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(Exact name of registrant as specified in its charter)
iDelaware
i81-4403168
(State
or other jurisdiction
(I.R.S. Employer Identification No.)
of incorporation or organization)
i17021 Aldine Westfield
iHouston,
iTexas
i77073-5101
(Address
of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (i713) i439-8600
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol
Name of each exchange on which registered
iClass A Common Stock, par value $0.0001 per share
iBKR
iThe
Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
iYes☑
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
iYes☑ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer""smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
iLarge
accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No i☑
As of April 13, 2023, the registrant had outstanding i1,012,362,186
shares of Class A Common Stock, $0.0001 par value per share.
Liabilities
for pensions and other postretirement benefits
i932
i960
All
other liabilities
i1,422
i1,412
Equity:
Class
A Common Stock, $ii0.0001/ par value - ii2,000/
authorized, ii1,012/ and ii1,006/
issued and outstanding as of March 31, 2023 and December 31, 2022, respectively
i—
i—
Class
B Common Stock, $ii0.0001/ par value - ii1,250/
authorized, iiiinil///
issued and outstanding as of March 31, 2023 and December 31, 2022, respectively
i—
i—
Capital
in excess of par value
i27,925
i28,126
Retained
loss
(i10,185)
(i10,761)
Accumulated
other comprehensive loss
(i3,026)
(i2,971)
Baker
Hughes Company equity
i14,714
i14,394
Noncontrolling
interests
i135
i131
Total equity
i14,849
i14,525
Total
liabilities and equity
$
i35,042
$
i34,181
See
accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Baker Hughes Company 2023 First Quarter Form 10-Q | 3
Baker Hughes Company
Condensed Consolidated Statements of Changes in Equity
Effect
of currency exchange rate changes on cash and cash equivalents
(i55)
i1
Decrease
in cash and cash equivalents
(i73)
(i662)
Cash
and cash equivalents, beginning of period
i2,488
i3,853
Cash
and cash equivalents, end of period
$
i2,415
$
i3,191
Supplemental
cash flows disclosures:
Income taxes paid, net of refunds
$
i163
$
i130
Interest
paid
$
i50
$
i48
See
accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Baker Hughes Company 2023 First Quarter Form 10-Q | 5
Baker Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1. iBASIS
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. We are a holding company and have no material assets other than our wholly owned operating company, Baker Hughes Holdings LLC ("BHH LLC"). BHH LLC is a Securities and Exchange Commission ("SEC") Registrant with separate filing requirements with the SEC and its separate financial information can be obtained from www.sec.gov.
i
BASIS
OF PRESENTATION
The accompanying unaudited condensed 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 interim financial information. Accordingly, certain information and disclosures normally included in our annual financial statements have been condensed or omitted. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the "2022 Annual Report").
In
the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary by management to fairly state our results of operations, financial position and cash flows of the Company and its subsidiaries for the periods presented and are not indicative of the results that may be expected for a full year. The Company's financial statements have been prepared on a consolidated basis. Under this basis of presentation, our financial statements consolidate all of our subsidiaries (entities in which we have a controlling financial interest,
most often because we hold a majority voting interest). All intercompany accounts and transactions have been eliminated.
In the Company's financial statements and notes, certain prior year amounts have been reclassified to conform to the current year presentation. In the notes to the unaudited condensed 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
Please refer to "Note 1. Basis of Presentation and Summary of Significant Accounting Policies," to our consolidated financial
statements from our 2022 Annual Report for the discussion of our significant accounting policies.
i
Cash and Cash Equivalents
As of March 31, 2023 and December 31, 2022, we had $i549
million and $i605 million, respectively, of cash held in bank accounts that cannot be readily 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.
/i
Supply
Chain Finance Programs
On January 1, 2023, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. ASU 2022-04, Liabilities – Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which enhances the transparency of supplier finance programs and requires certain disclosures for a buyer in a supplier finance program.
Baker Hughes Company 2023 First Quarter Form 10-Q | 6
Baker Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
Under
the supply chain finance (“SCF”) 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.
As of March 31, 2023 and December 31, 2022, $i316
million and $i275 million of SCF program liabilities are recorded in “Accounts payable” in our condensed consolidated statements of financial position, respectively, and reflected as cash flow from operating activities in our condensed consolidated statements of cash flows when settled.
NEW ACCOUNTING STANDARDS TO BE ADOPTED
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. iCURRENT RECEIVABLES
i
Current
receivables are comprised of the following:
Customer
receivables are recorded at the invoiced amount. The "Other" category consists primarily of advance payments to suppliers, indirect taxes, and customer retentions.
NOTE 3. iINVENTORIES
i
Inventories,
net of reserves of $i383 million and $i396 million as of March 31, 2023 and December 31,
2022, respectively, are comprised of the following:
During
the three months ended March 31, 2023, we recorded inventory impairments of $i18 million, predominately in our Oilfield Services & Equipment ("OFSE") segment. Charges for inventory impairments are reported in the "Cost of goods sold" caption in the condensed consolidated statements of income (loss). See "Note 17. Restructuring, Impairment, and Other" for further information.
Baker Hughes Company 2023 First Quarter Form 10-Q | 7
Baker
Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 4. iGOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
i
The
changes in the carrying value of goodwill are detailed below by segment:
(1)The
reduction in Industrial & Energy Technology ("IET") goodwill relates to transferring our IET Nexus Controls business to held for sale. See "Note 18. Business Held for Sale" for further information.
/
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. We also test goodwill for impairment 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 2023, we completed a review to assess whether indicators of impairment existed. As a result of this assessment, we concluded that no indicators existed that would lead to a determination that it is more likely than not that the fair value of each reporting unit 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.
Baker Hughes Company 2023 First Quarter Form 10-Q | 8
Baker
Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
Intangible
assets are generally amortized on a straight-line basis with estimated useful lives ranging from i1 to i35 years. Amortization expense for the three months ended March 31, 2023 and 2022
was $i63 million and $i55 million, respectively.
i
Estimated
amortization expense for the remainder of 2023 and each of the subsequent five fiscal years is expected to be as follows:
Contract assets reflect revenue earned in excess of billings on our long-term contracts to construct technically complex equipment, provide long-term product service and maintenance or extended
warranty arrangements and other deferred contract related costs. Our long-term product service agreements are provided by our IET segment. Our long-term equipment contracts are provided by both our IET and OFSE segments. iContract assets are comprised of the following:
(1)
Other costs to fulfill or obtain a contract consist primarily of non-recurring engineering costs incurred and expected to be recovered.
Baker Hughes Company 2023 First Quarter Form 10-Q | 9
Baker Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
Revenue recognized during the three months ended March 31, 2023 and 2022 from performance obligations satisfied (or partially satisfied) in previous periods related
to our long-term service agreements was $i1 million and $(i4)
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 6. iPROGRESS 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:
Progress
collections and deferred income (contract liabilities)
$
i4,434
$
i3,822
Revenue
recognized during the three months ended March 31, 2023 and 2022 that was included in the contract liabilities at the beginning of the period was $i962 million and $i739
million, respectively.
NOTE 7. iLEASES
i
Our leasing activities primarily
consist of operating leases for administrative offices, manufacturing facilities, research centers, service centers, sales offices and certain equipment.
