BAKER HUGHES COMPANY 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. EXECUTIVE SUMMARY We are an energy technology company with a broad and diversified portfolio of technologies and services that span the energy and industrial value chain. We conduct business in more than 120 countries and employ approximately 58,000 employees. We operate through our four business segments: Oilfield Services (OFS), Oilfield Equipment (OFE), Turbomachinery & Process Solutions (TPS), and Digital Solutions (DS). We sell products and services primarily in the global oil and gas markets, within the upstream, midstream and downstream segments. Throughout the first three quarters of 2020, the industry experienced multiple factors which drove expectations for global oil and gas related spending to be lower through 2020. First, the COVID-19 pandemic lowered global demand for hydrocarbons, as social distancing and travel restrictions were implemented across the world. Second, the lifting ofOrganization of the Petroleum Exporting Countries (OPEC+) supply curtailments in the first quarter of 2020, and the associated increase in production, drove the global excess supply of hydrocarbons higher. In the second quarter of 2020, OPEC+ reached a supply curtailment agreement of up to 10 million barrels per day, which drove expectations for future hydrocarbon supply lower. After significant turmoil during the first half of the year, oil markets have somewhat stabilized. However, demand recovery is beginning to level off and significant excess capacity remains, which could create volatility in the future. Lastly, global gross domestic product (GDP) growth was impacted by COVID-19 during the first three quarters of 2020, and we expect GDP to decline globally for the total year 2020. Since the COVID-19 pandemic began, the health and safety of our employees has continued to be a top priority. We are taking critical steps as a company to reduce the risk of exposure, as well as mitigate the impacts of this pandemic to our employees, contractors and partners. We have adopted remote working where possible. Where on-site operations are required, masks are mandatory and our employees have adopted social distancing. We have worked with our employees to implement other site-specific precautionary measures to reduce the risk of exposure. We are collaborating closely with our customers, suppliers, and vendors to minimize operational disruption. In addition, we have restricted non-essential business travel and have encouraged our employees, customers and partners to collaborate virtually. Our goal through this downturn is to remain disciplined in allocating capital, focus on liquidity and cash preservation, and to preserve our investment grade rating while also maintaining our current dividend payout. We are taking the necessary actions to right-size the business for expected activity levels. During the first quarter of 2020, we approved a plan for restructuring and other actions totaling$1.8 billion ,$1.5 billion of which was recorded in the first quarter of 2020,$0.1 billion in the second quarter of 2020, and$0.2 billion in the third quarter of 2020. These charges are primarily related to the costs for reductions in work force, product line exits in certain geographies, and the write down of inventory and intangible assets. These actions are taking place across the business and our corporate functions as we align our workforce with expected activity levels. We expect cash expenditures from the restructuring plan to total approximately$500 million , and for the cash payback to be less than one year. In addition, during the first quarter of 2020, our market capitalization declined significantly driven by the current macroeconomic and geopolitical conditions including the decrease in demand caused by the COVID-19 pandemic and collapse of oil prices. Based on these events, we concluded that a triggering event occurred, and we performed an interim quantitative impairment test as ofMarch 31, 2020 . Based upon the results of the impairment test, we recognized a goodwill impairment charge of$14,773 million during the first quarter of 2020. There were no further goodwill impairments in the second and third quarters of 2020. In the third quarter of 2020, we generated revenue of$5,049 million compared to$5,882 million in the third quarter of 2019. The decline in revenue was primarily driven by volume declines in OFS and to a lesser extent DS, partially offset by volume increases in TPS. The persistent weakness in oil prices continues to create a challengingBaker Hughes Company 2020 Third Quarter FORM 10-Q
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environment for the OFS segment. Loss before income taxes was$264 million for the third quarter of 2020, which included the write-down of assets held for sale of$129 million , restructuring, impairment and other charges of$209 million , and inventory impairments of$42 million . In the third quarter of 2019, income before income taxes was$224 million , which included restructuring and impairment charges of$71 million . OUTLOOK Our business is exposed to a number of macro factors, which influence our outlook and expectations given the volatile conditions in the industry. After significant volatility during the first half of the year, oil markets somewhat stabilized in the third quarter. However, demand recovery is beginning to level off and significant excess capacity remains, which could create volatility in the future. In addition, we expect the risk of a reinstatement of COVID-19 related restrictions or lockdowns to remain high, which creates uncertainty in the global economic outlook and impact on oil and gas markets. •North America onshore activity: as a result of the significant decline in oil and gas prices, we expectU.S. drilling & completion spending to decline