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 54,000
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.
In 2020, the industry experienced multiple factors which drove expectations for
global oil and gas related spending to be lower. The COVID-19 pandemic lowered
global demand for hydrocarbons, as social distancing and travel restrictions
were implemented across the world.
The health and safety of our employees continues to be a top priority.
Throughout the COVID-19 pandemic, we have utilized remote working where
possible, limited travel, and implemented rigorous safety protocols at our sites
including pre-entry screenings, social distancing, and face coverings. As
conditions improve in certain locations, we are starting to return additional
employees to offices/worksites and enabling opportunities for more in-person
engagements where it is safe to do so. We are also closely monitoring the
evolving dynamics and vaccine situation, and will adjust our protocols as needed
to continue protecting our employees and delivering for our customers, in
alignment with all associated requirements.
As we look at the macro environment in 2021 and into 2022, the global economy
continues to recover from the impact of the global pandemic. However, the pace
of growth is being constrained by effects from variant strains of the COVID-19
virus, global chip shortages, supply chain challenges, and energy supply
constraints in multiple parts of the world. Despite these headwinds, global
growth appears to be on relatively solid footing, underpinning a favorable
outlook for the oil market, aided by continued spending discipline by the
world's largest producers. In the natural gas and liquefied natural gas (LNG)
markets, fundamentals remain strong with a combination of solid demand growth
and extremely tight supply in many parts of the world. We anticipate future
demand improving as governments around the world accelerate the transition
towards cleaner sources of energy. Outside of the oil and gas industry, the
focus on cleaner energy sources and technology to decarbonize resource-intensive
industries continue to accelerate. In the U.S., Europe, and Asia, various
projects around wind, solar, and green and blue hydrogen are moving forward, as
well as a number of carbon capture projects.
In the third quarter of 2021, we took steps to accelerate our strategy and to
view our company in two broad business areas: Oilfield Services & Equipment and
Industrial Energy Technology to better position Baker Hughes for today and in
the coming years. We believe that focusing on two major business areas with
close alignment will enhance our flexibility, improve execution, and provide
long-term optionality as the energy markets evolve.
On the Oilfield Services & Equipment side of the Company, we have a
technology-leading global enterprise with core strengths in drilling services,
high-end completion tools, flexible pipe, artificial lift, and production and
downstream chemicals. Oilfield Services & Equipment is poised to benefit from
cyclical growth in the coming years as we believe that we are in the early
stages of a broad based, multi-year recovery that will be characterized by
longer term investments into the core OPEC+ countries.
Industrial Energy Technology is our TPS and DS businesses. Both product
companies have compelling portfolios that are beginning to see significant
secular growth opportunities, particularly in areas such as hydrogen and carbon
capture, utilization and storage (CCUS). With core competencies across a number
of offerings like power generation, compression, and condition monitoring, as
well as a growing presence in flow control, industrial asset management and
digital, we have a strong foundation on which to build an even more
comprehensive presence in the broad industrial energy technology markets.
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In the third quarter of 2021, we generated revenue of $5,093 million compared to
$5,049 million in the third quarter of 2020. The increase in revenue was driven
by higher volume in the OFS, TPS and DS segments, partially offset by lower
activity in the OFE segment. Income before income taxes was $209 million for the
third quarter of 2021, which included restructuring, impairment and other
charges of $14 million and separation related costs of $11 million. In the third
quarter of 2020, loss before income taxes was $264 million, which included the
write-down of assets held for sale of $129 million, restructuring, impairment
and other charges of $209 million, separation related costs of $32 million, and
inventory impairments of $42 million.
OUTLOOK
Our business is exposed to a number of different macro factors, which influence
our outlook and expectations given the volatile conditions in the industry. All
of our outlook expectations are purely based on the market as we see it today,
and are subject to changing conditions in the industry.
•North America onshore activity: we expect North America onshore activity to
continue to improve in the fourth quarter of 2021 as compared to the third
quarter of 2021 along with further growth in 2022 should commodity prices remain
at current levels.
•International onshore activity: we expect international activity to continue to
improve in the fourth quarter of 2021 across a broad range of markets compared
to the third quarter of 2021 with further growth in 2022 should commodity prices
remain at current levels.
