ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data contained herein.
For management's discussion and analysis of our financial condition and results of operations for fiscal year 2019 as compared to fiscal year 2018 please refer to Part II, Item 7 "Management's discussion and analysis of financial condition and results of operations" on Form 10-K for our fiscal year ended December 31, 2019, filed with the SEC on February 13, 2020.
EXECUTIVE SUMMARY
We are an energy technology company with a broad and diversified portfolio of technologies and services that span the energy and industrial value chain. We operate through our four business segments: Oilfield Services (OFS), Oilfield Equipment (OFE), Turbomachinery & Process Solutions (TPS), and Digital Solutions (DS).
We sell products and services primarily in the global oil and gas markets, within the upstream, midstream and downstream segments. Throughout 2020, the industry experienced multiple factors which drove expectations for global oil and gas related spending to be lower than 2019. First, the COVID-19 pandemic lowered global demand for hydrocarbons, as social distancing and travel restrictions were implemented across the world. Second, the lifting of Organization of the Petroleum Exporting Countries (OPEC+) supply curtailments in the first quarter of 2020, and the associated increase in production, drove the global excess supply of hydrocarbons higher. In the second quarter of 2020, OPEC+ reached a supply curtailment agreement of up to 10 million barrels per day, which drove expectations for future hydrocarbon supply lower. After significant turmoil during the first half of the year from the industry downturn, oil markets stabilized and demand for oil improved in the second half of the year. Lastly, global gross domestic product (GDP) declined in 2020, as a result of the impact from the COVID-19 pandemic.
Since the COVID-19 pandemic began, the health and safety of our employees has continued to be a top priority. We have taken critical steps as a company to reduce the risk of exposure, as well as mitigate the impacts of this pandemic to our employees, contractors and partners. We have adopted remote working where possible. Where on-site operations are required, masks are mandatory and our employees have adopted social distancing. We have worked with our employees to implement other site-specific precautionary measures to reduce the risk of exposure. We are collaborating closely with our customers, suppliers, and vendors to minimize operational disruption. In addition, we have restricted non-essential business travel and have encouraged our employees, customers and partners to collaborate virtually.
Our goal throughout the downturn in 2020 was to remain disciplined in allocating capital, focus on liquidity and cash preservation, and to preserve our investment grade rating while also maintaining our current dividend payout.
During the year, we took necessary actions to right-size the business for expected activity levels. In the first quarter of 2020, we approved a plan for restructuring and other actions totaling $1.8 billion, which was increased by $0.3 billion as we took further actions during the year to address the continuing industry challenges. Total restructuring and other costs were $2.1 billion in 2020. These charges are primarily related to the costs for reductions in work force, product line exits in certain geographies, and the write down of inventory and intangible assets. These actions took place across the business and our corporate functions. We expect the cash payback of these actions to be less than one year.
In addition, during the first quarter of 2020, our market capitalization declined significantly driven by the macroeconomic and geopolitical conditions caused by the COVID-19 pandemic and collapse of oil prices. Based on these events, we concluded that a triggering event occurred, and we performed an interim quantitative impairment test as of March 31, 2020. Based upon the results of the impairment test, we recognized a goodwill impairment charge of $14.8 billion during the first quarter of 2020. There were no other goodwill impairments in 2020.
Baker Hughes Company 2020 FORM 10-K | 28
In 2020, we generated revenue of $20.7 billion, compared to $23.8 billion in 2019. The decrease in revenue was driven by declines in all four of our segments primarily due to the industry downturn. Loss before income taxes was $15.2 billion in 2020, and included goodwill impairment charges of $14.8 billion, restructuring and impairment charges of $1.9 billion, inventory impairment charges of $246 million, separation and merger related costs of $134 million, and a gain of $1.4 billion related to our investment in C3.ai recorded in other non-operating income. In 2019, income before income taxes was $0.8 billion, which also included restructuring and impairment charges of $342 million, and separation and merger related costs of $184 million.
The gain of $1.4 billion related to our C3.ai investment was recorded in the fourth quarter of 2020. We invested in C3.ai when we formed our partnership in June 2019. In December 2020, C3.ai completed its initial public offering, which requires us to mark our investment to fair value. Both our investment and strong partnership with C3.ai demonstrate our commitment for growth in high potential segments as we develop and market new AI solutions for the oil and gas industry.
OUTLOOK
Our business is exposed to a number of macro factors, which influence our outlook and expectations given the current volatile conditions in the industry. After significant volatility during the first half of 2020, oil markets stabilized during the second half of the year. However, there is still uncertainty in the global economic outlook and impact on oil and gas markets in the wake of the COVID-19 pandemic.
•North America onshore activity: in 2020, we experienced a significant decline in rig count, as compared to 2019 driven by lower commodity prices. We expect North American onshore activity to improve in 2021, as compared to the second half of 2020.
•International onshore activity: in 2020, we experienced a decline in rig count, as compared to 2019 driven by lower commodity prices. We expect onshore spending outside of North America to stabilize in early 2021, and see a modest recovery over the second half of the year.
•Offshore projects: in 2020, we experienced significantly fewer offshore projects reaching positive final investment decisions, due to the economic uncertainty and lower oil and gas prices. In 2021, we expect the offshore markets to stabilize and for the number of tree awards in the market to remain stable or grow modestly compared to 2020 levels.
•Liquefied natural gas (LNG) projects: we remain optimistic on the LNG market long term and view natural gas as a transition and destination fuel. We continue to view the long-term economics of the LNG industry as positive.
We have other segments in our portfolio that are more correlated with various industrial metrics, including GDP, such as our Digital Solutions segment.
We also have segments within our portfolio that are exposed to new energy solutions, specifically focused around decarbonization of energy and industry, including hydrogen, geothermal, carbon capture, utilization and storage, and energy storage. We expect to see continued growth in these segments as new energy solutions become a more prevalent part of the broader energy mix.
Overall, we believe our portfolio is well positioned to compete across the energy value chain and deliver comprehensive solutions for our customers. We remain optimistic about the long-term economics of the industry, but we are continuing to operate with flexibility given our expectations for volatility and changing activity levels in the near term. While governments may change or discontinue incentives for renewable energy additions, we do not anticipate any significant impacts to our business in the foreseeable future.
Over time, we believe the world’s demand for energy will continue to rise, and that hydrocarbons will play a major role in meeting the world's energy needs for the foreseeable future. As such, we remain focused on delivering innovative, cost-efficient solutions that deliver step changes in operating and economic performance for our customers.
Baker Hughes Company 2020 FORM 10-K | 29
BUSINESS ENVIRONMENT
The following discussion and analysis summarizes the significant factors affecting our results of operations, financial condition and liquidity position as of and for the year ended December 31, 2020 and 2019, and should be read in conjunction with the consolidated financial statements and related notes of the Company.
We operate in more than 120 countries helping customers find, evaluate, drill, produce, transport and process hydrocarbon resources. Our revenue is predominately generated from the sale of products and services to major, national, and independent oil and natural gas companies worldwide, and is dependent on spending by our customers for oil and natural gas exploration, field development and production. This spending is driven by a number of factors, including our customers' forecasts of future energy demand and supply, their access to resources to develop and produce oil and natural gas, their ability to fund their capital programs, the impact of new government regulations and most importantly, their expectations for oil and natural gas prices as a key driver of their cash flows.
Oil and Natural Gas Prices
Oil and natural gas prices are summarized in the table below as averages of the daily closing prices during each of the periods indicated.
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2020
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2019
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Brent oil prices ($/Bbl) (1)
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$
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41.96
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$
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64.28
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WTI oil prices ($/Bbl) (2)
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39.16
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56.98
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Natural gas prices ($/mmBtu) (3)
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2.03
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2.56
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(1)Energy Information Administration (EIA) Europe Brent Spot Price per Barrel
(2)EIA Cushing, OK WTI (West Texas Intermediate) spot price
(3)EIA Henry Hub Natural Gas Spot Price per million British Thermal Unit
Outside North America, customer spending is most heavily influenced by Brent oil prices. After a stable and positive 2019, volatility increased sharply in April 2020 when oil prices dropped nearly 87%, due to lower demand. Brent oil prices decreased from a high of $70.25/Bbl in January 2020, to a low of $9.12/Bbl in April 2020. The average Brent oil prices decreased to $41.96/Bbl in 2020 from $64.28/Bbl in 2019, due to lower prices during majority of the year 2020.
In North America, customer spending is highly driven by WTI oil prices, which similarly to Brent oil prices, on average decreased to $39.16/Bbl in 2020 from $56.98/Bbl in 2019, and ranged from a high of $63.27/Bbl in January 2020, to a low of $(36.98)/Bbl in April 2020.
In North America, natural gas prices, as measured by the Henry Hub Natural Gas Spot Price, averaged $2.03/mmBtu in 2020, representing a 21% decrease over the prior year. Throughout the year, Henry Hub Natural Gas Spot Prices ranged from a low of $1.33/mmBtu in September 2020, to a high of $3.14/mmBtu in October 2020. According to the U.S. Department of Energy (DOE), working natural gas in storage at the end of 2020 was 3,460 billion cubic feet (Bcf), which was 7.7%, or 268 Bcf, above the corresponding week in 2019.
Baker Hughes Company 2020 FORM 10-K | 30
Baker Hughes Rig Count
The Baker Hughes rig counts are an important business barometer for the drilling industry and its suppliers. When drilling rigs are active they consume products and services produced by the oil service industry. Rig count trends are driven by the exploration and development spending by oil and natural gas companies, which in turn is influenced by current and future price expectations for oil and natural gas. The counts may reflect the relative strength and stability of energy prices and overall market activity, however, these counts should not be solely relied on as other specific and pervasive conditions may exist that affect overall energy prices and market activity.
We have been providing rig counts to the public since 1944. We gather all relevant data through our field service personnel, who obtain the necessary data from routine visits to the various rigs, customers, contractors and other outside sources as necessary. We base the classification of a well as either oil or natural gas primarily upon filings made by operators in the relevant jurisdiction. This data is then compiled and distributed to various wire services and trade associations and is published on our website. We believe the counting process and resulting data is reliable, however, it is subject to our ability to obtain accurate and timely information. Rig counts are compiled weekly for the U.S. and Canada and monthly for all international rigs. Published international rig counts do not include rigs drilling in certain locations, such as Russia, the Caspian region and onshore China because this information is not readily available.
Beginning in the second quarter of 2019, Ukraine was added to the Baker Hughes international rig count. The Company will continue tracking active drilling rigs in the country going forward. Historical periods will not be updated.
Rigs in the U.S. and Canada are counted as active if, on the day the count is taken, the well being drilled has been started but drilling has not been completed and the well is anticipated to be of sufficient depth to be a potential consumer of our drill bits. In international areas, rigs are counted on a weekly basis and deemed active if drilling activities occurred during the majority of the week. The weekly results are then averaged for the month and published accordingly. The rig count does not include rigs that are in transit from one location to another, rigging up, being used in non-drilling activities including production testing, completion and workover, and are not expected to be significant consumers of drill bits.
The rig counts are summarized in the table below as averages for each of the periods indicated.
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2020
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2019
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North America
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522
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1,077
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International
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827
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1,097
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Worldwide
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1,349
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2,174
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2020 Compared to 2019
Overall the rig count was 1,349 in 2020, a decrease of 38% as compared to 2019 due primarily to North American activity. The rig count in North America decreased 52% and the international rig count decreased 25% in 2020 compared to 2019, both as a result of lower commodity prices and exploration and production capital expenditure reductions.
Within North America, the decrease was primarily driven by the U.S. rig count, which was down 54% on average when compared to the same period last year, and a decrease in the Canadian rig count, which was down 33% on average. Internationally, the decrease in the rig count was driven primarily by decreases in the Latin America region, Africa region and Europe region of 44%, 34% and 24%, respectively.
Baker Hughes Company 2020 FORM 10-K | 31
RESULTS OF OPERATIONS
The discussions below relating to significant line items from our consolidated statements of income (loss) are based on available information and represent our analysis of significant changes or events that impact the comparability of reported amounts. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where reasonably practicable, have quantified the impact of such items. In addition, the discussions below for revenue and cost of revenue are on a total basis as the business drivers for product sales and services are similar. All dollar amounts in tabulations in this section are in millions of dollars, unless otherwise stated. Certain columns and rows may not add due to the use of rounded numbers.
Our results of operations are evaluated by the Chief Executive Officer on a consolidated basis as well as at the segment level. The performance of our operating segments is evaluated based on segment operating income (loss), which is defined as income (loss) before income taxes and equity in loss of affiliate and before the following: net interest expense, net other non-operating income (loss), corporate expenses, restructuring, impairment and other charges, goodwill and inventory impairments, separation-related costs, and certain gains and losses not allocated to the operating segments.
In evaluating the segment performance, the Company uses the following:
Volume: Volume is the increase or decrease in products and/or services sold period-over-period excluding the impact of foreign exchange and price. The volume impact on profit is calculated by multiplying the prior period profit rate by the change in revenue volume between the current and prior period. It also includes price, defined as the change in sales price for a comparable product or service period-over-period and is calculated as the period-over-period change in sales prices of comparable products and services.
Foreign Exchange (FX): FX measures the translational foreign exchange impact, or the translation impact of the period-over-period change on sales and costs directly attributable to change in the foreign exchange rate compared to the U.S. dollar. FX impact is calculated by multiplying the functional currency amounts (revenue or profit) with the period-over-period FX rate variance, using the average exchange rate for the respective period.
(Inflation)/Deflation: (Inflation)/deflation is defined as the increase or decrease in direct and indirect costs of the same type for an equal amount of volume. It is calculated as the year-over-year change in cost (i.e. price paid) of direct material, compensation & benefits and overhead costs.
Productivity: Productivity is measured by the remaining variance in profit, after adjusting for the period-over-period impact of volume & price, foreign exchange and (inflation)/deflation as defined above. Improved or lower period-over-period cost productivity is the result of cost efficiencies or inefficiencies, such as cost decreasing or increasing more than volume, or cost increasing or decreasing less than volume, or changes in sales mix among segments. This also includes the period-over-period variance of transactional foreign exchange, aside from those foreign currency devaluations that are reported separately for business evaluation purposes.
Orders and Remaining Performance Obligations
Our statement of income (loss) displays sales and costs of sales in accordance with SEC regulations under which “goods” is required to include all sales of tangible products and “services” must include all other sales, including other services activities. For the amounts shown below, we distinguish between “equipment” and “product services,” where product services refers to sales under product services agreements, including sales of both goods (such as spare parts and equipment upgrades) and related services (such as monitoring, maintenance and repairs), which is an important part of our operations. We refer to “product services” simply as “services” within Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Orders: We recognized orders of $20.7 billion and $27.0 billion in 2020 and 2019, respectively. In 2020, equipment orders were down 27% and service orders were down 20%, compared to 2019.
Remaining Performance Obligations (RPO): As of December 31, 2020 and 2019, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $23.4 billion and $22.9 billion, respectively.
Baker Hughes Company 2020 FORM 10-K | 32
Revenue and Segment Operating Income Before Tax
Revenue and segment operating income for each of our four operating segments is provided below.
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Year Ended December 31,
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$ Change
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2020
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2019
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From 2019 to 2020
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Revenue:
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Oilfield Services
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$
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10,140
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$
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12,889
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$
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(2,749)
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Oilfield Equipment
|
2,844
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2,921
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(77)
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Turbomachinery & Process Solutions
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5,705
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5,536
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|
|
|
169
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Digital Solutions
|
2,015
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2,492
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(477)
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Total
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$
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20,705
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$
|
23,838
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|
$
|
(3,133)
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Year Ended December 31,
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$ Change
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2020
|
2019
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From 2019 to 2020
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|
Segment operating income:
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Oilfield Services
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$
|
487
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$
|
917
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$
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(430)
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Oilfield Equipment
|
19
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|
55
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|
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|
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(36)
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|
|
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Turbomachinery & Process Solutions
|
805
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|
719
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|
|
|
|
86
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|
|
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Digital Solutions
|
193
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|
343
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|
|
|
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(150)
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|
|
|
|
Total segment operating income
|
1,504
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|
2,035
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|
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|
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(531)
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|
|
|
|
Corporate
|
(464)
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|
(433)
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|
|
|
|
(31)
|
|
|
|
|
Inventory impairment (1)
|
(246)
|
|
—
|
|
|
|
|
(246)
|
|
|
|
|
Goodwill impairment
|
(14,773)
|
|
—
|
|
|
|
|
(14,773)
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|
|
|
|
Restructuring, impairment and other
|
(1,866)
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|
(342)
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|
|
|
|
(1,524)
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|
|
|
|
Separation and merger related
|
(134)
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|
(184)
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|
|
|
|
50
|
|
|
|
|
Operating income (loss)
|
(15,978)
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|
1,074
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|
|
|
|
(17,052)
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|
|
|
|
Other non-operating income (loss), net
|
1,040
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|
(84)
|
|
|
|
|
1,124
|
|
|
|
|
Interest expense, net
|
(264)
|
|
(237)
|
|
|
|
|
(27)
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|
|
|
|
Income (loss) before income taxes and equity in loss of affiliate
|
(15,202)
|
|
753
|
|
|
|
|
(15,955)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit (provision) for income taxes
|
(559)
|
|
(482)
|
|
|
|
|
(77)
|
|
|
|
|
Net income (loss)
|
$
|
(15,761)
|
|
$
|
271
|
|
|
|
|
$
|
(16,032)
|
|
|
|
|
(1)Inventory impairments are reported in "Cost of goods sold" of the consolidated statements of income (loss).
Fiscal Year 2020 to Fiscal Year 2019
Revenue in 2020 was $20,705 million, a decrease of $3,133 million, or 13%, from 2019. This decrease in revenue was largely a result of decreased activity in OFS, DS and OFE, partially offset by an increase in TPS. OFS decreased $2,749 million, DS decreased $477 million, OFE decreased $77 million, and TPS increased $169 million.
Total segment operating income in 2020 was $1,504 million, a decrease of $531 million, or 26%, from 2019. The decrease was primarily driven by OFS, which decreased $430 million, OFE, which decreased $36 million and DS, which decreased $150 million, partially offset by TPS, which increased $86 million.
Oilfield Services
OFS 2020 revenue was $10,140 million, a decrease of $2,749 million from 2019, as a result of decreased activity in North America and international in 2020 compared to 2019, as evidenced by a decline in the corresponding rig counts. North America revenue was $2,802 million in 2020, a decrease of $1,794 million from
Baker Hughes Company 2020 FORM 10-K | 33
2019. International revenue was $7,338 million in 2020, a decrease of $955 million from 2019, driven by declines in most regions, primarily in the Middle East and Latin America regions.
OFS 2020 segment operating income was $487 million, compared to $917 million in 2019. The decrease was primarily driven by lower volume, and to a lesser extent, unfavorable business mix, partially offset by our restructuring and productivity initiatives.
Oilfield Equipment
OFE 2020 revenue was $2,844 million, a decrease of $77 million, or 3%, from 2019. The decrease was primarily driven by lower volume in the services business, mostly driven by the impact of the COVID-19 pandemic, partially offset by higher volume in the subsea production systems and flexible pipe businesses. The decrease was also impacted by the sale of the Surface Pressure Control Flow business in October 2020.
OFE 2020 segment operating income was $19 million, compared to $55 million in 2019. The decrease was primarily driven by unfavorable business mix and to a lesser extent by lower volume.
Turbomachinery & Process Solutions
TPS 2020 revenue was $5,705 million, an increase of $169 million, or 3%, from 2019. The increase was primarily driven by higher equipment and projects revenue, partially offset by lower services volume as well as business dispositions that occurred in 2019. Equipment revenue in 2020 represented 44% and Service revenue represented 56% of total revenue. Equipment revenue was up 27% year-over-year, and services revenue was down 10% year-over-year, partially due to mobility restrictions related to the COVID-19 pandemic.
TPS 2020 segment operating income was $805 million, compared to $719 million in 2019. The increase in profitability was driven primarily by higher cost productivity and to a lesser extent by higher volume, partially offset by unfavorable business mix.
