369
|
|
Non-U.S.
|
3,646
|
|
3,574
|
|
3,590
|
|
Total
|
$
|
6,240
|
|
$
|
6,228
|
|
$
|
6,959
|
|
NOTE 17. RELATED PARTY TRANSACTIONS
Our most significant related party transactions are transactions that we have entered into with our members and their affiliates. GE and its affiliates have provided and continue to provide a variety of services to us. We also enter into certain transactions with Baker Hughes as provided in the BHGE LLC Agreement.
On September 16, 2019 (the Trigger Date), as a result of the secondary offering and the repurchase of Class B common stock of Baker Hughes and our associated Units, GE's ownership in us was reduced from approximately 50.3% to approximately 36.8%. At December 31, 2019, GE's interest in us was 36.7% and Baker Hughes' interest in us was 63.3%.
BHGE LLC 2019 FORM 10-K | 82
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
Following the Transactions, we have entered into various agreements with GE and its affiliates that govern our relationship with GE including an Intercompany Services Agreement pursuant to which GE and its affiliates and the Company provide certain services to each other. GE provided certain administrative services, GE proprietary technology and use of certain GE trademarks for an annual intercompany services fee of $55 million. Under the terms of the Master Agreement Framework, entered into on November 13, 2018, the annual intercompany services fee of $55 million was reduced by 50% to $27.5 million per year beginning on January 1, 2019. The Intercompany Services Agreement terminated on December 15, 2019 except with respect to certain provisions, including relating to certain tools access.
We sold products and services to GE and its affiliates for $337 million, $363 million and $639 million during the years ended December 31, 2019, 2018 and 2017, respectively. Purchases from GE and its affiliates were $1,498 million, $1,791 million and $1,512 million during the years ended December 31, 2019, 2018 and 2017, respectively.
MASTER AGREEMENT FRAMEWORK
In June 2018, GE announced their intention to pursue an orderly separation from Baker Hughes over time. On November 13, 2018, we entered into a Master Agreement and a series of related ancillary agreements and binding term sheets (which were later negotiated into definitive agreements) with GE and Baker Hughes (collectively, the Master Agreement Framework) designed to further solidify the commercial and technological collaborations between us and GE and to facilitate Baker Hughes ability to transition from operating as a controlled company. In particular, the Master Agreement Framework contemplated long-term agreements between us, Baker Hughes and GE on technology, fulfillment and other key areas to provide greater clarity to customers, employees and members.
Key elements of the Master Agreement Framework include:
Secured long-term collaboration on critical rotating equipment
Under the terms of the Master Agreement Framework, we have defined the parameters for a long-term collaboration and strategic relationship with GE on certain critical rotating equipment products.
On February 28, 2019, we entered into an aero-derivative joint venture (JV) agreement with GE to form a JV relating to the parties’ respective aero-derivative gas turbine products and services. These jet engine aero-derivative products are mainly used in our Turbomachinery & Process Solutions segment. Consequently, on November 1, 2019, we contributed $289 million in certain assets, inventory, cash and service facilities into Aero Products and Services JV, LLC, a Delaware limited liability company, and both GE and us jointly control its operations. In addition to the contributions to the JV, we paid $60 million to GE in order to equalize each party's interests in the JV at 50%. The JV has a supply and technology development agreement with GE’s aviation business, which, among other things, revised and extended certain pricing arrangements for applicable aero-derivative products. The Company's interest in the JV is accounted for as an equity method investment.
Additionally, effective May 1, 2019, we closed on the previously announced transfer of our assets, liabilities and employees related to our prior business of developing, designing, engineering, marketing, supplying, installing and servicing certain industrial steam turbine product lines (IST) to GE pursuant to a stock and asset purchase agreement. In addition and in connection with the transfer of the IST business, we made a cash payment of $13 million, in addition to working capital adjustments, to GE at the closing of the transaction.