•Offshore projects: we expect the offshore markets to stabilize in 2021 and for
the number of tree awards in the market to remain stable or grow modestly
compared to 2020 levels. Looking ahead to 2022, we expect a modest recovery in
offshore activity.
•LNG projects: we remain optimistic on the LNG market long-term and view natural
gas as a transition and destination fuel. We continue to view the long-term
economics of the LNG industry as positive.
We have other segments in our portfolio that are more correlated with various
industrial metrics, including GDP, such as our Digital Solutions segment.
We also have segments within our portfolio that are exposed to new energy
solutions, specifically focused around decarbonization of energy and industry,
including hydrogen, geothermal, CCUS, and energy storage. We expect to see
continued growth in these segments as new energy solutions become a more
prevalent part of the broader energy mix.
Overall, we believe our portfolio is well positioned to compete across the
energy value chain and deliver comprehensive solutions for our customers. We
remain optimistic about the long-term economics of the industry, but we are
continuing to operate with flexibility given our expectations for volatility and
changing activity levels in the near term. While governments may change or
discontinue incentives for renewable energy additions, we do not anticipate any
significant impacts to our business in the foreseeable future.
Over time, we believe the world's demand for energy will continue to rise, and
that hydrocarbons will play a major role in meeting the world's energy needs for
the foreseeable future. As such, we remain focused on delivering innovative,
cost-efficient solutions that deliver step changes in operating and economic
performance for our customers.
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 ended September 30, 2021 and 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
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to develop and produce oil and natural gas, their ability to fund their capital
programs, the impact of new government regulations and most importantly, their
expectations for oil and natural gas prices as a key driver of their cash flows.
Oil and Natural Gas Prices
Oil and natural gas prices are summarized in the table below as averages of the
daily closing prices during each of the periods indicated.
                                         Three Months Ended September 30,

Nine Months Ended September 30,


                                                2021              2020              2021              2020
Brent oil price ($/Bbl) (1)             $           73.51    $     42.91    $           67.89    $     41.15
WTI oil price ($/Bbl) (2)                           70.58          40.89                65.05          38.04
Natural gas price ($/mmBtu) (3)                      4.35           2.00                 3.61           1.87


(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
Oil and natural gas prices increased during the three and nine months ended
September 30, 2021 largely driven by increased demand as a result of the global
recovery from the COVID-19 pandemic which has outpaced a constrained supply.
Outside North America, customer spending is most heavily influenced by Brent oil
prices, which increased from the same quarter last year, ranging from a low of
$65.51/Bbl in August 2021 to a high of $78.85/Bbl in September 2021. For the
nine months ended September 30, 2021, Brent oil prices averaged $67.89/Bbl,
which represented an increase of $26.74/Bbl from the same period last year.
In North America, customer spending is highly driven by WTI oil prices, which
increased from the same quarter last year. Overall, WTI oil prices ranged from a
low of $62.25/Bbl in August 2021 to a high of $75.54/Bbl in September 2021. For
the nine months ended September 30, 2021, WTI oil prices averaged $65.05/Bbl,
which represented an increase of $27.01/Bbl from the same period last year.
In North America, natural gas prices, as measured by the Henry Hub Natural Gas
Spot Price, averaged $4.35/mmBtu in the third quarter of 2021, representing a
118% increase from the same quarter in the prior year. Throughout the quarter,
Henry Hub Natural Gas Spot Prices ranged from a low of $3.56/mmBtu in July 2021
to a high of $5.94/mmBtu in September 2021.
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
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do not include rigs drilling in certain locations, such as Russia, the Caspian
region, and onshore China because this information is not readily available.
Rigs in the U.S. and Canada are counted as active if, on the day the count is
taken, the well being drilled has been started but drilling has not been
completed and the well is anticipated to be of sufficient depth to be a
potential consumer of our drill bits. In international areas, rigs are counted
on a weekly basis and deemed active if drilling activities occurred during the
majority of the week. The weekly results are then averaged for the month and
published accordingly. The rig count does not include rigs that are in transit
from one location to another, rigging up, being used in non-drilling activities
including production testing, completion and workover, and are not expected to
be significant consumers of drill bits.
