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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-38143
Baker Hughes, a GE company
(Exact name of registrant as specified in its charter)
Delaware
81-4403168
(State or other jurisdiction
(I.R.S. Employer Identification No.)
of incorporation or organization)
 
 
 
17021 Aldine Westfield, Houston, Texas - 77073-5101
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 439-8600
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.
YES þ NO o
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).
YES þ NO o
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):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ
As of April 23, 2019, the registrant had outstanding 515,558,511 shares of Class A Common Stock, $0.0001 par value per share and 521,543,095 shares of Class B Common Stock, $0.0001 par value per share.



Baker Hughes, a GE company
Table of Contents

 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


                                                
BHGE 2019 First Quarter FORM 10-Q | i



PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Baker Hughes, a GE company
Condensed Consolidated Statements of Income (Loss)
(Unaudited)


Three Months Ended March 31,
(In millions, except per share amounts)
2019
2018
Revenue:



Sales of goods
$
3,202

$
3,160

Sales of services
2,413

2,239

Total revenue
5,615

5,399





Costs and expenses:



Cost of goods sold
2,810

2,800

Cost of services sold
1,829

1,758

Selling, general and administrative expenses
704

674

Restructuring, impairment and other
62

162

Separation and merger related costs
34

46

Total costs and expenses
5,439

5,440

Operating income (loss)
176

(41
)
Other non operating income, net
21

2

Interest expense, net
(59
)
(46
)
Income (loss) before income taxes and equity in loss of affiliate
138

(85
)
Equity in loss of affiliate

(20
)
Benefit (provision) for income taxes
(67
)
86

Net income (loss)
71

(19
)
Less: Net income (loss) attributable to noncontrolling interests
39

(89
)
Net income attributable to Baker Hughes, a GE company
$
32

$
70






Per share amounts:


Basic and diluted earnings per Class A common stock
$
0.06

$
0.17






Cash dividend per Class A common stock
$
0.18

$
0.18

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

                                                
BHGE 2019 First Quarter FORM 10-Q | 1



Baker Hughes, a GE company
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

 
Three Months Ended March 31,
(In millions)
2019
2018
Net income (loss)
$
71

$
(19
)
Less: Net income (loss) attributable to noncontrolling interests
39

(89
)
Net income attributable to Baker Hughes, a GE company
32

70

Other comprehensive income:
 
 
Investment securities
2


Foreign currency translation adjustments
166

312

Cash flow hedges
4

7

Benefit plans

(3
)
Other comprehensive income
172

316

Less: Other comprehensive income attributable to noncontrolling interests
87

198

Other comprehensive income attributable to Baker Hughes, a GE company
85

118

Comprehensive income
243

297

Less: Comprehensive income attributable to noncontrolling interests
126

109

Comprehensive income attributable to Baker Hughes, a GE company
$
117

$
188

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

                                                
BHGE 2019 First Quarter FORM 10-Q | 2



Baker Hughes, a GE company
Condensed Consolidated Statements of Financial Position
(Unaudited)
(In millions, except par value)
March 31, 2019
December 31, 2018
ASSETS
Current assets:
 
 
Cash and cash equivalents (1)
$
3,073

$
3,723

Current receivables, net
6,319

5,969

Inventories, net
4,871

4,620

All other current assets
649

659

Total current assets
14,912

14,971

Property, plant and equipment (net of accumulated depreciation of $3,854 and $3,625)
6,218

6,228

Goodwill
20,762

20,717

Other intangible assets, net
5,663

5,719

Contract and other deferred assets
1,808

1,894

All other assets
2,769

1,838

Deferred income taxes
997

1,072

Total assets (1)
$
53,129

$
52,439

LIABILITIES AND EQUITY
Current liabilities:
 
 
Accounts payable
$
3,918

$
4,025

Short-term debt and current portion of long-term debt (1)
906

942

Progress collections and deferred income
1,923

1,765

All other current liabilities
2,305

2,288

Total current liabilities
9,052

9,020

Long-term debt
6,270

6,285

Deferred income taxes
89

143

Liabilities for pensions and other postretirement benefits
1,033

1,018

All other liabilities
1,599

960

Equity:


Class A Common Stock, $0.0001 par value - 2,000 authorized, 515 and 513 issued and outstanding as of March 31, 2019 and December 31, 2018, respectively


Class B Common Stock, $0.0001 par value - 1,250 authorized, 522 and 522 issued and outstanding as of March 31, 2019 and December 31, 2018, respectively


Capital in excess of par value
18,646

18,659

Retained earnings

25

Accumulated other comprehensive loss
(1,134
)
(1,219
)
Baker Hughes, a GE company equity
17,512