In parallel, we have also entered into an agreement for the long-term supply and related distribution arrangement with GE for heavy-duty gas turbine technology at the current pricing levels, which became effective at the Trigger Date. Under this agreement, we are appointed as GE's exclusive distributor (with limited exceptions) within the oil and gas industry with respect to the heavy-duty gas turbine units for an initial term of 5 years and associated services (including parts and components) for an initial term of 20 years or the operating service life of the relevant gas turbine, whichever is more. The heavy-duty gas turbine technologies are important components of TPS’ offerings and the long-term agreements provide greater clarity on the commercial approach and customer fulfillment, and will enable us and GE to jointly innovate on leading technology.
BHGE LLC 2019 FORM 10-K | 83
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
Access to GE Digital software & technology
As part of the Master Agreement Framework, we agreed with GE Digital to maintain, subject to certain conditions, our status as the exclusive reseller of GE Digital offerings in the oil & gas space. As part of such agreement, BHGE LLC and GE Digital also revised and extended certain pricing arrangements and established service level obligations. However, these commercial arrangements were further modified pursuant to the Omnibus Agreement, described below, including by modifying the relationship between us and GE Digital to be nonexclusive with respect to digital offerings in the oil and gas space.
Other key agreements
• We agreed with GE to maintain current operations and pricing levels with regards to Control upgrade services we offer through our Digital Solutions segment division for the 4 years commencing on the Trigger Date.
• In 2019, GE transferred to us certain UK pension liabilities related to our oil and gas businesses and certain specified former oil and gas businesses of GE. The assets associated with these liabilities were also transferred on a fully funded basis. No liabilities associated with GE’s broad-based U.S. defined benefit pension plan were transferred to us.
• The Tax Matters Agreement with GE that was negotiated at the time of the Transactions will remain substantially in place and both companies retain the ability to monetize certain tax benefits.
• Under the terms of the Master Agreement Framework, the annual intercompany services fee of $55 million that we agreed to pay GE as part of the Transactions was reduced by 50% to $27.5 million per year beginning on January 1, 2019. The Intercompany Services Agreement terminated on December 15, 2019 except with respect to certain tools access.
OMNIBUS AGREEMENT
On July 31, 2019, we entered into an Omnibus Agreement, a general framework agreement that addresses certain outstanding matters under existing long-term commercial agreements between us and GE. The Omnibus Agreement contains provisions regarding, among other things, (i) the repayment of certain outstanding amounts mutually owed by the parties, (ii) certain employee and assets transfers (including the allocation of costs and expenses associated therewith), and (iii) certain matters related to three international joint ventures.
Material terms agreed to between the parties include:
|
|
i.
|
Provision of certain transition services by each of BHGE LLC and GE, including providing for the development and use of certain service related intellectual property at the end of the transition period and the management of certain data and information for future business needs;
|
|
|
ii.
|
Sale of certain digital business assets of BHGE LLC to GE for consideration of $50 million, which closed on September 3, 2019;
|
|
|
iii.
|
Modification of certain sales arrangements between the parties and the ability of each party to directly market offerings of its digital business to customers in the oil and gas industry;
|
|
|
iv.
|
Research and development efforts and the purchase of products and services related to aero-derivative turbines;
|
|
|
v.
|
Supply and distribution terms for certain trailer-mounted gas turbine generator-based engine units and related parts and services; and
|
|
|
vi.
|
Repayment by us to GE of amounts due under the promissory note (see Other Related Party discussion below), net of certain costs and tax adjustments;
|
BHGE LLC 2019 FORM 10-K | 84
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
OTHER RELATED PARTY
In connection with the Transactions, on July 3, 2017, we executed a promissory note with GE (which was amended and restated on July 31, 2019 in connection with the entry into the Omnibus Agreement referenced above) that represents certain cash that we are holding on GE's behalf due to the restricted nature of the cash. The restriction arises as the majority of the 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. There is no maturity date on the promissory note, but we remain obligated to repay GE, therefore, this obligation is reflected as short-term borrowings. As of December 31, 2019, of the $273 million due to GE, $162 million was held in the form of cash and $111 million was held in the form of investment securities. As of December 31, 2018, of the $896 million due to GE, $747 million was held in the form of cash and $149 million was held in the form of investment securities. A corresponding liability is reported in short-term borrowings in the consolidated and combined statements of financial position.
