Baker Hughes Holdings LLC - FORM 10-Q - October 30, 2018

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EX-32 - EXHIBIT 32 - Baker Hughes Holdings LLCbhgellc20180930exhibit32.htm
EX-31.2 - EXHIBIT 31.2 - Baker Hughes Holdings LLCbhgellc20180930exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - Baker Hughes Holdings LLCbhgellc20180930exhibit311.htm
EX-10.1 - EXHIBIT 10.1 - Baker Hughes Holdings LLCa20180930exhibit101.htm
        

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 September 30, 2018
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, LLC
(Exact name of registrant as specified in its charter)
Delaware
76-0207995
(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 o
Accelerated filer o
Non-accelerated filer þ
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 October 22, 2018, all of the common units of the registrant are held by affiliates of the registrant. None of the common units are publicly traded.



Baker Hughes, a GE company, LLC
Table of Contents

 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | i


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


Three Months Ended September 30,
Nine Months Ended September 30,
(In millions, except per unit amounts)
2018
2017
2018
2017
Revenue:






Sales of goods
$
3,142

$
3,110

$
9,421

$
7,619

Sales of services
2,523

2,191

7,191

3,761

Total revenue
5,665

5,301

16,612

11,380








Costs and expenses:



 
 
Cost of goods sold
2,819

2,587

8,371

6,377

Cost of services sold
1,873

1,762

5,491

2,826

Selling, general and administrative expenses
608

795

1,944

1,748

Restructuring, impairment and other
66

191

374

292

Merger and related costs
17

159

113

310

Total costs and expenses
5,383

5,494

16,293

11,553

Operating income (loss)
282

(193
)
319

(173
)
Other non operating income, net
6

4

51

62

Interest expense, net
(55
)
(41
)
(164
)
(75
)
Income (loss) before income taxes and equity in loss of affiliate
233

(230
)
206

(186
)
Equity in loss of affiliate
(85
)
(13
)
(139
)
(13
)
Provision for income taxes
(108
)
(117
)
(208
)
(115
)
Net income (loss)
40

(360
)
(141
)
(314
)
Less: Net income attributable to noncontrolling interests
1

1

14

5

Net income (loss) attributable to Baker Hughes, a GE company, LLC
$
39

$
(361
)
$
(155
)
$
(319
)





 
 





 
 
Cash distribution per common unit
$
0.18

$
0.17

$
0.54

$
0.17

See accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 1


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

 
Three Months Ended September 30,
Nine Months Ended September 30,
(In millions)
2018
2017
2018
2017
Net income (loss)
$
40

$
(360
)
$
(141
)
$
(314
)
Less: Net income attributable to noncontrolling interests
1

1

14

5

Net income (loss) attributable to Baker Hughes, a GE company, LLC
39

(361
)
(155
)
(319
)
Other comprehensive income (loss):
 
 
 
 
Investment securities
(1
)
1

(3
)
2

Foreign currency translation adjustments
(88
)
265

(312
)
192

Cash flow hedges
(2
)
9

(1
)
17

Benefit plans
1

(4
)
3

(6
)
Other comprehensive income (loss)
(90
)
271

(313
)
205

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

1

(1
)
4

Other comprehensive income (loss) attributable to Baker Hughes, a GE company, LLC
(90
)
270

(312
)
201

Comprehensive loss
(50
)
(89
)
(454
)
(109
)
Less: Comprehensive loss attributable to noncontrolling interests
1

2

13

9

Comprehensive loss attributable to Baker Hughes, a GE company, LLC
$
(51
)
$
(91
)
$
(467
)
$
(118
)
See accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 2


Baker Hughes, a GE company, LLC
Condensed Consolidated and Combined Statements of Financial Position
(Unaudited)
(In millions)
September 30, 2018
December 31, 2017
ASSETS
Current assets:
 
 
Cash, cash equivalents and restricted cash (1)
$
4,741

$
7,026

Current receivables, net
5,938

6,128

Inventories, net
4,681

4,507

All other current assets
863

872

Total current assets
16,223

18,533

Property, plant and equipment (net of accumulated depreciation of $3,517 and $2,817)
6,226