more than 50% versus 2019, as operators adjust budgets for the current oil price environment. •International onshore activity: we expect spending outside ofNorth America to decline over 15% versus 2019. •Offshore projects: following a strong 2019, we expect significantly fewer offshore projects to reach positive final investment decisions in 2020, due to the economic uncertainty and lower oil and gas prices. •Liquefied natural gas (LNG) projects: we remain optimistic on the LNG market long term, but expect fewer positive final investment decisions on LNG projects in 2020 than in 2019. We have other segments in our portfolio that are more correlated with various industrial metrics, including GDP, such as our Digital Solutions segment. As a result of the economic impact caused by COVID-19, we expect global GDP to contract in 2020. Overall, we believe our portfolio is well positioned to compete across the energy value chain and deliver comprehensive solutions for our customers. We remain optimistic about the long-term economics of the industry, but we are continuing to operate with flexibility given our expectations for volatility and changing activity levels in the near term. While governments may change or discontinue incentives for renewable energy additions, in the long term, renewable energy cost declines may accelerate to compete with new-build fossil fuel capacity. However, we do not anticipate any significant impacts to our business in the foreseeable future. Over time, we believe the world's demand for energy will continue to rise, and the supply of energy will continue to increase in complexity, requiring greater service intensity and more advanced technology from oilfield service companies. As such, we remain focused on delivering innovative, cost-efficient solutions that deliver step changes in operating and economic performance for our customers. 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 and nine months endedSeptember 30, 2020 , and should be read in conjunction with the condensed consolidated financial statements and related notes of the Company. We operate in more than 120 countries helping customers find, evaluate, drill, produce, transport and process hydrocarbon resources. Our revenue is predominately generated from the sale of products and services to major, national, and independent oil and natural gas companies worldwide, and is dependent on spending by our customers for oil and natural gas exploration, field development and production. This spending is driven by a number of factors, including our customers' forecasts of future energy demand and supply, their access to resources to develop and produce oil and natural gas, their ability to fund their capital programs, the impact of new government regulations and most importantly, their expectations for oil and natural gas prices as a key driver of their cash flows.Baker Hughes Company 2020 Third Quarter FORM 10-Q
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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.
Nine Months Ended
Three Months Ended September 30, September 30,
2020 2019 2020 2019
Brent oil price ($/Bbl) (1) $ 42.91 $ 61.95 $ 41.15 $ 64.65
WTI oil price ($/Bbl) (2) 40.89 56.34 38.04 57.04
Natural gas price ($/mmBtu) (3) 2.00 2.38 1.87 2.62
(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 low of
$38.53 /Bbl in September 2020 to a high of $46.01 /Bbl in August 2020 . For the
nine months ended September 30, 2020 , Brent oil prices averaged $41.15 /Bbl,
which represented a decrease of $23.50 /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
low of $36.87 /Bbl in September 2020 to a high of $43.21 /Bbl in August 2020 . For
the nine months ended September 30, 2020 , WTI oil prices averaged $38.04 /Bbl,
which represented a decrease of $19.00 /Bbl from the same period last year.
In North America , natural gas prices, as measured by the Henry Hub Natural Gas
Spot Price, averaged $2.00 /mmBtu in the third quarter of 2020, representing a
16% decrease from the same quarter in the prior year. Throughout the quarter,
Henry Hub Natural Gas Spot Prices ranged from a low of $1.33 /mmBtu in September
2020 to a high of $2.57 /mmBtu in August 2020 .
Baker Hughes Rig Count
The Baker Hughes rig counts are an important business barometer for the drilling
industry and its suppliers. When drilling rigs are active they consume products
and services produced by the oil service industry. Rig count trends are driven
by the exploration and development spending by oil and natural gas companies,
which in turn is influenced by current and future price expectations for oil and
natural gas. The counts may reflect the relative strength and stability of
energy prices and overall market activity; however, these counts should not be
solely relied on as other specific and pervasive conditions may exist that
affect overall energy prices and market activity.
We have been providing rig counts to the public since 1944. We gather all
relevant data through our field service personnel, who obtain the necessary data
from routine visits to the various rigs, customers, contractors and other
outside sources as necessary. We base the classification of a well as either oil
or natural gas primarily upon filings made by operators in the relevant
jurisdiction. This data is then compiled and distributed to various wire
services and trade associations and is published on our website. We believe the
counting process and resulting data is reliable; however, it is subject to our
ability to obtain accurate and timely information. Rig counts are compiled
weekly for the U.S. and Canada and monthly for all international rigs. Published
international rig counts do not include rigs drilling in certain locations, such
as Russia , the Caspian region, and onshore China because this information is not
readily available.