The Company has $536 million and $538 million of accounts payable at December 31, 2019 and 2018, respectively, for goods and services provided by GE in the ordinary course of business; this excludes any liability associated with our participation in the trade payables accelerated payment program (see below). The Company has $495 million and $653 million of current receivables at December 31, 2019 and 2018, respectively, for goods and services provided to GE in the ordinary course of business. Additionally, the Company has $75 million and $93 million of current receivables at December 31, 2019 and 2018, respectively, from Baker Hughes.
We also provide guarantees to GE Capital on behalf of some customers who have entered into financing arrangements with GE Capital.
TRADE PAYABLES ACCELERATED PAYMENT PROGRAM
Prior to our separation from GE, our North American operations participated in supply chain finance programs funded through GE Capital. Invoices were settled with suppliers per our payment terms to obtain cash discounts. GE Capital provided funding for invoices eligible for a cash discount. Our liability associated with the GE Capital funded participation in the accounts payable programs was $38 million and $471 million as of December 31, 2019 and 2018, respectively.
As a result of separation, our participation in this program ended, and we have begun transitioning to a program administered by a third party. Under these supply chain finance programs, our suppliers are given the opportunity to sell receivables from us to participating financial institutions at their sole discretion. A third party administers the program. Our responsibility is limited to making payment on the terms originally negotiated with our supplier, regardless of whether the supplier sells its receivable to a financial institution. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the program. These liabilities continue to be presented as accounts payable in our consolidated statements of financial position and reflected as cash flow from operating activities when settled.
NOTE 18. 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.
BHGE LLC 2019 FORM 10-K | 85
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
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 arbitration 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 estimated financial impact of the Arbitration Ruling has been reflected in the Company's financial statements and did not have a material impact. Further, on March 11, 2019, the customer initiated a second arbitral proceeding against us, under the rules of the German Institute of Arbitration e.V. (DIS). The customer alleged damages of €142 million plus interest at an annual rate of prime + 5% since June 20, 2015. The allegations in this second arbitration proceeding are related to the claims made in the June 19, 2015 German arbitration and Houston Federal Court proceedings referenced above. The Company is contesting the claims made by TRIUVA in the Houston Federal Court and the claims made by the customer in the second arbitration proceeding. At this time, we are not able to predict the outcome of the claims asserted in the Houston Federal Court or the second arbitration proceeding.
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 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. On September 26, 2018, the USPTO issued its final written decision in the inter-partes review of U.S. Patent No. 7,134,505 finding all of the challenged claims unpatentable. On September 27, 2018, the USPTO issued its final written decision in the inter-partes review of U.S. Patent No. 7,543,634 finding all of the challenged claims unpatentable. On November
BHGE LLC 2019 FORM 10-K | 86
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
19, 2018, the U.S. Court of Appeals for the Federal Circuit affirmed the USPTO’s unpatentability findings with respect to U.S. Patent Nos. 8,657,009 and 9,074,451. On November 26, 2018, Rapid Completions filed notices of appeal of the USPTO’s final written decisions in the inter partes reviews of U.S. Patent No. 7,134,505, and 7,543,634. On May 2, 2019, the USPTO issued a final written decision in an IPR on U.S. Patent Number 9,303,501 finding all of its claims unpatentable, and Rapid Completions appealed that decision to the Federal Circuit on July 5, 2019. On November 13, 2019, the U.S. Court of Appeals for the Federal Circuit affirmed the USPTO’s unpatentability findings with respect to U.S. Patent No. 7,134,505, and 7,543,634. On November 26, 2019, the USPTO issued a final written decision in the inter-partes review of U.S. Patent No. 7,861,774 finding all challenged claims unpatentable, and Rapid Completions did not timely appeal that decision. On January 21, 2020, the Federal Circuit affirmed the USPTO’s unpatentability finding as to all asserted claims of the U.S. Patent No. 9,303,501.
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. This patent relates primarily to certain specific downhole completions equipment. The plaintiff 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. 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. On April 24, 2019, the Canadian Court of Appeals ruled against Rapid Completions and dismissed Rapid Completion’s appeal in Canada. On June 24, 2019, Rapid Completions filed an application for leave to appeal the Court of Appeals decision to the Supreme Court of Canada. On December 19, 2019, the Supreme Court of Canada dismissed Rapid Completion's appeal.