Three Months Ended March 31,
Operating Lease Expense
2023
2022
Long-term fixed lease
$
i69
$
i63
Long-term
variable lease
i15
i9
Short-term
lease
i128
i109
Total
operating lease expense
$
i212
$
i181
/
Cash
flows used in operating activities for operating leases approximates our expense for the three months ended March 31, 2023 and 2022.
The weighted-average remaining lease term as of March 31, 2023 and December 31, 2022 was approximately iiseven
years/ for our operating leases. The weighted-average discount rate used to determine the operating lease liability as of March 31, 2023 and December 31, 2022 was i3.2% and i3.1%,
respectively.
Baker Hughes Company 2023 First Quarter Form 10-Q | 10
Baker Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 8. iDEBT
i
The
carrying value of our short-term and long-term debt are comprised of the following:
Total short-term and current portion of long-term debt
i684
i677
Long-term
debt
i8.55% Debentures due June 2024
i113
i114
i2.061%
Senior Notes due December 2026
i597
i597
i3.337%
Senior Notes due December 2027
i1,287
i1,277
i6.875%
Notes due January 2029
i272
i273
i3.138%
Senior Notes due November 2029
i523
i523
i4.486%
Senior Notes due May 2030
i497
i497
i5.125%
Senior Notes due September 2040
i1,285
i1,286
i4.080%
Senior Notes due December 2047
i1,338
i1,338
Other
long-term debt
i63
i75
Total long-term debt
i5,975
i5,980
Total
debt
$
i6,659
$
i6,658
/
The
estimated fair value of total debt at March 31, 2023 and December 31, 2022 was $i6,040 million and $i5,863
million, respectively. For a majority of our debt 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.
BHH LLC has a $i3 billion committed unsecured revolving credit facility ("the Credit Agreement") with commercial banks maturing in December 2024. In addition, we have a commercial paper program
with authorization up to $i3 billion under which we may issue from time to time commercial paper with maturities of no more than i397 days. The 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 Credit Agreement may be accelerated. Such events of default include payment defaults to lenders under the Credit Agreement and other customary defaults. No such events of default have occurred. At March 31, 2023 and December 31, 2022, there were iino/
borrowings under either the Credit Agreement or the commercial paper program.
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 i100%-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 March 31, 2023, Baker Hughes Co-Obligor, Inc. is a co-obligor of our long-term debt securities
totaling $i6,560 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 March 31, 2023, we were in compliance with all debt covenants.
Baker Hughes Company
2023 First Quarter Form 10-Q | 11
Baker Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 9. iINCOME TAXES
For the three months ended March
31, 2023, the provision for income taxes was $i179 million. The difference between the U.S. statutory tax rate of 21% and the effective tax rate is primarily related to income in jurisdictions with tax rates higher than in the U.S., which is partially offset by income subject to U.S. tax at an effective rate less than 21% due to valuation allowances.
For the three months ended March 31, 2022, the provision for income taxes was $i107
million. The difference between the U.S. statutory tax rate of 21% and the effective tax rate is primarily related to losses with no tax benefit due to valuation allowances and income in jurisdictions with tax rates higher than the U.S., partially offset by tax benefits related to uncertain tax positions.
NOTE 10. iEQUITY
COMMON STOCK
We
are authorized to issue i2 billion shares of Class A common stock, i1.25 billion shares of Class B common stock and i50
million shares of preferred stock each of which have a par value of $ii0.0001/
per share. The number of shares outstanding of Class A and Class B common stock as of March 31, 2023 is i1,012 million and inil,
respectively. We have not issued any preferred 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 or any assets in the event of liquidation of the Company. As of March 31, 2023, there are iino/
shares of Class B common stock issued and outstanding.
We have a share repurchase program which we expect to fund from cash generated from operations, and we expect to make share repurchases from time to time subject to the Company's capital plan, market conditions, and other factors, including regulatory restrictions. The repurchase program may be suspended or discontinued at any time and does not have a specified expiration date. There were ino
shares of Class A common stock or common units of BHH LLC ("LLC Units") repurchased during the three months ended March 31, 2023. During the three months ended March 31, 2022, the Company and BHH LLC repurchased and canceled i8.1 million shares of Class A common stock and LLC Units, respectively, each for $i236
million, representing an average price per share of $i28.96. As of March 31, 2023, the Company and BHH LLC had authorization remaining to repurchase up to approximately $i2.8
billion of its Class A common stock and LLC Units, respectively.
i
The following table presents the changes in the number of shares outstanding (in thousands):
Class A Common Stock
Class
B Common Stock
2023
2022
2023
2022
Balance at January 1
i1,005,960
i909,142
i—
i116,548
Issue
of shares upon vesting of restricted stock units (1)
i5,342
i5,906
i—
i—
Issue
of shares on exercises of stock options (1)
i88
i1,233
i—
i—
Issue
of shares for employee stock purchase plan
i491
i591
i—
i—
Exchange
of Class B common stock for Class A common stock (2)
i—
i75,957
i—
(i75,957)
Repurchase
and cancellation of Class A common stock
i—
(i8,142)
i—
i—
Balance
at March 31
i1,011,881
i984,688
i—
i40,591
(1)Share
amounts reflected above are net of shares withheld to satisfy the employee's tax withholding obligation.
(2)When shares of Class B common stock, together with associated LLC Units, are exchanged for shares of Class A common stock, such shares of Class B common stock are canceled.
/
Baker Hughes Company 2023 First Quarter Form 10-Q | 12
Baker Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
ACCUMULATED OTHER COMPREHENSIVE
LOSS (AOCL)
i
The following tables present the changes in accumulated other comprehensive loss, net of tax:
The
amounts reclassified from accumulated other comprehensive loss during the three months ended March 31, 2023 and 2022 represent (i) gains (losses) reclassified on cash flow hedges when the hedged transaction occurs, (ii) the amortization of net actuarial gain (loss), prior service credit, settlements, and curtailments which are included in the computation of net periodic pension cost, and (iii) the release of foreign currency translation adjustments (see "Note 17. Restructuring, Impairment, and Other" for additional details).
NOTE 11. iEARNINGS
PER SHARE
i
Basic and diluted net income per share of Class A common stock is presented below:
Three Months Ended March 31,
(In
millions, except per share amounts)
2023
2022
Net income
$
i581
$
i80
Less:
Net income attributable to noncontrolling interests
i5
i8
Net
income attributable to Baker Hughes Company
$
i576
$
i72
Weighted
average shares outstanding:
Class A basic
i1,010
i938
Class
A diluted
i1,018
i948
Net
income per share attributable to common stockholders:
Class A basic and diluted
$
ii0.57/
$
ii0.08/
/
Baker Hughes Company 2023 First Quarter Form 10-Q | 13
Baker Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
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 our Class B common stock for the three months ended March 31, 2023 and 2022
were inil and i88 million, respectively. The basic weighted average shares
outstanding for both our Class A and Class B common stock combined for the three months ended March 31, 2023 and 2022 were i1,010 million and i1,026 million,
respectively.
For the three months ended March 31, 2023 and 2022, Class A diluted shares include the dilutive impact of equity awards except for approximately ii2/
million options that were excluded because the exercise price exceeded the average market price of our Class A common stock and is therefore antidilutive.