Digital Solutions
DS 2020 revenue was $2,015 million, a decrease of $477 million, or 19%, from 2019, driven by volume declines across most DS segments, largely driven by lower economic activity related to COVID-19 disruptions.
DS 2020 segment operating income was $193 million, compared to $343 million in 2019. The decrease in profitability was primarily driven by lower volume.
Corporate
In 2020, corporate expenses were $464 million, an increase of $31 million compared to 2019, primarily from the additional expenses related to the separation from GE.
Inventory Impairment
In 2020, we recorded inventory impairments of $246 million, primarily related to our Oilfield Services segment as a result of certain restructuring activities initiated by the Company. There were no inventory impairments recorded in 2019. Charges for inventory impairments are reported in the "Cost of goods sold" caption of the consolidated statements of income (loss).
Goodwill Impairment
During the first quarter of 2020, the Company’s market capitalization declined significantly driven by current macroeconomic and geopolitical conditions including the decrease in demand caused by the COVID-19 pandemic and collapse of oil prices driven by both surplus production and supply. Based on these events, we concluded that a triggering event occurred and we performed an interim quantitative impairment test as of March 31, 2020. Based upon the results of the impairment test, we recognized a goodwill impairment charge of $14,773 million during the first quarter of 2020. There have been no other goodwill impairments during 2020.
Baker Hughes Company 2020 FORM 10-K | 34
Restructuring, Impairment and Other
In 2020, we recognized $1,866 million in restructuring, impairment and other charges, compared to $342 million in 2019. These charges primarily relate to the restructuring plan announced in the first quarter of 2020, which include product line rationalization actions, headcount reductions in certain geographical locations, and other initiatives to right-size our operations for anticipated activity levels and market conditions.
Separation and Merger Related
We recorded $134 million of separation related costs in 2020, a decrease of $50 million from the prior year. Costs in 2020 relate to the ongoing activities for the separation from GE including costs for the build-out of certain information technology infrastructures as a result of the separation.
Other Non-Operating Income /(Loss), Net
In 2020, we recorded $1,040 million of other net non-operating income. Included in this amount is an unrealized gain of $1,417 million related to marking our investment in C3.ai to fair value, partially offset by losses of $353 million for the sale of our Rod Lift Systems business in OFS and the sale of our Surface Pressure Control Flow business in OFE.
Interest Expense, Net
In 2020, we incurred net interest expense of $264 million, an increase of $27 million from the prior year, primarily driven by lower interest income.
Income Taxes
In 2020, our income tax expense was $559 million, an increase of $77 million, from $482 million in 2019. The increase was primarily due to valuation allowances on deferred tax assets and the geographical mix of earnings, partially offset by the benefit of the U.S. Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
In response to the COVID-19 pandemic, the CARES Act was enacted on March 27, 2020 in the U.S., and includes measures to assist companies, including allowing net operating losses originating in 2018, 2019, or 2020 to be carried back up to five years. During 2020, we elected to carry back losses to 2014 and accordingly recognized a tax benefit of $117 million and we expect to receive a cash refund of the same amount.
COMPLIANCE
We, in the conduct of all of our activities, are committed to maintaining the core values of our Company, as well as high safety, ethical, and quality standards as also reported in our Quality Management System (QMS). We believe such a commitment is integral to running a sound, successful, and sustainable business. We devote significant resources to maintain a comprehensive global ethics and compliance program (Compliance Program) which is designed to prevent, detect, and appropriately respond to any potential violations of the law, the Code of Conduct, and other Company policies and procedures.
Highlights of our Compliance Program include the following:
•Comprehensive internal policies over such areas as anti-bribery; travel, entertainment, gifts and charitable donations to government officials and other parties; payments to commercial sales representatives; and, the use of non-U.S. police or military organizations for security purposes. In addition, there are policies and procedures to address customs requirements, visa processing risks, export and re-export controls, economic sanctions, anti-money laundering and anti-boycott laws.
•Global and independent structure of Chief Compliance Officer and other compliance professionals providing compliance advice, customized training and governance, as well as investigating concerns across all regions and countries where we do business.
Baker Hughes Company 2020 FORM 10-K | 35
•Comprehensive employee compliance training program that combines instructor-led and web-based training modules tailored to the key risks that employees face on an ongoing basis.
•Due diligence procedures for third parties who conduct business on our behalf, including channel partners (sales representatives, distributors, resellers), administrative service providers, as well as an enhanced risk-based process for classifying channel partners and suppliers.
•Due diligence procedures for merger and acquisition activities.
•Specifically tailored compliance risk assessments and audits focused on country and third party risk.
•Compliance Review Board comprised of senior officers of the Company that meets quarterly to monitor effectiveness of the Compliance Program, as well as product company and regional compliance committees that meet quarterly.
•Technology to monitor and report on compliance matters, including an internal investigations management system, a web-based anti-boycott reporting tool, global trade management systems and comprehensive watch list screening.
•Data privacy compliance policies and procedures to ensure compliance with applicable data privacy requirements.
•A compliance program designed to create an “Open Reporting Environment” where employees are encouraged to report any ethics or compliance matter without fear of retaliation, including a global network of trained employee ombudspersons, and a worldwide, 24-hour business helpline operated by a third party and available in approximately 200 languages.
•Centralized finance organization with company-wide policies.
•Anti-corruption audits of high-risk countries, as well as risk-based compliance audits of third parties.
•We have region-specific processes and procedures for management of HR related issues, including pre-hire screening of employees; a process to screen existing employees prior to promotion into select roles where they may be exposed to finance and/or corruption-related risks; and implementation of a global new hire compliance training module for all employees.
LIQUIDITY AND CAPITAL RESOURCES
Our objective in financing our business is to maintain sufficient liquidity, adequate financial resources, and financial flexibility in order to fund the requirements of our business. Despite the challenging dynamics during 2020, we continue to maintain solid financial strength and liquidity. At December 31, 2020, we had cash and cash equivalents of $4.1 billion compared to $3.2 billion at December 31, 2019. Our liquidity is further supported by a revolving credit facility of $3 billion, and access to both commercial paper and uncommitted lines of credit. At December 31, 2020, we had no borrowings outstanding under the revolving credit facility or our uncommitted lines of credit, and had £600 million ($801 million) commercial paper outstanding. Our next debt maturity is December 2022.
Cash and cash equivalents includes $44 million and $162 million of cash held on behalf of GE at December 31, 2020 and 2019, respectively. Excluding cash held on behalf of GE, our U.S. subsidiaries held approximately $1 billion and $0.4 billion while our foreign subsidiaries held approximately $3.1 billion and $2.7 billion of our cash and cash equivalents as at December 31, 2020 and 2019, respectively. A substantial portion of the cash held by foreign subsidiaries at December 31, 2020 has been reinvested in active non-U.S. business operations. If we decide at a later date to repatriate those funds to the U.S., they will generally be free of U.S. federal tax but may incur other taxes such as withholding or state taxes.
We have a $3 billion committed unsecured revolving credit facility (the 2019 Credit Agreement) with commercial banks maturing in December 2024. The 2019 Credit Agreement contains certain customary representations and
Baker Hughes Company 2020 FORM 10-K | 36
warranties, certain customary affirmative covenants and certain customary negative covenants. Upon the occurrence of certain events of default, our 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. We have no borrowings under the 2019 Credit Agreement.
In addition, we have a commercial paper program under which we may issue from time to time commercial paper with maturities of no more than 397 days. During the second quarter of 2020, we established a £600 million commercial paper facility under which the Bank of England may invest through the COVID Corporate Financing Facility (the Program), which increased our total commercial paper program from $3.0 billion to approximately $3.8 billion. In May 2020, we issued £600 million of commercial paper under the Program that matures in April 2021 and can be repaid prior to that with no additional cost.
Certain Senior Notes contain covenants that restrict our ability to take certain actions. See "Note 10. Borrowings" of the Notes to Consolidated Financial Statements in this Annual Report for further details. At December 31, 2020, we were in compliance with all debt covenants.
We continuously review our liquidity and capital resources. If market conditions were to change, for instance due to the uncertainty created by the COVID-19 pandemic or a significant decline in oil and gas prices, and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be negatively impacted. Additionally, it could cause the rating agencies to lower our credit ratings. There are no ratings triggers that would accelerate the maturity of any borrowings under our committed credit facility; however, a downgrade in our credit ratings could increase the cost of borrowings under the credit facility and could also limit or preclude our ability to issue commercial paper. Should this occur, we could seek alternative sources of funding, including borrowing under the credit facility.
During the year ended December 31, 2020, we dispersed cash to fund a variety of activities including certain working capital needs, restructuring and GE separation related costs, capital expenditures, the payment of dividends, and distributions to noncontrolling interests. We believe that cash on hand, cash flows generated from operating and financing activities, and the available credit facility will provide sufficient liquidity to manage our global cash needs.
Cash Flows
Cash flows provided by (used in) each type of activity were as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2020
|
2019
|
|
Operating activities
|
$
|
1,304
|
|
$
|
2,126
|
|
|
Investing activities
|
(618)
|
|
(1,045)
|
|
|
Financing activities
|
225
|
|
(1,534)
|
|
|
Fiscal Year 2020 to Fiscal Year 2019
Operating Activities
Our largest source of operating cash is payments from customers, of which the largest component is collecting cash related to our sales of products and services including advance payments or progress collections for work to be performed. The primary use of operating cash is to pay our suppliers, employees, tax authorities and others for a wide range of goods and services.
Cash flows from operating activities generated cash of $1,304 million and $2,126 million for the years ended December 31, 2020 and 2019, respectively. For the year ended December 31, 2020, cash generated from operating activities were primarily driven by net losses adjusted for certain noncash items (primarily depreciation, amortization, impairments, loss on sale of businesses, and the unrealized gain on an equity security) and working capital, which includes contract and other deferred assets.
Working capital generated $216 million of cash in 2020 primarily due to receivables and positive progress collections partially offset by accounts payable, as we continue to improve our working capital processes. In 2019,
Baker Hughes Company 2020 FORM 10-K | 37
working capital generated $553 million of cash primarily due to net positive progress collections and receivables in TPS for equipment contracts. Included in our cash flows from operating activities for 2020 and 2019 are payments of $670 million and $307 million, respectively, made primarily for employee severance as a result of our restructuring activities and separation-related costs including the build-out of information technology infrastructure as a result of GE separation activities.
Investing Activities
Cash flows from investing activities used cash of $618 million and $1,045 million for the years ended December 31, 2020 and 2019, respectively.
Our principal recurring investing activity is the funding of capital expenditures to ensure that we have the appropriate levels and types of machinery and equipment in place to generate revenue from operations. Expenditures for capital assets totaled $974 million and $1,240 million for 2020 and 2019, respectively, partially offset by cash flows from the sale of property, plant and equipment of $187 million and $264 million in 2020 and 2019, respectively. Proceeds from the disposal of assets related primarily to equipment that was lost-in-hole, and to property, machinery and equipment no longer used in operations that was sold throughout the period. In 2020, we received proceeds of $187 million primarily from the sale of our Rod Lift Systems and our Surface Pressure Control Flow businesses. In 2019, we received $77 million from the sale of our high-speed reciprocating compression business.
Financing Activities
Cash flows from financing activities generated cash of $225 million and used cash of $1,534 million for the years ended December 31, 2020 and 2019, respectively.
We had net repayments of short-term debt of $204 million and $542 million in 2020 and 2019, respectively. We had repayments of our long-term debt of $42 million in 2020 and $570 million in 2019, which was primarily driven by our repayment of certain senior notes.
In 2020, we had proceeds from the issuance of commercial paper of £600 million ($737 million at date of issuance). In addition, we had proceeds from the issuance of $500 million aggregate principal amount of 4.486% Senior Notes due May 2030. We pay interest on the notes each May and November. In 2019, we had proceeds from the issuance of $525 million aggregate principal amount of 3.138% Senior Notes due November 2029. We pay interest on the notes each May and November. We used the proceeds from this offering to repurchase all of our outstanding 3.2% Senior Notes due August 2021.
During 2020, we paid aggregate dividends of $488 million to our Class A stockholders, and BHH LLC made a distribution of $256 million to GE. During 2019, we paid aggregate dividends of $395 million to our Class A stockholders, and BHH LLC made a distribution of $350 million to GE. Additionally, in September 2019, BHH LLC repurchased 11.9 million of its units from GE for a cash consideration of $250 million.
Cash Requirements
In 2021, we believe cash on hand, cash flows from operating activities, the available revolving credit facility, and availability under our existing shelf registrations of debt will provide us with sufficient capital resources and liquidity to manage our working capital needs, meet contractual obligations, fund capital expenditures and dividends, and support the development of our short-term and long-term operating strategies. When necessary, we issue commercial paper or other short-term debt to fund cash needs in the U.S. in excess of the cash generated in the U.S.
Our capital expenditures can be adjusted and managed by us to match market demand and activity levels. Based on current market conditions, capital expenditures, net of proceeds from disposal of assets, in 2021 are expected to be below 2020 levels. The expenditures are expected to be used primarily for normal, recurring items necessary to support our business. We also anticipate making income tax payments in the range of $350 million to $450 million in 2021.
Baker Hughes Company 2020 FORM 10-K | 38
Contractual Obligations
In the table below, we set forth our contractual obligations as of December 31, 2020. Certain amounts included in this table are based on our estimates and assumptions about these obligations, including their duration, anticipated actions by third parties and other factors. The contractual obligations we will actually pay in future periods may vary from those reflected in the table because the estimates and assumptions are subjective.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
(In millions)
|
Total
|
|
Less Than
1 Year
|
|
1 - 3
Years
|
|
4 - 5
Years
|
|
More Than
5 Years
|
Total debt and finance lease obligations (1)
|
$
|
7,446
|
|
|
$
|
890
|
|
|
$
|
1,261
|
|
|
$
|
175
|
|
|
$
|
5,120
|
|
Estimated interest payments (2)
|
3,582
|
|
|
260
|
|
|
481
|
|
|
435
|
|
|
2,406
|
|
Operating leases (3)
|
972
|
|
|
235
|
|
|
286
|
|
|
138
|
|
|
313
|
|
Purchase obligations (4)
|
992
|
|
|
838
|
|
|
123
|
|
|
13
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
12,992
|
|
|
$
|
2,223
|
|
|
$
|
2,151
|
|
|
$
|
761
|
|
|
$
|
7,857
|
|
(1)Amounts represent the expected cash payments for the principal amounts related to our debt, including finance lease obligations. Amounts for debt do not include any deferred issuance costs or unamortized discounts or premiums including step up in the value of the debt on the acquisition of BHI. Expected cash payments for interest are excluded from these amounts. Total debt and finance lease obligations includes $45 million payable to GE and its affiliates. As there is no fixed payment schedule on the amount payable to GE and its affiliates we have classified it as payable in less than one year.
(2)Amounts represent the expected cash payments for interest on our long-term debt and finance lease obligations.
(3)Amounts represent the future minimum payments under operating leases with initial terms of one year or more. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
(4)Purchase obligations include expenditures for capital assets for 2020 as well as agreements to purchase goods or services or licenses that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.
Due to the uncertainty with respect to the timing of potential future cash outflows associated with our uncertain tax positions, we are unable to make reasonable estimates of the period of cash settlement, if any, to the respective taxing authorities. Therefore, $601 million in uncertain tax positions, including interest and penalties, have been excluded from the contractual obligations table above. See "Note 12. Income Taxes" of the Notes to Consolidated Financial Statements in Item 8 herein for further information.
We have certain defined benefit pension and other post-retirement benefit plans covering certain of our U.S. and international employees. In 2020, we made contributions and paid direct benefits of approximately $39 million in connection with those plans, and we anticipate funding between approximately $30 million to $45 million in 2021. Amounts for pension funding obligations are based on assumptions that are subject to change, therefore, we are currently not able to reasonably estimate our contribution figures after 2021. See "Note 11. Employee Benefit Plans" of the Notes to Consolidated Financial Statements in Item 8 herein for further information.
Off-Balance Sheet Arrangements
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 $4.1 billion at December 31, 2020. 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 consolidated financial statements.
As of December 31, 2020, we had no material off-balance sheet financing arrangements other than those discussed above. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.
Baker Hughes Company 2020 FORM 10-K | 39
Other factors affecting liquidity
Registration Statements: In November 2018, Baker Hughes filed a universal shelf registration statement on Form S-3ASR (Automatic Shelf Registration) with the SEC to have the ability to sell various types of securities including debt securities, Class A common stock, preferred stock, guarantees of debt securities, purchase contracts and units. The specific terms of any securities to be sold would be described in supplemental filings with the SEC. The registration statement will expire in 2021.
In December 2020, BHH LLC, Baker Hughes Netherlands Funding Company B.V., and Baker Hughes Co-Obligor, Inc. filed a shelf registration statement on Form S-3 with the SEC to have the ability to sell up to $3 billion in debt securities in amounts to be determined at the time of an offering. Any such offering, if it does occur, may happen in one or more transactions. The specific terms of any debt securities to be sold would be described in supplemental filings with the SEC. The registration statement will expire in December 2023.
Customer receivables: In line with industry practice, we may bill our customers for services provided in arrears dependent upon contractual terms. In a challenging economic environment, we may experience delays in the payment of our invoices due to customers' lower cash flow from operations or their more limited access to credit markets. While historically there have not been material non-payment events, we attempt to mitigate this risk through working with our customers to restructure their debts. A customer's failure or delay in payment could have a material adverse effect on our short-term liquidity and results from operations. As of December 31, 2020, 16% of our gross trade receivables were from customers in the U.S. Other than the U.S., no other country or single customer accounted for more than 10% of our gross trade receivables at this date. As of December 31, 2019, 19% of our gross trade receivables were from customers in the U.S.
International operations: Our cash that is held outside the U.S. is 76% of the total cash balance as of December 31, 2020. We may not be able to use this cash quickly and efficiently due to exchange or cash controls that could make it challenging. As a result, our cash balance may not represent our ability to quickly and efficiently use this cash.
Supply chain finance programs: Under supply chain finance programs, administered by a third party, our suppliers are given the opportunity to sell receivables from us to participating financial institutions at their sole discretion at a rate that leverages our credit rating and thus might be more beneficial to our suppliers. Our responsibility is limited to making payment on the terms originally negotiated with our supplier, regardless of whether the supplier sells its receivable to a financial institution. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the program. These liabilities continue to be presented as accounts payable in our condensed consolidated statements of financial position and reflected as cash flow from operating activities when settled. We do not believe that changes in the availability of supply chain financing programs would have a material impact on our liquidity.
CRITICAL ACCOUNTING ESTIMATES
Accounting estimates and assumptions discussed in this section are those considered to be the most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. Many of these estimates include determining fair value. These estimates reflect our best judgment about current, and for some estimates future, economic and market conditions and their potential effects based on information available as of the date of these financial statements. If these conditions change from those expected, it is reasonably possible that the judgments and estimates described below could change, which may result in future impairments of goodwill, intangibles and long-lived assets, increases in reserves for contingencies, establishment of valuation allowances on deferred tax assets and increased tax liabilities, among other effects. Also, see "Note 1. Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements in Item 8 herein, which discusses our most significant accounting policies.
We have defined a critical accounting estimate as one that is both important to the portrayal of either our financial condition or results of operations and requires us to make difficult, subjective or complex judgments or estimates about matters that are uncertain. The Audit Committee of our Board of Directors has reviewed our critical accounting estimates and the disclosure presented below. During the past three fiscal years, we have not made any material changes in the methodology used to establish the critical accounting estimates, and we believe that the
Baker Hughes Company 2020 FORM 10-K | 40
following are the critical accounting estimates used in the preparation of our consolidated financial statements. There are other items within our consolidated financial statements that require estimation and judgment but they are not deemed critical as defined above.
Revenue Recognition on Long-Term Product Services Agreements
We have long-term service agreements with our customers predominately within our TPS segment. These agreements typically require us to maintain assets sold to the customer over a defined contract term. These agreements have average contract terms of greater than 10 years. From time to time, these contract terms may be extended through contract modifications or amendments, which may result in revisions to future billing and cost estimates. Revenue recognition on long-term product services agreements requires estimates of both customer payments and the costs to perform required maintenance services over the contract term. We recognize revenue on an overtime basis using input method to measure our progress toward completion at the estimated margin rate of the contract.