17,465

Noncontrolling interests
17,574

17,548

Total equity
35,086

35,013

Total liabilities and equity
$
53,129

$
52,439

(1) 
Total assets include $861 million and $896 million of assets held on behalf of General Electric Company, of which $717 million and $747 million is cash and cash equivalents and $144 million and $149 million is investment securities at March 31, 2019 and December 31, 2018, respectively, and a corresponding amount of liability is reported in short-term borrowings. See "Note 16. Related Party Transactions" for further details.
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

                                                
BHGE 2019 First Quarter FORM 10-Q | 3



Baker Hughes, a GE company
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
(In millions, except per share amounts)
Class A
Common Stock
Class B
Common Stock
Capital
in Excess
of
Par Value
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Non-controlling
Interests
Total Equity
Balance at December 31, 2018
$

$

$
18,659

$
25

$
(1,219
)
$
17,548

$
35,013

Comprehensive income:
 
 
 
 
 
 
 
Net income
 
 
 
32

 
39

71

Other comprehensive income
 
 
 
 
85

87

172

Cash dividends to Class A Common Stock ($0.18 per share)
 
 
(34
)
(59
)

 
(93
)
Distribution to noncontrolling interests
 
 
 
 
 
(94
)
(94
)
Stock-based compensation cost
 
 
40

 
 
 
40

Other
 
 
(19
)
2


(6
)
(23
)
Balance at March 31, 2019
$

$

$
18,646

$

$
(1,134
)
$
17,574

$
35,086


(In millions, except per share amounts)
Class A
Common Stock
Class B
Common Stock
Capital
in Excess
of
Par Value
Retained
Loss
Accumulated
Other
Comprehensive
Loss
Non-controlling
Interests
Total Equity
Balance at December 31, 2017
$

$

$
15,083

$
(103
)
$
(703
)
$
24,133

$
38,410

Effect of adoption of ASU 2016-16 on taxes




25


42

67

Comprehensive income (loss):









Net income (loss)




70


(89
)
(19
)
Other comprehensive income





118

198

316

Cash dividends to Class A Common Stock ($0.18 per share)


(76
)



 
(76
)
Repurchase and cancellation of Class A and Class B common stock


(187
)


(313
)
(500
)
Distribution to noncontrolling interests
 
 
 
 
 
(127
)
(127
)
Stock-based compensation cost


30




30

Other


(5
)


(1
)
(6
)
Balance at March 31, 2018
$

$

$
14,845

$
(8
)
$
(585
)
$
23,843

$
38,095

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.




                                                
BHGE 2019 First Quarter FORM 10-Q | 4



Baker Hughes, a GE company
Condensed Consolidated Statements of Cash Flows
(Unaudited)

Three Months Ended March 31,
(In millions)
2019
2018
Cash flows from operating activities:
 
 
Net income (loss)
$
71

$
(19
)
Adjustments to reconcile net income (loss) to net cash flows from (used in) operating activities:
 
 
Depreciation and amortization
350

388

Provision for deferred income taxes
(18
)
(233
)
Changes in operating assets and liabilities:


Current receivables
(204
)
125

Inventories
(220
)
(134
)
Accounts payable
(93
)
101

Progress collections and deferred income
62

(124
)
Contract and other deferred assets
61

140

Other operating items, net
(193
)
50

Net cash flows from (used in) operating activities
(184
)
294

Cash flows from investing activities:
 
 
Expenditures for capital assets
(294
)
(177
)
Proceeds from disposal of assets
59

108

Other investing items, net
(21
)
(65
)
Net cash flows used in investing activities
(256
)
(134
)
Cash flows from financing activities:
 
 
Net repayments of short-term debt and other borrowings
(36
)
(181
)
Repayment of long-term debt
(12
)
(648
)
Dividends paid
(93
)
(76
)
Distributions to noncontrolling interests
(94
)
(127
)
Repurchase of Class A common stock

(190
)
Repurchase of common units from GE by BHGE LLC

(323
)
Other financing items, net
3

(8
)
Net cash flows used in financing activities
(232
)
(1,553
)
Effect of currency exchange rate changes on cash and cash equivalents
22

(6
)
Decrease in cash and cash equivalents
(650
)
(1,399
)
Cash and cash equivalents, beginning of period
3,723

7,030

Cash and cash equivalents, end of period
$
3,073

$
5,631

Supplemental cash flows disclosures:


Income taxes paid
$
76

$
82

Interest paid
$
56

$
72


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

                                                
BHGE 2019 First Quarter FORM 10-Q | 5



Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
Baker Hughes, a GE company (the Company, BHGE, we, us, or our), was formed on October 28, 2016, for the purpose of facilitating the combination of Baker Hughes Incorporated (Baker Hughes) and the oil and gas business (GE O&G) of General Electric Company (GE). BHGE is a fullstream oilfield technology provider that has a unique mix of equipment and service capabilities. We conduct business in more than 120 countries and employ approximately 67,000 employees.
BASIS OF PRESENTATION
On July 3, 2017, we closed the business combination (the Transactions) of GE O&G and Baker Hughes. As a result, substantially all of the businesses of GE O&G and of Baker Hughes were transferred to a subsidiary of the Company, Baker Hughes, a GE company, LLC (BHGE LLC). As of March 31, 2019, GE has approximately 50.3% of the economic interest and the Company has approximately 49.7% of the economic interest in BHGE LLC. Although we hold a minority economic interest in BHGE LLC, we conduct and exercise full control over all its activities, therefore, we consolidate the financial results of BHGE LLC and report a noncontrolling interest in our consolidated financial statements for the economic interest in BHGE LLC not held by us. We consider BHGE LLC to be a consolidated variable interest entity. We are a holding company and have no material assets other than our ownership interest in BHGE LLC and certain intercompany and tax related balances. BHGE 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.
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 and combined financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of operations, financial position and cash flows of the Company and its subsidiaries for the periods presented and are not indicative of the results that may be expected for a full year. The Company's financial statements have been prepared on a consolidated basis. 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 amounts have been reclassified to conform with the current year presentation. In the notes to 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.
In June 2018, GE announced their intention to pursue an orderly separation from BHGE over time. In the three months ended March 31, 2019, separation and merger related costs primarily include costs incurred in connection with the finalization of the Master Agreement Framework and costs related to the anticipated separation from GE. In the three months ended March 31, 2018, separation and merger related costs includes all costs associated with the Transactions. See "Note 16. Related Party Transactions" for further information on the Master Agreement Framework.

                                                
BHGE 2019 First Quarter FORM 10-Q | 6



Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements

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 Annual Report on Form 10-K for the year ended December 31, 2018 (2018 Annual Report) for the discussion of our significant accounting policies. Please refer to the "New Accounting Standards Adopted" section of this Note for changes to our accounting policies.
Cash and Cash Equivalents
As of March 31, 2019 and December 31, 2018, we had $1,214 million and $1,208 million, respectively, of cash held in bank accounts that cannot be released, transferred or otherwise converted into a currency that is regularly transacted internationally, due to lack of market liquidity, capital controls or similar monetary or exchange limitations limiting the flow of capital out of the jurisdiction. These funds are available to fund operations and growth in these jurisdictions and we do not currently anticipate a need to transfer these funds to the U.S. Included in these amounts are $432 million and $461 million, as of March 31, 2019 and December 31, 2018, respectively, held on behalf of GE.
Cash and cash equivalents includes a total of $717 million and $747 million of cash at March 31, 2019 and December 31, 2018, respectively, held on behalf of GE, and a corresponding liability is reported in short-term borrowings. See "Note 16. Related Party Transactions" for further details.
NEW ACCOUNTING STANDARDS ADOPTED
Leases
On January 1, 2019, we adopted Accounting Standards Update (ASU) No. 2016-02, Leases, and the related amendments (ASC 842). This ASU requires lessees to recognize an operating lease asset and a lease liability on the balance sheet, with the exception of short-term leases. We adopted the standard using the modified retrospective approach under which leases existing at, or entered into after January 1, 2019 were required to be recognized and measured. Prior period amounts have not been adjusted and continue to be reflected in accordance with our historical accounting. The Company has elected the practical expedients upon transition that allow entities not to reassess lease identification, classification and initial direct costs for leases that existed prior to adoption. 
The most significant impact of the standard is the recognition of right-of-use (ROU) assets and operating lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We implemented internal controls and key system functionality to enable the preparation of financial information on adoption.
We determine if an arrangement is a lease at inception. ROU assets are included in "All other assets" and operating lease liabilities are included in "All other current liabilities" and "All other liabilities" on our consolidated statement of financial position. Finance lease assets are included in "Property, plant and equipment," and finance lease liabilities are included in "Short-term debt," and "Long-term debt" on our consolidated statement of financial position.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at the later of the lease commencement date or the effective date of adoption of ASC 842 on January 1, 2019, based on the present value of lease payments over the remaining lease term. Finance lease ROU assets and liabilities are recognized at commencement date. As most of our leases do not provide an implicit rate, we use our incremental collateralized borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Short-term leases under one year do not result in a ROU asset, but are recognized in the income statement only on a straight-line basis over the lease term. The Company