NOTE 12. iFINANCIAL INSTRUMENTS
RECURRING FAIR VALUE MEASUREMENTS
i
Our
assets and liabilities measured at fair value on a recurring basis consists of derivative instruments and investment securities.
(1)Gains
recorded to earnings related to these securities were $i392 million and $i12 million for the three months ended March
31, 2023 and 2022, respectively.
(2)As of March 31, 2023, our non-U.S. debt securities are classified as available for sale securities and mature within ione year.
/
As of March 31, 2023 and December 31,
2022, our equity securities with readily determinable fair values are comprised primarily of our investment in C3.ai, Inc. ("C3 AI") of $i232 million and $i97 million,
respectively, and ADNOC Drilling of $i860 million and $i649 million, respectively. We measured our investments to fair value based on quoted prices in active markets.
As
of March 31, 2023, our investment in C3 AI consists of i6,920,476 shares of Class A common stock ("C3 AI Shares"). During the three months ended March 31, 2023, we sold approximately i1.7
million of C3 AI Shares and
Baker Hughes Company 2023 First Quarter Form 10-Q | 14
Baker Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
received proceeds of $i46 million.For the three months ended March 31, 2023 and 2022, we recorded a gain of $i181 million and a loss of $i74
million, respectively, from the net change in fair value of our investment in C3 AI, which is reported in “Other non-operating income (loss), net” in our condensed consolidated statements of income (loss).
As of March 31, 2023, our investment in ADNOC Drilling consists of i800,000,000 shares. For the three months ended March 31, 2023 and 2022, we recorded a gain of $i211
million and $i85 million, respectively, from the net change in fair value of our investment in ADNOC Drilling, which is reported in “Other non-operating income (loss), net” in our condensed consolidated statements of income (loss).
As of March 31, 2023 and December 31, 2022, $i1,105
million and $i748 million, respectively, of total investment securities are recorded in "All other current assets."
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Our financial instruments include cash and cash equivalents, current receivables, certain 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 as of March 31,
2023 and December 31, 2022 approximates their carrying value as reflected in our condensed consolidated financial statements. For further information on the fair value of our debt, see "Note 8. Debt."
DERIVATIVES AND HEDGING
We use derivatives to manage our risks and do not use derivatives for speculation. iThe table below summarizes the fair value of all derivatives, including hedging instruments
and embedded derivatives.
Derivatives
are classified in the condensed consolidated statements of financial position depending on their respective maturity date. As of March 31, 2023 and December 31, 2022, $i26 million and $i17
million of derivative assets are recorded in "All other current assets" and $i1 million and $i1 million are recorded in "All other assets" in the condensed consolidated statements of financial position, respectively.
As of March 31, 2023 and December 31, 2022, $i29 million and $i17 million of derivative liabilities are recorded
in "All other current liabilities" and $i59 million and $i69 million are recorded in "All other liabilities" of the condensed consolidated statements of financial position, respectively.
Baker Hughes Company 2023 First Quarter Form 10-Q | 15
Baker Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
FORMS OF HEDGING
Cash Flow Hedges
We use cash flow hedging primarily to reduce or eliminate the effects of foreign exchange rate changes on purchase and sale contracts. Accordingly, the vast majority of our derivative activity in this category consists of currency exchange contracts. In addition, we are exposed to
interest rate risk fluctuations in connection with long-term debt that we issue from time to time to fund our operations. During the three months ended March 31, 2023, the Company executed interest rate swap contracts designated as cash flow hedges with a notional amount of $i375 million in order to hedge the
Company's expected exposure in connection with refinancing activities we may undertake in 2023. Changes in the fair value of cash flow hedges are recorded in a separate component of equity (referred to as "Accumulated Other Comprehensive Income" or "AOCI") and are recorded in earnings in the period in which the hedged transaction occurs. See "Note 10. Equity" for further information on activity in AOCI for cash flow hedges. As of March 31, 2023 and December 31, 2022, the maximum term of derivative instruments that hedge forecasted transactions was approximately iione
year/.
Fair Value Hedges
All of our long-term debt is comprised of fixed rate instruments. We are subject to interest rate risk on our debt portfolio and may use interest rate swaps to manage the economic effect of fixed rate obligations associated with certain debt. Under these arrangements, we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount.
As of March 31, 2023 and December 31, 2022, we had interest rate swaps with a notional amount of $ii500/
million that converted a portion of our $ii1,350/ million aggregate
principal amount of ii3.337/% fixed
rate Senior Notes due 2027 into a floating rate instrument with an interest rate based on a LIBOR index as a hedge of its exposure to changes in fair value that are attributable to interest rate risk. We concluded that the interest rate swap met the criteria necessary to qualify for the short-cut method of hedge accounting, and as such, an assumption is made that the change in the fair value of the hedged debt, due to changes in the benchmark rate, exactly offsets the change in the fair value of the interest rate swaps. Therefore, the derivative is considered to be effective at achieving offsetting changes in the fair value of the hedged liability, and no ineffectiveness is recognized. The mark-to-market of this fair value hedge is recorded as gains or losses in interest expense and is equally offset by the gain or loss of the underlying debt instrument, which also is recorded in interest expense.
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. Economic hedges are marked to fair value through earnings each period.
i
The following table summarizes the gains (losses) from derivatives not designated as hedges in the condensed consolidated statements of income (loss):
Derivatives
not designated as hedging instruments
Condensed consolidated statements of income (loss) caption
(1)Excludes
losses of inil and gains of $i1 million on embedded derivatives
for the three months ended March 31, 2023 and 2022, respectively, as embedded derivatives are not considered to be hedging instruments in our economic hedges.
(2)The effect on earnings of derivatives not designated as hedges is substantially offset by the change in fair value of the economically hedged items in the current and future periods.
/
Baker Hughes Company 2023 First Quarter Form 10-Q | 16
Baker
Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
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 $i4.3 billion and $i3.8
billion at March 31, 2023 and December 31, 2022, respectively, is related to hedges of anticipated sales and purchases in foreign currency, commodity purchases, changes in interest rates, 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.
COUNTERPARTY CREDIT RISK
Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our agreements) on an individual counterparty basis.
NOTE 13. REVENUE RELATED TO CONTRACTS WITH CUSTOMERS
DISAGGREGATED
REVENUE
i
We disaggregate our OFSE and IET segment revenue from contracts with customers by product lines. See "Note 14. Segment Information" for further details.