To develop our billings estimates, we consider the number of billable events that will occur based on estimated utilization of the asset under contract, over the life of the contract term. This estimated utilization will consider both historical and market conditions, asset retirements and new product introductions, if applicable.
To develop our cost estimates, we consider the timing and extent of maintenance and overhaul events, including the amount and cost of labor, spare parts and other resources required to perform the services. In developing our cost estimates, we utilize a combination of our historical cost experience and expected cost improvements. Cost improvements are only included in future cost estimates after savings have been observed in actual results or proven effective through an extensive regulatory or engineering approval process.
We routinely review the estimates used in our product services agreements and regularly revise them to adjust for changes. These revisions are based on objectively verifiable information that is available at the time of the review.
The difference between the timing of our revenue recognition and cash received from our customers results in either a contract asset (revenue in excess of billings) or a contract liability (billings in excess of revenue). See "Note 7. Contract and Other Deferred Assets" and "Note 8. Progress Collections and Deferred Income" of the Notes to Consolidated Financial Statements in Item 8 herein for further information.
We regularly assess customer credit risk inherent in the carrying amounts of receivables and contract assets and estimated earnings, including the risk that contractual penalties may not be sufficient to offset our accumulated investment in the event of customer termination. We gain insight into expected future utilization and cost trends, as well as credit risk, through our knowledge of the equipment installed and the close interaction with our customers through supplying critical services and parts over extended periods. Revisions to cost or billing estimates may affect a product services agreement’s total estimated profitability resulting in an adjustment of earnings; such adjustments generated earnings of $17 million, $(1) million and $26 million for the three years ended December 31, 2020, 2019 and 2018, respectively. We provide for probable losses when they become evident.
On December 31, 2020, our long-term product service agreements, net of related billings in excess of revenues, of $0.3 billion, represent approximately 2.9% of our total estimated life of contract billings of $11.2 billion. Cash billings collected on these contracts were approximately $0.6 billion during the years ended December 31, 2020 and 2019. Our contracts (on average) are approximately 18% complete based on costs incurred to date and our estimate of future costs. Revisions to our estimates of future revenue or costs that increase or decrease total estimated contract profitability by 1% would increase or decrease the long-term product service agreements balance by $0.04 billion.
Goodwill and Other Identified Intangible 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. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. When performing the annual impairment test we have the option of first performing a qualitative
Baker Hughes Company 2020 FORM 10-K | 41
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. We assess the valuation methodology based upon the relevance and availability of the data at the time the valuation is performed.
Pension Assumptions
Pension benefits are calculated using significant inputs to the actuarial models that measure pension benefit obligations and related effects on operations. Two assumptions, discount rate and expected return on assets, are important elements of plan expense and asset/liability measurement. We evaluate these critical assumptions at least annually on a plan and country specific basis. We periodically evaluate other assumptions involving demographic factors such as retirement age, mortality and turnover, and update them to reflect its experience and expectations for the future. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors.
Projected benefit obligations are measured as the present value of expected payments discounted using the weighted average of market observed yields for high quality fixed income securities with maturities that correspond to the payment of benefits, lower discount rates increase present values and subsequent year pension expense and higher discount rates decrease present values and subsequent year pension expense. The discount rates used to determine the benefit obligations for our principal pension plans at December 31, 2020 and 2019 were 1.66% and 2.34%, respectively, reflecting market interest rates. Our expected return on assets at December 31, 2020 and 2019 was 4.20% and 5.48%, respectively.
Income Taxes
We operate in more than 120 countries and our effective tax rate is based on our income, statutory tax rates, and differences between tax laws and the U.S. GAAP in these various jurisdictions. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. This rate is further impacted by the extent earnings are indefinitely reinvested as repatriation of these foreign earnings would incur other additional taxes such as withholding and income taxes. Indefinite reinvestment is determined by management’s judgment and intentions concerning the future operations of the Company. In cases where repatriation would otherwise incur significant withholding or income taxes, these foreign earnings have been indefinitely reinvested in active non-U.S. business operations. Computation of the potential deferred tax liability associated with these undistributed earnings and any other basis differences is not practicable.
Deferred income tax assets represent amounts available to reduce income taxes payable in future years. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income rely heavily on estimates. We use our historical experience and short and long range business forecasts to provide insight. 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.
Our tax filings routinely 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 we believe will ultimately result from these proceedings, but settlements of issues raised in these audits may affect our tax rate. We have $483 million of gross unrecognized tax benefits, excluding interest and penalties, at December 31, 2020. We are not able to reasonably estimate in which future periods these amounts ultimately will be settled.
Baker Hughes Company 2020 FORM 10-K | 42
Other Loss Contingencies
Other loss contingencies are uncertain and unresolved matters that arise in the ordinary course of business and result from events or actions by others that have the potential to result in a future loss. Such contingencies include, but are not limited to, environmental obligations, litigation, regulatory proceedings, product quality, and losses resulting from other events and developments.
The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures as well as disclosures about any contingent assets and liabilities. We base these estimates and judgments on historical experience and other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions about future events and their effects are subject to uncertainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the business environment in which we operate changes.
Allowance for Credit Losses
The estimation of anticipated credit losses that may be incurred as we work through the invoice collection process with our customers requires us to make judgments and estimates regarding our customers' ability to pay amounts due to us. We monitor our customers' payment history and current credit worthiness to determine that collectability is reasonably assured. We also consider the overall business climate in which our customers operate. For accounts receivable, a loss allowance matrix is utilized to measure lifetime expected credit losses. The matrix contemplates historical credit losses by age of receivables, adjusted for any forward-looking information and management expectations. At December 31, 2020 and 2019, the allowance for credit losses totaled $373 million and $323 million of total gross accounts receivable, respectively. We believe that our allowance for credit losses is adequate to cover the anticipated credit losses under current conditions; however, uncertainties regarding changes in the financial condition of our customers, either adverse or positive, could impact the amount and timing of any additional credit losses that may be required.
Inventory Reserves
Inventory is a significant component of current assets and is stated at the lower of cost or net realizable value. This requires us to 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. These estimates and forecasts inherently include uncertainties and require us to make judgments regarding potential future outcomes. At December 31, 2020 and 2019, inventory reserves totaled $421 million and $429 million of gross inventory, respectively. We believe that our reserves are adequate to properly value potential excess, slow moving, and obsolete inventory under current conditions. Significant or unanticipated changes to our estimates and forecasts could impact the amount and timing of any additional provisions for excess, slow moving or obsolete inventory that may be required.
NEW ACCOUNTING STANDARDS TO BE ADOPTED
See "Note 1. Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements in Item 8 herein for further discussion of accounting standards to be adopted.
RELATED PARTY TRANSACTIONS
See "Note 18. Related Party Transactions" of the Notes to Consolidated Financial Statements in Item 8 herein for further discussion of related party transactions.
Baker Hughes Company 2020 FORM 10-K | 43
FORWARD-LOOKING STATEMENTS
This Form 10-K, including MD&A and certain statements in the Notes to Consolidated Financial Statements, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, (each a "forward-looking statement"). Forward-looking statements concern future circumstances and results and other statements that are not historical facts and are sometimes identified by the words "may," "will," "should," "potential," "intend," "expect," "endeavor," "seek," "anticipate," "estimate," "overestimate," "underestimate," "believe," "could," "project," "predict," "continue," "target" or other similar words or expressions. Forward-looking statements are based upon current plans, estimates and expectations that are subject to risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. The inclusion of such statements should not be regarded as a representation that such plans, estimates or expectations will be achieved. Important factors that could cause actual results to differ materially from such plans, estimates or expectations include, among others, the risk factors in the "Risk Factors" section of Part 1 of Item 1A of this Form 10-K and those set forth from time-to-time in other filings by the Company with the SEC. These documents are available through our website or through the SEC's Electronic Data Gathering and Analysis Retrieval (EDGAR) system at http://www.sec.gov.
In light of such risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. These forward-looking statements speak only as of the date of this annual report, or if earlier, as of the date they were made. We do not intend to, and disclaim any obligation to, update or revise any forward-looking statements unless required by securities law.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks that are inherent in our financial instruments and arise from changes in interest rates and foreign currency exchange rates. We may enter into derivative financial instrument transactions to manage or reduce market risk but do not enter into derivative financial instrument transactions for speculative purposes. A discussion of our primary market risk exposure in financial instruments is presented below.
INTEREST RATE RISK
All of our long-term debt is comprised of fixed rate instruments. We are subject to interest rate risk on our debt and investment portfolio. We may use interest rate swaps to manage the economic effect of fixed rate obligations associated with certain debt. There were no outstanding interest rate swap agreements as of December 31, 2020. The following table sets forth our fixed rate long-term debt, excluding finance leases, and the related weighted average interest rates by expected maturity dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
Thereafter
|
|
Total (2)
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (1)
|
$
|
—
|
|
|
$
|
1,250
|
|
|
$
|
—
|
|
|
$
|
107
|
|
|
$
|
—
|
|
|
$
|
5,106
|
|
|
$
|
6,463
|
|
Weighted average interest rates
|
—
|
%
|
|
2.88
|
%
|
|
—
|
%
|
|
4.06
|
%
|
|
—
|
%
|
|
3.89
|
%
|
|
3.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Fair market value of our fixed rate long-term debt, excluding finance leases, was $7.5 billion at December 31, 2020.
(2)Amounts represent the principal value of our long-term debt outstanding and related weighted average interest rates at the end of the respective period.
Baker Hughes Company 2020 FORM 10-K | 44
FOREIGN CURRENCY EXCHANGE RISK
We conduct our operations around the world in a number of different currencies, and we are exposed to market risks resulting from fluctuations in foreign currency exchange rates. Many of our significant foreign subsidiaries have designated the local currency as their functional currency. As such, future earnings are subject to change due to fluctuations in foreign currency exchange rates when transactions are denominated in currencies other than our functional currencies.
Additionally, we buy, manufacture and sell components and products across global markets. These activities expose us to changes in foreign currency exchange rates, commodity prices and interest rates which can adversely affect revenue earned and costs of our operating businesses. When the currency in which equipment is sold differs from the primary currency of the legal entity and the exchange rate fluctuates, it will affect the revenue earned on the sale. These sales and purchase transactions also create receivables and payables denominated in foreign currencies and exposure to foreign currency gains and losses based on changes in exchange rates. Changes in the price of raw materials used in manufacturing can affect the cost of manufacturing. We use derivatives to mitigate or eliminate these exposures, where appropriate.
We use cash flow hedging primarily to reduce or eliminate the effects of foreign currency exchange rate changes on purchase and sale contracts. Accordingly, most derivative activity in this category consists of currency exchange contracts. We had outstanding foreign currency forward contracts with notional amounts aggregating $6.8 billion and $5.3 billion to hedge exposure to currency fluctuations in various foreign currencies at December 31, 2020 and 2019, respectively. The notional amount of these derivative instruments do not generally represent cash amounts exchanged by us and the counterparties, but rather the nominal amount upon which changes in the value of the derivatives are measured.
As of December 31, 2020, the Company estimates that a 1% appreciation or depreciation in the U.S. dollar would result in an impact of less than $5 million to our pre-tax earnings, however, the Company is generally able to mitigate its foreign exchange exposure, where there are liquid financial markets, through use of foreign currency derivative transactions. Also, see "Note 16. Financial Instruments" of the Notes to Consolidated Financial Statements in Item 8 herein, which has additional details on our strategy.
Baker Hughes Company 2020 FORM 10-K | 45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we assessed the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, our principal executive officer and principal financial officer concluded that our internal control over financial reporting was effective as of December 31, 2020. This conclusion is based on the recognition that there are inherent limitations in all systems of internal control. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
KPMG LLP, the Company's independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company's internal control over financial reporting.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
/s/ LORENZO SIMONELLI
Lorenzo Simonelli
Chairman, President and
Chief Executive Officer
|
|
/s/ BRIAN WORRELL
Brian Worrell
Chief Financial Officer
|
|
/s/ KURT CAMILLERI
Kurt Camilleri
Senior Vice President, Controller and Chief Accounting Officer
|
Houston, Texas
February 25, 2021
Baker Hughes Company 2020 FORM 10-K | 46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Baker Hughes Company:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of Baker Hughes Company and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income (loss), comprehensive income (loss), changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue recognition on certain agreements for sales of new products manufactured to unique customer specifications
As discussed in Note 1 to the consolidated financial statements, the Company enters into agreements for sales of goods manufactured to unique customer specifications on an over time basis. Revenue from these types of contracts is recognized to the extent of progress towards completion measured by actual costs incurred relative to total expected costs. The Company provides for potential losses on these types of contracts when it is probable that a loss will be incurred.
We identified revenue recognition for certain agreements for sales of new products as a critical audit matter. Complex auditor judgment was required in evaluating the Company's long-term estimates of the expected direct material costs to be incurred in order to complete these agreements.
Baker Hughes Company 2020 FORM 10-K | 47
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s revenue recognition process for sales of new products. This included controls pertaining to the Company's estimation of direct material costs expected to be incurred to complete agreements for sales of new products. We evaluated the Company's ability to accurately estimate direct material costs expected to be incurred to complete the agreements for sales of new products. We evaluated the estimated direct material costs expected to be incurred to complete the new products for the agreements by:
–questioning the Company's finance and project managers regarding progress to date based on the latest project reports and the costs expected to still be incurred until completion;
–observing project review meetings performed by the Company or inspecting relevant minutes of those meetings to identify changes in the estimated costs expected to be incurred to complete the contract and related contract margins;
–investigating changes to the contract margin when compared to the prior year's estimated contract margin; and
–evaluating the estimated direct material costs to be incurred by obtaining supplier cost estimates and considering changes to those estimates during the year
Goodwill impairment in the Oilfield Services reporting unit
As discussed in Notes 1 and 6 to the consolidated financial statements, the Company has four reporting units which are monitored for impairment on the basis of market conditions. The Company performs an impairment test on goodwill on an annual basis for each of its reporting units as of July 1, or more frequently when circumstances indicate that an impairment indicator exists at the reporting unit level. Potential impairment indicators include the results of the most recent annual impairment testing, downward revisions to internal forecasts, declines in market capitalization below book value, and the magnitude and duration of those declines, if any. The Company identified impairment indicators and therefore performed an interim quantitative impairment test comparing the fair value of each of its reporting units to its carrying value as of March 31, 2020. Based on the results of the quantitative impairment test as of March 31, 2020, the Company concluded that the carrying value of the Oilfield Services reporting unit exceeded its estimated fair value and recorded a goodwill impairment charge in the amount of $11,484 million associated with the Oilfield Services reporting unit. The goodwill balance as of December 31, 2020 was $5,977 million, of which $1,539 million was related to the Oilfield Services reporting unit. Projected revenue, projected operating profit, and the discount rate are elements of the estimated future cash flows used by the Company in determining the fair value of each of the reporting units.
We identified the evaluation of the goodwill impairment analysis for the Oilfield Services reporting unit as a critical audit matter. Specifically, the evaluation of projected revenue and projected operating profit required the application of subjective auditor judgment because these projections involve assumptions about future events. In addition, changes to the discount rate assumptions may have a significant effect on the Company’s assessment of the carrying value of the goodwill of the reporting unit.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the goodwill impairment process. This included controls relating to management’s goodwill impairment test, the development of projected financial information and the discount rate, and management’s review of the projections. We evaluated the projected revenue and projected operating profit assumptions by comparing the projected amounts to (1) the past performance of the reporting unit, including historical actual results, and (2) relevant industry benchmark data related to future events. We also considered evidence obtained in other areas of the audit. We evaluated the Company’s ability to accurately prepare projections by comparing the projected revenues and projected operating profit to actual results for the period. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the discount rate used by comparing it against a discount rate range that was independently developed using publicly available market data for comparable entities.
/s/ KPMG LLP
We have served as the Company’s auditor since 2017.
Houston, Texas
February 25, 2021
Baker Hughes Company 2020 FORM 10-K | 48
REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Baker Hughes Company:
Opinion on Internal Control Over Financial Reporting
We have audited Baker Hughes Company and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial position of the Company as of December 31, 2020 and 2019, the related consolidated statements of income (loss), comprehensive income (loss), changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 25, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Houston, Texas
February 25, 2021
Baker Hughes Company 2020 FORM 10-K | 49
BAKER HUGHES COMPANY
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In millions, except per share amounts)
|
2020
|
2019
|
2018
|
Revenue:
|
|
|
|
Sales of goods
|
$
|
12,846
|
|
$
|
13,689
|
|
$
|
13,113
|
|
Sales of services
|
7,859
|
|
10,149
|
|
9,764
|
|
Total revenue
|
20,705
|
|
23,838
|
|
22,877
|
|
Costs and expenses:
|
|
|
|
Cost of goods sold
|
11,383
|
|
11,798
|
|
11,524
|
|
Cost of services sold
|
6,123
|
|
7,608
|
|
7,367
|
|
Selling, general and administrative
|
2,404
|
|
2,832
|
|
2,699
|
|
Goodwill impairment
|
14,773
|
|
—
|
|
—
|
|
Restructuring, impairment and other
|
1,866
|
|
342
|
|
433
|
|
Separation and merger related
|
134
|
|
184
|
|
153
|
|
Total costs and expenses
|
36,683
|
|
22,764
|
|
22,176
|
|
Operating income (loss)
|
(15,978)
|
|
1,074
|
|
701
|
|
Other non-operating income (loss), net
|
1,040
|
|
(84)
|
|
202
|
|
Interest expense, net
|
(264)
|
|
(237)
|
|
(223)
|
|
Income (loss) before income taxes and equity in loss of affiliate
|
(15,202)
|
|
753
|
|
680
|
|
Equity in loss of affiliate
|
—
|
|
—
|
|
(139)
|
|
Provision for income taxes
|
(559)
|
|
(482)
|
|
(258)
|
|
Net income (loss)
|
(15,761)
|
|
271
|
|
283
|
|
|
|
|
|
Less: Net income (loss) attributable to noncontrolling interests
|
(5,821)
|
|
143
|
|
88
|
|
Net income (loss) attributable to Baker Hughes Company
|
$
|
(9,940)
|
|
$
|
128
|
|
$
|
195
|
|
|
|
|
|
Per share amounts:
|
|
|
|
Basic income (loss) per Class A common share
|
$
|
(14.73)
|
|
$
|
0.23
|
|
$
|
0.46
|
|
Diluted income (loss) per Class A common share
|
$
|
(14.73)
|
|
$
|
0.23
|
|
$
|
0.45
|
|
|
|
|
|
Cash dividend per Class A common share
|
$
|
0.72
|
|
$
|
0.72
|
|
$
|
0.72
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
Baker Hughes Company 2020 FORM 10-K | 50
BAKER HUGHES COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In millions)
|
2020
|
2019
|
2018
|
Net income (loss)
|
$
|
(15,761)
|
|
$
|
271
|
|
$
|
283
|
|
|
|
|
|
Less: Net income (loss) attributable to noncontrolling interests
|
(5,821)
|
|
143
|
|
88
|
|
Net income (loss) attributable to Baker Hughes Company
|
(9,940)
|
|
128
|
|
195
|
|
Other comprehensive income (loss):
|
|
|
|
Investment securities
|
(2)
|
|
2
|
|
(3)
|
|
Foreign currency translation adjustments
|
175
|
|
53
|
|
(502)
|
|
Cash flow hedges
|
(5)
|
|
12
|
|
(4)
|
|
Benefit plans
|
(125)
|
|
(75)
|
|
(64)
|
|
Other comprehensive income (loss)
|
43
|
|
(8)
|
|
(573)
|
|
|
|
|
|
Less: Other comprehensive loss attributable to noncontrolling interests
|
—
|
|
(1)
|
|
(343)
|
|
Other comprehensive income (loss) attributable to Baker Hughes Company
|
43
|
|
(7)
|
|
(230)
|
|
Comprehensive income (loss)
|
(15,718)
|
|
263
|
|
(290)
|
|
|
|
|
|
Less: Comprehensive income (loss) attributable to noncontrolling interests
|
(5,821)
|
|
142
|
|
(255)
|
|
Comprehensive income (loss) attributable to Baker Hughes Company
|
$
|
(9,897)
|
|
$
|
121
|
|
$
|
(35)
|
|
See accompanying Notes to Consolidated Financial Statements
Baker Hughes Company 2020 FORM 10-K | 51
BAKER HUGHES COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In millions, except par value)
|
2020
|
2019
|
ASSETS
|
|
|
Current Assets:
|
|
|
Cash and cash equivalents (1)
|
$
|
4,132
|
|
$
|
3,249
|
|
Current receivables, net
|
5,622
|
|
6,416
|
|
Inventories, net
|
4,421
|
|
4,608
|
|
All other current assets
|
2,280
|
|
949
|
|
Total current assets
|
16,455
|
|
15,222
|
|
Property, plant and equipment, less accumulated depreciation
|
5,358
|
|
6,240
|
|
Goodwill
|
5,977
|
|
20,690
|
|
Other intangible assets, net
|
4,397
|
|
5,381
|
|
Contract and other deferred assets
|
2,001
|
|
1,881
|
|
All other assets
|
2,866
|
|
3,001
|
|
Deferred income taxes
|
953
|
|
954
|
|
Total assets (1)
|
$
|
38,007
|
|
$
|
53,369
|
|
LIABILITIES AND EQUITY
|
Current Liabilities:
|
|
|
Accounts payable
|
$
|
3,532
|
|
$
|
4,268
|
|
Short-term debt and current portion of long-term debt (1)
|
889
|
|
321
|
|
Progress collections and deferred income
|
3,454
|
|
2,870
|
|
All other current liabilities
|
2,352
|
|
2,555
|
|
Total current liabilities
|
10,227
|
|
10,014
|
|
Long-term debt
|
6,744
|
|
6,301
|
|
Deferred income taxes
|
186
|
|
51
|
|
Liabilities for pensions and other employee benefits
|
1,217
|
|
1,079
|
|
All other liabilities
|
1,391
|
|
1,425
|
|
Equity:
|
|
|
Class A common stock, $0.0001 par value - 2,000 authorized, 724 and 650 issued and outstanding as of December 31, 2020 and 2019, respectively
|
—
|
|
—
|
|
Class B common stock, $0.0001 par value - 1,250 authorized, 311 and 377 issued and outstanding as of December 31, 2020 and 2019, respectively
|
—
|
|
—
|
|
Capital in excess of par value
|
24,613
|
|
23,565
|
|
|
|
|
Retained loss
|
(9,942)
|
|
—
|
|
Accumulated other comprehensive loss
|
(1,778)
|
|
(1,636)
|
|
Baker Hughes Company equity
|
12,893
|
|
21,929
|
|
Noncontrolling interests
|
5,349
|
|
12,570
|
|
Total equity
|
18,242
|
|
34,499
|
|
Total liabilities and equity
|
$
|
38,007
|
|
$
|
53,369
|
|
(1)Total assets include $45 million and $273 million of assets held on behalf of GE, of which $44 million and $162 million is cash and cash equivalents and $1 million and $111 million is investment securities at December 31, 2020 and 2019, respectively, and a corresponding amount of liability is reported in short-term borrowings. See "Note 18. Related Party Transactions" for further details.