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,
                                                2021                  2020              % Change              2021                  2020              % Change
North America                                     647                   301                    115  %           570                   566                      1  %
International                                     770                   729                      6  %           735                   877                    (16) %
Worldwide                                       1,417                 1,030                     38  %         1,305                 1,443                    (10) %


The worldwide rig count was 1,417 for the third quarter of 2021, an increase of
38% as compared to the same period last year due primarily to an increase in
North America.
Within North America, the increase was primarily driven by the Canada rig count,
which was up 220% when compared to the same period last year, and an increase in
the U.S. rig count, which was up 95% when compared to the same period last year.
Internationally, the rig count increase was driven by increases in the Latin
America and Africa regions of 78% and 28%, respectively.
The worldwide rig count was 1,305 for the nine months ended September 30, 2021,
a decrease of 10% as compared to the same period last year. Within North
America, the rig count was relatively flat primarily driven by the land rig
count, which was up 1%, and a decrease in the offshore rig count of 19%.
Internationally, the rig count decline was driven by decreases in the Middle
East and Africa regions of 29% and 21%, 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 with SEC regulations under which "goods" is required to
include all sales of tangible products and "services" must include all other
sales, including other service activities. For the amounts shown below, we
distinguish between "equipment" and "product services", where product services
refer to sales under product services agreements, including sales of both goods
(such as spare parts and equipment upgrades) and related services (such as
monitoring, maintenance and repairs), which is an important part of our
operations. We refer to "product services" simply as "services" within the
Business Environment section of Management's Discussion and Analysis.
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 income
(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.
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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 the
U.S. dollar. FX impact is calculated by multiplying the functional currency
amounts (revenue or profit) with the period-over-period FX rate variance, using
the average exchange rate for the respective period.
(Inflation)/Deflation: (Inflation)/deflation is defined as the increase or
decrease in direct and indirect costs of the same type for an equal amount of
volume. It is calculated as the year-over-year change in cost (i.e. price paid)
of direct material, compensation & benefits and overhead costs.
Productivity: Productivity is measured by the remaining variance in profit,
after adjusting for the period-over-period impact of volume & price, foreign
exchange and (inflation)/deflation as defined above. Improved or lower
period-over-period cost productivity is the result of cost efficiencies or
inefficiencies, such as cost decreasing or increasing more than volume, or cost
increasing or decreasing less than volume, or changes in sales mix among
segments. This also includes the period-over-period variance of transactional
foreign exchange, aside from those foreign currency devaluations that are
reported separately for business evaluation purposes.
Orders and Remaining Performance Obligations
Orders: For the nine months ended September 30, 2021, we recognized orders
of $15.0 billion, a decrease of $0.5 billion, or 3%, from the nine months ended
September 30, 2020. For the three months ended September 30, 2021, we recognized
orders of $5.4 billion, an increase of $0.3 billion, or 5%, from the three
months ended September 30, 2020. Service orders were up 18% and equipment orders
were down 7%. The increase in orders was driven by OFE, OFS and DS, partially
offset by TPS.
Remaining Performance Obligations (RPO): As of September 30, 2021, the aggregate
amount of the transaction price allocated to the unsatisfied (or partially
unsatisfied) performance obligations was $23.5 billion.
Revenue and Operating Income (Loss)
Revenue and operating income (loss) for each of our four operating segments is
provided below.