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. 2 of the Company's subsidiaries (and 17 other companies) were notified to participate in the proceedings. The proceedings are ongoing, and at this time, there is no indication that the Company's subsidiaries were involved in the incident. Although the outcome of the claims remains uncertain, our insurer has accepted coverage and is defending the Company in the expertise proceeding.
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 Baker Hughes contracts, expected to be mainly in our TPS business. We have provided all requested documents to GE. At this time, we are not able to predict the outcome of this review.
On July 31, 2018, International Engineering & Construction S.A. (IEC) initiated arbitration proceedings in New York administered by the International Center for Dispute Resolution (ICDR) against the Company and its subsidiaries arising out of a series of sales and service contracts entered between IEC and the Company’s subsidiaries for the sale and installation of LNG plants and related power generation equipment in Nigeria (Contracts). Prior to the filing of the IEC Arbitration, the Company’s subsidiaries made demands for payment due under the Contracts. On August 15, 2018, the Company’s subsidiaries initiated a separate demand for ICDR arbitration against IEC for claims of additional costs and amounts due under the Contracts. On October 10, 2018, IEC filed a Petition to Compel Arbitration in the United States District Court for the Southern District of New York against the Company seeking to compel non-signatory Baker Hughes entities to participate in the arbitration filed by IEC. The complaint is captioned International Engineering & Construction S.A. et al. v. Baker Hughes, a GE company, LLC, et al. No. 18-cv-09241 (S.D.N.Y 2018); this action was dismissed by the Court on August 13, 2019. In the arbitration, IEC alleges breach of contract and other claims against the Company and its subsidiaries and seeks recovery of alleged compensatory damages, in addition to reasonable attorneys' fees, expenses and arbitration costs. On March 15, 2019, IEC amended its request for arbitration to alleged damages of $591 million of lost profits plus unspecified additional costs based on alleged non-performance of the contracts in dispute. The arbitration hearing was held from December 9, 2019 to December 20, 2019. The Company and its subsidiaries have contested IEC’s claims and are pursuing claims for compensation under the contracts. At this time, we are not able to predict the outcome of these claims.
BHGE LLC 2019 FORM 10-K | 87
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
On March 15, 2019 and March 18, 2019, the City of Riviera Beach Pension Fund and Richard Schippnick, respectively, filed in the Delaware Court of Chancery shareholder derivative lawsuits for and on Baker Hughes’s behalf against GE, the then-current members of the Board of Directors of Baker Hughes and Baker Hughes as a nominal defendant, related to the decision to (i) terminate the contractual prohibition barring GE from selling any of Baker Hughes' shares before July 3, 2019; (ii) repurchase $1.5 billion in the Baker Hughes’ stock from GE; (iii) permit GE to sell approximately $2.5 billion in Baker Hughes' stock through a secondary offering; and (iv) enter into a series of other agreements and amendments that will govern the ongoing relationship between Baker Hughes and GE (collectively, the “2018 Transactions”). The complaints in both lawsuits allege, among other things, that GE, as Baker Hughes' controlling stockholder, and the members of Baker Hughes' Board of Directors breached their fiduciary duties by entering into the 2018 Transactions. The relief sought in the complaints includes a request for a declaration that the defendants breached their fiduciary duties, that GE was unjustly enriched, disgorgement of profits, an award of damages sustained by the Company, pre- and post-judgment interest, and attorneys’ fees and costs. On March 21, 2019, the Chancery Court entered an order consolidating the Schippnick and City of Riviera Beach complaints under consolidated C.A. No. 2019-0201-AGB, styled in re Baker Hughes, a GE company derivative litigation. On May 10, 2019, Plaintiffs voluntarily dismissed their claims against the members of the Baker Hughes' Conflicts Committee, and on May 15, 2019, Plaintiffs voluntarily dismissed their claims against former Baker Hughes director Martin Craighead. On June 7, 2019, the defendants and nominal defendant filed a motion to dismiss the lawsuit on the ground that the derivative plaintiffs failed to make a demand on Baker Hughes' Board of Directors to pursue the claims itself, and GE and Baker Hughes' Board of Directors filed a motion to dismiss the lawsuit on the ground that the complaint failed to state a claim on which relief can be granted. The Chancery Court denied the motions on October 8, 2019, except granted GE’s motion to dismiss the unjust enrichment claim against it. On October 31, 2019, Baker Hughes' Board of Directors designated a Special Litigation Committee and empowered it with full authority to investigate and evaluate the allegations and issues raised in the derivative litigation. The Special Litigation Committee filed a motion to stay the derivative litigation during its investigation. On December 3, 2019, the Chancery Court granted the motion and stayed the derivative litigation until June 1, 2020. The Special Litigation Committee’s investigation and evaluation remains ongoing. At this time, we are not able to predict the outcome of the Special Litigation Committee investigation or these claims.