                                                
BHGE 2019 First Quarter FORM 10-Q | 7



Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements

has made an election to include within our operating lease liability future payments for both lease and non-lease components. See "Note 8. Leases" for additional information.
The adoption of this standard resulted in the recording of ROU assets and operating lease liabilities of $844 million as of January 1, 2019 on our consolidated statements of financial position with an immaterial impact on our consolidated statements of equity and no related impact on our consolidated statements of income (loss). Short-term leases have not been recorded on the consolidated statements of financial position. Our accounting for finance leases remained substantially unchanged.
Derivatives and Hedging
On January 1, 2019, we adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. Since there was no impact from the new guidance to our consolidated financial statements, no transition adjustments were recorded. ASU 2017-12 simplifies the application of hedge accounting and expands the strategies that qualify for hedge accounting. In accordance with the ASU, both the effective and ineffective portion of a cash flow hedge are initially reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings when the forecasted transaction affects earnings. The ASU requires certain changes to the presentation of hedge accounting in the financial statements and some new or modified disclosures. See "Note 14. Financial Instruments" for additional information.
NEW ACCOUNTING STANDARDS TO BE ADOPTED
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses. The ASU introduces a new accounting model, the Current Expected Credit Losses model (CECL), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for loans and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current U.S. GAAP, which generally require that a loss be incurred before it is recognized. The new standard will also apply to receivables arising from revenue transactions such as contract assets and accounts receivables and is effective for fiscal years beginning after December 15, 2019. We continue to evaluate the effect of the standard on our consolidated financial statements.
All other new accounting pronouncements that have been issued but not yet effective are currently being evaluated and at this time are not expected to have a material impact on our financial position or results of operations.
NOTE 2. REVENUE RELATED TO CONTRACTS WITH CUSTOMERS
DISAGGREGATED REVENUE
We disaggregate our revenue from contracts with customers by primary geographic markets.
 
Three Months Ended March 31,
Total Revenue
2019
2018
U.S.
$
1,505

$
1,483

Non-U.S.
4,110

3,916

Total
$
5,615

$
5,399



                                                
BHGE 2019 First Quarter FORM 10-Q | 8



Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements

REMAINING PERFORMANCE OBLIGATIONS
As of March 31, 2019 and 2018, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $20.5 billion and $21.3 billion, respectively. As of March 31, 2019, we expect to recognize revenue of approximately 47%, 62% and 89% of the total remaining performance obligations within 2, 5, and 15 years, respectively, and the remaining thereafter. Contract modifications could affect both the timing to complete as well as the amount to be received as we fulfill the related remaining performance obligations.
NOTE 3. CURRENT RECEIVABLES
Current receivables are comprised of the following:
 
March 31, 2019
December 31, 2018
Customer receivables
$
5,305

$
4,974

Related parties
635

653

Other
714

669

Total current receivables
6,654

6,296

Less: Allowance for doubtful accounts
(335
)
(327
)
Total current receivables, net
$
6,319

$
5,969


Customer receivables are recorded at the invoiced amount. Related parties consists primarily of amounts owed to us by GE. The "Other" category consists primarily of indirect taxes, customer retentions, other tax receivables and advance payments to suppliers.
NOTE 4. INVENTORIES
Inventories, net of reserves of $438 million and $430 million as of March 31, 2019 and December 31, 2018, respectively, are comprised of the following:
 
March 31, 2019
December 31, 2018
Finished goods
$
2,782

$
2,575

Work in process and raw material
2,089

2,045

Total inventories, net
$
4,871

$
4,620


We recorded inventory impairments of $61 million during the three months ended March 31, 2018 as a result of certain restructuring activities we initiated. Charges for inventory impairments are reported in the "Cost of goods sold" caption of the condensed consolidated statements of income (loss).

                                                
BHGE 2019 First Quarter FORM 10-Q | 9



Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
The changes in the carrying value of goodwill are detailed below by segment:

Oilfield Services
Oilfield Equipment
Turbo-machinery & Process Solutions
Digital Solutions
Total
Balance at December 31, 2017, gross
$
15,838

$
3,901

$
1,906

$
2,036

$
23,681

Accumulated impairment at December 31, 2017
(2,633
)
(867
)

(254
)
(3,754
)
Balance at December 31, 2017
13,205

3,034

1,906

1,782

19,927

Purchase accounting adjustments (1)
(136
)
293

394

429

980

Currency exchange and others
(26
)
(17
)
(114
)
(33
)
(190
)
Balance at December 31, 2018
13,043