                                           Three Months Ended                     Nine Months Ended
                                              September 30,                         September 30,
                                            2021         2020       $ Change       2021        2020       $ Change
Segment revenue:
Oilfield Services                       $    2,419    $  2,308    $     111    $   6,976    $  7,858    $    (882)
Oilfield Equipment                             603         726         (123)       1,867       2,133         (266)
Turbomachinery & Process Solutions           1,562       1,513           49        4,675       3,759          916
Digital Solutions                              510         503            7        1,499       1,460           39
Total                                   $    5,093    $  5,049    $      44    $  15,017    $ 15,210    $    (193)


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                                         Three Months Ended September                Nine Months Ended September
                                                     30,                                         30,
                                               2021           2020       $ Change         2021            2020      $ Change
Segment operating income (loss):
Oilfield Services                       $           190    $     93    $      97    $          505    $     345    $    160
Oilfield Equipment                                   14          19           (5)               45           (4)         49
Turbomachinery & Process Solutions                  278         191           87               705          473         232
Digital Solutions                                    26          46          (20)               75          117         (42)
Total segment operating income                      508         349          159             1,330          931         399
Corporate                                          (105)       (115)          10              (324)        (353)         29
Goodwill impairment                                   -           -            -                 -      (14,773)     14,773
Inventory impairment                                  -         (42)          42                 -         (218)        218
Restructuring, impairment and other                 (14)       (209)         195              (219)      (1,637)      1,418
Separation related                                  (11)        (32)          21               (53)        (110)         57
Operating income (loss)                             378         (49)         427               736      (16,160)     16,896
Other non-operating loss, net                      (102)       (149)          47              (791)        (367)       (424)
Interest expense, net                               (67)        (66)          (1)             (205)        (195)        (10)
Income (loss) before income taxes                   209        (264)         473              (260)     (16,722)     16,462

Benefit (provision) for income taxes               (193)         (6)        (187)             (406)          10        (416)
Net income (loss)                       $            16    $   (270)   $     286    $         (666)   $ (16,712)   $ 16,046


Segment Revenues and Segment Operating Income (Loss)
Third Quarter of 2021 Compared to the Third Quarter of 2020
Revenue increased $44 million, or 1%, driven by higher volume in OFS, TPS and
DS, partially offset by lower volume in OFE. OFS increased $111 million, TPS
increased $49 million and DS increased $7 million, partially offset by OFE which
decreased $123 million.
Total segment operating income increased $159 million. The increase was driven
by OFS which increased $97 million and TPS which increased $87 million,
partially offset by DS which decreased $20 million and OFE which decreased $5
million.
Oilfield Services
OFS revenue of $2,419 million increased $111 million, or 5%, in the third
quarter of 2021 compared to the third quarter of 2020, as a result of increased
activity in North America, as evidenced by an increase in the North America rig
count. North America revenue was $714 million in the third quarter of 2021, an
increase of $155 million from the third quarter of 2020. International revenue
was $1,705 million in the third quarter of 2021, a decrease of $44 million from
the third quarter of 2020, mainly driven by the Middle East region. OFS revenue
growth was affected by Hurricane Ida and supply chain-related shipment delays in
the quarter.
OFS segment operating income was $190 million in the third quarter of 2021
compared to $93 million in the third quarter of 2020, primarily driven by higher
volume and increased cost productivity as a result of cost efficiencies and
restructuring actions, partially offset by commodity cost inflation.
Oilfield Equipment
OFE revenue of $603 million decreased $123 million, or 17%, in the third quarter
of 2021 compared to the third quarter of 2020. The decrease was primarily driven
by lower volume in the subsea production systems and surface pressure control
projects businesses, and from the disposition of the surface pressure control
flow business in the fourth quarter of 2020, partially offset by higher volume
in the services and flexible pipe businesses.
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OFE segment operating income was $14 million in the third quarter of 2021
compared to segment operating income of $19 million in the third quarter of
2020. The decrease in income was primarily driven by lower volume.
Turbomachinery & Process Solutions
TPS revenue of $1,562 million increased $49 million, or 3%, in the third quarter
of 2021 compared to the third quarter of 2020. The increase was driven by higher
equipment and services volume. Equipment revenue was up 2% and service revenue
was up 4% when compared to the prior year. Equipment revenue in the quarter
represented 45% and service revenue represented 55% of total segment revenue.
TPS segment operating income was $278 million in the third quarter of 2021
compared to $191 million in the third quarter of 2020. The increase in income
was driven primarily by higher volume and increased cost productivity.
Digital Solutions
DS revenue of $510 million increased $7 million, or 1%, in the third quarter of
2021 compared to the third quarter of 2020, mainly driven by higher volume
across the Process & Pipeline Services and Waygate Technologies businesses,
partially offset by declines in the Nexus Control and Bently Nevada businesses.