See accompanying Notes to Consolidated Financial Statements
Baker Hughes Company 2020 FORM 10-K | 52
BAKER HUGHES COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
Class A and Class B Common Stock
|
Capital in Excess of Par Value
|
|
Retained Earnings (Loss)
|
Accumulated Other Comprehensive Loss
|
Non-controlling Interests
|
Total
|
Balance at December 31, 2017
|
—
|
|
$
|
15,083
|
|
|
$
|
(103)
|
|
$
|
(703)
|
|
$
|
24,133
|
|
$
|
38,410
|
|
Effect of adoption of ASU 2016-16 on taxes
|
|
|
|
25
|
|
|
42
|
|
67
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
Net income
|
|
|
|
195
|
|
|
88
|
|
283
|
|
Other comprehensive loss
|
|
|
|
|
(230)
|
|
(343)
|
|
(573)
|
|
Dividends on Class A Common Stock ($0.72 per share)
|
|
(224)
|
|
|
(91)
|
|
|
|
(315)
|
|
Distributions to GE
|
|
|
|
|
|
(495)
|
|
(495)
|
|
Effect of exchange of Class B common stock and associated BHH LLC Units for Class A common stock
|
|
3,638
|
|
|
|
(230)
|
|
(3,408)
|
|
—
|
|
Repurchase and cancellation of Class B common stock and associated BHH LLC Units
|
|
405
|
|
|
|
(52)
|
|
(2,440)
|
|
(2,087)
|
|
Repurchase and cancellation of Class A common stock
|
|
(374)
|
|
|
|
|
|
(374)
|
|
Stock-based compensation cost
|
|
121
|
|
|
|
|
|
121
|
|
Other
|
|
10
|
|
|
(1)
|
|
(4)
|
|
(29)
|
|
(24)
|
|
Balance at December 31, 2018
|
—
|
|
18,659
|
|
|
25
|
|
(1,219)
|
|
17,548
|
|
35,013
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
Net income
|
|
|
|
128
|
|
|
143
|
|
271
|
|
Other comprehensive loss
|
|
|
|
|
(7)
|
|
(1)
|
|
(8)
|
|
Dividends on Class A Common Stock ($0.72 per share)
|
|
(241)
|
|
|
(154)
|
|
|
|
(395)
|
|
Distributions to GE
|
|
|
|
|
|
(350)
|
|
(350)
|
|
Effect of exchange of Class B common stock and associated BHH LLC Units for Class A common stock
|
|
4,740
|
|
|
|
(332)
|
|
(4,408)
|
|
—
|
|
Repurchase and cancellation of Class B common stock and associated BHH LLC Units
|
|
107
|
|
|
|
(18)
|
|
(339)
|
|
(250)
|
|
Stock-based compensation cost
|
|
187
|
|
|
|
|
|
187
|
|
Other
|
|
113
|
|
|
1
|
|
(60)
|
|
(23)
|
|
31
|
|
Balance at December 31, 2019
|
—
|
|
23,565
|
|
|
—
|
|
(1,636)
|
|
12,570
|
|
34,499
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
(9,940)
|
|
|
(5,821)
|
|
(15,761)
|
|
Other comprehensive loss
|
|
|
|
|
43
|
|
|
43
|
|
Dividends on Class A Common Stock ($0.72 per share)
|
|
(488)
|
|
|
|
|
|
(488)
|
|
Distributions to GE
|
|
|
|
|
|
(256)
|
|
(256)
|
|
Effect of exchange of Class B common stock and associated BHH LLC Units for Class A common stock
|
|
1,317
|
|
|
|
(185)
|
|
(1,132)
|
|
—
|
|
|
|
|
|
|
|
|
|
Stock-based compensation cost
|
|
210
|
|
|
|
|
|
210
|
|
Other
|
|
9
|
|
|
(2)
|
|
|
(12)
|
|
(5)
|
|
Balance at December 31, 2020
|
—
|
|
$
|
24,613
|
|
|
$
|
(9,942)
|
|
$
|
(1,778)
|
|
$
|
5,349
|
|
$
|
18,242
|
|
See accompanying Notes to Consolidated Financial Statements
Baker Hughes Company 2020 FORM 10-K | 53
BAKER HUGHES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In millions)
|
2020
|
2019
|
2018
|
Cash flows from operating activities:
|
|
|
|
Net income (loss)
|
$
|
(15,761)
|
|
$
|
271
|
|
$
|
283
|
|
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
|
|
|
|
Depreciation and amortization
|
1,317
|
|
1,418
|
|
1,486
|
|
Goodwill impairment
|
14,773
|
|
—
|
|
—
|
|
Intangible assets impairment
|
729
|
|
—
|
|
—
|
|
Property, plant and equipment impairment
|
461
|
|
107
|
|
80
|
|
Inventory impairment
|
246
|
|
—
|
|
105
|
|
Loss (gain) on business dispositions
|
353
|
|
138
|
|
(171)
|
|
Provision (benefit) for deferred income taxes
|
160
|
|
51
|
|
(249)
|
|
Unrealized gain on equity security
|
(1,417)
|
|
—
|
|
—
|
|
Equity in loss of affiliate
|
—
|
|
—
|
|
139
|
|
Changes in operating assets and liabilities:
|
|
|
|
Current receivables
|
680
|
|
(583)
|
|
(204)
|
|
Inventories
|
(80)
|
|
(200)
|
|
(339)
|
|
Accounts payable
|
(711)
|
|
249
|
|
794
|
|
Progress collections and deferred income
|
396
|
|
1,147
|
|
(27)
|
|
Contract and other deferred assets
|
(69)
|
|
(60)
|
|
129
|
|
Other operating items, net
|
227
|
|
(412)
|
|
(264)
|
|
Net cash flows from operating activities
|
1,304
|
|
2,126
|
|
1,762
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Expenditures for capital assets
|
(974)
|
|
(1,240)
|
|
(995)
|
|
Proceeds from disposal of assets
|
187
|
|
264
|
|
458
|
|
Proceeds from business dispositions
|
187
|
|
77
|
|
453
|
|
|
|
|
|
Net cash paid for business interests
|
(26)
|
|
(176)
|
|
(530)
|
|
Other investing items, net
|
8
|
|
30
|
|
36
|
|
Net cash flows used in investing activities
|
(618)
|
|
(1,045)
|
|
(578)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Net repayments of short-term debt
|
(204)
|
|
(542)
|
|
(376)
|
|
Proceeds from the issuance of long-term debt
|
500
|
|
525
|
|
—
|
|
Proceeds from issuance of commercial paper
|
737
|
|
—
|
|
—
|
|
Repayments of long-term debt
|
(42)
|
|
(570)
|
|
(684)
|
|
Dividends paid
|
(488)
|
|
(395)
|
|
(315)
|
|
Distributions to GE
|
(256)
|
|
(350)
|
|
(495)
|
|
Repurchase of Class A common stock
|
—
|
|
—
|
|
(387)
|
|
Repurchase of common units from GE by BHH LLC
|
—
|
|
(250)
|
|
(2,099)
|
|
|
|
|
|
|
|
|
|
Other financing items, net
|
(22)
|
|
48
|
|
(7)
|
|
Net cash flows from (used in) financing activities
|
225
|
|
(1,534)
|
|
(4,363)
|
|
Effect of currency exchange rate changes on cash and cash equivalents
|
(28)
|
|
(21)
|
|
(128)
|
|
Increase (decrease) in cash and cash equivalents
|
883
|
|
(474)
|
|
(3,307)
|
|
Cash and cash equivalents, beginning of period
|
3,249
|
|
3,723
|
|
7,030
|
|
Cash and cash equivalents, end of period
|
$
|
4,132
|
|
$
|
3,249
|
|
$
|
3,723
|
|
See "Note 22. Supplementary Information" for additional cash flow disclosures.
See accompanying Notes to Consolidated Financial Statements
Baker Hughes Company 2020 FORM 10-K | 54
Baker Hughes Company
Notes to Consolidated Financial Statements
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
Baker Hughes Company (Baker Hughes, the Company, we, us, or our) is an energy technology company with a diversified portfolio of technologies and services that span the energy and industrial value chain. The Company was formed as the result of a combination between Baker Hughes Incorporated (BHI) and the oil and gas business (GE O&G) of General Electric Company (GE) (the Transactions). As of September 16, 2019, GE ceased to hold more than 50% of the voting power of all classes of our outstanding voting stock. Subsequently, on October 17, 2019, the Company changed its name from Baker Hughes, a GE company to Baker Hughes Company. On October 18, 2019, the Company began trading as BKR on the New York Stock Exchange.
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. and such principles, U.S. GAAP) and pursuant to the rules and regulations of the SEC for annual financial information. All intercompany accounts and transactions have been eliminated.
We hold a majority economic interest in Baker Hughes Holdings LLC (BHH LLC) and conduct and exercise full control over all activities of BHH LLC without the approval of any other member. Accordingly, we consolidate the financial results of BHH LLC and report a noncontrolling interest in our consolidated financial statements for the economic interest held by GE. As of December 31, 2020, GE's economic interest in BHH LLC was 30.1%. See "Note 14. Equity" for further information.
In the Company's consolidated financial statements and notes, certain amounts have been reclassified to conform with the current year presentation. In the notes to the consolidated financial statements, all dollar and share amounts in tabulations are in millions of dollars and shares, respectively, unless otherwise indicated. Certain columns and rows in our financial statements and notes thereto may not add due to the use of rounded numbers.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 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 credit losses 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.
Baker Hughes Company 2020 FORM 10-K | 55
Baker Hughes Company
Notes to Consolidated Financial Statements
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 statements 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.
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
Baker Hughes Company 2020 FORM 10-K | 56
Baker Hughes Company
Notes to Consolidated Financial Statements
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 revenue 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 $595 million, $687 million and $700 million for the years ended December 31, 2020, 2019 and 2018, respectively. Research and development expenses were reported in cost of goods sold and cost of services sold.
Separation and Merger Related
In 2020 and 2019, 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. Prior to 2019, separation and merger related costs primarily include costs associated with the combination of BHI and GE O&G.
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, 2020 and 2019, we had $687 million and $1,102 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 $42 million and $142 million, as of December 31, 2020 and 2019, respectively, held on behalf of GE.
Cash and cash equivalents includes a total of $44 million and $162 million of cash at December 31, 2020 and 2019, respectively, held on behalf of GE, and a corresponding liability is reported in short-term borrowings. See "Note 18. Related Party Transactions" for further details.
Allowance for Credit Losses
We monitor our customers' payment history and current credit worthiness to determine that collectability of the related financial assets are reasonably assured. We also consider the overall business climate in which our customers operate. For accounts receivable, a loss allowance matrix is utilized to measure lifetime expected credit losses. The matrix contemplates historical credit losses by age of receivables, adjusted for any forward-looking information and management expectations.
Baker Hughes Company 2020 FORM 10-K | 57
Baker Hughes Company
Notes to Consolidated Financial Statements
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, which is generally provided by using the straight-line method over the estimated economic lives of the individual assets, 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 in inventory and subsequently moved to PP&E.
Other Intangible Assets
We amortize the cost of other intangible assets over their estimated useful lives unless such lives are deemed indefinite. The cost of intangible assets is generally amortized on a straight-line basis over the asset's estimated economic life. Amortizable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. In these circumstances, they are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested annually for impairment and written down to fair value as required. Refer to the Impairment of Goodwill and Other Long-Lived Assets accounting policy.
Impairment of Goodwill and Other Long-lived Assets
We perform an annual impairment test of goodwill on a qualitative or quantitative basis for each of our reporting units as of July 1, or more frequently when circumstances indicate an impairment may exist at the reporting unit level. When performing the annual impairment test we have the option of first performing a qualitative assessment to determine the existence of events and circumstances that would lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If such a conclusion is reached, we would then be required to perform a quantitative impairment assessment of goodwill. However, if the assessment leads to a determination that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then no further assessments are required. A quantitative assessment for the determination of impairment is made by comparing the carrying amount of each reporting unit with its fair value, which is generally calculated using a combination of market, comparable transaction and discounted cash flow approaches. See "Note 6. Goodwill and Other Intangible Assets" for further information on valuation methodology and impairment of goodwill.
We review PP&E, intangible assets and certain other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable and at least annually for indefinite-lived intangible assets. When testing for impairment, we group our long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (or asset group). The determination of recoverability is made based upon the estimated
Baker Hughes Company 2020 FORM 10-K | 58
Baker Hughes Company
Notes to Consolidated Financial Statements
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 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 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:
•Level 1 - Quoted prices for identical instruments in active markets.
•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.
•Level 3 - Significant inputs to the valuation model are unobservable.
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.
Baker Hughes Company 2020 FORM 10-K | 59
Baker Hughes Company
Notes to Consolidated Financial Statements
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 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 "other non- operating income (loss), net" in the consolidated 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. These changes are recorded in "other non-operating income (loss), net" in the consolidated statements of income (loss).
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 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 (loss), net," and (iii) our equity method investment in BJ Services, which was a Delaware limited liability company, 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.
Baker Hughes Company 2020 FORM 10-K | 60
Baker Hughes Company
Notes to Consolidated Financial Statements
Income Taxes
We file U.S. federal and state income tax returns which after the closing of the Transactions primarily includes our distributive share of items of income, gain, loss and deduction of BHH LLC, which is treated as a partnership for U.S. tax purposes. As such, BHH LLC will not itself be subject to U.S. federal income tax under current U.S. tax laws. Non-U.S. current and deferred income taxes owed by the subsidiaries of BHH LLC are reflected in the 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 more likely than not be realized.
We provide U.S. deferred taxes on our outside basis difference in our investment in BHH LLC. In determining this outside basis difference, we exclude non-deductible goodwill and the basis difference related to certain foreign corporations owned by BHH LLC where the undistributed earnings of the foreign corporation have been, or will be, reinvested indefinitely.
Indefinite reinvestment is determined by management’s judgment and intentions concerning the future operations of the Company. In cases where repatriation would otherwise incur significant withholding or income taxes, these foreign earnings have been indefinitely reinvested in the Company’s active non-U.S. business operations. Computation of the potential deferred tax liability associated with these undistributed earnings and any other basis difference is not practicable.
Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. We operate in more than 120 countries and our tax filings are subject to audit by the tax authorities in the jurisdictions where we conduct business. These audits may result in assessments of additional taxes that are resolved with the tax authorities or through the courts. We have provided for the amounts that we believe will ultimately result from these proceedings. We recognize uncertain tax positions that are “more likely than not” to be sustained if the relevant tax authority were to audit the position with full knowledge of all the relevant facts and other information. For those tax positions that meet this threshold, we measure the amount of tax benefit based on the largest amount of tax benefit that has a greater than 50% chance of being realized in a final settlement with the relevant authority. We classify interest and penalties associated with uncertain tax positions as income tax expense. The effects of tax adjustments and settlements from taxing authorities are presented in 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.
Baker Hughes Company 2020 FORM 10-K | 61
Baker Hughes Company
Notes to Consolidated Financial Statements
NEW ACCOUNTING STANDARDS ADOPTED
Financial Instruments - Credit Losses
On January 1, 2020, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses. The ASU introduces 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 previously used under U.S. GAAP, which generally require that a loss be incurred before it is recognized. The new standard also applies to financial assets arising from revenue transactions such as contract assets and accounts receivables. The adoption did not have a material impact on our consolidated financial statements.
Intangibles - Goodwill and Other
On January 1, 2020, we adopted FASB ASU No. 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, when required to test goodwill for recoverability, 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. We have applied this ASU on a prospective basis. See "Note 6. Goodwill and Other Intangible Assets" for further details.
NEW ACCOUNTING STANDARDS TO BE ADOPTED
All other new accounting pronouncements that have been issued but not yet effective are currently being evaluated and at this time are not expected to have a material impact on our financial position or results of operations.
NOTE 2. REVENUE RELATED TO CONTRACTS WITH CUSTOMERS
DISAGGREGATED REVENUE
We disaggregate our revenue from contracts with customers by primary geographic markets.
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
2020
|
2019
|
2018
|
U.S.
|
$
|
4,638
|
|
$
|
6,188
|
|
$
|
6,576
|
|
Non-U.S.
|
16,067
|
|
17,650
|
|
16,301
|
|
Total
|
$
|
20,705
|
|
$
|
23,838
|
|
$
|
22,877
|
|
REMAINING PERFORMANCE OBLIGATIONS
As of December 31, 2020 and 2019, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $23.4 billion and $22.9 billion, respectively. As of December 31, 2020, we expect to recognize revenue of approximately 51%, 67% and 90% 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.