3,310

2,186

2,178

20,717

Currency exchange and others

22

6

17

45

Balance at March 31, 2019
$
13,043

$
3,332

$
2,192

$
2,195

$
20,762


(1) 
Includes the final determination of fair value of the assets and liabilities and the related goodwill associated with the acquisition of Baker Hughes that was concluded in the second quarter of 2018. Of the total goodwill of $13,963 million resulting from the acquisition of Baker Hughes, $12,898 million is allocated to our Oilfield Services segment and the remainder to our other segments based on the expected benefit from the synergies of the acquisition.
We test goodwill for impairment annually in the third quarter using data as of July 1 of that year. Our reporting units are the same as our four reportable segments. We also test goodwill for impairment between annual impairment testing dates whenever events or circumstances occur that, in our judgment, could more likely than not reduce the fair value of one or more reporting units below its carrying amount. In assessing the possibility that a reporting unit’s fair value has been reduced below its carrying amount due to the occurrence of events or circumstances between annual impairment testing dates, we consider all available evidence, including, but not limited to, (i) the results of our impairment testing at the prior annual impairment testing date, in particular the magnitude of the excess of fair value over carrying value observed, (ii) downward revisions to internal forecasts, and the magnitude thereof, if any, (iii) the impact of the separation from GE, if any, and (iv) declines in our market capitalization below our book value, and the magnitude and duration of those declines, if any. During the first quarter of 2019, we have not identified any events or circumstances that could more likely than not reduce the fair value of one or more of our reporting units below its carrying amount.
As of March 31, 2019, we believe that the goodwill is recoverable, however, there can be no assurances that sustained declines in macroeconomic or business conditions affecting our industry and business will not occur. The impairment testing involves significant management judgment and are based on assumptions about future commodity pricing, supply and demand for our goods and services, and market conditions, which are difficult to forecast in volatile economic environments. If actual results materially differ from the estimated assumptions utilized in our forecasts, we may need to record impairment charges in future periods.

                                                
BHGE 2019 First Quarter FORM 10-Q | 10



Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements

OTHER INTANGIBLE ASSETS
Intangible assets are comprised of the following:
 
March 31, 2019
December 31, 2018
 
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
Accumulated
Amortization
Net
Customer relationships
$
3,101

$
(983
)
$
2,118

$
3,085

$
(944
)
$
2,141

Technology
1,091

(557
)
534

1,107

(526
)
581

Trade names and trademarks
703

(237
)
466

698

(229
)
469

Capitalized software
1,169

(866
)
303

1,118

(824
)
294

Other
1

(1
)

14

(2
)
12

Finite-lived intangible assets
6,065

(2,644
)
3,421

6,022

(2,525
)
3,497

Indefinite-lived intangible assets (1)
2,242


2,242

2,222


2,222

Total intangible assets
$
8,307

$
(2,644
)
$
5,663

$
8,244

$
(2,525
)
$
5,719


(1) 
Indefinite-lived intangible assets are principally comprised of the Baker Hughes trade name.
Intangible assets are generally amortized on a straight-line basis with estimated useful lives ranging from 1 to 30 years. Amortization expense for the three months ended March 31, 2019 and 2018 was $96 million and $139 million, respectively.
Estimated amortization expense for the remainder of 2019 and each of the subsequent five fiscal years is expected to be as follows:
Year
Estimated Amortization Expense
Remainder of 2019
$
261

2020
329

2021
280

2022
237

2023
225

2024
218



                                                
BHGE 2019 First Quarter FORM 10-Q | 11



Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 6. CONTRACT AND OTHER DEFERRED ASSETS
A majority of our long-term product service agreements relate to our Turbomachinery & Process Solutions segment. Contract assets reflect revenue earned in excess of billings on our long-term contracts to construct technically complex equipment, long-term product maintenance or extended warranty arrangements and other deferred contract related costs. Contract assets are comprised of the following:
 
March 31, 2019
December 31, 2018
Long-term product service agreements
$
576

$
609

Long-term equipment contracts (1)
1,040

1,085

Contract assets (total revenue in excess of billings) (2)
1,616

1,694

Deferred inventory costs (3) 
144

179

Non-recurring engineering costs
48

21

Contract and other deferred assets
$
1,808

$
1,894

(1) 
Reflects revenue earned in excess of billings on our long-term contracts to construct technically complex equipment and certain other service agreements.
(2) 
Contract assets (total revenue in excess of billings) were $1,684 million as of January 1, 2018.
(3) 
Deferred inventory costs were $360 million as of January 1, 2018, which represents cost deferral for shipped goods and other costs where the criteria for revenue recognition has not yet been met.
Revenue recognized during the three months ended March 31, 2019 and 2018 from performance obligations satisfied (or partially satisfied) in previous periods related to our long-term service agreements was $7 million and $10 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 7. PROGRESS COLLECTIONS AND DEFERRED INCOME
Contract liabilities include progress collections, which reflects billings in excess of revenue, and deferred income on our long-term contracts to construct technically complex equipment, long-term product maintenance or extended warranty arrangements. Contract liabilities are comprised of the following:
 
March 31, 2019
December 31, 2018
Progress collections
$
1,790

$
1,600

Deferred income
133

165

Progress collections and deferred income (contract liabilities) (1)
$
1,923

$
1,765

(1) 
Progress collections and deferred income (contract liabilities) were $1,775 million at January 1, 2018.
Revenue recognized during the three months ended March 31, 2019 and 2018 that was included in the contract liabilities at the beginning of the period was $553 million and $602 million, respectively.