Three
Months Ended March 31,
Total Revenue
2023
2022
Well Construction
$
i1,061
$
i883
Completions,
Intervention & Measurements
i909
i781
Production
Solutions
i938
i825
Subsea
& Surface Pressure Systems
i670
i528
Oilfield
Services & Equipment
i3,577
i3,017
Gas
Technology - Equipment
i827
i543
Gas
Technology - Services
i591
i581
Total
Gas Technology
i1,418
i1,124
Condition
Monitoring
i140
i126
Inspection
i254
i212
Pumps,
Valves & Gears
i201
i221
PSI
& Controls
i125
i136
Total
Industrial Technology
i721
i694
Industrial
& Energy Technology
i2,138
i1,818
Total
$
i5,716
$
i4,835
/
Baker Hughes Company 2023 First Quarter Form 10-Q | 17
Baker Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
i
In addition, management views OFSE segment revenue from contracts with customers by geographic region:
Three
Months Ended March 31,
Oilfield Services & Equipment Geographic Revenue
2023
2022
North America
$
i992
$
i823
Latin
America
i661
i440
Europe/CIS/Sub-Saharan
Africa
i581
i660
Middle
East/Asia
i1,345
i1,094
Oilfield
Services & Equipment
$
i3,577
$
i3,017
/
REMAINING
PERFORMANCE OBLIGATIONS
As of March 31, 2023, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $i29.6 billion. As of March 31, 2023, we expect to recognize revenue of approximately i60%,
i72% and i90% of the total remaining performance obligations within i2,
i5, and i15 years, respectively, and the remaining thereafter. Contract
modifications could affect both the timing to complete as well as the amount to be received as we fulfill the related remaining performance obligations.
NOTE 14. iSEGMENT INFORMATION
The Company's segments are determined as those operations whose results are reviewed regularly by the
chief operating decision maker ("CODM"), who is our Chief Executive Officer, in deciding how to allocate resources and assess performance. We report our operating results through itwo operating segments, Oilfield Services & Equipment and Industrial & Energy Technology. Each segment is organized and managed based upon the nature of our markets and customers and consists of similar products and services. These products and services operate across upstream oil and gas and broader energy and industrial markets.
OILFIELD
SERVICES & EQUIPMENT ("OFSE")
Oilfield Services & Equipment provides products and services for onshore and offshore oilfield operations across the lifecycle of a well, ranging from exploration, appraisal, and development, to production, rejuvenation, and decommissioning. OFSE is organized into ifour product lines: Well Construction, which encompasses drilling services, drill bits, and drilling & completions fluids; Completions, Intervention, and
Measurements, which encompasses well completions, pressure pumping, and wireline services; Production Solutions, which spans artificial lift systems and oilfield & industrial chemicals; and Subsea & Surface Pressure Systems, which encompasses subsea projects services and drilling systems, surface pressure control, and flexible pipe systems. Beyond its traditional oilfield concentration, OFSE is expanding its capabilities and technology portfolio to meet the challenges of a net-zero future. These efforts include expanding into new energy areas such as geothermal and CCUS, strengthening its digital architecture and addressing key energy market themes.
INDUSTRIAL & ENERGY TECHNOLOGY ("IET")
Industrial & Energy Technology provides technology
solutions and services for mechanical-drive, compression and power-generation applications across the energy industry, including oil and gas, liquefied natural gas ("LNG") operations, downstream refining and petrochemical markets, as well as lower carbon solutions to broader energy and industrial sectors. IET also provides equipment, software, and services that serve a wide range of industries including petrochemical and refining, nuclear, aviation, automotive, mining, cement, metals, pulp and paper, and food and beverage. IET is organized intoisixproduct lines - Gas Technology Equipment and Gas Technology Services, collectively referred to as Gas Technology, and Condition Monitoring, Inspection, Pumps Valves & Gears, and PSI & Controls, collectively referred to as Industrial Technology.
Revenue and operating income for each segment are determined based on the internal performance measures used by the CODM to assess the performance of each segment in a financial period. The performance of our
Baker Hughes Company 2023 First Quarter Form 10-Q | 18
Baker
Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
operating segments is evaluated based on segment operating income (loss), which is defined as income (loss) before income taxes before the following: net interest expense, net other non-operating income (loss), corporate expenses, restructuring, impairment and other charges, inventory impairments, and certain gains and losses not allocated to the operating segments. Consistent accounting policies have been applied by all segments within the Company, for all reporting periods. Intercompany revenue and expense amounts have been eliminated within each segment to report on the basis that management uses internally for evaluating segment performance.
i
Summarized
financial information for the Company's segments is shown in the following tables.
Three Months Ended March 31,
Revenue
2023
2022
Oilfield Services & Equipment
$
i3,577
$
i3,017
Industrial
& Energy Technology
i2,138
i1,818
Total
$
i5,716
$
i4,835
Three
Months Ended March 31,
Income before income taxes
2023
2022
Oilfield Services & Equipment
$
i371
$
i213
Industrial
& Energy Technology
i241
i241
Total
segment
i612
i453
Corporate
(i100)
(i105)
Inventory
impairment
(i18)
i—
Restructuring,
impairment and other
(i56)
(i70)
Other
non-operating income (loss), net
i386
(i28)
Interest
expense, net
(i64)
(i64)
Income
before income taxes
$
i760
$
i187
The
following table presents depreciation and amortization by segment:
Three Months Ended March 31,
Depreciation and amortization
2023
2022
Oilfield Services & Equipment
$
i208
$
i222
Industrial
& Energy Technology
i56
i51
Total
segment
i264
i272
Corporate
i5
i4
Total
$
i269
$
i277
/
NOTE
15. iRELATED PARTY TRANSACTIONS
We have an aeroderivative joint venture ("Aero JV") we formed with GE in 2019. The Aero JV is jointly controlled by GE and us, each with ownership interest of ii50/%,
and therefore, we do not consolidate the JV. We had purchases with the Aero JV of $i114 million and $i108
million during the three months ended March 31, 2023 and 2022, respectively. We have $i55 million and $i110
million of accounts payable at March 31, 2023 and December 31, 2022, respectively, for goods and services provided by the Aero JV in the ordinary course of business. Sales of products and services and related receivables with the Aero JV were immaterial for the three months ended March 31, 2023 and 2022.
Baker Hughes Company 2023 First Quarter Form 10-Q | 19
Baker Hughes Company
Notes
to Unaudited Condensed Consolidated Financial Statements
NOTE 16. iCOMMITMENTS 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.
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 $i591
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 $i700 million of alleged loss cash flow or, in the alternative,
$i244.9 million of lost profits and various costs based on alleged non-performance of the contracts in dispute, and in addition $i4.8
million of liquidated damages, $i58.6 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 $i14.2
million and reduced their alternative claim from $i244.9 million to approximately $i235 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. On March 5, 2021, the Company filed a petition to confirm
the arbitral award, and on March 8, 2021, the Company removed the matter to the United States District Court for the Southern District of New York. On November 16, 2021, the court granted the Company's petition to confirm the award and denied IEC's petition to vacate. During the second quarter of 2022, IEC paid the amounts owed under the arbitration award, which had an immaterial impact on the Company’s financial statements. On February 3, 2022, IEC initiated another arbitration proceeding in New York administered by the ICDR against certain of the
Company’s subsidiaries arising out of the same project which formed the basis of the first arbitration. On March 25, 2022, the Company's subsidiaries initiated a separate demand for ICDR arbitration against IEC for claims of additional costs and amounts due; such claims against IEC have now been resolved, with any consideration having an immaterial impact on the Company’s financial statements. At this time, we are not able to predict the outcome of the proceeding which is pending against the
Company’s subsidiaries.
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 $i1.5 billion in the Company’s stock from GE; (iii) permit GE to sell approximately $i2.5
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
Baker Hughes Company 2023 First Quarter Form 10-Q | 20
Baker Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
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. On April 17, 2023, the Court granted the Special Litigation Committee’s motion to terminate the litigation.