Baker Hughes Company 2020 FORM 10-K | 62
Baker Hughes Company
Notes to Consolidated Financial Statements
NOTE 3. CURRENT RECEIVABLES
Current receivables are comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Customer receivables
|
$
|
4,676
|
|
$
|
5,448
|
|
Related parties
|
429
|
|
495
|
|
Other
|
890
|
|
796
|
|
Total current receivables
|
5,995
|
|
6,739
|
|
Less: Allowance for credit losses
|
(373)
|
|
(323)
|
|
Total current receivables, net
|
$
|
5,622
|
|
$
|
6,416
|
|
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, other tax receivables and customer retentions.
NOTE 4. INVENTORIES
Inventories, net of reserves of $421 million and $429 million in 2020 and 2019, respectively, are comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Finished goods
|
$
|
2,337
|
|
$
|
2,546
|
|
Work in process and raw materials
|
2,084
|
|
2,062
|
|
Total inventories, net
|
$
|
4,421
|
|
$
|
4,608
|
|
We recorded inventory impairments of $246 million, nil, and $105 million for the years ended December 31, 2020, 2019, and 2018, respectively. Inventory impairments in 2020 and 2018 are predominantly in our Oilfield Services segment and Oilfield Equipment segment, respectively, as a result of certain restructuring activities initiated by the Company. Charges for inventory impairments are reported in the "Cost of goods sold" caption of the consolidated statements of income (loss).
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
2020
|
2019
|
Land and improvements (1)
|
8 - 20 years (1)
|
$
|
404
|
|
$
|
430
|
|
Buildings, structures and related equipment
|
5 - 40 years
|
2,618
|
|
2,870
|
|
Machinery, equipment and other
|
2 - 20 years
|
7,451
|
|
7,324
|
|
Total cost
|
|
10,473
|
|
10,624
|
|
Less: Accumulated depreciation
|
|
(5,115)
|
|
(4,384)
|
|
Property, plant and equipment, less accumulated depreciation
|
|
$
|
5,358
|
|
$
|
6,240
|
|
(1)Useful life excludes land.
Depreciation expense relating to property, plant and equipment was $1,009 million, $1,053 million and $1,031 million for the years ended December 31, 2020, 2019 and 2018, respectively. See "Note 20. Restructuring, Impairment and Other" for additional information on property, plant and equipment impairments.
Baker Hughes Company 2020 FORM 10-K | 63
Baker Hughes Company
Notes to Consolidated Financial Statements
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
GOODWILL
The changes in the carrying value of goodwill are detailed below by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oilfield Services
|
Oilfield Equipment
|
Turbo-machinery & Process Solutions
|
Digital Solutions
|
Total
|
Balance at December 31, 2018, gross
|
$
|
15,676
|
|
$
|
4,177
|
|
$
|
2,186
|
|
$
|
2,432
|
|
$
|
24,471
|
|
Accumulated impairment at December 31, 2018
|
(2,633)
|
|
(867)
|
|
—
|
|
(254)
|
|
(3,754)
|
|
Balance at December 31, 2018
|
13,043
|
|
3,310
|
|
2,186
|
|
2,178
|
|
20,717
|
|
|
|
|
|
|
|
Currency exchange and others
|
—
|
|
9
|
|
(15)
|
|
(21)
|
|
(27)
|
|
Balance at December 31, 2019
|
13,043
|
|
3,319
|
|
2,171
|
|
2,157
|
|
20,690
|
|
Impairment
|
(11,484)
|
|
(3,289)
|
|
—
|
|
—
|
|
(14,773)
|
|
Currency exchange and others
|
(20)
|
|
(24)
|
|
63
|
|
41
|
|
60
|
|
Balance at December 31, 2020
|
$
|
1,539
|
|
$
|
6
|
|
$
|
2,234
|
|
$
|
2,198
|
|
$
|
5,977
|
|
We perform our annual goodwill impairment test for each of our reporting units as of July 1 of each fiscal year, in conjunction with our annual strategic planning process. Our reporting units are the same as our four reportable segments. In addition to our annual impairment test, we also test goodwill for impairment between annual impairment dates whenever events or circumstances occur which, in our judgment, could more likely than not reduce the fair value of one or more reporting units below its carrying value. Potential impairment indicators include, but are not limited to, (i) the results of our most recent annual or interim 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, and (iii) declines in our market capitalization below our book value, and the magnitude and duration of those declines, if any.
During the first quarter of 2020, our market capitalization declined significantly compared to the fourth quarter of 2019. Our closing stock price fell to a historic low of $9.33 on March 23, 2020. Over the same period, the equity value of our peer group companies and the overall U.S. stock market also declined significantly amid market volatility. In addition, the Oilfield Services Index (OSX), an indicator of investors’ view of the earnings prospects and cost of capital of the oil and gas services industry, traded at prices that were the lowest in its history. These declines were driven by the uncertainty surrounding the outbreak of the coronavirus (COVID-19) and other macroeconomic events such as the geopolitical tensions between OPEC and Russia, which also resulted in a significant drop in oil prices. Based on these factors, we concluded that a triggering event occurred and, accordingly, an interim quantitative impairment test was performed as of March 31, 2020 (“testing date”).
In performing the interim quantitative impairment test as of March 31, 2020 and consistent with our prior practice, we determined the fair value of each of our reporting units using a combination of the income approach and the market approach by assessing each of these valuation methodologies based upon availability and relevance of comparable company data and determining the 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, updated for recent events, to estimate future cash flows with cash flows beyond the specific operating plans estimated using a terminal value calculation, which incorporates historical and forecasted trends, including an estimate of long-term future growth rates, based on our most recent views of the long-term outlook for each reporting unit. Our internal forecasts include 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.
Baker Hughes Company 2020 FORM 10-K | 64
Baker Hughes Company
Notes to Consolidated Financial Statements
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, updated for recent events.
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.
Based upon the results of our interim quantitative impairment test performed as of March 31, 2020, we concluded that the carrying value of the Oilfield Services (OFS) and Oilfield Equipment (OFE) reporting units exceeded their estimated fair value as of the testing date, which resulted in goodwill impairment charges of $11,484 million and $3,289 million, respectively. The goodwill impairment was calculated as the amount that the carrying value of the reporting unit, including any goodwill, exceeded its fair value.
During the third quarter of 2020, we completed our annual impairment test for each reporting unit and determined it was more likely than not that the fair value of our reporting units exceeded their carrying amounts. Between our annual test date of July 1, 2020 and December 31, 2020, we did not identify any indicators that would lead to a determination that it is more likely than not that the fair value of any of our reporting units is less than its carrying value. There can be no assurances that future sustained declines in macroeconomic or business conditions affecting our industry will not occur, which could result in goodwill impairment charges in future periods.
OTHER INTANGIBLE ASSETS
Intangible assets are comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
|
Customer relationships
|
$
|
2,261
|
|
$
|
(916)
|
|
$
|
1,345
|
|
$
|
3,027
|
|
$
|
(1,045)
|
|
$
|
1,982
|
|
Technology
|
1,127
|
|
(696)
|
|
431
|
|
1,075
|
|
(626)
|
|
$
|
449
|
|
Trade names and trademarks
|
326
|
|
(181)
|
|
145
|
|
696
|
|
(254)
|
|
442
|
|
Capitalized software
|
1,294
|
|
(1,041)
|
|
253
|
|
1,193
|
|
(928)
|
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
—
|
|
—
|
|
—
|
|
3
|
|
(2)
|
|
1
|
|
Finite-lived intangible assets (1)
|
5,008
|
|
(2,834)
|
|
2,174
|
|
5,994
|
|
(2,855)
|
|
3,139
|
|
Indefinite-lived intangible assets
|
2,223
|
|
—
|
|
2,223
|
|
2,242
|
|
—
|
|
2,242
|
|
Total intangible assets
|
$
|
7,231
|
|
$
|
(2,834)
|
|
$
|
4,397
|
|
$
|
8,236
|
|
$
|
(2,855)
|
|
$
|
5,381
|
|
(1)For the year ended December 31, 2020, we recorded intangible asset impairments to customer relationships of $481 million, technology of $8 million, trade names and trademarks of $237 million, and capitalized software of $3 million. See "Note 20. Restructuring, Impairment and Other" for further discussion.
Intangible assets are generally amortized on a straight-line basis with estimated useful lives ranging from one to 30 years. Amortization expense was $308 million, $365 million and $455 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Baker Hughes Company 2020 FORM 10-K | 65
Baker Hughes Company
Notes to Consolidated Financial Statements
Estimated amortization expense for each of the subsequent five fiscal years is expected to be as follows:
|
|
|
|
|
|
Year
|
Estimated Amortization Expense
|
2021
|
$
|
255
|
|
2022
|
214
|
|
2023
|
200
|
|
2024
|
182
|
|
2025
|
142
|
|
NOTE 7. CONTRACT AND OTHER DEFERRED ASSETS
The 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:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Long-term product service agreements
|
$
|
660
|
|
$
|
603
|
|
Long-term equipment contracts (1)
|
1,160
|
|
1,097
|
|
Contract assets (total revenue in excess of billings)
|
1,820
|
|
1,700
|
|
Deferred inventory costs
|
138
|
|
130
|
|
Non-recurring engineering costs
|
43
|
|
51
|
|
Contract and other deferred assets
|
$
|
2,001
|
|
$
|
1,881
|
|
(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, 2020 and 2019 from performance obligations satisfied (or partially satisfied) in previous years related to our long-term service agreements was $17 million and $(1) 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 8. PROGRESS COLLECTIONS AND DEFERRED INCOME
Contract liabilities include progress collections, which reflects billings in excess of revenue, and deferred income on our long-term contracts to construct technically complex equipment, long-term product maintenance or extended warranty arrangements. Contract liabilities are comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Progress collections
|
$
|
3,352
|
|
$
|
2,760
|
|
Deferred income
|
102
|
|
110
|
|
Progress collections and deferred income (contract liabilities)
|
$
|
3,454
|
|
$
|
2,870
|
|
Revenue recognized during the year ended December 31, 2020 and 2019 that was included in the contract liabilities at the beginning of the year was $1,962 million and $1,239 million, respectively.
Baker Hughes Company 2020 FORM 10-K | 66
Baker Hughes Company
Notes to Consolidated Financial Statements
NOTE 9. 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:
|
|
|
|
|
|
|
|
|
Operating Lease Expense
|
2020
|
2019
|
Long-term fixed lease
|
$
|
288
|
|
$
|
233
|
|
Long-term variable lease
|
25
|
|
48
|
|
Short-term lease (1)
|
477
|
|
706
|
|
Total operating lease expense
|
$
|
790
|
|
$
|
987
|
|
(1)Leases with a term of one year or less, including leases with a term of one month or less.
For the year ended December 31, 2018, total operating lease expense was $783 million. Cash flows used in operating activities for operating leases approximates our expense for the years ended December 31, 2020, 2019 and 2018.
As of December 31, 2020, maturities of our operating lease liabilities are as follows:
|
|
|
|
|
|
|
Year
|
Operating Leases
|
|
2021
|
$
|
235
|
|
|
2022
|
172
|
|
|
2023
|
114
|
|
|
2024
|
78
|
|
|
2025
|
60
|
|
|
Thereafter
|
313
|
|
|
Total lease payments
|
972
|
|
|
Less: imputed interest
|
163
|
|
|
Total
|
$
|
809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated statement of financial position for operating leases are as follows:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
All other current liabilities
|
$
|
218
|
|
$
|
201
|
|
All other liabilities
|
591
|
|
641
|
|
|
|
|
|
|
|
Total
|
$
|
809
|
|
$
|
842
|
|
Right-of-use assets of $802 million and $829 million as of December 31, 2020 and 2019, respectively, were included in "All other assets" in our consolidated statements of financial position. The weighted-average remaining lease term for our operating leases was approximately 8 years for both years ended December 31, 2020 and 2019. The weighted-average discount rate used to determine the operating lease liability as of December 31, 2020 and 2019 was 3.7% and 4.1%, respectively.
Baker Hughes Company 2020 FORM 10-K | 67
Baker Hughes Company
Notes to Consolidated Financial Statements
NOTE 10. BORROWINGS
Short-term and long-term borrowings are comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
|
Amount
|
Weighted Average Rate(1)
|
Amount
|
Weighted Average Rate(1)
|
Short-term borrowings
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
$
|
801
|
|
0.5
|
%
|
$
|
—
|
|
n/a
|
Short-term borrowings from GE
|
45
|
|
n/a
|
273
|
|
n/a
|
Other borrowings
|
43
|
|
4.2
|
%
|
48
|
|
4.8
|
%
|
Total short-term borrowings
|
889
|
|
|
321
|
|
|
|
|
|
|
|
Long-term borrowings
|
|
|
|
|
|
|
|
|
|
2.773% Senior Notes due December 2022
|
1,247
|
|
2.9
|
%
|
1,246
|
|
2.9
|
%
|
8.55% Debentures due June 2024 (2)
|
123
|
|
4.1
|
%
|
127
|
|
4.1
|
%
|
3.337% Senior Notes due December 2027
|
1,344
|
|
3.4
|
%
|
1,343
|
|
3.4
|
%
|
6.875% Notes due January 2029 (2)
|
284
|
|
3.9
|
%
|
289
|
|
3.9
|
%
|
3.138% Senior Notes due November 2029
|
522
|
|
3.2
|
%
|
522
|
|
3.2
|
%
|
4.486% Senior Notes due May 2030
|
497
|
|
4.6
|
%
|
—
|
|
n/a
|
5.125% Senior Notes due September 2040 (2)
|
1,297
|
|
4.2
|
%
|
1,301
|
|
4.2
|
%
|
4.080% Senior Notes due December 2047
|
1,337
|
|
4.1
|
%
|
1,337
|
|
4.1
|
%
|
Other long-term borrowings
|
93
|
|
3.0
|
%
|
136
|
|
3.4
|
%
|
|
|
|
|
|
Total long-term borrowings
|
6,744
|
|
|
6,301
|
|
|
Total borrowings
|
$
|
7,633
|
|
|
$
|
6,622
|
|
|
(1)Weighted average effective interest rate is based on the carrying value including step-up adjustments, as applicable, recorded upon the acquisition of BHI. See "Note 1. Summary of Significant Accounting Policies" for further discussion.
(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 May 2020, BHH LLC issued $500 million aggregate principal amount of 4.486% Senior Notes due May 2030. In November 2019, BHH LLC issued $525 million aggregate principal amount of 3.138% Senior Notes due November 2029. We used the proceeds from the November 2019 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 statements of income (loss). These Senior Notes are presented net of issuance costs in our consolidated statements of financial position.
The estimated fair value of total borrowings at December 31, 2020 and 2019 was $8,502 million and $6,847 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, 2025, and in the aggregate thereafter, are listed in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
2022
|
2023
|
2024
|
2025
|
Thereafter
|
Total debt
|
$
|
889
|
|
$
|
1,254
|
|
$
|
4
|
|
$
|
173
|
|
$
|
19
|
|
$
|
5,294
|
|
Baker Hughes Company 2020 FORM 10-K | 68
Baker Hughes Company
Notes to Consolidated Financial Statements
In December 2019, BHH 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 certain customary representations and warranties, certain customary affirmative covenants and certain customary negative covenants. Upon the occurrence of certain events of default, BHH 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 BHH LLC’s entry into the 2019 Credit Agreement, BHH LLC terminated its then-existing five-year committed $3 billion revolving credit agreement dated as of July 3, 2017 (the 2017 Credit Agreement). During 2020 and 2019, there were no borrowings under the 2019 Credit Agreement or the 2017 Credit Agreement.
We have a commercial paper program under which we may issue from time to time commercial paper with maturities of no more than 397 days. During the second quarter of 2020, we increased our commercial paper program from $3 billion to approximately $3.8 billion.
Baker Hughes Co-Obligor, Inc. is a co-obligor, jointly and severally with BHH LLC on our long-term debt securities. This co-obligor is a 100%-owned finance subsidiary of BHH LLC that was incorporated for the sole purpose of serving as a corporate co-obligor of long-term debt securities and has no assets or operations other than those related to its sole purpose. As of 2020, Baker Hughes Co-Obligor, Inc. is a co-obligor of our long-term debt securities totaling $6,650 million.
Certain Senior Notes contain covenants that restrict BHH LLC's ability to take certain actions, including, but not limited to, the creation of certain liens securing debt, the entry into certain sale-leaseback transactions and engaging in certain merger, consolidation and asset sale transactions in excess of specified limits. At December 31, 2020, we were in compliance with all debt covenants.
See "Note 18. Related Party Transactions" for additional information on the short-term borrowings with GE.
NOTE 11. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PLANS
Certain of our employees are covered by company sponsored pension plans. Our primary pension plans in 2020 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 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.
Baker Hughes Company 2020 FORM 10-K | 69
Baker Hughes Company
Notes to Consolidated Financial Statements
Below is the reconciliation of the beginning and ending balances of benefit obligations, fair value of plan assets and the funded status of our plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2020
|
2019
|
2020
|
2019
|
Change in benefit obligation:
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
3,451
|
|
$
|
2,261
|
|
$
|
80
|
|
$
|
107
|
|
Service cost
|
27
|
|
21
|
|
—
|
|
1
|
|
Interest cost
|
77
|
|
90
|
|
2
|
|
4
|
|
Plan amendment
|
1
|
|
—
|
|
(18)
|
|
—
|
|
Actuarial loss (gain) (1)
|
393
|
|
301
|
|
17
|
|
(16)
|
|
Benefits paid
|
(101)
|
|
(102)
|
|
(19)
|
|
(16)
|
|
Curtailments
|
(3)
|
|
(21)
|
|
—
|
|
—
|
|
Settlements
|
(79)
|
|
(36)
|
|
—
|
|
—
|
|
Transfer from GE - UK Plan
|
—
|
|
837
|
|
—
|
|
—
|
|
Other
|
—
|
|
15
|
|
—
|
|
—
|
|
Foreign currency translation adjustments
|
40
|
|
85
|
|
—
|
|
—
|
|
Benefit obligation at end of year
|
3,806
|
|
3,451
|
|
62
|
|
80
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
Fair value of plan assets at beginning of year
|
3,004
|
|
1,866
|
|
—
|
|
—
|
|
Actual return on plan assets
|
347
|
|
314
|
|
—
|
|
—
|
|
Employer contributions
|
20
|
|
23
|
|
19
|
|
16
|
|
Benefits paid
|
(101)
|
|
(102)
|
|
(19)
|
|
(16)
|
|
Settlements
|
(79)
|
|
(36)
|
|
—
|
|
—
|
|
Transfer from GE - UK Plan
|
—
|
|
851
|
|
—
|
|
—
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
11
|
|
88
|
|
—
|
|
—
|
|
Fair value of plan assets at end of year
|
3,202
|
|
3,004
|
|
—
|
|
—
|
|
|
|
|
|
|
Funded status - underfunded at end of year
|
$
|
(604)
|
|
$
|
(447)
|
|
$
|
(62)
|
|
$
|
(80)
|
|
|
|
|
|
|
Accumulated benefit obligation
|
$
|
3,755
|
|
$
|
3,401
|
|
$
|
62
|
|
$
|
80
|
|
(1)The actuarial loss (gain) was primarily related to a change in the discount rate used to measure the benefit obligation for our plans in 2020 and 2019.