DS revenue growth was affected by supply chain constraints that impacted product
deliveries.
DS segment operating income was $26 million in the third quarter of 2021
compared to $46 million in the third quarter of 2020. The decrease in
profitability was primarily driven by lower cost productivity and unfavorable
business mix.
Corporate
In the third quarter of 2021, corporate expenses were $105 million compared to
$115 million in the third quarter of 2020. The decrease of $10 million was
primarily driven by lower expenses related to cost efficiencies and
restructuring actions.
Restructuring, Impairment and Other
In the third quarter of 2021, we recognized $14 million of restructuring,
impairment and other items, compared to $209 million in the third quarter of
2020. The charges in the third quarter of 2021 primarily relate to initiatives
in our OFS segment that are the continuation of our overall strategy to
right-size our structural costs. The charges in the third quarter of 2020
primarily related to the continuation of activities from our first quarter 2020
restructuring plan.
Other Non-Operating Loss, Net
In the third quarter of 2021, we incurred $102 million of other non-operating
losses. Included in this amount was a loss of $140 million related to marking
our investment in C3.ai to fair value. For the third quarter of 2020, we
incurred $149 million of other non-operating losses. Included in this amount was
a loss of $129 million related to the disposition of our surface pressure
control flow business.
Interest Expense, Net
In the third quarter of 2021, we incurred interest expense, net of interest
income, of $67 million, which increased $1 million compared to the third quarter
of 2020, primarily driven by lower interest income.
Income Taxes
In the third quarter of 2021, the provision for income taxes was $193 million.
The difference between the U.S. statutory tax rate of 21% and the effective tax
rate is primarily related to losses with no tax benefit due to valuation
allowances and changes in unrecognized tax benefits related to uncertain tax
positions.
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In the third quarter of 2020, the income tax expense was $6 million. The
difference between the U.S. statutory tax rate of 21% and the effective tax rate
is primarily related to losses with no tax benefit due to valuation allowance,
partially offset by the impact of the U.S. Coronavirus Aid, Relief, and Economic
Security Act (CARES Act).
The First Nine Months of 2021 Compared to the First Nine Months of 2020
Revenue decreased $193 million, or 1%, primarily driven by lower volume in OFS
and OFE, partially offset by higher volume in TPS and DS. OFS decreased $882
million and OFE decreased $266 million, partially offset by TPS which increased
$916 million and DS which increased $39 million.
Total segment operating income increased $399 million. The increase was driven
by TPS which increased $232 million, OFS which increased $160 million, and OFE
which increased $49 million, partially offset by DS which decreased $42 million.
Oilfield Services
OFS revenue of $6,976 million decreased $882 million, or 11%, in the first nine
months of 2021 compared to the first nine months of 2020, as a result of
decreased activity internationally and in North America as evidenced by the
decrease in the worldwide rig count. North America revenue was $2,031 million in
the first nine months of 2021, a decrease of $150 million from the first nine
months of 2020. International revenue was $4,945 million in the first nine
months of 2021, a decrease of $732 million from the first nine months of 2020,
mainly driven by the Middle East region.
OFS segment operating income was $505 million in the first nine months of 2021
compared to $345 million in the first nine months of 2020. The increase in
income was primarily driven by increased cost productivity as a result of cost
efficiencies and restructuring actions, partially offset by lower volume and
unfavorable business mix.
Oilfield Equipment
OFE revenue of $1,867 million decreased $266 million, or 12%, in the first nine
months of 2021 compared to the first nine months of 2020. The decrease was
primarily driven by lower volume in the subsea drilling systems and surface
pressure control projects businesses, and from the disposition of the surface
pressure control flow business in the fourth quarter of 2020, partially offset
by higher volume in the flexible pipe business.
OFE segment operating income was $45 million in the first nine months of 2021
compared to segment operating loss of $4 million in the first nine months of
2020. The increase in income was primarily driven by increased cost productivity
from our cost-out programs.