6,959

Goodwill
20,496

19,654

Other intangible assets, net
5,831

6,358

Contract and other deferred assets
2,001

2,044

All other assets
1,452

2,073

Deferred income taxes
1,212

715

Total assets (1)
$
53,441

$
56,336

LIABILITIES AND EQUITY
Current liabilities:
 
 
Accounts payable
$
3,702

$
3,377

Short-term debt and current portion of long-term debt (1)
1,000

2,037

Progress collections and deferred income
1,587

1,775

All other current liabilities
2,170

2,046

Total current liabilities
8,459

9,235

Long-term debt
6,293

6,312

Deferred income taxes
146

332

Liabilities for pensions and other postretirement benefits
1,082

1,172

All other liabilities
1,024

889

Members' equity:


Members' capital (common units 1,100 and 1,129, issued and outstanding as of September 30, 2018 and December 31, 2017, respectively)
39,155

40,678

Retained loss
(629
)
(541
)
Accumulated other comprehensive loss
(2,193
)
(1,881
)
Baker Hughes, a GE company, LLC members' equity
36,333

38,256

Noncontrolling interests
104

140

Total equity
36,437

38,396

Total liabilities and equity
$
53,441

$
56,336

(1) 
Total assets include $936 million and $1,124 million of assets held on behalf of GE, of which $780 million and $997 million is cash and cash equivalents and $156 million and $127 million is investment securities at September 30, 2018 and December 31, 2017, 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 and Combined Financial Statements.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 3


Baker Hughes, a GE company, LLC
Condensed Consolidated and Combined Statements of Changes in Members' Equity
(Unaudited)
(In millions, except per unit amounts)
Common Unitholders
Parent's Net Investment
Retained
Loss
Accumulated
Other
Comprehensive
Loss
Non-controlling
Interests
Total Equity
Balance at December 31, 2017
$
40,678

$
—

$
(541
)
$
(1,881
)
$
140

$
38,396

Effect of adoption of ASU 2016-16 on taxes (1)


67


 
67

Comprehensive income (loss):
 
 
 
 
 


Net income (loss)
 
 
(155
)
 
14

(141
)
Other comprehensive loss
 
 
 
(312
)
(1
)
(313
)
Regular cash distribution to members ($0.54 per unit)
(601
)





 
(601
)
Other cash distribution to members
(37
)
 
 
 
 
(37
)
Repurchase of common units
(1,000
)




(1,000
)
BHGE Stock-based compensation cost
90





90

Other
25




(49
)
(24
)
Balance at September 30, 2018
$
39,155

$
—

$
(629
)
$
(2,193
)
$
104

$
36,437


(In millions, except per unit amounts)
Common Unitholders
Parent's Net Investment
Retained
Loss
Accumulated
Other
Comprehensive
Loss
Non-controlling
Interests
Total Equity
Balance at June 30, 2018
$
39,356

$
—

$
(668
)
$
(2,103
)
$
109

$
36,694

Comprehensive income (loss):
 
 
 
 
 
 
Net income
 
 
39

 
1

40

Other comprehensive loss
 
 
 
(90
)
 
(90
)
Regular cash distribution to members ($0.18 per unit)
(198
)
 




(198
)
Other cash distribution to members
(37
)
 
 
 
 
(37
)
BHGE Stock-based compensation cost
31

 



31

Other
3

 


(6
)
(3
)
Balance at September 30, 2018
$
39,155

$
—

$
(629
)
$
(2,193
)
$
104

$
36,437

(1) 
See "Note 1. Basis of Presentation and Summary of Significant Accounting Policies" for further details.
See accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements.


                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 4


Baker Hughes, a GE company, LLC
Condensed Consolidated and Combined Statements of Changes in Members' Equity
(Unaudited)
(In millions, except per unit amounts)
Common Unitholders
Parent's Net Investment
Retained
Loss
Accumulated
Other
Comprehensive
Loss
Non-controlling
Interests
Total Equity
Balance at December 31, 2016
$
—

$
16,001

$
—

$
(1,888
)
$
167

$
14,280

Comprehensive income (loss):
 
 
 
 
 


Net income

42



4

46

Other comprehensive income (loss)



(69
)
3

(66
)
Changes in Parent's net investment

1,939




1,939

Net activity related to noncontrolling interests
 
 
 