The amounts recognized in the consolidated statements of financial position consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2020
|
2019
|
2020
|
2019
|
Noncurrent assets
|
$
|
14
|
|
$
|
78
|
|
$
|
—
|
|
$
|
—
|
|
Current liabilities
|
(18)
|
|
(17)
|
|
(9)
|
|
(11)
|
|
Noncurrent liabilities
|
(600)
|
|
(508)
|
|
(53)
|
|
(69)
|
|
Net amount recognized
|
$
|
(604)
|
|
$
|
(447)
|
|
$
|
(62)
|
|
$
|
(80)
|
|
Baker Hughes Company 2020 FORM 10-K | 70
Baker Hughes Company
Notes to Consolidated Financial Statements
Information for the plans with ABOs and PBOs in excess of plan assets is as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2020
|
2019
|
2020
|
2019
|
Projected benefit obligation
|
$
|
3,390
|
|
$
|
1,814
|
|
n/a
|
n/a
|
Accumulated benefit obligation
|
$
|
3,340
|
|
$
|
1,763
|
|
$
|
62
|
|
$
|
80
|
|
Fair value of plan assets
|
$
|
2,772
|
|
$
|
1,288
|
|
n/a
|
n/a
|
Net Periodic Cost (Income)
The components of net periodic cost (income) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Service cost
|
$
|
27
|
|
|
$
|
21
|
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
2
|
|
Interest cost
|
77
|
|
|
90
|
|
|
71
|
|
|
2
|
|
|
4
|
|
|
5
|
|
Expected return on plan assets
|
(121)
|
|
|
(122)
|
|
|
(121)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
1
|
|
|
1
|
|
|
—
|
|
|
(3)
|
|
|
(3)
|
|
|
(5)
|
|
Amortization of net actuarial loss (gain)
|
34
|
|
|
17
|
|
|
10
|
|
|
(3)
|
|
|
(7)
|
|
|
(2)
|
|
Curtailment / settlement loss (gain)
|
10
|
|
|
9
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic cost (income)
|
$
|
28
|
|
|
$
|
16
|
|
|
$
|
(17)
|
|
|
$
|
(4)
|
|
|
$
|
(5)
|
|
|
$
|
(5)
|
|
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 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.
Another assumption used is the interest crediting rate for our U.S. qualified cash balance plan. Under the provisions of this pension plan, a hypothetical cash balance account has been established for each participant. Such accounts receive quarterly interest credits based on a prescribed formula.
Weighted average assumptions used to determine benefit obligations for these plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2020
|
2019
|
2020
|
2019
|
Discount rate
|
1.66
|
%
|
2.34
|
%
|
1.67
|
%
|
2.89
|
%
|
Rate of compensation increase
|
3.25
|
%
|
3.11
|
%
|
n/a
|
n/a
|
Interest crediting rate
|
2.60
|
%
|
2.60
|
%
|
n/a
|
n/a
|
|
|
|
|
|
Baker Hughes Company 2020 FORM 10-K | 71
Baker Hughes Company
Notes to Consolidated Financial Statements
Weighted average assumptions used to determine net periodic cost for these plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Postretirement
Benefits
|
|
2020
|
2019
|
2018
|
2020
|
2019
|
2018
|
Discount rate
|
2.34
|
%
|
3.43
|
%
|
2.99
|
%
|
2.35
|
%
|
3.92
|
%
|
3.32
|
%
|
Expected long-term return on plan assets
|
4.20
|
%
|
5.48
|
%
|
5.94
|
%
|
n/a
|
n/a
|
n/a
|
Interest crediting rate
|
2.60
|
%
|
3.15
|
%
|
2.60
|
%
|
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, 2020, the health care cost trend rate was 6.5%, declining gradually each successive year until it reaches 4.5%.
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
|
|
2020
|
2019
|
2020
|
2019
|
Net actuarial loss (gain)
|
$
|
527
|
|
$
|
395
|
|
$
|
(30)
|
|
$
|
(38)
|
|
Net prior service cost (credit)
|
18
|
|
19
|
|
(17)
|
|
(15)
|
|
Total
|
$
|
545
|
|
$
|
414
|
|
$
|
(47)
|
|
$
|
(53)
|
|
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.
Baker Hughes Company 2020 FORM 10-K | 72
Baker Hughes Company
Notes to Consolidated Financial Statements
The table below presents the fair value of the pension assets at December 31:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Debt securities
|
|
|
Fixed income and cash investment funds
|
$
|
1,807
|
|
$
|
1,858
|
|
|
|
|
Equity securities
|
|
|
Global equity securities (1)
|
346
|
|
333
|
|
U.S. equity securities (1)
|
299
|
|
258
|
|
Insurance contracts
|
120
|
|
—
|
|
Real estate
|
85
|
|
84
|
|
Private equities
|
52
|
|
51
|
|
Other investments (2)
|
493
|
|
420
|
|
Total plan assets
|
$
|
3,202
|
|
$
|
3,004
|
|
(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 $3,072 million and $2,988 million as of December 31, 2020 and 2019, respectively. The percentages of plan assets valued using NAV by investment fund type for equity securities, fixed income and cash, and alternative investments were 21%, 59%, and 20% as of December 31, 2020, respectively, and 20%, 62%, and 18% as of December 31, 2019, 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 $130 million and $16 million as of December 31, 2020 and 2019, respectively. There were investments classified within Level 3 of $120 million as of December 31, 2020 for non U.S. insurance contracts. These contracts consisted of purchases of $124 million, reduced by $4 million of unrealized losses. There were no investments classified within Level 3 in 2019. The remaining investments were considered Level 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 2020, we contributed approximately $20 million. We anticipate we will contribute between approximately $20 million to $35 million to our pension plans in 2021.
We fund our Other Postretirement Benefits on a pay-as-you-go basis. In 2020, we funded $19 million and in 2021, we expect to fund approximately $10 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
|
2021
|
|
$
|
173
|
|
|
|
$
|
10
|
|
|
2022
|
|
131
|
|
|
|
7
|
|
|
2023
|
|
130
|
|
|
|
6
|
|
|
2024
|
|
135
|
|
|
|
5
|
|
|
2025
|
|
136
|
|
|
|
5
|
|
|
2026-2030
|
|
743
|
|
|
|
18
|
|
|
Baker Hughes Company 2020 FORM 10-K | 73
Baker Hughes Company
Notes to Consolidated Financial Statements
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. In May 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. Expenses associated with our participation in these plans were $3 million and $158 million in the years ended December 31, 2019 and 2018, respectively. We incurred no expenses associated with GE multi-employer plans in 2020.
DEFINED CONTRIBUTION PLANS
Our primary defined contribution plan during 2020 was the Company-sponsored U.S. 401(k) plan (401(k) Plan). The 401(k) Plan allows eligible employees to contribute portions of their eligible compensation to an investment trust. The Company matches employee contributions 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 after three years of employment. The 401(k) Plan provides several investment options, for which the employee has sole investment discretion; however, the 401(k) Plan does not offer the Company's 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 $236 million and $235 million, in 2020 and 2019, respectively.
OTHER
We have two non-qualified defined contribution plans that are invested through trusts. The assets and corresponding liabilities were $314 million and $276 million at December 31, 2020 and 2019, respectively, and are included in "All other assets" and "Liabilities for pensions and other employee benefits" captions in our consolidated statements of financial position.
NOTE 12. INCOME TAXES
In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. These measures may include deferring the due dates of tax payments or other changes to their income and non-income-based tax laws. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was enacted on March 27, 2020 in the U.S., includes measures to assist companies, including allowing net operating losses originating in 2018, 2019, or 2020 to be carried back up to five years. During 2020, we elected to carry back losses to 2014 and accordingly recognized a $117 million tax benefit.
The provision or benefit for income taxes is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
Current:
|
|
|
|
U.S.
|
$
|
(59)
|
|
$
|
(12)
|
|
$
|
63
|
|
Foreign
|
458
|
|
443
|
|
444
|
|
Total current
|
399
|
|
431
|
|
507
|
|
Deferred:
|
|
|
|
U.S.
|
11
|
|
(12)
|
|
(211)
|
|
Foreign
|
149
|
|
63
|
|
(38)
|
|
Total deferred
|
160
|
|
51
|
|
(249)
|
|
Provision for income taxes
|
$
|
559
|
|
$
|
482
|
|
$
|
258
|
|
Baker Hughes Company 2020 FORM 10-K | 74
Baker Hughes Company
Notes to Consolidated Financial Statements
The geographic sources of income (loss) before income taxes, inclusive of equity in loss of affiliate, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
U.S.
|
$
|
(14,288)
|
|
$
|
(693)
|
|
$
|
(672)
|
|
Foreign
|
(914)
|
|
1,446
|
|
1,213
|
|
Income (loss) before income taxes, inclusive of equity in loss of affiliate
|
$
|
(15,202)
|
|
$
|
753
|
|
$
|
541
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
Income (loss) before income taxes, inclusive of equity in loss of affiliate
|
$
|
(15,202)
|
|
$
|
753
|
|
$
|
541
|
|
Taxes at the U.S. federal statutory income tax rate
|
(3,192)
|
|
158
|
|
114
|
|
Impact of goodwill impairment
|
3,102
|
|
—
|
|
—
|
|
Effect of foreign operations
|
183
|
|
85
|
|
103
|
|
Tax impact of partnership structure
|
(33)
|
|
17
|
|
80
|
|
|
|
|
|
|
|
|
|
Change in valuation allowances
|
494
|
|
241
|
|
87
|
|
CARES Act
|
(117)
|
|
—
|
|
—
|
|
Tax Cuts and Jobs Act enactment
|
—
|
|
—
|
|
(107)
|
|
Other - net
|
122
|
|
(19)
|
|
(19)
|
|
Provision for income taxes
|
$
|
559
|
|
$
|
482
|
|
$
|
258
|
|
Actual income tax rate
|
(3.7)%
|
64.0%
|
47.7%
|
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.
The tax effects of our temporary differences and carryforwards are as follows at December 31:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Deferred tax assets:
|
|
|
Operating loss carryforwards
|
$
|
2,249
|
|
$
|
1,654
|
|
Tax credit carryforwards
|
1,083
|
|
941
|
|
Investment in partnership
|
160
|
|
381
|
|
Goodwill and other intangibles
|
143
|
|
117
|
|
Employee benefits
|
138
|
|
98
|
|
Property
|
127
|
|
137
|
|
Receivables
|
53
|
|
79
|
|
Inventory
|
51
|
|
91
|
|
Other
|
264
|
|
317
|
|
Total deferred income tax asset
|
4,268
|
|
3,815
|
|
Valuation allowances
|
(3,472)
|
|
(2,883)
|
|
Total deferred income tax asset after valuation allowance
|
796
|
|
932
|
|
Deferred tax liabilities:
|
|
|
Other
|
(29)
|
|
(29)
|
|
Total deferred income tax liability
|
(29)
|
|
(29)
|
|
Net deferred tax asset
|
$
|
767
|
|
$
|
903
|
|
Baker Hughes Company 2020 FORM 10-K | 75
Baker Hughes Company
Notes to Consolidated Financial Statements
At December 31, 2020, we had approximately $402 million of non-U.S. tax credits which may be carried forward indefinitely under applicable foreign law, $521 million of U.S. foreign tax credits and $160 million of other credits, the majority of which will expire after tax year 2027 under U.S. tax law. Additionally, we had $2,249 million of net operating loss carryforwards, of which approximately $347 million will expire within five years, $960 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, 2020, $3,472 million of valuation allowances are recorded against various deferred tax assets, including foreign net operating losses (NOL) of $1,657 million, U.S. federal and foreign tax credit carryforwards of $924 million, other U.S. NOL's and tax credit carryforwards of $452 million, and certain other U.S. and foreign deferred tax assets of $439 million. There are $319 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.
Indefinite reinvestment is determined by management’s intentions concerning the future operations of the Company. In cases where repatriation would otherwise incur significant withholding or income taxes, these earnings have been indefinitely reinvested in the company's active non-U.S. business operations. As of December 31, 2020, the cumulative amount of undistributed foreign earnings is approximately $6 billion. Computation of the potential deferred tax liability associated with these undistributed earnings and any other basis differences is not practicable.
At December 31, 2020, we had $483 million of tax liabilities for total gross unrecognized tax benefits related to uncertain tax positions. In addition to these uncertain tax positions, we had $95 million and $23 million related to interest and penalties, respectively, for total liabilities of $601 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 $523 million. The remaining $77 million comprised of $53 million for deferred tax assets that represent tax benefits that would be received in different taxing jurisdictions or in a different character in the event that we did not prevail on all uncertain tax positions and increased valuation allowances of $24 million.
The following table presents the changes in our gross unrecognized tax benefits included in the consolidated statements of financial position.
|
|
|
|
|
|
|
|
|
Asset / (Liability)
|
2020
|
2019
|
Balance at beginning of year
|
$
|
(451)
|
|
$
|
(472)
|
|
Additions for tax positions of the current year
|
(71)
|
|
(25)
|
|
Additions for tax positions of prior years
|
(31)
|
|
(27)
|
|
Reductions for tax positions of prior years
|
35
|
|
55
|
|
Settlements with tax authorities
|
12
|
|
6
|
|
Lapse of statute of limitations
|
23
|
|
12
|
|
Balance at end of year
|
$
|
(483)
|
|
$
|
(451)
|
|
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, 2020, we had approximately $57 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, each of which may have multiple open years subject to examination. All Internal Revenue Service examinations have been completed and closed through 2016 for the most significant U.S. returns. We believe that we have made adequate provision for all income tax uncertainties.
Baker Hughes Company 2020 FORM 10-K | 76
Baker Hughes Company
Notes to Consolidated Financial Statements
NOTE 13. STOCK-BASED COMPENSATION
The Company has a Long-Term Incentive Plan (LTI Plan) under which we may grant stock options and other equity-based awards to employees and non-employee directors providing services to the Company and our subsidiaries. A total of up to 57.4 million shares of Class A common stock are authorized for issuance pursuant to awards granted under the LTI Plan over its term which expires on the date of the annual meeting of the Company in 2027. A total of 26.1 million shares of Class A common stock are available for issuance as of December 31, 2020.
Stock-based compensation cost was $210 million, $187 million and $121 million for the years ended December 31, 2020, 2019 and 2018, respectively. We recorded a tax benefit of approximately $19 million in 2020 on our stock-based compensation cost. Stock-based compensation cost is measured at the date of grant based on the calculated fair value of the award and is generally recognized on a straight-line basis over the vesting period of the equity grant. The compensation cost is determined based on awards ultimately expected to vest; therefore, we have reduced the cost for estimated forfeitures based on historical forfeiture rates. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. There were no stock-based compensation costs capitalized as the amounts were not material.
Restricted Stock
We may grant to our officers, directors and key employees restricted stock awards (RSA), which is an award of common stock with no exercise price, or restricted stock units (RSU), where each unit represents the right to receive, at the end of a stipulated period, one unrestricted share of stock with no exercise price. Certain RSAs and RSUs are subject to cliff or graded vesting, generally ranging over a period of 3 years, or over a one year period for non-employee directors. Cash dividend equivalents are accrued on RSUs and are payable upon vesting of the awards. We determine the fair value of restricted stock awards and restricted stock units based on the market price of our common stock on the date of grant, discounted by the present value of future dividends.
The following table presents the changes in RSUs outstanding and related information (in thousands, except per unit prices):
|
|
|
|
|
|
|
|
|
|
Number of
Units
|
Weighted Average
Grant Date Fair
Value Per Unit
|
Unvested balance at December 31, 2019
|
11,285
|
|
$
|
27.26
|
|
Granted
|
9,301
|
|
22.33
|
|
Vested
|
(5,066)
|
|
29.02
|
|
Forfeited
|
(1,228)
|
|
24.18
|
|
Unvested balance at December 31, 2020
|
14,292
|
|
$
|
23.70
|
|
In 2020, the total intrinsic value of RSUs vested (defined as the value of shares awarded based on the price of our common stock at vesting date) was $111 million and unvested RSUs was $298 million. The total fair value of RSUs vested in 2020 was $147 million. As of December 31, 2020, there was $184 million of total unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted average period of 1.78 years.
Baker Hughes Company 2020 FORM 10-K | 77
Baker Hughes Company
Notes to Consolidated Financial Statements
Performance Share Units
We may grant performance share units (PSUs) to certain officers and key employees. The PSUs are stock-based awards tied to predefined company metrics and total shareholder return (TSR), which determine the number of units to be received. PSUs generally cliff vest after a service period of 3 years. Cash dividend equivalents are accrued only on PSUs tied to predefined company metrics and are payable upon vesting of the awards. The fair value of the awards determined for the predefined company metrics are based on the market price of our common stock on the date of grant, discounted by the present value of future dividends. The fair value of the TSR awards are determined based on a Monte Carlo simulation method.
The following table presents the changes in PSUs outstanding and related information (in thousands, except per unit prices):
|
|
|
|
|
|
|
|
|
|
Number of
Units
|
Weighted Average
Grant Date Fair
Value Per Unit
|
Unvested balance at December 31, 2019
|
2,044
|
|
$
|
27.91
|
|
Granted
|
1,418
|
|
21.37
|
|
|
|
|
Forfeited
|
(301)
|
|
23.61
|
|
Unvested balance at December 31, 2020
|
3,161
|
|
$
|
25.39
|
|
The total intrinsic value of PSUs (defined as the value of the shares awarded at the year-end market price) outstanding was $66 million as of December 31, 2020. Total unrecognized compensation cost related to unvested PSUs, which is expected to be recognized over a weighted average period of 2.23 years, was $29 million as of December 31, 2020.
Stock Options
In addition to RSUs and PSUs, we may grant stock options to our officers, directors and key employees. Stock options generally vest in equal amounts over a vesting period of 3 years provided that the employee has remained continuously employed by the Company through such vesting date. The fair value of each stock option granted is estimated using the Black-Scholes option pricing model. The following table presents the weighted average assumptions used in the option pricing model for options granted under the LTI Plan. The expected life of the options represents the period of time the options are expected to be outstanding. The expected life is based on a simple average of the vesting term and original contractual term of the awards. The expected volatility is based on the historical volatility of our five main competitors over a six year period. The risk-free interest rate is based on the observed U.S. Treasury yield curve in effect at the time the options were granted. In 2019, the dividend yield is based on Baker Hughes' current annual cash dividend divided by the valuation date stock price. Prior to 2019, the dividend yield was based on a five year history of dividend payouts by BHI. We did not grant any stock options during 2020.
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
2018
|
Expected life (years)
|
|
6
|
6
|
Risk-free interest rate
|
|
2.6
|
%
|
2.5
|
%
|
Volatility
|
|
36.5
|
%
|
33.7
|
%
|
Dividend yield
|
|
3.1
|
%
|
2.0
|
%
|
Weighted average fair value per share at grant date
|
|
$
|
6.37
|
|
$
|
10.34
|
|
Baker Hughes Company 2020 FORM 10-K | 78
Baker Hughes Company
Notes to Consolidated Financial Statements
The following table presents the changes in stock options outstanding and related information (in thousands, except per option prices):
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
Weighted Average
Exercise Price
Per Option
|
Outstanding at December 31, 2019
|
8,410
|
|
$
|
32.50
|
|
|
|
|
Exercised
|
(17)
|
|
21.80
|
|
Forfeited
|
(292)
|
|
25.89
|
|
Expired
|
(816)
|
|
33.90
|
|
Outstanding at December 31, 2020
|
7,285
|
|
$
|
32.63
|
|
Exercisable at December 31, 2020
|
5,882
|
|
$
|
34.32
|
|
The weighted average remaining contractual term for options outstanding and options exercisable at December 31, 2020 were 4.3 years and 3.5 years, respectively. The maximum contractual term of options outstanding is 8.1 years.
There were 1,553 thousand, 867 thousand and 505 thousand options that vested in 2020, 2019 and 2018, respectively. The total fair value of options vested was $14 million, $10 million and $6 million, in 2020, 2019 and 2018, respectively. As of December 31, 2020, there was $4 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 1 year.
The total intrinsic value of stock options exercised (defined as the amount by which the market price of our common stock on the date of exercise exceeds the exercise price of the option) in 2020 was immaterial. The total intrinsic value of stock options outstanding and options exercisable at December 31, 2020 was immaterial. The intrinsic value of stock options outstanding is calculated as the amount by which the quoted price of $20.85 of our common stock as of the end of 2020 exceeds the exercise price of the options.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (ESPP) provides for eligible employees to purchase shares of Class A common stock quarterly on an after-tax basis in an amount between 1% and 20% of their annual pay on March 31, June 30, September 30 and December 31 of each year at a 15% discount of the fair market value of our Class A common stock on March 31, June 30, September 30 and December 31. An employee may not purchase more than $3,000 in any of the three-month measurement periods described above or $12,000 annually.
A total of 15 million shares of Class A common stock are authorized for issuance, and at December 31, 2020, there were 8.5 million shares of Class A common stock reserved for future issuance.