In March 2019, Baker Hughes received a document request from the United States Department of Justice (the “DOJ”) related to certain of the Company’s operations in Iraq and its dealings with Unaoil Limited and its affiliates. In December 2019, Baker Hughes received a similar document request from the Securities Exchange Commission (the "SEC"). Baker Hughes and the Company are cooperating with the DOJ and SEC in connection with their requests and any related matters. In addition, Baker Hughes has agreed to toll any statute of limitations in connection with the matters subject to the DOJ’s document request.
On May 7, 2019, the Alaska District Attorney filed a Criminal Information against Baker Hughes Incorporated, Baker Hughes Oilfield Operations, Inc., Baker Petrolite Corporation and a Baker Hughes employee alleging that individuals working at a Baker Petrolite Corporation chemical transfer facility in Kenai, Alaska were exposed to hazardous air emissions. The Criminal Information charges six counts of Assault in the Third Degree, three counts of Assault in the Fourth Degree and Negligent Air Emissions. On July 22, 2019, the six counts of Assault in the Third Degree were dismissed, with the Alaska Attorney General’s office indicating their intent to present those charges to the grand jury to obtain an indictment. On or around September 11, 2019, the grand jury issued an indictment on 25 counts, including 10 counts of Assault in the First Degree, 10 counts of Assault in the Second Degree, and 5 counts of Assault in the Third Degree. On or around December 3, 2019, the State agreed to dismiss the indictment against Baker Hughes Oilfield Operations, Inc. The Company and other Defendants have pled not guilty and intend to defend the charges. At this time, we are not able to predict the outcome of the criminal proceeding.
On August 13, 2019, Tri-State Joint Fund filed in the Delaware Court of Chancery, a shareholder class action lawsuit for and on the behalf of itself and all similarly situated public stockholders of Baker Hughes Incorporated (“BHI”) against the General Electric Company, the former members of the Board of Directors of BHI, and certain former BHI Officers alleging breaches of fiduciary duty, aiding and abetting, and other claims in connection with the Transactions. On October 28, 2019, City of Providence filed in the Delaware Court of Chancery a shareholder class action lawsuit for and on behalf of itself and all similarly situated public shareholders of BHI against GE, the former members of the Board of Directors of BHI, and certain former BHI Officers alleging substantially the same claims in connection with the Transactions. The relief sought in these complaints include a request for a declaration that
BHGE LLC 2019 FORM 10-K | 88
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
Defendants breached their fiduciary duties, an award of damages, pre- and post-judgment interest, and attorneys’ fees and costs. The lawsuits have been consolidated, and plaintiffs filed a consolidated class action complaint on December 17, 2019 against certain former BHI officers alleging breaches of fiduciary duty and against GE for aiding and abetting those breaches. The December 2019 complaint omitted the former members of the Board of Directors of BHI, except for Mr. Craighead who also served as President and CEO of BHI. Mr. Craighead and Ms. Ross, who served as Senior Vice President and Chief Financial Officer of BHI, remain named in the December 2019 complaint along with GE. The relief sought in the consolidated complaint includes a declaration that the former BHI officers breached their fiduciary duties and that GE aided and abetted those breaches, an award of damages, pre- and post-judgment interest, and attorneys’ fees and costs. At this time, we are not able to predict the outcome of these claims.