Beginning in the second quarter of 2019, Ukraine was added to the Baker Hughes
international rig count. The Company will continue tracking active drilling rigs
in the country going forward. Historical periods will not be updated.
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Rigs in theU.S. andCanada are counted as active if, on the day the count is taken, the well being drilled has been started but drilling has not been completed and the well is anticipated to be of sufficient depth to be a potential consumer of our drill bits. In international areas, rigs are counted on a weekly basis and deemed active if drilling activities occurred during the majority of the week. The weekly results are then averaged for the month and published accordingly. The rig count does not include rigs that are in transit from one location to another, rigging up, being used in non-drilling activities including production testing, completion and workover, and are not expected to be significant consumers of drill bits. The rig counts are summarized in the table below as averages for each of the periods indicated. Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 % Change 2020 2019 % Change North America 301 1,052 (71) % 566 1,117 (49) % International 729 1,144 (36) % 877 1,094 (20) % Worldwide 1,030 2,196 (53) % 1,443 2,211 (35) % Overall rig count was 1,030 for the third quarter of 2020, a decrease of 53% as compared to the same period last year due primarily to declines inNorth America . TheNorth America rig count decreased 71% and internationally the rig count decreased 36% compared to the same period last year. WithinNorth America , the decrease was primarily driven by theU.S. rig count, which was down 72% on average when compared to the same period last year, and a decrease in theCanada rig count, which was down 64% on average when compared to the same period last year. Internationally, the rig count decrease was driven by decreases in theLatin America andAfrica regions of 61% and 50%, respectively. Overall rig count was 1,443 for the nine months endedSeptember 30, 2020 , a decrease of 35% as compared to the same period last year due primarily to declines inNorth America . WithinNorth America , the decrease was primarily driven by the land rig count, which was down 50%, and a decrease in the offshore rig count of 29%. Internationally, the rig count decline was driven by decreases in theLatin America andAfrica regions of 42% and 31%, 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. 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 statement of income (loss) displays sales and costs of sales in accordance withSEC 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. The performance of our operating segments is 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 loss, corporate expenses, restructuring, impairment and other charges, goodwill impairments, inventory impairments, separation related costs, and certain gains and losses not allocated to the operating segments. Baker Hughes Company 2020 Third Quarter FORM 10-Q
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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 theU.S. dollar. FX impact is calculated by multiplying the functional currency amounts (revenue or profit) with the period-over-period FX rate variance, using the average exchange rate for the respective period. (Inflation)/Deflation: (Inflation)/deflation is defined as the increase or decrease in direct and indirect costs of the same type for an equal amount of volume. It is calculated as the year-over-year change in cost (i.e. price paid) of direct material, compensation & benefits and overhead costs. Productivity: Productivity is measured by the remaining variance in profit, after adjusting for the period-over-period impact of volume & price, foreign exchange and (inflation)/deflation as defined above. Improved or lower period-over-period cost productivity is the result of cost efficiencies or inefficiencies, such as cost decreasing or increasing more than volume, or cost increasing or decreasing less than volume, or changes in sales mix among segments. This also includes the period-over-period variance of transactional foreign exchange, aside from those foreign currency devaluations that are reported separately for business evaluation purposes. Orders and Remaining Performance Obligations Orders: For the nine months endedSeptember 30, 2020 , we recognized orders of$15.5 billion , a decrease of$4.5 billion , or 22%, from the nine months endedSeptember 30, 2019 . For the three months endedSeptember 30, 2020 , we recognized orders of$5.1 billion , a decrease of$2.7 billion , or 34%, from the three months endedSeptember 30, 2019 . Service orders were down 28% and equipment orders were down 40%. The decline in orders was driven by a decline across all segments. Remaining Performance Obligations (RPO): As ofSeptember 30, 2020 , the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was$23.0 billion . Revenue and Segment Operating Income (Loss) Before Tax Revenue and segment operating income (loss) for each of our four operating segments is provided below. Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 $ Change 2020 2019 $ Change Revenue: Oilfield Services$ 2,308 $ 3,348 $ (1,040) $ 7,858 $ 9,597 $ (1,739) Oilfield Equipment 726 728 (2) 2,133 2,156 (23) Turbomachinery & Process Solutions 1,513 1,197 316 3,759 3,904 (145) Digital Solutions 503 609 (106) 1,460 1,833 (373) Total$ 5,049 $ 5,882 $ (833) $ 15,210 $ 17,490 $ (2,280) Baker Hughes Company 2020 Third Quarter FORM 10-Q | 34