Turbomachinery & Process Solutions
TPS revenue of $4,675 million increased $916 million, or 24%, in the first nine
months of 2021 compared to the first nine months of 2020. The increase was
primarily driven by higher equipment volume. Equipment revenue was up 50% and
service revenue was up 8% when compared to the prior year. Equipment revenue in
the period represented 47% and service revenue represented 53% of total segment
revenue.
TPS segment operating income was $705 million in the first nine months of 2021
compared to $473 million in the first nine months of 2020. The increase in
income was driven primarily by higher volume and increased cost productivity,
partially offset by unfavorable business mix.
Digital Solutions
DS revenue of $1,499 million increased $39 million, or 3%, in the first nine
months of 2021 compared to the first nine months of 2020, mainly driven by
volume increases in Process & Pipeline Services and Waygate Technologies,
partially offset by declines in the Nexus Controls business.
DS segment operating income was $75 million in the first nine months of 2021
compared to $117 million in the first nine months of 2020. The decrease in
profitability was primarily driven by decreased cost productivity.
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Corporate


In the first nine months of 2021, corporate expenses were $324 million compared
to $353 million in the first nine months of 2020. The decrease of $29 million
was primarily driven by lower expenses related to cost efficiencies and
restructuring actions.
Goodwill Impairment
In the first quarter of 2020, the Company's market capitalization declined
significantly driven by 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
performed an interim quantitative impairment test as of March 31, 2020. Based
upon the results of the impairment test, we recognized a goodwill impairment
charge of $14,773 million during the first quarter of 2020.
Restructuring, Impairment and Other
In the first nine months of 2021, we recognized $219 million of restructuring,
impairment and other charges, primarily related to initiatives in our OFS
segment that are the continuation of our overall strategy to right-size our
structural costs. For the first nine months of 2020, we recognized $1,637
million of restructuring, impairment and other charges, primarily related to
product line rationalization and headcount reductions in certain geographical
locations to align our workforce with expected activity levels and market
conditions.
Other Non-Operating Loss, Net
In the first nine months of 2021, we incurred $791 million of other
non-operating losses. Included in this amount were losses of $955 million
related to marking our investment in C3.ai to fair value, partially offset by
the reversal of current accruals of $121 million due to the settlement of
certain legal matters. For the first nine months of 2020, we incurred $367
million of other non-operating losses. Included in this amount was a loss of
$217 million related to the sale of our rod lift systems business in the second
quarter of 2020, and a loss of $129 million related to the disposition of our
surface pressure control flow business.
Interest Expense, Net
In the first nine months of 2021, we incurred interest expense, net of interest
income, of $205 million, which increased $10 million compared to the first nine
months of 2020, driven by lower interest income.
Income Taxes
In the first nine months of 2021, the provision for income taxes was $406
million. The difference between the U.S. statutory tax rate of 21% and the
effective tax rate is primarily related to losses with no tax benefit due to
valuation allowances and changes in unrecognized tax benefits related to
uncertain tax positions.
In the first nine months of 2020, the income tax benefit was $10 million. The
difference between the U.S. statutory tax rate of 21% and the effective tax rate
is primarily related to non-deductible goodwill impairment, the geographical mix
of earnings and losses with no tax benefit due to valuation allowances,
partially offset by the impact of the CARES act.
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 since the first
quarter of 2020, we continue to maintain solid financial strength and liquidity.
At September 30, 2021, we had cash and cash equivalents of $3.9 billion compared
to $4.1 billion at December 31, 2020. Our liquidity is further supported by a
revolving credit facility of $3 billion, and access to both commercial paper and
uncommitted lines of credit. At September 30, 2021, we had no borrowings
outstanding under the revolving credit facility, our commercial paper program or
our uncommitted lines of credit. Our next debt maturity is December 2022.
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Cash and cash equivalents includes $11 million and $44 million of cash held on
behalf of GE at September 30, 2021 and December 31, 2020, respectively.