                                                
BHGE 2019 First Quarter FORM 10-Q | 12



Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 8. LEASES
Our leasing activities primarily consist of operating leases for administrative offices, manufacturing facilities, research centers, service centers, sales offices and certain equipment.
Operating Lease Expense
Three Months Ended March 31, 2019
Long-term fixed lease
$
48

Long-term variable lease
11

Short-term lease
123

Total operating lease expense
$
182


For the three months ended March 31, 2018, total operating lease expense was $147 million. Cash flows used in operating activities for operating leases approximates our expense for the three months ended March 31, 2019 and 2018.
As of March 31, 2019, maturities of our operating lease liabilities are as follows:
Year
Operating leases
Remainder of 2019
$
165

2020
194

2021
140

2022
113

2023
80

Thereafter
386

Total lease payments
1,078

Less: imputed interest
209

Total
$
869


   Amounts recognized in the condensed consolidated statement of financial position as of March 31, 2019:
 
Operating leases
All other current liabilities
$
194

All other liabilities
675

Total
$
869


ROU assets of $860 million as of March 31, 2019 were included in "All other assets" in our condensed consolidated statements of financial position.
The weighted-average remaining lease term as of March 31, 2019 was approximately nine years for our operating leases. The weighted-average discount rate used to determine the operating lease liability as of March 31, 2019 was 4.4%.

                                                
BHGE 2019 First Quarter FORM 10-Q | 13



Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 9. BORROWINGS
Short-term and long-term borrowings are comprised of the following:
 
March 31, 2019
December 31, 2018
Short-term borrowings
 
 
Short-term borrowings from GE
$
861

$
896

Other borrowings
45

46

Total short-term borrowings
906

942

 
 
 
Long-term borrowings
 
 
3.2% Senior Notes due August 2021
522

523

   2.773% Senior Notes due December 2022
1,245

1,245

8.55% Debentures due June 2024
130

131

   3.337% Senior Notes due December 2027
1,343

1,343

6.875% Notes due January 2029
292

294

5.125% Senior Notes due September 2040
1,305

1,306

4.08% Senior Notes due December 2047
1,336

1,336

Other long-term borrowings
97

107

Total long-term borrowings
6,270

6,285

Total borrowings
$
7,176

$
7,227


BHGE LLC has a $3 billion committed unsecured revolving credit facility (the 2017 Credit Agreement) with commercial banks maturing in July 2022. The 2017 Credit Agreement contains certain customary representations and warranties, certain affirmative covenants and no negative covenants. Upon the occurrence of certain events of default, our obligations under the 2017 Credit Agreement may be accelerated. Such events of default include payment defaults to lenders under the 2017 Credit Agreement, and other customary defaults. No such events of default have occurred. At March 31, 2019 and December 31, 2018, there were no borrowings under the 2017 Credit Agreement.
BHGE LLC has a commercial paper program under which it may issue from time to time up to $3 billion in commercial paper with maturities of no more than 397 days. At March 31, 2019 and December 31, 2018, there were no borrowings outstanding under the commercial paper program. The maximum combined borrowing at any time under both the 2017 Credit Agreement and the commercial paper program is $3 billion.
Concurrent with the Transactions associated with the acquisition of Baker Hughes on July 3, 2017, Baker Hughes Co-Obligor, Inc. became a co-obligor, jointly and severally with BHGE LLC, on our registered debt securities.  This co-obligor is a 100%-owned finance subsidiary of BHGE LLC that was incorporated for the sole purpose of serving as a co-obligor of debt securities and has no assets or operations other than those related to its sole purpose. Baker Hughes Co-Obligor, Inc. is also a co-obligor of the $3,950 million senior notes issued in December 2017 by BHGE LLC in a private placement and subsequently registered in January 2018.
Certain Senior Notes contain covenants that restrict BHGE LLC's ability to take certain actions, including, but not limited to, the creation of certain liens securing debt, the entry into certain sale-leaseback transactions and engaging in certain merger, consolidation and asset sale transactions in excess of specified limits.
The estimated fair value of total borrowings at March 31, 2019 and December 31, 2018 was $6,966 million and $6,629 million, respectively. For a majority of our borrowings the fair value was determined using quoted period-end market prices. Where market prices are not available, we estimate fair values based on valuation methodologies using current market interest rate data adjusted for our non-performance risk.
See "Note 16. Related Party Transactions" for additional information on the short-term borrowings from GE.