On December 11, 2019, BMC Software, Inc. (“BMC”) filed a lawsuit in federal court in the Southern District of Texas against Baker Hughes, a GE company, LLC alleging trademark infringement, unfair competition, and unjust enrichment, arising out of the Company’s use of its new logo and affiliated branding. On January 1, 2020, BMC amended its complaint to add Baker Hughes Company. The relief sought in the complaint includes a request for injunctive relief, an award of damages (including punitive damages), pre- and post-judgment interest, and attorneys’ fees and costs. At this time, we are not able to predict the outcome of these claims.
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.
ENVIRONMENTAL MATTERS
Estimated remediation costs are accrued using currently available facts, existing environmental permits, technology and enacted laws and regulations. Our cost estimates are developed based on internal evaluations and are not discounted. Accruals are recorded when it is probable that we will be obligated to pay for environmental site evaluation, remediation or related activities, and such costs can be reasonably estimated. As additional information becomes available, accruals are adjusted to reflect current cost estimates. Ongoing environmental compliance costs, such as obtaining environmental permits, installation of pollution control equipment and waste disposal are expensed as incurred. Where we have been identified as a potentially responsible party in a U.S. federal or state Comprehensive Environmental Response, Compensation and Liability Act (Superfund) site, we accrue our share of the estimated remediation costs of the site. This share is based on the ratio of the estimated volume of waste we contributed to the site to the total volume of waste disposed at the site.
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 $3.9 billion at December 31, 2019. 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. We also had commitments outstanding for purchase obligations for each of the five years in the period ending December 31, 2024 of $1,304 million, $170 million, $61 million, $9 million and $12 million, respectively, and $15 million in the aggregate thereafter.
We sometimes enter into consortium or similar arrangements for certain projects primarily in our Oilfield Equipment segment. Under such arrangements, each party is responsible for performing a certain scope of work within the total scope of the contracted work, and the obligations expire when all contractual obligations are completed. The failure or inability, financially or otherwise, of any of the parties to perform their obligations could impose additional costs and obligations on us. These factors could result in unanticipated costs to complete the project, liquidated damages or contract disputes.
BHGE LLC 2019 FORM 10-K | 89
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
NOTE 19. RESTRUCTURING, IMPAIRMENT AND OTHER
We recorded restructuring, impairment and other charges of $342 million, $433 million, and $412 million during the years ended December 31, 2019, 2018 and 2017, respectively. 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 $314 million, $304 million and $385 million for the years ended December 31, 2019, 2018 and 2017, respectively. These restructuring initiatives are expected to generate charges of approximately $11 million in future periods as these restructuring plans come to completion.
These charges are included in the "Restructuring, impairment and other" caption in the consolidated and combined statements of income (loss).
The amount of costs not included in the reported segment results is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
2018
|
2017
|
Oilfield Services
|
$
|
211
|
|
$
|
160
|
|
$
|
187
|
|
Oilfield Equipment
|
18
|
|
25
|
|
114
|
|
Turbomachinery & Process Solutions
|
48
|
|
71
|
|
21
|
|
Digital Solutions
|
15
|
|
17
|
|
34
|
|
Corporate
|
22
|
|
31
|
|
29
|
|
Total
|
$
|
314
|
|
$
|
304
|
|
$
|
385
|
|
These costs were primarily related to employee termination benefits, product line terminations, plant closures and related expenses such as property, plant and equipment impairments, contract terminations, and other incremental costs that were a direct result of the restructuring plans.