NOTE 14. EQUITY
COMMON STOCK
We are authorized to issue 2 billion shares of Class A common stock, 1.25 billion shares of Class B common stock and 50 million shares of preferred stock each of which have a par value of $0.0001 per share. The number of shares of Class A common stock and Class B common stock outstanding at December 31, 2020 is 724 million and 311 million, respectively. We have not issued any preferred stock. GE owns all the issued and outstanding Class B common stock. Each share of Class A and Class B common stock and the associated membership interest in BHH LLC form a paired interest. While each share of Class B common stock has equal voting rights to a share of Class A common stock, it has no economic rights, meaning holders of Class B common stock have no right to dividends and any assets in the event of liquidation of the Company. GE is entitled through BHH LLC Units (LLC Units) to receive distributions on an equal per share amount of any dividend paid by the Company. In July 2020, GE launched a program to divest of its ownership interest in us, at its discretion, in a series of transactions over approximately three years, subject to market conditions and other factors.
Baker Hughes Company 2020 FORM 10-K | 79
Baker Hughes Company
Notes to Consolidated Financial Statements
In 2020, GE’s economic interest in BHH LLC was reduced to approximately 30.1% primarily as a result of the exchange of 66 million shares of Class B common stock, and associated LLC Units.
The following table presents the changes in the number of shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
|
Class A Common Stock
|
Class B Common Stock
|
Class A Common Stock
|
Class B Common Stock
|
Balance at beginning of year
|
650,065
|
|
377,428
|
|
513,399
|
|
521,543
|
|
Issue of shares upon vesting of restricted stock units (1)
|
3,548
|
|
—
|
|
1,973
|
|
—
|
|
Issue of shares on exercises of stock options (1)
|
13
|
|
—
|
|
362
|
|
—
|
|
Issue of shares for employee stock purchase plan
|
4,378
|
|
—
|
|
2,081
|
|
—
|
|
Exchange of Class B common stock for Class A common stock (2)
|
65,995
|
|
(65,995)
|
|
132,250
|
|
(132,250)
|
|
Repurchase and cancellation of Class B common stock (3)
|
—
|
|
—
|
|
—
|
|
(11,865)
|
|
Balance at end of year
|
723,999
|
|
311,433
|
|
650,065
|
|
377,428
|
|
(1) Share amounts reflected above are net of shares withheld to satisfy the employee's tax withholding obligation.
(2) In 2020, GE exchanged 66 million shares of Class B common stock and paired LLC Units for Class A common stock. In 2019, we completed underwritten secondary public offerings in which GE and its affiliates sold 132 million shares of our Class A common stock. We did not receive any proceeds from the shares sold by GE and its affiliates in these offerings. The offerings included the exchange by GE and its affiliates of LLC Units, together with the corresponding shares of our Class B common stock, for Class A common stock. When shares of Class B common stock, together with associated LLC Units, are exchanged for shares of Class A common stock pursuant to the Exchange Agreement, such shares of Class B common stock are canceled.
(3) In 2019, we repurchased and canceled 12 million shares of Class B common stock, together with an equal number of associated LLC Units, from GE and its affiliates for an aggregate of $250 million, or $21.07 per share, which is the same per share price paid by the underwriters to GE and its affiliates in the concurrent underwritten secondary public offering.
During 2020 and 2019, the Company declared and paid aggregate regular dividends of $0.72 per share to holders of record of the Company's Class A common stock.
Baker Hughes Company 2020 FORM 10-K | 80
Baker Hughes Company
Notes to Consolidated Financial Statements
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, 2018
|
$
|
—
|
|
$
|
(1,152)
|
|
$
|
(1)
|
|
$
|
(66)
|
|
$
|
(1,219)
|
|
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 comprehensive income (loss) attributable to noncontrolling interests
|
1
|
|
23
|
|
4
|
|
(29)
|
|
(1)
|
|
Less: Reallocation of AOCL based on change in ownership of BHH LLC Units
|
—
|
|
314
|
|
—
|
|
36
|
|
350
|
|
Less: Other adjustments
|
—
|
|
—
|
|
1
|
|
59
|
|
60
|
|
Balance at December 31, 2019
|
1
|
|
(1,436)
|
|
6
|
|
(207)
|
|
(1,636)
|
|
Other comprehensive income (loss) before reclassifications
|
(2)
|
|
175
|
|
(2)
|
|
(181)
|
|
(10)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
—
|
|
(4)
|
|
51
|
|
47
|
|
Deferred taxes
|
—
|
|
—
|
|
1
|
|
5
|
|
6
|
|
Other comprehensive income (loss)
|
(2)
|
|
175
|
|
(5)
|
|
(125)
|
|
43
|
|
Less: Other comprehensive income (loss) attributable to noncontrolling interests
|
(1)
|
|
40
|
|
(2)
|
|
(37)
|
|
—
|
|
Less: Reallocation of AOCL based on change in ownership of BHH LLC Units
|
—
|
|
163
|
|
—
|
|
22
|
|
185
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
$
|
—
|
|
$
|
(1,464)
|
|
$
|
3
|
|
$
|
(317)
|
|
$
|
(1,778)
|
|
The amounts reclassified from accumulated other comprehensive loss during the years ended December 31, 2020 and 2019 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 11. Employee Benefit Plans" for additional details). Net periodic pension cost is recorded across the various cost and expense line items in the consolidated statements of income (loss).
NONCONTROLLING INTEREST
Noncontrolling interests represent the portion of net assets in consolidated entities that are not owned by the Company. As of December 31, 2020 and 2019, GE owned approximately 30.1% and 36.7%, respectively, of BHH LLC and this represents the majority of the noncontrolling interest balance reported within equity.
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
GE's interest in BHH LLC
|
$
|
5,216
|
|
$
|
12,454
|
|
Other noncontrolling interests
|
133
|
|
116
|
|
Total noncontrolling interests
|
$
|
5,349
|
|
$
|
12,570
|
|
Baker Hughes Company 2020 FORM 10-K | 81
Baker Hughes Company
Notes to Consolidated Financial Statements
NOTE 15. EARNINGS PER SHARE
Basic and diluted net income (loss) per share of Class A common stock is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
2020
|
2019
|
2018
|
Net income (loss)
|
$
|
(15,761)
|
|
$
|
271
|
|
$
|
283
|
|
|
|
|
|
Less: Net income (loss) attributable to noncontrolling interests
|
(5,821)
|
|
143
|
|
88
|
|
Net income (loss) attributable to Baker Hughes Company
|
$
|
(9,940)
|
|
$
|
128
|
|
$
|
195
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
Class A basic
|
675
|
|
555
|
|
427
|
|
Class A diluted
|
675
|
|
557
|
|
429
|
|
Net income (loss) per share attributable to common stockholders:
|
|
|
|
Class A basic
|
$
|
(14.73)
|
|
$
|
0.23
|
|
$
|
0.46
|
|
Class A diluted
|
$
|
(14.73)
|
|
$
|
0.23
|
|
$
|
0.45
|
|
Shares of our Class B common stock do not share in earnings or losses of the Company and are not considered in the calculation of basic or diluted earnings per share (EPS) above. As such, separate presentation of basic and diluted EPS of Class B under the two class method has not been presented. The basic weighted average shares outstanding for both our Class A and Class B common stock combined were 1,034 million, 1,034 million, and 1,100 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Under the Exchange Agreement between GE and us, GE is entitled to exchange its holding in our Class B common stock, and associated LLC Units, for Class A common stock on a one-for-one basis (subject to adjustment in accordance with the terms of the Exchange Agreement) or, at the option of Baker Hughes, an amount of cash equal to the aggregate value (determined in accordance with the terms of the Exchange Agreement) of the shares of Class A common stock that would have otherwise been received by GE in the exchange. In computing the dilutive effect, if any, that the aforementioned exchange would have on net income (loss) per share, net income (loss) attributable to holders of Class A common stock would be adjusted due to the elimination of the noncontrolling interests associated with the Class B common stock (including any tax impact). For the three years ended December 2020, 2019 and 2018, such exchange is not reflected in diluted net income (loss) per share as the assumed exchange is not dilutive.
For the year ended December 31, 2020, we excluded all outstanding equity awards from the computation of diluted net loss per share because their effect is antidilutive. For years ended December 31, 2019 and 2018, Class A diluted shares include the dilutive impact of equity awards except for approximately 6 million and 4 million options that were excluded because the exercise price exceeded the average market price of the Class A common stock and is therefore antidilutive.
Baker Hughes Company 2020 FORM 10-K | 82
Baker Hughes Company
Notes to Consolidated Financial Statements
NOTE 16. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
|
Level 1
|
Level 2
|
Level 3
|
Net Balance
|
Level 1
|
Level 2
|
Level 3
|
Net Balance
|
Assets
|
|
|
|
|
|
|
|
|
Derivatives
|
$
|
—
|
|
$
|
118
|
|
$
|
—
|
|
$
|
118
|
|
$
|
—
|
|
$
|
58
|
|
$
|
—
|
|
$
|
58
|
|
Investment securities
|
1,502
|
|
—
|
|
30
|
|
1,532
|
|
24
|
|
—
|
|
259
|
|
283
|
|
Total assets
|
1,502
|
|
118
|
|
30
|
|
1,650
|
|
24
|
|
58
|
|
259
|
|
341
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivatives
|
—
|
|
(52)
|
|
—
|
|
(52)
|
|
—
|
|
(27)
|
|
—
|
|
(27)
|
|
Total liabilities
|
$
|
—
|
|
$
|
(52)
|
|
$
|
—
|
|
$
|
(52)
|
|
$
|
—
|
|
$
|
(27)
|
|
$
|
—
|
|
$
|
(27)
|
|
There were no transfers between Level 1, 2 and 3 during 2020.
The following table provides a reconciliation of recurring Level 3 fair value measurements for investment securities:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Balance at beginning of year
|
$
|
259
|
|
$
|
288
|
|
Purchases
|
12
|
|
7
|
|
Proceeds at maturity
|
(239)
|
|
(38)
|
|
Unrealized gains (losses) recognized in accumulated other comprehensive income (loss)
|
(2)
|
|
2
|
|
Balance at end of year
|
$
|
30
|
|
$
|
259
|
|
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 statement of income (loss) on account of any Level 3 instrument still held at the reporting date. We held $1 million and $111 million of these investment securities on behalf of GE at December 31, 2020 and 2019, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
|
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)
|
$
|
30
|
|
$
|
—
|
|
$
|
—
|
|
$
|
30
|
|
$
|
257
|
|
$
|
2
|
|
$
|
—
|
|
$
|
259
|
|
Equity securities (2)
|
76
|
|
1,431
|
|
(5)
|
|
1,502
|
|
17
|
|
8
|
|
(1)
|
|
24
|
|
Total
|
$
|
106
|
|
$
|
1,431
|
|
$
|
(5)
|
|
$
|
1,532
|
|
$
|
274
|
|
$
|
10
|
|
$
|
(1)
|
|
$
|
283
|
|
(1)All of our investment securities are classified as available for sale instruments. Non-U.S. debt securities mature within two years.
(2)Gains (losses) recorded to earnings related to these securities were $1.4 billion, $2 million and $(25) million for the years ended December 31, 2020, 2019, and 2018, respectively.
Baker Hughes Company 2020 FORM 10-K | 83
Baker Hughes Company
Notes to Consolidated Financial Statements
At December 31, 2020, our equity securities consist primarily of our investment in C3.ai. In June 2019, we entered into a stock purchase agreement and certain other related agreements with C3.ai, a company with a suite of artificial intelligence (AI) software that resulted in us acquiring an economic interest in C3.ai of approximately 15%. Our investment in C3.ai did not have a recurring readily determinable fair value until December 9, 2020 when C3.ai stock began trading publicly. At December 31, 2020, we owned 10,813,095 shares of C3.ai Class A common stock, an economic interest of approximately 11%, with a fair value of $1,500 million. For the year ended December 31, 2020, we recorded a mark-to-market unrealized gain of $1,417 million on our investment in C3.ai, which is reported in the “Non-operating income (loss)” caption in our consolidated statement of income (loss). See “Note 18. Related Party Transactions” for further details on our agreements with C3.ai.
As of December 31, 2020, $1,514 million of total investment securities are recorded in "All other current assets" of the consolidated statements of financial position, with the remaining $18 million in "All other assets." As of December 31, 2019, $254 million of equity securities are recorded in "All other current assets" of the consolidated statements of financial position, with the remaining $29 million in "All other assets."
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, 2020 and 2019 approximates their carrying value as reflected in our consolidated financial statements. For further information on the fair value of our debt, see "Note 10. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
|
Assets
|
(Liabilities)
|
Assets
|
(Liabilities)
|
Derivatives accounted for as hedges
|
|
|
|
|
Currency exchange contracts
|
$
|
5
|
|
$
|
—
|
|
$
|
11
|
|
$
|
—
|
|
|
|
|
|
|
Derivatives not accounted for as hedges
|
|
|
|
|
Currency exchange contracts and other
|
113
|
|
(52)
|
|
47
|
|
(27)
|
|
Total derivatives
|
$
|
118
|
|
$
|
(52)
|
|
$
|
58
|
|
$
|
(27)
|
|
Derivatives are classified in the consolidated statements of financial position depending on their respective maturity date. As of December 31, 2020 and 2019, $115 million and $52 million of derivative assets are recorded in "All other current assets" and $3 million and $6 million are recorded in "All other assets" of the consolidated statements of financial position, respectively. As of December 31, 2020 and 2019, $48 million and $24 million of derivative liabilities are recorded in "All other current liabilities" and $4 million and $3 million are recorded in "All other liabilities" of the consolidated statements of financial position, respectively.
FORMS OF HEDGING
Cash flow hedges
We use cash flow hedging primarily to reduce or eliminate the effects of foreign exchange rate changes on purchase and sale contracts. Accordingly, the vast majority of our derivative activity in this category consists of currency exchange contracts. We also use commodity derivatives to reduce or eliminate price risk on raw materials purchased for use in manufacturing.
Baker Hughes Company 2020 FORM 10-K | 84
Baker Hughes Company
Notes to Consolidated Financial Statements
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 our hedging instrument activity for currency exchange contracts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
Gain (loss) recognized in AOCI
|
$
|
(2)
|
|
$
|
13
|
|
$
|
(6)
|
|
Gain (loss) reclassified from AOCI to earnings
|
$
|
4
|
|
$
|
(1)
|
|
$
|
(1)
|
|
We expect to transfer $5 million to earnings as a gain in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions. The maximum term of derivative instruments that hedge forecasted transactions was one year at December 31, 2020 and 2019.
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. These derivatives are marked to fair value through earnings each period.
The following table summarizes the gains (losses) from derivatives not designated as hedges on the consolidated statements of income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
Consolidated statement of income caption
|
2020
|
2019
|
2018
|
Currency exchange contracts (1)
|
Cost of goods sold
|
$
|
59
|
|
$
|
(13)
|
|
$
|
(35)
|
|
Currency exchange contracts
|
Cost of services sold
|
62
|
|
(15)
|
|
32
|
|
Commodity derivatives
|
Cost of goods sold
|
2
|
|
2
|
|
(1)
|
|
Other derivatives
|
Other non-operating income (loss), net
|
8
|
|
2
|
|
—
|
|
Total (2)
|
|
$
|
131
|
|
$
|
(24)
|
|
$
|
(4)
|
|
(1)Excludes losses on embedded derivatives of $14 million, $7 million and $3 million for the years ended December 31, 2020, 2019 and 2018, respectively, as embedded derivatives are not considered to be hedging instruments in our economic hedges.
(2)The effect on earnings from changes in fair value of derivatives not designated as hedges is substantially offset by the earnings effect of the economically hedged items in the same income statement caption in current and future periods.
NOTIONAL AMOUNT OF DERIVATIVES
The notional amount of a derivative is the number of units of the underlying. A substantial majority of the outstanding notional amount of $7.0 billion and $5.7 billion at December 31, 2020 and 2019, 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 notional amount of these derivative instruments do not generally represent cash amounts exchanged by us and the counterparties, but rather the nominal amount upon which changes in the value of the derivatives are measured.
Baker Hughes Company 2020 FORM 10-K | 85
Baker Hughes Company
Notes to Consolidated Financial Statements
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, 2020 and 2019, the carrying amount of equity securities without readily determinable fair values was $554 million and $637 million, respectively. In 2019, certain of these equity securities 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.
During 2018, we discontinued applying the equity method on our investment in BJ Services, as required under U.S. GAAP, as previous losses had reduced our investment to zero, and we have no requirements to advance any additional funds.
NOTE 17. 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 wellhead to the production facilities. The Oilfield Equipment portfolio has solutions for the subsea, offshore surface, and onshore operating environments. Products and services include subsea and surface pressure control and production systems and services, capital drilling equipment and services, flexible pipe systems for offshore and onshore applications, and life-of-field solutions including well intervention, covering the entire life cycle of a field.
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.
Baker Hughes Company 2020 FORM 10-K | 86
Baker Hughes Company
Notes to Consolidated Financial Statements
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.
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenue
|
2020
|
2019
|
2018
|
Oilfield Services
|
$
|
10,140
|
|
$
|
12,889
|
|
$
|
11,617
|
|
Oilfield Equipment
|
2,844
|
|
2,921
|
|
2,641
|
|
Turbomachinery & Process Solutions
|
5,705
|
|
5,536
|
|
6,015
|
|
Digital Solutions
|
2,015
|
|
2,492
|
|
2,604
|
|
Total
|
$
|
20,705
|
|
$
|
23,838
|
|
$
|
22,877
|
|
The performance of our operating segments is evaluated based on segment operating income (loss), which is defined as income (loss) before income taxes and equity in loss of affiliate and before the following: net interest expense, net other non-operating income (loss), corporate expenses, restructuring, impairment and other charges, inventory impairments, separation and merger related costs, goodwill impairment and certain gains and losses not allocated to the operating segments.
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) before income taxes
|
2020
|
2019
|
2018
|
Oilfield Services
|
$
|
487
|
|
$
|
917
|
|
$
|
785
|
|
Oilfield Equipment
|
19
|
|
55
|
|
—
|
|
Turbomachinery & Process Solutions
|
805
|
|
719
|
|
621
|
|
Digital Solutions
|
193
|
|
343
|
|
390
|
|
Total segment
|
1,504
|
|
2,035
|
|
1,796
|
|
Corporate
|
(464)
|
|
(433)
|
|
(405)
|
|
Inventory impairment and related charges (1)
|
(246)
|
|
—
|
|
(105)
|
|
Goodwill impairment
|
(14,773)
|
|
—
|
|
—
|
|
Restructuring, impairment and other
|
(1,866)
|
|
(342)
|
|
(433)
|
|
Separation and merger related
|
(134)
|
|
(184)
|
|
(153)
|
|
Other non-operating income (loss), net
|
1,040
|
|
(84)
|
|
202
|
|
Interest expense, net
|
(264)
|
|
(237)
|
|
(223)
|
|
Total
|
$
|
(15,202)
|
|
$
|
753
|
|
$
|
680
|
|
(1)Inventory impairments and related charges are reported in "Cost of goods sold" of the consolidated statements of income (loss).
Baker Hughes Company 2020 FORM 10-K | 87
Baker Hughes Company
Notes to Consolidated Financial Statements
The following table presents total assets by segment at December 31:
|
|
|
|
|
|
|
|
|
Segment assets
|
2020
|
2019
|
Oilfield Services
|
$
|
15,482
|
|
$
|
30,611
|
|
Oilfield Equipment
|
3,344
|
|
7,645
|
|
Turbomachinery & Process Solutions
|
8,951
|
|
8,365
|
|
Digital Solutions
|
3,948
|
|
3,983
|
|
Total segment
|
31,725
|
|
50,604
|
|
Corporate and eliminations (1)
|
6,282
|
|
2,765
|
|
Total
|
$
|
38,007
|
|
$
|
53,369
|
|
(1)The assets in Corporate and eliminations consist primarily of cash, the Baker Hughes trade name, our investment in C3.ai, certain facilities, and certain other noncurrent assets. It also includes adjustments to eliminate intercompany investments and receivables reflected within the total assets of each of our reportable segments.