Excluding cash held on behalf of GE, our U.S. subsidiaries held approximately
$1.2 billion and $1 billion while our foreign subsidiaries held approximately
$2.7 billion and $3.1 billion of our cash and cash equivalents as of
September 30, 2021 and December 31, 2020, respectively. A substantial portion of
the cash held by foreign subsidiaries at September 30, 2021 has been reinvested
in active non-U.S. business operations. If we decide at a later date to
repatriate those funds to the U.S., they will generally be free of U.S. federal
tax but may incur other taxes such as withholding or state taxes.
We have a $3 billion committed unsecured revolving credit facility (the Credit
Agreement) with commercial banks maturing in December 2024. The Credit Agreement
contains certain customary representations and warranties, certain customary
affirmative covenants and certain customary negative covenants. Upon the
occurrence of certain events of default, our obligations under the Credit
Agreement may be accelerated. Such events of default include payment defaults to
lenders under the Credit Agreement and other customary defaults. No such events
of default have occurred. We have no borrowings under the 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. As a
result of the repayment of £600 million of our commercial paper on April 30,
2021, originally issued in May of 2020 under the COVID Corporate Financing
Facility established by the Bank of England, our authorized commercial paper
program was reduced from $3.8 billion to $3 billion.
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.
At September 30, 2021, we were in compliance with all debt covenants.
We continuously review our liquidity and capital resources. If market conditions
were to change, for instance due to the uncertainty created by a global pandemic
or a significant decline in oil and gas prices, and our revenue was reduced
significantly or operating costs were to increase significantly, our cash flows
and liquidity could be negatively impacted. Additionally, it could cause the
rating agencies to lower our credit ratings. There are no ratings triggers that
would accelerate the maturity of any borrowings under our committed credit
facility; however, a downgrade in our credit ratings could increase the cost of
borrowings under the credit facility and could also limit or preclude our
ability to issue commercial paper. Should this occur, we could seek alternative
sources of funding, including borrowing under the credit facility.
During the nine months ended September 30, 2021, we dispersed cash to fund a
variety of activities including certain working capital needs, restructuring and
GE separation related costs, capital expenditures, the payment of dividends and
distributions to noncontrolling interests, and repurchases of our common stock.
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 ended September 30:
(In millions)             2021     2020
Operating activities    $ 1,600   $ 927
Investing activities       (212)   (551)
Financing activities     (1,585)    494


Operating Activities
Our largest source of operating cash is payments from customers, of which the
largest component is collecting cash related to our sales of products and
services including advance payments or progress collections for work to be
performed. The primary use of operating cash is to pay our suppliers, employees,
tax authorities, and others for a wide range of material and services.
Cash flows from operating activities generated cash of $1,600 million and $927
million for the nine months ended September 30, 2021 and 2020, respectively.
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For the nine months ended September 30, 2021, cash generated from operating
activities were primarily driven by net losses adjusted for certain noncash
items (including depreciation, amortization, and loss on equity securities) and
working capital, which includes contract and other deferred assets. Net working
capital cash generation was $470 million for the nine months ended September 30,
2021, mainly due to receivables, inventory, and contract assets, partially
offset by progress collections, as we continue to improve our working capital
processes. Restructuring and GE separation related payments were $210 million
for the nine months ended September 30, 2021.
For the nine months ended September 30, 2020, cash generated from operating
activities were primarily driven by net losses adjusted for certain noncash
items (including 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 generation was
$255 million for the nine months ended September 30, 2020, mainly due to
positive customer progress collections, partially offset by higher inventory to
deliver the volume for TPS equipment contracts in the second half of the year.
We also used working capital from net negative receivables and payables as a
result of lower revenues. Restructuring and GE separation related payments were
$480 million for the nine months ended September 30, 2020.
Investing Activities
Cash flows from investing activities used cash of $212 million and $551 million
for the nine months ended September 30, 2021 and 2020, 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 $590
million and $801 million for the nine months ended September 30, 2021 and 2020,
respectively. Proceeds from the sale of property, plant and equipment were $178
million and $141 million for the nine months ended September 30, 2021 and 2020,
respectively.
During the nine months ended September 30, 2021, we sold approximately
2.2 million shares of C3.ai Class A common stock and received proceeds of $145
million, which is reported as an other investing activity.