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Three Months Ended Nine Months Ended September
September 30, 30,
2020 2019 $ Change 2020 2019 $ Change
Segment operating income (loss):
Oilfield Services $ 93 $ 274 $ (181) $ 345 $ 683 $ (338)
Oilfield Equipment 19 14 5 (4) 40 (44)
Turbomachinery & Process Solutions 191 161 30
473 414 59 Digital Solutions 46 82 (36) 117 234 (117) Total segment operating income 349 531 (182) 931 1,370 (439) Corporate (115) (109) (6) (353) (314) (39) Inventory impairment (42) - (42) (218) - (218) Goodwill impairment - - - (14,773) - (14,773) Restructuring, impairment and other (209) (71) (138) (1,637) (183) (1,454) Separation related (32) (54) 22 (110) (128) 18 Operating income (loss) (49) 297 (346) (16,160) 744 (16,904) Other non-operating loss, net (149) (14) (135) (367) (124) (243) Interest expense, net (66) (59) (7) (195) (174) (21)
Income (loss) before income taxes (264) 224 (488) (16,722)
446 (17,168)
Benefit (provision) for income taxes (6) (107) 101
10 (269) 279 Net income (loss)$ (270) $ 117 $ (387) $ (16,712) $ 177 $ (16,889) Segment Revenues and Segment Operating Income (Loss) Third Quarter of 2020 Compared to the Third Quarter of 2019 Revenue decreased$833 million , or 14%, primarily driven by lower volume in OFS and DS. OFS decreased$1,040 million , DS decreased$106 million , and OFE decreased$2 million , partially offset by TPS which increased$316 million . Total segment operating income decreased$182 million . The decline was driven by OFS which decreased$181 million and DS which decreased$36 million , partially offset by OFE which increased$5 million and TPS which increased$30 million . Oilfield Services OFS revenue decreased$1,040 million , or 31%, in the third quarter of 2020 compared to the third quarter of 2019, primarily as a result of decreased activity inNorth America , as evidenced by a decline in theNorth America rig count, and to a lesser extent from decreased international activity.North America revenue was$559 million in the third quarter of 2020, a decrease of$619 million from the third quarter of 2019. International revenue was$1,749 million in the third quarter of 2020, a decrease of$421 million from the third quarter of 2019, partially related to COVID-19 disruptions in theMiddle East andLatin America regions. OFS segment operating income was$93 million in the third quarter of 2020 compared to$274 million in the third quarter of 2019, primarily driven by lower volume and unfavorable business mix. Oilfield Equipment OFE revenue decreased$2 million in the third quarter of 2020 compared to the third quarter of 2019. The decrease was driven by lower volume in the subsea services, surface pressure control and subsea drilling systems product lines, offset by higher volume in subsea production systems and flexible pipe. OFE segment operating income was$19 million in the third quarter of 2020 compared to segment operating income of$14 million in the third quarter of 2019. The increase in income was driven primarily by increased cost productivity as we focus on cost-out efforts. Baker Hughes Company 2020 Third Quarter FORM 10-Q
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Turbomachinery & Process Solutions TPS revenue of$1,513 million increased$316 million , or 26%, in the third quarter of 2020 compared to the third quarter of 2019. The increase was driven by higher equipment volume. Equipment revenue in the quarter represented 46%, and service revenue represented 54% of total segment revenue. Equipment revenue was up 78% year-over-year, and service revenue was up 1% compared to the prior year. TPS segment operating income was$191 million in the third quarter of 2020 compared to$161 million in the third quarter of 2019. The increase in income was driven primarily by higher volume and increased cost productivity, partially offset by unfavorable business mix. Digital Solutions DS revenue decreased$106 million , or 17%, in the third quarter of 2020 compared to the third quarter of 2019, driven by lower economic activity caused by the COVID-19 pandemic. Most product lines experienced volume declines. DS segment operating income was$46 million in the third quarter of 2020 compared to$82 million in the third quarter of 2019. The decrease in profitability was primarily driven by lower volume and negative cost productivity, partially offset by favorable business mix. Restructuring, Impairment and Other In the third quarter of 2020, we recognized$209 million of restructuring, impairment and other items, compared to$71 million in the third quarter of 2019. The charges in the third quarter of 2020 primarily relate to the continuation of activities from our first quarter 2020 restructuring plan, which include actions to right-size our operations for anticipated activity levels and market conditions. Separation Related Costs For the third quarter of 2020, we incurred separation related costs of$32 million , a decrease of$22 million from the third quarter of 2019. Costs in the third quarter of 2020 relate to the ongoing activities for the separation fromGE . Other Non-Operating Loss, Net For the third quarter of 2020, we incurred$149 million of other net non-operating losses. Included in this amount was a loss of$129 million related to the write-down of