                                                
BHGE 2019 First Quarter FORM 10-Q | 14



Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 10. EMPLOYEE BENEFIT PLANS
In 2018, certain of our U.S. employees were covered under various U.S. GE employee benefit plans, including GE's retirement plans (pension, retiree health and life insurance, and savings benefit plans). Beginning in 2019, such employees ceased to participate in these GE U.S. plans. In addition, certain United Kingdom (UK) employees participate in the GE UK Pension Plan. We are allocated relevant participation costs for these GE employee benefit plans as part of multi-employer plans. As such, we have not recorded any liabilities associated with our participation in these plans. Expenses associated with our participation in these plans was $2 million and $37 million in the three months ended March 31, 2019 and 2018, respectively. In November 2018, the Company entered into an agreement with GE whereby GE will transfer the assets and liabilities of the GE UK Pension Plan related to the oil & gas businesses to BHGE on what is intended to be a fully funded basis. Subsequent to this transfer, BHGE employees shall cease to participate in the GE UK Pension Plan. This transfer is expected to close in 2019.
In addition to these GE plans, certain of our employees are also covered by company sponsored employee defined benefit plans. These defined benefit plans include four U.S. plans and six non-U.S. plans, primarily in the UK, Germany, and Canada, all with plan assets or obligations greater than $20 million. We use a December 31 measurement date for these plans. These defined benefit plans generally provide benefits to employees based on formulas recognizing length of service and earnings.
The components of net periodic cost (benefit) of plans sponsored by us are as follows for the three months ended March 31:

2019
2018
Service cost
$
4

$
5

Interest cost
19

18

Expected return on plan assets
(25
)
(30
)
Amortization of net actuarial loss
4

2

Net periodic cost (benefit)
$
2

$
(5
)

The service cost component of the net periodic cost (benefit) is included in operating income (loss) and all other components are included in non operating income (loss) in our condensed consolidated statements of income (loss).
NOTE 11. INCOME TAXES
For the quarter ended March 31, 2019, income tax expense was $67 million compared to a tax benefit of $86 million for the prior year quarter. The difference between the U.S. statutory tax rate of 21% and the current effective tax rate is primarily related to the geographical mix of earnings and losses, coupled with $21 million related to losses with no tax benefit due to valuation allowances.
NOTE 12. EQUITY
COMMON STOCK
We are authorized to issue 2 billion shares of Class A common stock, 1.25 billion shares of Class B common stock and 50 million shares of preferred stock each of which have a par value of $0.0001 per share. The number of Class A common stock and Class B common stock shares outstanding as of March 31, 2019 is 515 million and 522 million, respectively. We have not issued any preferred stock. GE owns all the issued and outstanding Class B common stock. Each share of Class A and Class B common stock and the associated membership interest in BHGE 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. GE is entitled through BHGE LLC to receive distributions on an equal amount of any dividend paid by the Company.

                                                
BHGE 2019 First Quarter FORM 10-Q | 15



Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements

During the three months ended March 31, 2019 and 2018, the Company declared and paid a regular dividend of $0.18 per share to holders of record of the Company's Class A common stock.
The following table presents the changes in the number of shares outstanding (in thousands):
 
Class A Common Stock
Class B Common Stock
Balance at December 31, 2018
513,399

521,543

Issue of shares upon vesting of restricted stock units (1)
1,377


Issue of shares on exercises of stock options (1)
164


Balance at March 31, 2019
514,940

521,543

(1)
Share amounts reflected above are net of shares withheld to satisfy the employee's tax withholding obligation.
ACCUMULATED OTHER COMPREHENSIVE LOSS (AOCL)
The following tables present the changes in accumulated other comprehensive loss, net of tax:
 
Investment Securities
Foreign Currency Translation Adjustments
Cash Flow Hedges
Benefit Plans
Accumulated Other Comprehensive Loss
Balance at December 31, 2018
$

$
(1,152
)
$
(1
)
$
(66
)
$
(1,219
)
Other comprehensive income (loss) before reclassifications
2

166

5

(2
)
171

Amounts reclassified from accumulated other comprehensive income (loss)



1

1

Deferred taxes


(1
)
1


Other comprehensive income
2

166

4


172

Less: Other comprehensive income attributable to noncontrolling interests
1

84

2


87

Balance at March 31, 2019
$
1

$
(1,070
)
$
1

$
(66
)
$
(1,134
)

 
Investment Securities
Foreign Currency Translation Adjustments
Cash Flow Hedges
Benefit Plans
Accumulated Other Comprehensive Loss
Balance at December 31, 2017
$
1

$
(682
)
$
1

$
(23
)
$
(703
)
Other comprehensive income (loss) before reclassifications

312

8

(3
)
317

Amounts reclassified from accumulated other comprehensive income (loss)





Deferred taxes


(1
)

(1
)
Other comprehensive income (loss)

312

7

(3
)
316

Less: Other comprehensive income (loss) attributable to noncontrolling interests

196

4

(2
)
198

Balance at March 31, 2018
$
1

$
(566
)
$
4

$
(24
)
$
(585
)

The amounts reclassified from accumulated other comprehensive loss during the three months ended March 31, 2019 represent amortization of net actuarial gain (loss) which are included in the computation of net periodic pension cost (see "Note 10. Employee Benefit Plans" for additional details). These reclassifications are recorded across the various cost and expense line items within the condensed consolidated statements of income (loss).