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
2018
|
2017
|
Property, plant & equipment, net
|
$
|
107
|
|
$
|
80
|
|
$
|
131
|
|
Employee-related termination expenses
|
179
|
|
123
|
|
186
|
|
Asset relocation costs
|
4
|
|
28
|
|
10
|
|
EHS remediation costs
|
11
|
|
6
|
|
9
|
|
Contract termination fees
|
12
|
|
44
|
|
26
|
|
Other incremental costs
|
1
|
|
23
|
|
23
|
|
Total
|
$
|
314
|
|
$
|
304
|
|
$
|
385
|
|
OTHER CHARGES
Other charges included in "Restructuring, impairment and other" caption of the consolidated and combined statements of income (loss) was $28 million, $129 million and $27 million for the years ended December 31, 2019, 2018 and 2017, respectively. In 2019, such items primarily relate to currency devaluations in our OFS segment. In 2018, other charges consist primarily of accelerated amortization of $80 million related to trade names and technology in our OFS segment, litigation charges of $25 million in Corporate and costs of $13 million to exit certain operations that impacted our TPS and OFS segments. In 2017, other charges primarily relate to currency devaluations of $12 million.
BHGE LLC 2019 FORM 10-K | 90
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
NOTE 20. SUPPLEMENTARY INFORMATION
All Other Current Liabilities
All other current liabilities as of December 31, 2019 and 2018 include $1,115 million and $951 million, respectively, of employee related liabilities.
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:
|
|
|
|
|
|
|
|
|
2019
|
2018
|
Balance at beginning of year
|
$
|
236
|
|
$
|
164
|
|
Provisions
|
4
|
|
47
|
|
Expenditures
|
(14
|
)
|
(96
|
)
|
Other (1)
|
(6
|
)
|
121
|
|
Balance at end of year
|
$
|
220
|
|
$
|
236
|
|
|
|
(1)
|
2018 amounts primarily related to the acquisition of BHI.
|
Allowance for doubtful accounts
The change in allowance for doubtful accounts is as follows:
|
|
|
|
|
|
|
|
|
2019
|
2018
|
Balance at beginning of year
|
$
|
327
|
|
$
|
330
|
|
Additions
|
48
|
|
47
|
|
Amounts written off
|
(42
|
)
|
(43
|
)
|
Other
|
(10
|
)
|
(7
|
)
|
Balance at end of year
|
$
|
323
|
|
$
|
327
|
|
BHGE LLC 2019 FORM 10-K | 91
Baker Hughes, a GE company, LLC
Notes to Consolidated and Combined Financial Statements
NOTE 21. QUARTERLY DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per unit amounts)
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
Total Year
|
2019
|
|
|
|
|
|
Revenue
|
$
|
5,615
|
|
$
|
5,994
|
|
$
|
5,882
|
|
$
|
6,347
|
|
$
|
23,838
|
|
Gross profit (1)
|
976
|
|
1,062
|
|
1,101
|
|
1,295
|
|
4,432
|
|
Restructuring, impairment and other (2)
|
62
|
|
50
|
|
71
|
|
159
|
|
342
|
|
Separation and merger related
|
34
|
|
40
|
|
54
|
|
57
|
|
184
|
|
Net income (loss) attributable to Baker Hughes, a GE company, LLC
|
65
|
|
(18
|
)
|
110
|
|
86
|
|
241
|
|
Cash distribution per common unit
|
0.18
|
|
0.18
|
|
0.18
|
|
0.18
|
|
0.72
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
Revenue
|
$
|
5,399
|
|
$
|
5,548
|
|
$
|
5,665
|
|
$
|
6,264
|
|
$
|
22,877
|
|
Gross profit (1)
|
841
|
|
936
|
|
973
|
|
1,236
|
|
3,986
|
|
Restructuring, impairment and other (2)
|
162
|
|
146
|
|
66
|
|
59
|
|
433
|
|
Separation and merger related
|
46
|
|
50
|
|
17
|
|
41
|
|
153
|
|
Net income (loss) attributable to Baker Hughes, a GE company, LLC
|
(143
|
)
|
(51
|
)
|
38
|
|
276
|
|
120
|
|
Cash distribution per common unit
|
0.18
|
|
0.18
|
|
0.18
|
|
0.18
|
|
0.72
|
|
|
|
(1)
|
Represents revenue less cost of sales and cost of services.
|
|
|
(2)
|
Restructuring, impairment and other costs associated with asset impairments, workforce reductions, facility closures and contract terminations recorded during 2019 and 2018. See "Note 19. Restructuring, Impairment and Other" for further discussion.
|
BHGE LLC 2019 FORM 10-K | 92