assets held for sale. Interest Expense, Net For the third quarter of 2020, we incurred interest expense, net of interest income, of$66 million , which increased$7 million in comparison to the third quarter of 2019, primarily driven by lower interest income. Income Taxes For the third quarter of 2020, income tax expense was$6 million . The difference between theU.S. statutory tax rate of 21% and the current effective tax rate is primarily related to losses with no tax benefit due to valuation allowances, partially offset by the impact of theU.S. Coronavirus Aid, Relief, and Economic Security Act (CARES Act). In response to the COVID-19 pandemic, the CARES Act was enacted onMarch 27, 2020 in theU.S. , and includes measures to assist companies, including allowing net operating losses originating in 2018, 2019 or 2020 to be carried back up to five years. During the third quarter of 2020, we elected to carry back losses to 2014 and accordingly recognized a tax benefit of$42 million , which we plan to apply for a cash refund in the fourth quarter of 2020.Baker Hughes Company 2020 Third Quarter FORM 10-Q
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The First Nine Months of 2020 Compared to the First Nine Months of 2019 Revenue decreased$2,280 million , or 13%, driven by lower activity across all segments. OFS decreased$1,739 million , TPS decreased$145 million , DS decreased$373 million and OFE decreased$23 million . Total segment operating income decreased$439 million . The decrease was driven by OFS, which decreased$338 million , DS which decreased$117 million , and OFE which decreased$44 million , partially offset by TPS which increased$59 million . Oilfield Services OFS revenue decreased$1,739 million , or 18%, in the first nine months of 2020 compared to the first nine months of 2019, as a result of decreased activity inNorth America , as evidenced by a decline in theNorth America rig count, and to a lesser extent from decreased international activity.North America revenue was$2,181 million in the first nine months of 2020, a decrease of$1,371 million from the first nine months of 2019. International revenue was$5,677 million in the first nine months of 2020, a decrease of$368 million from the first nine months of 2019, partially related to COVID-19 disruptions in theMiddle East andLatin America regions. OFS segment operating income was$345 million in the first nine months of 2020 compared to$683 million in the first nine months of 2019. The decrease was primarily driven by lower volume, unfavorable business mix, and decreased cost productivity. Oilfield Equipment OFE revenue decreased$23 million , or 1%, in the first nine months of 2020 compared to the first nine months of 2019. The decrease was driven by lower volume in the surface pressure control and services businesses, partially due to mobility-related delays from the COVID-19 pandemic in the first half of 2020. These decreases were partially offset by higher volume in the subsea production systems, subsea drilling systems, and flexible pipe businesses. OFE segment operating loss was$4 million in the first nine months of 2020 compared to segment operating income of$40 million in the first nine months of 2019. The decrease in income was driven primarily by lower volume, decreased cost productivity and unfavorable business mix. Turbomachinery & Process Solutions TPS revenue of$3,759 million decreased$145 million , or 4%, in the first nine months of 2020 compared to the first nine months of 2019. The decrease was driven by lower services volume, primarily related to supply chain delays and mobility restrictions due to the COVID-19 pandemic, as well as a business disposition that occurred inJuly 2019 . Equipment revenue in the first nine months of 2020 represented 39%, and service revenue represented 61% of total segment revenue. Equipment revenue was up 9% year-over-year, and service revenue was down 10% year-over-year. TPS segment operating income was$473 million in the first nine months of 2020 compared to$414 million in the first nine months of 2019. The increase in profitability was driven primarily by higher cost productivity, partially offset by lower volume. Digital Solutions DS revenue decreased$373 million , or 20%, in the first nine months of 2020 compared to the first nine months of 2019, driven by volume declines across most of the DS segments, largely driven by COVID-19 related supply chain delays and customer related disruptions. DS segment operating income was$117 million in the first nine months of 2020 compared to$234 million in the first nine months of 2019. The decrease in profitability was primarily driven by lower volume and decreased cost productivity, partially offset by favorable business mix.Baker Hughes Company 2020 Third Quarter FORM 10-Q