                                                
BHGE 2019 First Quarter FORM 10-Q | 16



Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements

NONCONTROLLING INTEREST
Noncontrolling interests represent the portion of net assets in consolidated entities that are not owned by the Company. As of March 31, 2019 and December 31, 2018, GE owned approximately 50.3% and 50.4%, respectively, of BHGE LLC and this represents the majority of the noncontrolling interest balance reported within equity.

March 31, 2019
December 31, 2018
GE's interest in BHGE LLC
$
17,461

$
17,438

Other noncontrolling interests
113

110

Total noncontrolling interests
$
17,574

$
17,548


NOTE 13. EARNINGS PER SHARE
Basic and diluted net income (loss) per share of Class A common stock is presented below:

Three Months Ended March 31,
(In millions, except per share amounts)
2019
2018
Net income (loss)
$
71

$
(19
)
Less: Net income (loss) attributable to noncontrolling interests
39

(89
)
Net income attributable to BHGE
$
32

$
70

 
 
 
Weighted average shares outstanding:
 
 
Class A basic
515

421

Class A diluted
516

422

Net income per share attributable to common stockholders:
 
 
Class A basic
$
0.06

$
0.17

Class A diluted
$
0.06

$
0.17


As of July 3, 2017, GE, BHGE and BHGE LLC entered into an Exchange Agreement under which GE is entitled to exchange its holding in Class B common stock and units of BHGE LLC for Class A common stock on a one-for-one basis (subject to adjustment in accordance with the terms of the Exchange Agreement) or, at the option of BHGE, an amount of cash equal to the aggregate value (determined in accordance with the terms of the Exchange Agreement) of the shares of Class A common stock that would have otherwise been received by GE in the exchange. In computing the dilutive effect, if any, that the aforementioned exchange would have on net income (loss) per share, net income (loss) attributable to holders of Class A common stock would be adjusted due to the elimination of the noncontrolling interests associated with the Class B common stock (including any tax impact). For the three months ended March 31, 2019 and 2018, such exchange is not reflected in diluted net income (loss) per share as the assumed exchange is not dilutive.
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). As such, separate presentation of basic and diluted EPS of Class B under the two class method has not been presented.
For the three months ended March 31, 2019 and 2018, Class A diluted shares include the dilutive impact of equity awards. For the three months ended March 31, 2019 and 2018, there were approximately six million and five million options, respectively, that were excluded from our diluted EPS calculation because their effect is antidilutive. These options were outstanding but excluded from the calculation because the exercise price exceeded the average market price of the Class A common shares.

                                                
BHGE 2019 First Quarter FORM 10-Q | 17



Baker Hughes, a GE company
Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 14. FINANCIAL INSTRUMENTS
RECURRING FAIR VALUE MEASUREMENTS
Our assets and liabilities measured at fair value on a recurring basis consists of derivative instruments and investment securities.
 
March 31, 2019
December 31, 2018
 
Level 1
Level 2
Level 3
 
Net Balance
Level 1
Level 2
Level 3
Net Balance
Assets
 

 

 

 
 
 
 
 
 
Derivatives
$

$
55

$

 
$
55

$

$
74

$

$
74

   Investment securities
49


290

 
339

39


288

327

Total assets
49

55

290

 
394

39

74

288

401

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Derivatives

(47
)

 
(47
)

(82
)

(82
)
Total liabilities
$

$
(47
)
$

 
$
(47
)
$

$
(82
)
$

$
(82
)

There were no transfers between Level 1, 2 and 3 during the three months ended March 31, 2019.
The following table provides a reconciliation of recurring Level 3 fair value measurements for investment securities:
 
2019
2018
Balance at January 1
$
288

$
304

Purchases
6

34

Proceeds at maturity
(6
)
(12
)
Unrealized gains recognized in AOCI
2


Balance at March 31
$
290

$
326


The most significant unobservable input used in the valuation of our Level 3 instruments is the discount rate. Discount rates are determined based on inputs that market participants would use when pricing investments, including credit and liquidity risk. An increase in the discount rate would result in a decrease in the fair value of our investment securities. There are no unrealized gains or losses recognized in the condensed consolidated statement of income (loss) on account of any Level 3 instrument still held at the reporting date. At March 31, 2019 and December 31, 2018, we held $144 million and $149 million, respectively, of these investment securities on behalf of GE.
 
March 31, 2019
December 31, 2018
 
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
Investment securities
 

 

 

 
 

 

 

 
  Non-U.S. debt securities (1)
$
288

$
2

$

$
290

$
288

$

$

$
288

  Equity securities (2)
49



49

39



39

Total
$
337

$
2

$

$
339

$
327

$

$

$
327

(1) 
All of our investment securities are classified as availab