Financing Activities
Cash flows from financing activities used cash of $1,585 million and generated
cash of $494 million for the nine months ended September 30, 2021 and 2020,
respectively.
We had net repayments of debt and other borrowings of $60 million and $170
million for the nine months ended September 30, 2021 and 2020, respectively. In
addition, in April 2021 we repaid $832 million (£600 million) of commercial
paper originally issued in May 2020 under the COVID Corporate Financing Facility
established by the Bank of England. In May 2020, we received proceeds from the
issuance of $500 million aggregate principal amount of 4.486% Senior Notes due
May 2030.
We paid dividends of $436 million to our Class A shareholders, and we made a
distribution of $127 million to GE during the nine months ended September 30,
2021. We paid dividends of $359 million to our Class A shareholders, and we made
a distribution of $199 million to GE during the nine months ended September 30,
2020.
On July 30, 2021, our Board of Directors authorized each of the Company and BHH
LLC to repurchase up to $2 billion of its Class A common stock and LLC Units,
respectively. During the three months ended September 30, 2021, the Company and
BHH LLC repurchased and canceled 4.4 million shares of Class A common stock and
LLC Units, respectively, for a total of $106 million.
Cash Requirements
For the remainder of 2021, we believe cash on hand, cash flows from operating
activities, the available revolving credit facility, and the availability to
issue debt under our existing shelf registrations will provide us with
sufficient capital resources and liquidity to manage our working capital needs,
meet contractual obligations, fund capital expenditures, dividends and
repurchases of our common stock, and support the development of our short-
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term and long-term operating strategies. When necessary, we issue commercial
paper or other short-term debt to fund cash needs in the U.S. in excess of the
cash generated in the U.S.
Our capital expenditures can be adjusted and managed by us to match market
demand and activity levels. Based on current market conditions, capital
expenditures, net of proceeds from disposal of assets, in 2021 are expected to
be below 2020 levels. The expenditures are expected to be used primarily for
normal, recurring items necessary to support our business. We currently
anticipate making income tax payments in the range of $350 million to $450
million in 2021.
Other Factors Affecting Liquidity
Registration Statements: In May 2021, Baker Hughes filed a universal shelf
registration statement on Form S-3ASR (Automatic Shelf Registration) with the
SEC to have the ability to sell various types of securities including debt
securities, Class A common stock, preferred stock, guarantees of debt
securities, purchase contracts and units. The specific terms of any securities
to be sold would be described in supplemental filings with the SEC. The
registration statement will expire in May 2024.
In December 2020, BHH LLC, Baker Hughes Netherlands Funding Company B.V., and
Baker Hughes Co-Obligor, Inc. filed a shelf registration statement on Form S-3
with the SEC to have the ability to sell up to $3 billion in debt securities in
amounts to be determined at the time of an offering. Any such offering, if it
does occur, may happen in one or more transactions. The specific terms of any
debt securities to be sold would be described in supplemental filings with the
SEC. The registration statement will expire in December 2023.
Customer receivables: In line with industry practice, we may bill our customers
for services provided in arrears dependent upon contractual terms. In a
challenging economic environment, we may experience delays in the payment of our
invoices due to customers' lower cash flow from operations or their more limited
access to credit markets. While historically there have not been material
non-payment events, we attempt to mitigate this risk through working with our
customers to restructure their debts. A customer's failure or delay in payment
could have a material adverse effect on our short-term liquidity and results
from operations. As of September 30, 2021, no single customer accounted for more
than 10% of our gross trade receivables.
International operations: Our cash that is held outside the U.S. is 70% of the
total cash balance as of September 30, 2021. 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.
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,
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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 I of Item 1A of our
2020 Annual Report and those set forth from time-to-time in other filings by the
Company with the SEC. These documents are available through our website or
through the SEC's Electronic Data Gathering and Analysis Retrieval (EDGAR)
system at http://www.sec.gov.
Any forward-looking statements speak only as of the date of this Quarterly
Report on Form 10-Q. The Company does not undertake any obligation to update any
forward-looking statements, whether as a result of new information or
developments, future events or otherwise, except as required by law. Readers are
cautioned not to place undue reliance on any of these forward-looking
statements.

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