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Goodwill Impairment During the first quarter of 2020, the Company's market capitalization declined significantly driven by current macroeconomic and geopolitical conditions including the decrease in demand caused by the COVID-19 pandemic and collapse of oil prices driven by both surplus production and supply. Based on these events, we concluded that a triggering event occurred and we performed an interim quantitative impairment test as ofMarch 31, 2020 . Based upon the results of the impairment test, we recognized a goodwill impairment charge of$14,773 million during the first quarter of 2020. There have been no goodwill impairments in the second and third quarters of 2020. Restructuring, Impairment and Other For the first nine months of 2020, we recognized$1,637 million of restructuring, impairment and other charges, an increase of$1,454 million from the first nine months of 2019. These charges primarily relate to product line rationalization and headcount reductions in certain geographical locations to align our workforce with expected activity levels and market conditions. Separation Related Costs For the first nine months of 2020, we incurred separation related costs of$110 million , a decrease of$18 million from the first nine months of 2019. Costs in the first nine months of 2020 relate to ongoing activities for the separation fromGE . Other Non-Operating Loss, Net For the first nine months of 2020, we incurred$367 million of other net non-operating losses. Included in this amount was a loss of approximately$217 million related to the sale of our RLS business in the second quarter of 2020, and a loss of$129 million related to the write-down of assets held for sale in the third quarter of 2020. Interest Expense, Net For the first nine months of 2020, we incurred interest expense, net of interest income, of$195 million , an increase of$21 million from the first nine months of 2019, primarily driven by lower interest income. Income Taxes For the first nine months of 2020, income tax benefit was$10 million . The difference between theU.S. statutory tax rate of 21% and the current effective tax rate is primarily related to non-deductible goodwill impairment, the geographical mix of earnings and losses, and losses with no tax benefit due to valuation allowances, partially offset by the impact of the CARES Act. In response to the COVID-19 pandemic, the CARES Act was enacted onMarch 27, 2020 in theU.S. , and includes measures to assist companies, including allowing net operating losses originating in 2018, 2019 or 2020 to be carried back up to five years. For the first nine months of 2020, we elected to carry back losses to 2014 and accordingly recognized a tax benefit of$117 million and we expect to receive a cash refund of the same amount. LIQUIDITY AND CAPITAL RESOURCES Our objective in financing our business is to maintain sufficient liquidity, adequate financial resources and financial flexibility in order to fund the requirements of our business. Despite the challenging dynamics during the quarter, we continue to maintain solid financial strength and liquidity. AtSeptember 30, 2020 , we had cash and cash equivalents of$4.1 billion compared to$3.2 billion atDecember 31, 2019 . Our liquidity is further supported by a revolving credit facility of$3 billion , and access to both commercial paper and uncommitted lines of credit. AtSeptember 30, 2020 , we had no borrowings outstanding under the revolving credit facility or our uncommitted lines of credit, and had £600 million (approximately$772 million ) commercial paper outstanding. Our next debt maturity isDecember 2022 . Cash and cash equivalents includes$85 million and$162 million of cash held on behalf ofGE atSeptember 30, 2020 andDecember 31, 2019 , respectively. Excluding cash held on behalf ofGE , ourU.S. subsidiaries heldBaker Hughes Company 2020 Third Quarter FORM 10-Q
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approximately$1.1 billion and$0.4 billion while our foreign subsidiaries held approximately$2.9 billion and$2.7 billion of our cash and cash equivalents as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. A substantial portion of the cash held by foreign subsidiaries atSeptember 30, 2020 has been reinvested in active non-U.S. business operations. If we decide at a later date to repatriate those funds to theU.S. , they will generally be free ofU.S. federal tax but may incur other taxes such as withholding or state taxes. We have a$3 billion committed unsecured revolving credit facility (the 2019 Credit Agreement) with commercial banks maturing inDecember 2024 . The 2019 Credit Agreement contains certain customary representations and warranties, certain customary affirmative covenants and certain customary negative covenants. Upon the occurrence of certain events of default, our obligations under the 2019 Credit Agreement may be accelerated. Such events of default include payment defaults to lenders under the 2019 Credit Agreement and other customary defaults. No such events of default have occurred. We have no borrowings under the 2019 Credit Agreement. In addition, we have a commercial paper program under which we may issue from time to time commercial paper with maturities of no more than 397 days. During the second quarter of 2020, we established a £600 million commercial paper facility under which theBank of England may invest through the COVID Corporate Financing Facility (the Program), which increased our total commercial paper program from$3.0 billion to approximately$3.8 billion . InMay 2020 , we issued £600 million of commercial paper under the Program that matures inApril 2021 and can be repaid prior to that with no additional cost. Certain Senior Notes contain covenants that restrict our ability to take certain actions. See Note 9. "Borrowings" of the Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report for further details. AtSeptember 30, 2020 , we were in compliance with all debt covenants. We continuously review our liquidity and capital