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 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 or around February 15, 2023, the lead plaintiff and three additional named plaintiffs in a putative securities class action styled The Reckstin Family Trust, et al., v. C3.ai, Inc., et al., No. 4:22-cv-01413-HSG, filed an amended class action complaint (the “Amended Complaint”) in the United States District Court for the Northern District of California. The Amended Complaint names the following as defendants: (i) C3.ai., Inc. (“C3 AI”), (ii) certain of C3 AI’s current and/or former
officers and directors, (iii) certain underwriters for the C3 AI initial public offering (the “IPO”), and (iv) the Company, and its President and CEO (who formerly served as a director on the board of C3 AI). The Amended Complaint alleges violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 (the “Exchange Act”) in connection with the IPO and the subsequent period between December 9, 2020 and December 2, 2021, during which BHH LLC held equity investments in C3 AI. The action seeks unspecified damages and the award of costs and expenses, including reasonable attorneys' fees. At this time, we are not able to predict the outcome of these proceedings.
Baker Hughes Company
2023 First Quarter Form 10-Q | 21
Baker Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
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.
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. We also provide a guarantee to GE Capital on behalf of a customer who entered into a financing arrangement with GE Capital. Total off-balance sheet arrangements were approximately $i4.7
billion at March 31, 2023. It is not practicable to estimate the fair value of these financial instruments. As of March 31, 2023, 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 sometimes enter into consortium or similar arrangements for certain projects primarily in our OFSE 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 17. iRESTRUCTURING, IMPAIRMENT AND OTHER
We recorded restructuring, impairment and other charges of $i56
million and $i70 million during the three months ended March 31, 2023 and 2022, respectively.
RESTRUCTURING AND IMPAIRMENT CHARGES
We recorded restructuring and impairment charges of $i56
million for the three months ended March 31, 2023. In the third quarter of 2022, we announced a restructuring plan in conjunction with a change in our operating segments that was effective October 1, 2022 (the "2022 Plan"). As a result, we continued to incur charges in the first quarter of 2023 related to the 2022 Plan primarily for employee termination expenses driven by actions taken by the Company to facilitate the reorganization into itwo
segments and corporate restructuring. In addition, under a new plan (the "2023 Plan") we incurred costs related to exit activities at specific locations in our segments to align with our current market outlook and rationalize our manufacturing supply chain footprint. These actions also included inventory impairments of $i18 million recorded in "Cost of goods sold" in our condensed consolidated statements of income (loss). We expect to incur additional charges of approximately $i145
million in 2023 in connection with these restructuring plans, and currently expect these plans to be substantially completed by the end of 2023, with the majority of charges incurred within the first half of 2023.
i
The following table presents restructuring and impairment charges by the impacted segment, however, these charges are not included in the reported segment results:
Three
Months Ended March 31,
Segments
2023
2022
Oilfield Services & Equipment
$
i15
$
i2
Industrial
& Energy Technology
i14
(i1)
Corporate
i27
i3
Total
$
i56
$
i4
/
Baker Hughes Company 2023 First Quarter Form 10-Q | 22
Baker Hughes Company
Notes to Unaudited Condensed Consolidated Financial Statements
The following table presents restructuring and impairment charges by type, and includes gains on the dispositions of certain property, plant and equipment previously impaired as a consequence of exit activities:
Three Months Ended
March 31,
Charges by Type
2023
2022
Property, plant & equipment, net
$
i15
$
(i9)
Employee-related
termination costs
i31
i8
Other
incremental costs
i10
i5
Total
$
i56
$
i4
OTHER
CHARGES
We recorded other charges of inil and $i66 million for the three months ended March
31, 2023 and 2022, respectively. Other charges for the three months ended March 31, 2022 were predominately in our IET segment for a write-off of an equity method investment and the release of foreign currency translation adjustments. The 2022 charges also include separation related costs.
NOTE 18. iBUSINESS
HELD FOR SALE
The Company classifies assets and liabilities as held for sale (“disposal group”) when management commits to a plan to sell the disposal group and concludes that it meets the relevant criteria. Assets held for sale are measured at the lower of their carrying value or fair value less costs to sell. Any loss resulting from the measurement is recognized in the period the held for sale criteria are met. Conversely, gains are not recognized until the date of sale.
In July 2022, we entered into an agreement with GE to sell our Nexus Controls business, a product line in our IET segment, specializing in scalable industrial controls systems, safety systems, hardware, and software cybersecurity solutions and services, and on April 3,
2023, we completed the sale resulting in an immaterial gain.
i
The following table presents financial information related to the assets and liabilities of our Nexus Controls business classified as held for sale and reported in “All other current assets” and “All other current liabilities” in our condensed consolidated statements of financial position as of March 31,
2023.
Assets and liabilities of business held for sale
Nexus Controls
Assets
Current receivables
$
i48
Inventories
i40
Property,
plant and equipment
i2
Goodwill
i230
Other
assets
i9
Total assets of business held for sale
i329
Liabilities
Accounts
payable
i18
Progress collections and deferred income
i39
All
other current liabilities
i19
Other liabilities
i7
Total
liabilities of business held for sale
i83
Total net assets of business held for sale
$
i246
/
Baker Hughes Company 2023 First Quarter Form 10-Q | 23
ITEM 2. 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 condensed consolidated financial statements and the related notes included in Item 1 thereto, as well as our Annual Report on Form 10-K for the year ended December 31, 2022 ("2022 Annual Report").
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 conduct business in more than 120 countries and employ approximately 56,000 employees. We operate through our two business segments: Oilfield Services & Equipment ("OFSE") and Industrial & Energy Technology ("IET"). We sell products and services primarily in the global oil and gas markets, within the upstream, midstream and downstream segments.
EXECUTIVE SUMMARY
Market Conditions
As we look at 2023, the macro environment remains volatile with elevated recession risk for major developed economies. Despite these challenges, we expect the supply-demand balance in the global oil markets to gradually tighten over the course of the year. Factors driving this include China’s economy recovering, demand continuing to grow in countries outside
the Organization for Economic Cooperation and Development, and the Organization of the Petroleum Exporting Countries (OPEC+) remaining proactive in maintaining adequate and stable oil price levels. We expect this macro backdrop to still support a double-digit increase in global upstream spending in 2023, with multiple international projects being executed and the offshore development pipeline growing.
We believe that the current spending cycle is more durable and less sensitive to commodity price swings relative to prior cycles. Factors driving this extended cycle include financially strong operator balance sheets, disciplined capital spending focused on returns versus growth, and both independent oil companies and national oil companies balancing modest production growth with longer-term investments in new energy.
Another notable characteristic of this cycle is the continued shift
towards the development of natural gas and LNG. As the world increasingly recognizes the crucial role natural gas is expected to play in the energy transition, serving as both a transition and destination fuel, the case for a multi-decade growth opportunity in gas is steadily improving. This is driving operators of all sizes to dedicate more spending towards natural gas development, as well as LNG projects and associated infrastructure.
