BHGE 2017 FORM 10-K | i
PART I
ITEM 1. BUSINESS
Baker Hughes, a GE company (the Company, BHGE, we, us, or our), a Delaware corporation, was formed on October 28, 2016, for the purpose of facilitating the combination of Baker Hughes Incorporated, a Delaware corporation (Baker Hughes), and the oil and gas business (GE O&G) of General Electric Company (GE).
On July 3, 2017, we closed our business combination (the Transactions) to combine GE O&G and Baker Hughes creating a fullstream oilfield technology provider that has a unique mix of integrated equipment and service capabilities (refer to "Note 2. Business Acquisition" of the Notes to the Consolidated and Combined Financial Statements in Item 8 herein for further details on the Transactions). As a result of the Transactions, the Company became the holding company of the combined businesses of Baker Hughes and GE O&G. Substantially all of the business of GE O&G and of Baker Hughes was transferred to a subsidiary of the Company, Baker Hughes, a GE company, LLC (BHGE LLC), on July 3, 2017. GE has approximately 62.5% of economic interest in BHGE LLC and the Company has approximately 37.5% of the remaining economic interest in BHGE LLC, held indirectly through two wholly owned subsidiaries. One of these wholly owned subsidiaries of the Company is the sole managing member of BHGE LLC. Although we hold a minority economic interest in BHGE LLC, we conduct and exercise full control over all activities of BHGE LLC, without the approval of any other member, through this wholly owned subsidiary. Accordingly, we consolidate the financial results of BHGE LLC and report a noncontrolling interest in our consolidated and combined financial statements for the economic interest in BHGE LLC not held by us. 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 Transactions were treated as a “reverse acquisition” for accounting purposes and, as such, the historical financial statements of the accounting acquirer, GE O&G, are the historical financial statements of the Company. The Company’s financial statements have been prepared on a consolidated basis, effective July 3, 2017. For all periods prior to July 3, 2017, the Company’s financial statements were prepared on a combined basis. The combined financial statements combine certain accounts of GE and its subsidiaries that were historically managed as part of its oil & gas business. The historical financial results in the combined financial statements presented may not be indicative of the results that would have been achieved had GE O&G operated as a separate, stand-alone entity during those periods. The GE O&G numbers in the consolidated and combined statements of income (loss) and statements of cash flows have been reclassified to conform to the current presentation. We believe that the current presentation is a more appropriate presentation of the combined businesses.
OUR VISION
We are the only fullstream provider of integrated oilfield products, services and digital solutions with 2017 revenue of $17.3 billion and a presence in more than 120 countries. We strive to provide best-in-class physical and digital technology solutions for customer productivity, leveraging complementary technologies to serve customers across the full spectrum of the oil and gas value chain.
We believe that there are structural changes taking place in the oil and gas industry that require a change in how we work. No matter the oil price, our customers are looking for new models and solutions to deliver higher industrial yield, which means improving productivity and efficiency and leveraging economies of scale, with lower carbon impact. While we will continue to serve customers on a project basis, our fullstream portfolio, digital capabilities and leading technology and services will enable us to shift towards outcome-focused solutions, enabling customers to lower capital and operating costs, reduce non-productive time and boost resource recovery. This is the cornerstone of our corporate strategy that is based on three pillars.
BHGE 2017 FORM 10-K | 1
We expect to benefit from the following:
We believe we are positioned to assist our customers as they balance investment decisions between greenfield projects, brownfield projects and optimizing existing assets as a result of the current macroeconomic environment and the potentially prolonged period of lower oil prices. We expect that aging fields will require increased maintenance and intervention to sustain production later into the well life cycle when depletion accelerates. We believe our strategy coupled with our capabilities will help us compete and win in the current environment, while positioning us for the future.
ORDERS AND BACKLOG
We are a global business with consolidated 2017 revenue of $17,259 million. We generate revenue and orders from a combination of equipment sales and services. In 2017, 42% of revenue was generated from equipment sales and 58% from services, while 39% of orders were for equipment and 61% for services. In 2016 and 2015, 46% and 50% of revenue was generated from equipment sales, and 54% and 50% of revenue was from services, respectively. We recognized orders of $17,376 million, $11,273 million, and $15,385 million, respectively, in 2017, 2016 and 2015. Due to the nature of our business, including the time required to manufacture equipment and the long-term nature of many of its service contracts, there is a backlog of unfilled customer orders for equipment sales and services, which as of December 31, 2017, 2016 and 2015 totaled $21,022 million, $21,697 million, and $23,941 million, respectively.
Our statement of income (loss) displays sales and costs of sales in accordance with SEC regulations under which “goods” is required to include all sales of tangible products and “services” must include all other sales, including other services activities. For the amounts shown above, as well as in the orders and backlog charts included in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 in this Form 10-K, we distinguish between “equipment” and “product services,” where product services refers to sales under product services agreements, including sales of both goods (such as spare parts and equipment upgrades) and related services (such as monitoring, maintenance and repairs), which is an important part of its operations. We refer to “product services” simply as “services” within this Business section and the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 in this Form 10-K.