resources. If market conditions continue to deteriorate, for instance due to the uncertainty created by the COVID-19 pandemic or the significant decline in oil and gas prices, and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be negatively impacted. Additionally, it could cause the rating agencies to lower our credit ratings. There are no ratings triggers that would accelerate the maturity of any borrowings under our committed credit facility; however, a downgrade in our credit ratings could increase the cost of borrowings under the credit facility and could also limit or preclude our ability to issue commercial paper. Should this occur, we could seek alternative sources of funding, including borrowing under the credit facility. During the nine months endedSeptember 30, 2020 , we dispersed cash to fund a variety of activities including certain working capital needs, restructuring andGE separation related costs, capital expenditures, and the payment of dividends and distributions to noncontrolling interests. We believe that cash on hand, cash flows generated from operating and financing activities, and the available credit facility will provide sufficient liquidity to manage our global cash needs. Cash Flows Cash flows provided by (used in) each type of activity were as follows for the nine months endedSeptember 30 : (In millions) 2020 2019 Operating activities$ 927 $ 769 Investing activities (551) (659) Financing activities 494 (996) Operating Activities Our largest source of operating cash is payments from customers, of which the largest component is collecting cash related to 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 material and services. Cash flows from operating activities generated cash of$927 million and$769 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Baker Hughes Company 2020 Third Quarter FORM 10-Q | 39
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For the nine months endedSeptember 30, 2020 , cash generated from operating activities were primarily driven by net losses adjusted for certain noncash items (depreciation, amortization, impairments, loss on sale of business, and write-down of assets held for sale) and working capital, which includes contract and other deferred assets. Net working capital cash generation was$255 million for the nine months endedSeptember 30, 2020 , mainly due to positive customer progress collections, partially offset by higher inventory to deliver the volume for TPS equipment contracts. Accounts payable, net of receivables, used working capital as a result of lower volume. Restructuring andGE separation related payments were$480 million for the nine months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2019 , operating cash generation was primarily driven by net income adjusted for certain noncash items (depreciation and amortization), partially offset by the use of working capital, and cash payments for restructuring and separation related costs. Net working capital used cash of$86 million in the nine months endedSeptember 30, 2019 , mainly due to higher trade receivables and inventory to support expected volume growth. We also had restructuring andGE separation related payments of approximately$222 million for the nine months endedSeptember 30, 2019 . Investing Activities Cash flows from investing activities used cash of$551 million and$659 million for the nine months endedSeptember 30, 2020 and 2019, 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$801 million and$873 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Proceeds from the sale of property, plant and equipment were$141 million and$201 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Financing Activities Cash flows from financing activities generated cash of$494 million and used cash of$996 million for the nine months endedSeptember 30, 2020 and 2019, respectively. We had net repayments of debt and other borrowings of$170 million and$227 million for the nine months endedSeptember 30, 2020 and 2019, respectively. We had proceeds from the issuance of commercial paper of £600 million ($737 million at date of issuance) for the nine months endedSeptember 30, 2020 . In addition, we had proceeds from the issuance of$500 million aggregate principal amount of 4.486% Senior Notes dueMay 1, 2030 . We will pay interest on the notes eachMay 1 andNovember 1 , beginning onNovember 1, 2020 . We paid dividends of$359 million to our Class A shareholders, and we made a distribution of$199 million toGE during the nine months endedSeptember 30, 2020 . We paid dividends of$278 million to our Class A shareholders, and we made a distribution of$282 million toGE during the nine months endedSeptember 30, 2019 . During the nine months endedSeptember 30, 2019 , we used cash of$250 million to repurchase and cancel some of our Class B common stock and corresponding paired common unites ofBHH LLC . Cash Requirements For the remainder of 2020, we believe cash on hand, cash flows from operating activities, the available revolving credit facility, and the availability under our existing shelf registrations of debt will provide us with sufficient capital resources and liquidity to manage our working capital needs, meet contractual obligations, fund capital expenditures and dividends, and support the development of our short-term and long-term operating strategies. When necessary, we issue commercial paper or other short-term debt to fund cash needs in theU.S. in excess of the cash generated in theU.S. Our capital expenditures can be adjusted and managed by us to match market demand and activity levels. Based on current market conditions, the Company has updated its plan for 2020 net capital expenditures, which are now expected to be down over 20% compared to 2019 net capital expenditures. The expenditures are expected toBaker Hughes Company 2020 Third Quarter FORM 10-Q | 40