Financial Results and Key Company Initiatives
In the first quarter of 2023, we generated revenue of $5,716 million compared to $4,835 million in the first quarter of 2022. The increase in revenue was driven by increased activity in our OFSE and IET segments. Operating income in the first quarter of 2023 was $438 million compared to $279 million in the first quarter of 2022. The increase in operating income was driven primarily by higher segment operating
income from OFSE. Income before income taxes was $760 million for the first quarter of 2023, which included a gain of $392 million from the change in fair value on certain equity investments. In the first quarter of 2022, income before income taxes was $187 million, which included a gain of $11 million from the change in fair value on certain equity investments.
Our results in the first quarter of 2023 were impacted by the discontinuation of our Russia operations that occurred in 2022. Russia represented approximately 4% of our total revenue in the first quarter of 2022, the majority of which was in our OFSE segment.
In 2022, we announced a reorganization of the Company from four to two operating segments, OFSE and IET. To date, we have made great progress on this transformation, which is designed
to create a leaner, more simplified organization which we expect to enable faster decision making and better position the Company for the future of the energy markets.
We continue to invest in the Baker Hughes portfolio through strategic acquisitions and early-stage new energy investments. In April 2023, we closed on the acquisition of Altus Intervention, a leading international provider of well intervention services and downhole technology, which will enhance OFSE's existing intervention solutions business
Baker Hughes Company 2023 First Quarter Form 10-Q | 24
and add new technology that can be scaled into new
geographic markets. Also in April 2023, we closed on the disposition of our Nexus Controls business to GE. GE will continue to provide Baker Hughes with GE’s MarkTM controls products currently in the Nexus Controls portfolio.
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. All of our outlook expectations are purely based on the market as we see it today and are subject to changing conditions in the industry.
•OFSE North America activity: We expect North American spending to continue to improve in 2023, as compared to 2022, should commodity prices remain at current levels.
•OFSE International activity: We expect spending outside of
North America to experience strong growth in 2023, as compared to 2022, should commodity prices remain at current levels.
•IET 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 businesses in our portfolio that are more correlated with various industrial metrics, including global GDP growth. We also have businesses within our portfolio that are exposed to new energy solutions, specifically focused around reducing carbon emissions of the energy and broader industry, including hydrogen, geothermal, carbon capture, utilization and storage, and energy storage. We expect to see continued growth in these businesses 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 oil and gas industry, but we are continuing to operate with flexibility. 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, low-emission, and cost-effective solutions that deliver step changes in operating and economic performance for our customers.
Corporate Responsibility
We believe we have an important role to play in society as an industry leader and partner. We view environmental, social, and governance as a key lever to transform the performance of our
Company and our industry. In January 2019, we made a commitment to reduce Scope 1 and 2 carbon dioxide equivalent emissions from our operations by 50% by 2030, achieving net zero emissions by 2050. We continue to make progress on emissions reductions, and reported in our 2021 Corporate Responsibility report a 23% reduction in our Scope 1 and 2 carbon dioxide equivalent emissions compared to our 2019 base year.
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 three months ended March 31, 2023 and 2022, and should be read
in conjunction with the condensed consolidated financial statements and related notes of the Company.
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.
Baker Hughes
Company 2023 First Quarter Form 10-Q | 25
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.
(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, which decreased from the same quarter last year, ranging from a high of $87.54/Bbl in January 2023 to a low of $71.03/Bbl in March 2023. For the three months ended March 31, 2023, Brent oil prices averaged $81.14/Bbl, which represented a decrease of $19.73/Bbl from the same period last year.
In North America, customer spending is highly driven by WTI oil prices, which decreased from the same quarter last year.
Overall, WTI oil prices ranged from a high of $81.62/Bbl in January 2023 to a low of $66.61/Bbl in March 2023. For the three months ended March 31, 2023, WTI oil prices averaged $76.00/Bbl, which represented a decrease of $19.18/Bbl from the same period last year.
In North America, natural gas prices, as measured by the Henry Hub Natural Gas Spot Price, averaged $2.62/mmBtu in the first quarter of 2023, representing a 44% decrease from the same quarter in the prior year. Throughout the quarter, Henry Hub Natural Gas Spot Prices ranged from a high of $3.78/mmBtu in January 2023 to a low of $1.93/mmBtu in March 2023.
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 onshore China because this information is not readily available.
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.
Baker Hughes Company 2023 First Quarter Form 10-Q | 26
The rig counts are summarized in the table below as averages for each of the periods indicated.
The
worldwide rig count was 1,897 for the first quarter of 2023, an increase of 15% as compared to the same period last year primarily due to an increase in North America.
Within North America, the increase was primarily driven by the U.S. rig count, which was up 20% when compared to the same period last year, and an increase in the Canada rig count, which was up 11% when compared to the same period last year. Internationally, the rig count increase was driven primarily by an increase in the Europe, Latin America, and Middle East regions of 19%, 13%, and 10%, respectively.
RESULTS OF OPERATIONS
The discussions below relating to significant line items from our condensed 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 condensed consolidated statements 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 service activities.
For the amounts shown below, we distinguish between "equipment" and "product services", where product services refer 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 the Business Environment section of Management's Discussion and Analysis.
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 primarily evaluated based on segment operating income (loss), which is defined as income (loss) before income taxes and before the following: net interest expense, net other non-operating income (loss), corporate expenses, restructuring, impairment and
other charges, goodwill and inventory impairments, and certain gains and losses not allocated to the operating segments.
In evaluating the segment performance, the Company primarily 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 and benefits and overhead costs.
Baker Hughes Company 2023 First Quarter Form 10-Q | 27
Productivity:
Productivity is measured by the remaining variance in profit, after adjusting for the period-over-period impact of volume and 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
Orders: For the three months ended March 31, 2023, we recognized total orders of $7.6 billion, an increase
of $0.8 billion, or 12%, from the three months ended March 31, 2022.
For the three months ended March 31, 2023, our OFSE segment recognized orders of $4.1 billion, an increase of $0.8 billion, or 25% and our IET segment recognized orders of $3.5 billion, a decrease of $35 million, or 1% compared to the three months ended March 31, 2022. Within IET, Gas Technology Equipment orders were $1.9 billion and Gas Technology Services orders were $0.7 billion for the three months ended March 31, 2023.
Remaining Performance Obligations ("RPO"): As of March 31, 2023, the aggregate amount of the transaction price allocated
to the unsatisfied (or partially unsatisfied) performance obligations was $29.6 billion. As of March 31, 2023, OFSE remaining performance obligations totaled $3.1 billion, and IET remaining performance obligations totaled $26.5 billion.
Revenue and Operating Income
Summarized financial information for the Company's segments is shown in the following tables.