The following table presents depreciation and amortization by segment:
|
|
|
|
|
|
|
|
|
|
|
|
Segment depreciation and amortization
|
2020
|
2019
|
2018
|
Oilfield Services
|
$
|
926
|
|
$
|
985
|
|
$
|
1,003
|
|
Oilfield Equipment
|
146
|
|
175
|
|
173
|
|
Turbomachinery & Process Solutions
|
118
|
|
116
|
|
156
|
|
Digital Solutions
|
98
|
|
103
|
|
112
|
|
Total Segment
|
1,288
|
|
1,379
|
|
1,444
|
|
Corporate
|
29
|
|
39
|
|
42
|
|
Total
|
$
|
1,317
|
|
$
|
1,418
|
|
$
|
1,486
|
|
The following table presents net property, plant and equipment by its geographic location at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment - net
|
2020
|
2019
|
2018
|
U.S.
|
$
|
2,007
|
|
$
|
2,594
|
|
$
|
2,654
|
|
Non-U.S.
|
3,351
|
|
3,646
|
|
3,574
|
|
Total
|
$
|
5,358
|
|
$
|
6,240
|
|
$
|
6,228
|
|
NOTE 18. RELATED PARTY TRANSACTIONS
RELATED PARTY TRANSACTIONS WITH GE
GE is our largest shareholder, and we have continuing involvement with GE primarily through their remaining interest in us and BHH LLC, ongoing purchases and sales of products and services, transition services that they provide, as well as an aeroderivative joint venture (Aero JV) we formed with GE in the fourth quarter of 2019. On September 16, 2019 (the Trigger Date), as a result of the secondary offering and the repurchase of Class B common stock and associated LLC Units, GE's ownership interest was reduced from approximately 50.3% to approximately 36.8%, and GE ceased to be our controlling shareholder. Following the Trigger Date and until GE and its affiliates own less than 20% of the voting power of our outstanding common stock, GE is entitled to designate one person for nomination to our board of directors. At December 31, 2020, GE's economic interest in BHH LLC through their ownership of Class B common stock and associated LLC Units was 30.1%.
The Aero JV is jointly controlled by GE and us, and therefore, we do not consolidate the JV. In 2020, we had purchases with GE and its affiliates, including the Aero JV, of $1,446 million, $1,498 million and $1,791 million during the years ended December 31, 2020, 2019 and 2018, respectively. In addition, we sold products and services to GE and its affiliates for $216 million, $337 million and $363 million during the years ended December 31, 2020, 2019 and 2018, respectively.
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Notes to Consolidated Financial Statements
The Company has $356 million and $536 million of accounts payable at December 31, 2020 and 2019, respectively, for goods and services provided by GE in the ordinary course of business. The Company has $429 million and $495 million of current receivables at December 31, 2020 and 2019, respectively, for goods and services provided to GE in the ordinary course of business.
On July 3, 2017, we executed a promissory note with GE 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 debt. As of December 31, 2020, of the $45 million due to GE, $44 million was held in the form of cash and $1 million was held in the form of investment securities. 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. A corresponding liability is reported in short-term debt in the consolidated statements of financial position.
We also provide guarantees to GE Capital on behalf of some customers who have entered into financing arrangements with GE Capital.
RELATED PARTY TRANSACTIONS WITH C3.ai
In June 2019, we entered into a stock purchase agreement and certain other related agreements with C3.ai, a company with a suite of artificial intelligence (AI) software that resulted in us acquiring approximately 15% economic interest in C3.ai. In April and June 2019, we also entered into agreements with C3.ai under which, among other things, we received a three-year subscription (which we refer to below as direct subscription fees) to use certain C3.ai offerings for internal use and the development of applications on the C3.ai AI Suite, as well as the right to resell C3.ai offerings worldwide on an exclusive basis in the oil and gas market and, with C3.ai's prior consent, non-exclusively in other markets, in each case subject to certain exceptions and conditions. This arrangement was subsequently revised in September 2019 and again in June 2020, when the term was extended to a total of five years with an expiration date in the fiscal year ending April 30, 2024 and the annual contractual amounts of our minimum revenue commitment were modified to $53 million, $75 million, $125 million, and $150 million per year, which amounts are inclusive of the revised direct subscription fees of approximately $28 million per year, over the fiscal years ending April 30, 2021, 2022, 2023, and 2024, respectively. To the extent we are unable to meet the annual minimum revenue commitment under such arrangement, we are obligated to pay C3.ai the shortfall; if we exceed the annual minimum revenue commitment, C3.ai will pay us a sales commission. For the fiscal year ended April 30, 2020, we fulfilled the annual minimum revenue commitment. Lorenzo Simonelli, Chief Executive Officer of Baker Hughes, serves as a member of the board of directors of C3.ai. As of December 31, 2020, we hold an economic interest in C3.ai of approximately 11%. See “Note 16. Financial Instruments” for further discussion of our investment in C3.ai.
NOTE 19. COMMITMENTS AND CONTINGENCIES
LITIGATION
We are subject to legal proceedings arising in the ordinary course of our business. Because legal proceedings are inherently uncertain, we are unable to predict the ultimate outcome of such matters. We record a liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated. Based on the opinion of management, we do not expect the ultimate outcome of currently pending legal proceedings to have a material adverse effect on our results of operations, financial position or cash flows. However, there can be no assurance as to the ultimate outcome of these matters.
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,
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Notes to Consolidated Financial Statements
and March 20, 2017 through March 21, 2017. In addition, on September 21, 2015, TRIUVA Kapitalverwaltungsgesellschaft mbH (TRIUVA) 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. In October 2020, the DIS notified the Company of a partial award in the second arbitration, which addressed certain of the claims asserted by the customer. At this time, we are not able to predict the outcome of the claims asserted in the Houston Federal Court or the claims that remain pending in the second arbitration.
In January 2013, INEOS and Naphtachimie initiated expertise proceedings in Aix-en-Provence, France arising out of a fire at a chemical plant owned by INEOS in Lavera, France, which resulted in a 15-day plant shutdown and destruction of a steam turbine, which was part of a compressor train owned by Naphtachimie. The most recent quantification of the alleged damages is €250 million. Two of the Company's subsidiaries (and 17 other companies) were notified to participate in the proceedings. The proceedings are ongoing, and at this time, there is no indication that the Company's subsidiaries were involved in the incident. Although the outcome of the claims remains uncertain, our insurer has accepted coverage and is defending the Company in the expertise proceeding.
On July 31, 2018, International Engineering & Construction S.A. (IEC) initiated arbitration proceedings in New York administered by the International Center for Dispute Resolution (ICDR) against the Company and its subsidiaries arising out of a series of sales and service contracts entered between IEC and the Company’s subsidiaries for the sale and installation of LNG plants and related power generation equipment in Nigeria (Contracts). Prior to the filing of the IEC Arbitration, the Company’s subsidiaries made demands for payment due under the Contracts. On August 15, 2018, the Company’s subsidiaries initiated a separate demand for ICDR arbitration against IEC for claims of additional costs and amounts due under the Contracts. On October 10, 2018, IEC filed a Petition to Compel Arbitration in the United States District Court for the Southern District of New York against the Company seeking to compel non-signatory Baker Hughes entities to participate in the arbitration filed by IEC. The complaint is captioned International Engineering & Construction S.A. et al. v. Baker Hughes, a GE company, LLC, et al. No. 18-cv-09241 (S.D.N.Y 2018); this action was dismissed by the Court on August 13, 2019. In the arbitration, IEC alleges breach of contract and other claims against the Company and its subsidiaries and seeks recovery of alleged compensatory damages, in addition to reasonable attorneys' fees, expenses and arbitration costs. On March 15, 2019, IEC amended its request for arbitration to alleged damages of $591 million of lost profits plus unspecified additional costs based on alleged non-performance of the contracts in dispute. The arbitration hearing was held from December 9, 2019 to December 20, 2019. On March 3, 2020, IEC amended their damages claim to $700 million of alleged loss cash flow or, in the alternative, $244.9 million of lost profits and various costs based on alleged non-performance of the contracts in dispute, and in addition $4.8 million of liquidated damages, $58.6 million in take-or-pay costs of feed gas, and unspecified additional costs of rectification and take-or-pay future obligations, plus unspecified interest and attorneys' fees. On May 3, 2020, the arbitration panel dismissed IEC's request for take-or-pay damages. On May 29, 2020, IEC quantified their claim for legal fees at $14.2 million and reduced their alternative claim from $244.9 million to approximately $235 million. The Company and its subsidiaries have contested IEC’s claims and are pursuing claims for compensation under the contracts. On October 31, 2020, the ICDR notified the arbitration panel’s final award, which dismissed the majority of IEC’s claims and awarded a portion of the Company’s claims. On January 27, 2021, IEC filed a petition to vacate the arbitral award in the Supreme Court of New York, County of New York. At this time, we are not able to predict the outcome of these proceedings.
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Notes to Consolidated 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 the Company’s behalf against GE, the then-current members of the Board of Directors of the Company and the Company as a nominal defendant, related to the decision to (i) terminate the contractual prohibition barring GE from selling any of the Company’s shares before July 3, 2019; (ii) repurchase $1.5 billion in the Company’s stock from GE; (iii) permit GE to sell approximately $2.5 billion in the Company’s stock through a secondary offering; and (iv) enter into a series of other agreements and amendments that will govern the ongoing relationship between the Company and GE (collectively, the “2018 Transactions”). The complaints in both lawsuits allege, among other things, that GE, as the Company’s controlling stockholder, and the members of the Company’s 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 Company’s 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 the Company’s Board of Directors to pursue the claims itself, and GE and the Company’s 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, the Company’s Board of Directors designated a Special Litigation Committee and empowered it with full authority to investigate and evaluate the allegations and issues raised in the derivative litigation. The Special Litigation Committee filed a motion to stay the derivative litigation during its investigation. On December 3, 2019, the Chancery Court granted the motion and stayed the derivative litigation until June 1, 2020. On May 20, 2020, the Chancery Court granted an extension of the stay to October 1, 2020, and on September 29, 2020, the Court granted a further extension of the stay to October 15, 2020. On October 13, 2020, the Special Litigation Committee filed its report with the Court. At this time, we are not able to predict the outcome of these claims.
In March 2019, the Company 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, the Company received a similar document request from the Securities Exchange Commission (the "SEC"). The Company is cooperating with the DOJ and the SEC in connection with their requests and any related matters. In addition, the Company has agreed to toll any statute of limitations in connection with the matters subject to the DOJ’s document request.
On August 13, 2019, Tri-State Joint Fund filed in the Delaware Court of Chancery, a shareholder class action lawsuit for and on the behalf of itself and all similarly situated public stockholders of Baker Hughes Incorporated (“BHI”) against the General Electric Company (GE), the former members of the Board of Directors of BHI, and certain former BHI Officers alleging breaches of fiduciary duty, aiding and abetting, and other claims in connection with the combination of BHI and the oil and gas business (GE O&G) of GE (the Transactions). On October 28, 2019, City of Providence filed in the Delaware Court of Chancery a shareholder class action lawsuit for and on behalf of itself and all similarly situated public shareholders of BHI against GE, the former members of the Board of Directors of BHI, and certain former BHI Officers alleging substantially the same claims in connection with the Transactions. The relief sought in these complaints include a request for a declaration that Defendants breached their fiduciary duties, an award of damages, pre- and post-judgment interest, and attorneys’ fees and costs. The lawsuits have been consolidated, and plaintiffs filed a consolidated class action complaint on December 17, 2019 against certain former BHI officers alleging breaches of fiduciary duty and against GE for aiding and abetting those breaches. The December 2019 complaint omitted the former members of the Board of Directors of BHI, except for Mr. Craighead who also served as President and CEO of BHI. Mr. Craighead and Ms. Ross, who served as Senior Vice President and Chief Financial Officer of BHI, remain named in the December 2019 complaint along with GE. The relief sought in the consolidated complaint includes a declaration that the former BHI officers breached their fiduciary duties and that GE aided and abetted those breaches, an award of damages, pre- and post-judgment interest, and attorneys’ fees and costs. On or around February 12, 2020, the defendants filed motions to dismiss the lawsuit on the grounds that the complaint failed to state a claim on which relief could be granted. On or around
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Notes to Consolidated Financial Statements
October 27, 2020, the Chancery Court granted GE’s motion to dismiss, and granted in part the motion to dismiss filed by Mr. Craighead and Ms. Ross, thereby dismissing all of the claims against GE and Ms. Ross, and all but one of the claims against Mr. Craighead. At this time, we are not able to predict the outcome of the remaining claim.
On December 11, 2019, BMC Software, Inc. (“BMC”) filed a lawsuit in federal court in the Southern District of Texas against Baker Hughes, a GE company, LLC alleging trademark infringement, unfair competition, and unjust enrichment, arising out of the Company’s use of its new logo and affiliated branding. On January 1, 2020, BMC amended its complaint to add Baker Hughes Company. The relief sought in the complaint includes a request for injunctive relief, an award of damages (including punitive damages), pre- and post-judgment interest, and attorneys’ fees and costs. At this time, we are not able to predict the outcome of these claims.
In December 2020, the Company received notice that the SEC is conducting a formal investigation that the Company understands is related to its books and records and internal controls regarding sales of its products and services in projects impacted by U.S. sanctions. The Company is cooperating with the SEC and providing requested information. The Company has also initiated an internal review with the assistance of external legal counsel regarding internal controls and compliance related to U.S. sanctions requirements. The SEC's investigation and the Company's internal review are ongoing, and the Company cannot anticipate the timing, outcome or possible impact of the investigation or review, financial or otherwise.
We insure against risks arising from our business to the extent deemed prudent by our management and to the extent insurance is available, but no assurance can be given that the nature and amount of that insurance will be sufficient to fully indemnify us against liabilities arising out of pending or future legal proceedings or other claims. Most of our insurance policies contain deductibles or self-insured retentions in amounts we deem prudent and for which we are responsible for payment. In determining the amount of self-insurance, it is our policy to self-insure those losses that are predictable, measurable and recurring in nature, such as claims for automobile liability, general liability and workers compensation.
ENVIRONMENTAL MATTERS
Item 103 of SEC Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings and such proceedings involve potential monetary sanctions that the Company reasonably believes will exceed a specified threshold. Pursuant to recent SEC amendments to this item, the Company will be using a threshold of $1 million for such proceedings. Applying this threshold, there are no environmental matters to disclose for this period.
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 or renewing 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, if known, 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 $4.1 billion at December 31, 2020. 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, 2025 of $838 million, $86 million, $37 million, $8 million and $5 million, respectively, and $18 million in the aggregate thereafter.
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Notes to Consolidated Financial Statements
We sometimes enter into consortium or similar arrangements for certain projects primarily in our Oilfield Equipment segment. Under such arrangements, each party is responsible for performing a certain scope of work within the total scope of the contracted work, and the obligations expire when all contractual obligations are completed. The failure or inability, financially or otherwise, of any of the parties to perform their obligations could impose additional costs and obligations on us. These factors could result in unanticipated costs to complete the project, liquidated damages or contract disputes.
NOTE 20. RESTRUCTURING, IMPAIRMENT AND OTHER
In the first quarter of 2020, in response to the impact on our business from the COVID-19 pandemic and the significant decline in oil and gas prices, we approved a plan of $1.8 billion (the 2020 Plan) primarily associated with rationalizing certain product lines and restructuring our business, which is designed to, among other things, right-size our operations for anticipated activity levels and market conditions. During the remainder of the year, we incurred additional charges not originally contemplated by the 2020 Plan, primarily in our OFS segment to address the challenging market conditions in the upstream oil and gas market. We recorded restructuring, impairment and other charges totaling $1,866 million, and inventory impairments of $246 million in 2020. See "Note 4. Inventories" for further discussion. Substantially all of the activities and charges associated with the original 2020 Plan were completed by December 31, 2020. During the years ended December 31, 2019 and 2018, we recorded restructuring, impairment and other charges of $342 million, and $433 million, respectively.
These charges are included in the "Restructuring, impairment and other" caption in the consolidated statements of income (loss). Details of all 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 $903 million, $314 million and $304 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The following table presents the restructuring and impairment charges by the impacted segment, however, these charges are not included in the reported segment results.
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
Oilfield Services
|
$
|
675
|
|
$
|
211
|
|
$
|
160
|
|
Oilfield Equipment
|
125
|
|
18
|
|
25
|
|
Turbomachinery & Process Solutions
|
35
|
|
48
|
|
71
|
|
Digital Solutions
|
54
|
|
15
|
|
17
|
|
Corporate
|
14
|
|
22
|
|
31
|
|
Total
|
$
|
903
|
|
$
|
314
|
|
$
|
304
|
|
Restructuring and impairment charges were primarily related to employee termination expenses from reducing our headcount in certain geographical locations, and product line rationalization, including plant closures and related expenses such as property, plant and equipment impairments, and other incremental costs that were a direct result of the restructuring plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
Property, plant & equipment, net
|
$
|
385
|
|
$
|
107
|
|
$
|
80
|
|
Employee-related termination expenses
|
464
|
|
179
|
|
123
|
|
Asset relocation costs
|
15
|
|
4
|
|
28
|
|
|
|
|
|
Contract termination fees
|
23
|
|
12
|
|
44
|
|
Other incremental costs
|
16
|
|
12
|
|
29
|
|
Total
|
$
|
903
|
|
$
|
314
|
|
$
|
304
|
|
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Baker Hughes Company
Notes to Consolidated Financial Statements
OTHER CHARGES
Other charges included in "Restructuring, impairment and other" caption in the consolidated statements of income (loss) were $963 million, $28 million, and $129 million for the years ended December 31, 2020, 2019 and 2018, respectively.
In 2020, such charges consisted primarily of intangible asset impairments of $605 million driven by our decision to exit certain businesses primarily in our OFS segment, other long-lived asset impairments of $216 million ($124 million of intangible assets, $77 million of property, plant and equipment and $15 million of other assets) in our OFE segment, other charges of $73 million driven by certain litigation matters and the impairment of an equity method investment, and charges of $61 million related to corporate facility rationalization.
In 2019, such charges 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.
NOTE 21. BUSINESS DISPOSITIONS
We completed several product line dispositions over the past three years as described below. Any gain or loss on a business disposition is reported in the "Other non-operating income (loss), net" caption of the consolidated statements of income (loss).
•In October 2020, we completed the sale of our Surface Pressure Control Flow business, a non-strategic product line in our OFE segment that provided surface wellhead and surface tree systems for the onshore market. The sale resulted in a loss before income taxes of $137 million.
•In June 2020, we completed the sale of our Rod Lift Systems (RLS) business. RLS was part of our OFS segment and provided rod lift products, technologies, services and solutions to the oil and gas industry. The sale resulted in a loss before income taxes of $216 million.
•In July 2019, we completed the sale of our high-speed reciprocating compression (Recip) business. Recip 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 taxes of $138 million.
•In October 2018, we completed the sale of our Natural Gas Solution (NGS) business. 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 taxes of $171 million.
NOTE 22. SUPPLEMENTARY INFORMATION
ALL OTHER CURRENT LIABILITIES
All other current liabilities as of December 31, 2020 and 2019 include $910 million and $1,121 million, respectively, of employee related liabilities.
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Notes to Consolidated Financial Statements
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:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Balance at beginning of year
|
$
|
220
|
|
$
|
236
|
|
Provisions
|
6
|
|
4
|
|
Expenditures
|
(11)
|
|
(14)
|
|
Other
|
1
|
|
(6)
|
|
Balance at end of year
|
$
|
216
|
|
$
|
220
|
|
ALLOWANCE FOR CREDIT LOSSES
The change in allowance for credit losses is as follows:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Balance at beginning of year
|
$
|
323
|
|
$
|
327
|
|
Provision
|
66
|
|
48
|
|
Write-offs & other
|
(16)
|
|
(52)
|
|
|
|
|
Balance at end of year
|
$
|
373
|
|
$
|
323
|
|
CASH FLOW DISCLOSURES
Supplemental cash flow disclosures are as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
Income taxes paid, net of refunds
|
$
|
441
|
|
$
|
438
|
|
$
|
424
|
|
Interest paid
|
$
|
289
|
|
$
|
285
|
|
$
|
301
|
|