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be used primarily for normal, recurring items necessary to support our business. Also due to market conditions, and various COVID-19 related rule changes enacted globally, we currently anticipate making income tax payments in the range of$350 million to$450 million in 2020. Other Factors Affecting Liquidity Registration Statements: InNovember 2018 , Baker Hughes filed a universal shelf registration statement on Form S-3ASR (Automatic Shelf Registration) with theSEC to have the ability to sell various types of securities including debt securities, Class A common stock, preferred stock, guarantees of debt securities, purchase contracts and units. The specific terms of any securities to be sold would be described in supplemental filings with theSEC . The registration statement will expire inNovember 2021 . InDecember 2017 ,BHH LLC andBaker Hughes Co-Obligor, Inc. filed a shelf registration statement on Form S-3 with theSEC to have the ability to sell up to$3 billion in debt securities in amounts to be determined at the time of an offering. Any such offering, if it does occur, may happen in one or more transactions. The specific terms of any debt securities to be sold would be described in supplemental filings with theSEC . The registration statement will expire inDecember 2020 . Customer receivables: In line with industry practice, we may bill our customers for services provided in arrears dependent upon contractual terms. In a challenging economic environment, we may experience delays in the payment of our invoices due to customers' lower cash flow from operations or their more limited access to credit markets. While historically there have not been material non-payment events, we attempt to mitigate this risk through working with our customers to restructure their debts. A customer's failure or delay in payment could have a material adverse effect on our short-term liquidity and results from operations. As ofSeptember 30, 2020 , 13% of our gross trade receivables were from customers inthe United States . Other thanthe United States , no other country or single customer accounted for more than 10% of our gross trade receivables at this date. As ofDecember 31, 2019 , 19% of our gross trade receivables were from customers inthe United States . International operations: Our cash that is held outside theU.S. is 72% of the total cash balance as ofSeptember 30, 2020 . We may not be able to use this cash quickly and efficiently due to exchange or cash controls that could make it challenging. As a result, our cash balance may not represent our ability to quickly and efficiently use this cash. Supply chain finance programs: Under supply chain finance programs, administered by a third party, our suppliers are given the opportunity to sell receivables from us to participating financial institutions at their sole discretion at a rate that leverages our credit rating and thus might be more beneficial to our suppliers. Our responsibility is limited to making payment on the terms originally negotiated with our supplier, regardless of whether the supplier sells its receivable to a financial institution. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the program. These liabilities continue to be presented as accounts payable in our condensed consolidated statements of financial position and reflected as cash flow from operating activities when settled. We do not believe that changes in the availability of supply chain financing programs would have a material impact on our liquidity. OTHER ITEMS Brexit TheUnited Kingdom exited (Brexit) theEuropean Union (EU) onJanuary 31, 2020 . As per the terms of the exit theUK has ceased to be an EU member but will continue to follow its rules and contribute to its budget for an 11 month transition period endingDecember 31, 2020 . The purpose of the transition period is to give time for theUK and EU to negotiate their future relationship, including a trade deal. There remains significant uncertainty on the outcome of the negotiations and the terms of a future trade deal, if any. Although our customer base is global with predominant exposure to theU.S. dollar, we have a manufacturing and service base in theUK with some euro procurement, thus we are exposed to fluctuations in value of the British pound versus theU.S. dollar, euro and other currencies. We have a hedging program which looks to accommodate this potential volatility.Baker Hughes Company 2020 Third Quarter FORM 10-Q
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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 contained herein, the risk factors in the "Risk Factors" section of Part I of Item 1A of our 2019 Annual Report and those set forth from time-to-time in other filings by the Company with theSEC . These documents are available through our website or through theSEC'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.
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