Three
Months Ended March 31,
$ Change
2023
2022
Revenue:
Well Construction
$
1,061
$
883
$
178
Completions,
Intervention & Measurements
909
781
128
Production Solutions
938
825
113
Subsea & Surface Pressure Systems
670
528
142
Oilfield
Services & Equipment
3,577
3,017
560
Gas Technology - Equipment
827
543
284
Gas Technology - Services
591
581
10
Total
Gas Technology
1,418
1,124
294
Condition Monitoring
140
126
14
Inspection
254
212
42
Pumps,
Valves & Gears
201
221
(20)
PSI & Controls
125
136
(11)
Total Industrial Technology
721
694
27
Industrial
& Energy Technology
2,138
1,818
320
Total
$
5,716
$
4,835
$
881
Baker Hughes Company 2023 First Quarter Form 10-Q | 28
The following table presents Oilfield Services & Equipment revenue by geographic region:
Three Months Ended March 31,
$ Change
2023
2022
North
America
$
992
$
823
$
169
Latin America
661
440
221
Europe/CIS/Sub-Saharan Africa (1)
581
660
(79)
Middle
East/Asia
1,345
1,094
251
Oilfield Services & Equipment
$
3,577
$
3,017
$
560
North
America
$
992
$
823
$
169
International
2,586
2,194
392
(1)Impacted by the discontinuation of our Russia operations
that occurred in 2022.
The following table presents segment operating income through to net income for the Company.
Three Months Ended March 31,
$ Change
2023
2022
Segment
operating income:
Oilfield Services & Equipment
$
371
$
213
$
158
Industrial & Energy Technology
241
241
—
Total
segment operating income
612
453
159
Corporate
(100)
(105)
5
Inventory
impairment
(18)
—
(18)
Restructuring, impairment and other
(56)
(70)
14
Operating income
438
279
160
Other
non-operating income (loss), net
386
(28)
414
Interest expense, net
(64)
(64)
—
Income before income taxes
760
187
573
Provision
for income taxes
(179)
(107)
(72)
Net income
$
581
$
80
$
501
Segment
Revenues and Segment Operating Income
First Quarter of 2023 Compared to the First Quarter of 2022
Revenue increased $881 million, or 18%, driven by increased activity in OFSE and IET. OFSE increased $560 million and IET increased $320 million. Total segment operating income increased $159 million, driven by OFSE.
Oilfield Services & Equipment
OFSE revenue of $3,577 million increased $560 million, or 19%, in the first quarter of 2023 compared to the first quarter of 2022, as a result of increased activity in North America and internationally, as evidenced by an increase in the global rig count. North America revenue was $992 million in the first quarter of 2023, an increase of $169 million from the first quarter of 2022. International revenue was $2,586 million in
the first quarter of 2023, an increase of $392 million from the first quarter of 2022, driven by the Latin America and Middle East/Asia regions, partially offset by declines in the Europe/CIS/Sub-Saharan Africa region, driven by lower Russia volume.
OFSE segment operating income was $371 million in the first quarter of 2023 compared to $213 million in the first quarter of 2022. The increase in operating income was primarily driven by higher volume and price, partially offset by cost inflation and unfavorable cost productivity.
Baker Hughes Company 2023 First Quarter Form 10-Q | 29
Industrial & Energy
Technology
IET revenue of $2,138 million increased $320 million, or 18%, in the first quarter of 2023 compared to the first quarter of 2022. The increase was primarily driven by higher volume in Gas Technology Equipment and, to a lesser extent, in Gas Technology Services and Industrial Technology, partially offset by unfavorable foreign currency translation impact.
IET segment operating income was $241 million in the first quarter of 2023, flat when compared to the first quarter of 2022. The operating income performance in the first quarter of 2023 was driven by higher volume and pricing actions in certain product lines, offset by inflationary pressure, unfavorable business mix, higher research and development costs related to new energy investments, and unfavorable foreign currency translation impact.
Corporate
In
the first quarter of 2023, corporate expenses were $100 million compared to $105 million in the first quarter of 2022. The decrease of $5 million was driven by cost efficiencies.
Inventory Impairment
In the first quarter of 2023, we recorded inventory impairments of $18 million, predominately in our OFSE segment. Charges for inventory impairments are reported in the "Cost of goods sold" caption in the condensed consolidated statements of income (loss).
Restructuring, Impairment and Other
In the first quarter of 2023, we recognized $56 million of restructuring, impairment, and other charges, compared to $70 million in the first quarter of 2022.
In the third quarter of 2022, we announced a restructuring plan in conjunction with a change in our operating segments. As a result, we continued to incur charges in the first quarter of 2023 primarily related to employee termination expenses driven by actions taken to facilitate the reorganization into two segments. In addition, costs were incurred related to exit activities at specific locations in our segments to align with our current market outlook and to rationalize our manufacturing supply chain footprint. The charges in the first quarter of 2022 primarily related to our IET segment for a write-off of an equity method investment and the release of foreign currency translation adjustments for certain restructured product lines.
Other Non-Operating Income (loss), Net
In the first quarter of 2023, we incurred $386 million of other
non-operating income. Included in this amount was a gain of $392 million from the change in fair value for certain equity investments. For the first quarter of 2022, we incurred $28 million of other non-operating losses. Included in this amount was a gain of $11 million from the change in fair value for certain equity investments.
Interest Expense, Net
In the first quarter of 2023, we incurred interest expense, net of interest income, of $64 million, which was flat compared to the first quarter of 2022.
Income Taxes
In the first quarter of 2023, the provision for income taxes was $179 million. The difference between the U.S. statutory tax rate of 21% and the effective tax rate is primarily related to income in jurisdictions with tax rates higher than in the U.S., which
is partially offset by income subject to U.S. tax at an effective rate less than 21% due to valuation allowances.
In the first quarter of 2022, the provision for income taxes was $107 million. The difference between the U.S. statutory tax rate of 21% and the effective tax rate is primarily related to losses with no tax benefit due to valuation allowances and income in jurisdictions with tax rates higher than the U.S., partially offset by tax benefits related to uncertain tax positions.
Baker Hughes Company 2023 First Quarter Form 10-Q | 30
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. We continue to maintain solid financial strength and liquidity. At March 31, 2023, we had cash and cash equivalents of $2.4 billion compared to $2.5 billion at December 31, 2022.
In the U.S. we held cash and cash equivalents of approximately $0.7 billion and $0.6 billion and outside the U.S. of approximately $1.7 billion and $1.9 billion as of March 31, 2023 and December 31, 2022, respectively. A substantial portion of the cash held outside the U.S. at March 31, 2023 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., we may incur other additional taxes that would not be significant to the total tax provision.
We have a $3 billion committed unsecured revolving credit facility ("the Credit Agreement") with commercial banks maturing in December 2024. The 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, our obligations under the Credit Agreement may be accelerated. Such events of default include payment defaults to lenders under the Credit Agreement and other customary defaults. No such events of default have occurred. In addition, we have a commercial paper program with authorization up to $3 billion under which we may issue from time to time commercial paper with maturities of no more than
397 days. At March 31, 2023 and December 31, 2022, there were no borrowings under either the Credit Agreement or the commercial paper program.
Certain Senior Notes contain covenants that restrict our ability to take certain actions. See "Note 8. Debt" of the Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report for further details. At March 31, 2023, we were in compliance with all debt covenants. Our next debt maturity is December 2023.
We continuously review our liquidity and capital resources. If market conditions were to change, for instance due to the uncertainty created by geopolitical events, a global 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 three months ended March 31, 2023, we dispersed cash to fund a variety of activities including certain working capital needs, capital expenditures, and the payment of dividends.
Cash Flows
Cash
flows provided by (used in) each type of activity were as follows for the three months ended March 31:
(In millions)
2023
2022
Operating activities
$
461
$
72
Investing activities
(229)
(266)
Financing
activities
(250)
(469)
Operating Activities
Cash flows from operating activities generated cash of $461 million and $72 million for the three months ended March 31, 2023 and 2022, respectively.
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.
Baker Hughes Company 2023 First Quarter Form 10-Q | 31
For the three months ended March 31, 2023, cash generated from operating activities were primarily driven by net income adjusted for certain noncash items (including depreciation, amortization, gain on equity securities, stock-based compensation cost, deferred tax provision, and the impairment of certain assets). Net working capital cash usage was $63 million for the three months ended March 31, 2023, mainly due to the increase in receivables, and inventory as we continue to build for revenue growth, partially offset by strong progress collections on equipment contracts.
For
the three months ended March 31, 2022, cash generated from operating activities were primarily driven by net income adjusted for certain noncash items (including depreciation, amortization, gain on equity securities, stock-based compensation costs, and deferred tax provision). Net working capital cash usage was $93 million for the three months ended March 31, 2022, mainly due to the increase in receivables, driven primarily by lower collections, and inventory as we built for revenue growth, partially offset by strong progress collections on equipment contracts.
Investing Activities
Cash flows from investing activities used cash of $229 million and $266 million for the three months ended March
31, 2023 and 2022, respectively.
Our principal recurring investing activity is the funding of capital expenditures including property, plant and equipment and software, to support and generate revenue from operations. Expenditures for capital assets were $310 million and $268 million for the three months ended March 31, 2023 and 2022, respectively, partially offset by cash flows from the sale of property, plant and equipment ("PP&E") of $46 million and $91 million for the three months ended March 31, 2023 and 2022, respectively. Proceeds from the disposal of assets are primarily related to equipment that was lost-in-hole, predominantly in OFSE, and to PP&E no
longer used in operations that was sold throughout the period.
Financing Activities
Cash flows from financing activities used cash of $250 million and $469 million for the three months ended March 31, 2023 and 2022, respectively.
We paid dividends of $192 million and $172 million to our Class A shareholders during the three months ended March 31, 2023 and 2022, respectively.
There were no shares of Class A common stock or LLC Units repurchased during the three months ended March 31, 2023. During the three months ended March
31, 2022, the Company and BHH LLC repurchased and canceled 8.1 million shares of Class A common stock and LLC Units, respectively, for a total of $236 million. As of March 31, 2023, the Company and BHH LLC had authorization remaining to repurchase up to approximately $2.8 billion of its Class A common stock and LLC Units, respectively.
Cash Requirements
We believe cash on hand, cash flows from operating activities, the available revolving credit facility, access to both our commercial paper program or our uncommitted lines of credit, and availability under our existing shelf registrations of debt will provide us with sufficient capital resources and liquidity
in the short-term and long-term to manage our working capital needs, meet contractual obligations, fund capital expenditures and dividends, repay debt, repurchase our common stock, 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. We continue to believe that based on current market conditions, capital expenditures in 2023 are expected to be made at a rate that would equal up to 5% of annual revenue. The expenditures are expected to be used primarily for normal, recurring items necessary to support our business. We currently anticipate making income tax payments in the range of $500 million to $550 million in 2023.
Baker Hughes Company 2023 First Quarter Form 10-Q | 32
Other Factors Affecting Liquidity
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
of operations. Our gross customer receivables in the U.S. were 16% and in Mexico 13% as of March 31, 2023. No other country accounted for more than 10% of our gross customer receivables at this date.
International operations:Our cash that is held outside the U.S. is 73% of the total cash balance as of March 31, 2023. 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.
CRITICAL ACCOUNTING ESTIMATES
Our critical accounting estimation processes are consistent with those described in Item 7 of Part
II, "Management's discussion and analysis of financial condition and results of operations" of our 2022 Annual Report.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, 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"). All statements, other than historical facts, including statements regarding the presentation of the Company's operations in future reports and any assumptions underlying any of the foregoing, are forward-looking statements. 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,""would,""seek,""anticipate,""estimate,""overestimate,""underestimate,""believe,""could,""project,""predict,""continue,""target", "goal" 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 identified in the "Risk Factors" section of Part II of Item 1A of this report and Part 1 of Item 1A of our 2022 Annual Report 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.
Any forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. The Company does not undertake any obligation to update any forward-looking statements, whether as a result of new information or developments, future events
or otherwise, except as required by law. Readers are cautioned not to place undue reliance on any of these forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk affecting us, see Item 7A. “Quantitative and Qualitative Disclosures about Market Risk,” in our 2022 Annual Report. Our exposure to market risk has not changed materially since December 31, 2022.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation
of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation,
Baker Hughes Company 2023 First Quarter Form 10-Q | 33
the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (as defined in Rule 15d-15(e) of the Exchange Act) were effective at a reasonable assurance level.
There
has been no change in our internal controls over financial reporting during the quarter ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See discussion of legal proceedings
in "Note 16. Commitments and Contingencies" of the Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report, Item 3 of Part I of our 2022 Annual Report and Note 19 of the Notes to Consolidated Financial Statements included in Item 8 of our 2022 Annual Report.
ITEM 1A. RISK FACTORS
As of the date of this filing, the Company and its operations continue to be subject to the risk factors previously discussed in the "Risk Factors" sections contained in the 2022 Annual Report.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table contains information about our purchases of our Class A common stock equity securities during the three months ended March 31, 2023.
Period
Total Number of Shares Purchased (1)
Average
Price
Paid
Per Share (2)
Total Number of Shares Purchased as Part of a Publicly Announced Program (3)
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program (3)
January 1-31, 2023
1,953,998
$
30.85
—
$
2,755,776,668
February
1-28, 2023
52,842
$
31.34
—
$
2,755,776,668
March 1-31, 2023
286,954
$
28.38
—
$
2,755,776,668
Total
2,293,794
$
30.56
—
(1)Represents
Class A common stock purchased from employees to satisfy the tax withholding obligations primarily in connection with the vesting of restricted stock units.
(2)Average price paid for Class A common stock purchased from employees to satisfy the tax withholding obligations in connection with the vesting of restricted stock units and shares purchased in the open market under our publicly announced purchase program.
(3)We did not repurchase any shares of Class A common stock in the first quarter of 2023. At March 31, 2023, the Company and BHH LLC had authorization remaining to repurchase up to approximately $2.8 billion of its Class A common stock and LLC Units, respectively.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
We have no mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K to report for the current quarter.
ITEM 5. OTHER INFORMATION
None.
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ITEM
6. EXHIBITS
Each exhibit identified below is filed as a part of this report. Exhibits designated with an "*" are filed as an exhibit to this Quarterly Report on Form 10-Q and Exhibits designated with an "**" are furnished as an exhibit to this Quarterly Report on Form 10-Q. Exhibits designated with a "+" are identified as management contracts or compensatory plans or arrangements. Exhibits previously filed are incorporated by reference.
XBRL
Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*
XBRL Schema Document
101.CAL*
XBRL Calculation Linkbase Document
101.DEF*
XBRL Definition Linkbase Document
101.LAB*
XBRL Label Linkbase Document
101.PRE*
XBRL
Presentation Linkbase Document
104*
Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit 101)
Baker Hughes Company 2023 First Quarter Form 10-Q | 36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