 
4

4

Balance at June 30, 2017
—

17,982

—

(1,957
)
178

16,203

Changes in Parent's net investment
 
(1,077
)
 
(13
)
 
(1,090
)
Cash contribution received from GE
 
7,400

 
 
 
7,400

Issuance of common units to GE on business combination
24,305

(24,305
)
 
 

—

Issuance of common units to BHGE on business combination
24,798

 
 
 
77

24,875

Distribution to BHGE
(7,498
)
 
 
 
 
(7,498
)
Activity after business combination of July 3, 2017:
 
 
 
 
 


Comprehensive income (loss):
 
 
 
 
 


Net income (loss)
 
 
(361
)
 
1

(360
)
Other comprehensive income
 
 
 
270

1

271

Regular cash distribution to members ($0.17 per unit)
(198
)
 
 
 
 
(198
)
Net activity related to noncontrolling interests
(92
)
 
 
 
(117
)
(209
)
Other
23

 



23

Balance at September 30, 2017
$
41,338

$
—

$
(361
)
$
(1,700
)
$
140

$
39,417

See accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 5


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

Nine Months Ended September 30,
(In millions)
2018
2017
Cash flows from operating activities:
 
 
Net loss
$
(141
)
$
(314
)
Adjustments to reconcile net loss to net cash flows from (used in) operating activities:
 
 
Depreciation and amortization
1,133

716

Provision for deferred income taxes
(126
)
(27
)
Changes in operating assets and liabilities:


Current receivables
(29
)
(366
)
Inventories
(335
)
195

Accounts payable
458

98

Progress collections and deferred income
(198
)
(92
)
Contract and other deferred assets
53

(558
)
Other operating items, net
(144
)
(237
)
Net cash flows from (used in) operating activities
671

(585
)
Cash flows from investing activities:
 
 
Expenditures for capital assets
(653
)
(417
)
Proceeds from disposal of assets
330

76

Net cash paid for acquisitions
(20
)
(3,365
)
Other investing items, net
139

(173
)
Net cash flows used in investing activities
(204
)
(3,879
)
Cash flows from financing activities:
 
 
Net repayments of short-term debt and other borrowings
(319
)
(325
)
Repayment of long-term debt
(673
)
—

Distributions to members
(638
)
(198
)
Contribution received from GE
—

7,400

Net transfer from Parent
—

1,574

Repurchase of common units
(1,025
)
—

Other financing items, net
(10
)
(241
)
Net cash flows from (used in) financing activities
(2,665
)
8,210

Effect of currency exchange rate changes on cash, cash equivalents and restricted cash
(87
)
48

Increase (decrease) in cash, cash equivalents and restricted cash
(2,285
)
3,794

Cash, cash equivalents and restricted cash, beginning of period
7,026

981

Cash, cash equivalents and restricted cash, end of period
$
4,741

$
4,775

Supplemental cash flows disclosures:


Income taxes paid
$
305

$
122

Interest paid
$
218

$
31


See accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 6


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

NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
Baker Hughes, a GE company, LLC, a Delaware limited liability company (the Company, BHGE LLC, we, us, or our), and the successor to Baker Hughes Incorporated, a Delaware corporation (Baker Hughes) is a world-leading, 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 65,000 employees.
On July 3, 2017, we completed the combination of the oil and gas business (GE O&G) of General Electric Company (GE) and Baker Hughes (the Transactions). GE owns approximately 62.5% of our common units and Baker Hughes, a GE company (BHGE) owns approximately 37.5% of our common units indirectly through two wholly owned subsidiaries.
BASIS OF PRESENTATION
In connection with the Transactions, we entered into and are governed by an Amended & Restated Limited Liability Company Agreement, dated as of July 3, 2017 (the BHGE LLC Agreement). Under the BHGE LLC Agreement, EHHC Newco, LLC (EHHC), a wholly owned subsidiary of BHGE, is our sole managing member and BHGE is the sole managing member of EHHC. As our managing member, EHHC conducts, directs and exercises full control over all our activities, including our day-to-day business affairs and decision-making, without the approval of any other member. As such, EHHC is responsible for all our operational and administrative decisions and the day-to-day management of our business.
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 accompanying unaudited condensed consolidated and combined 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. All intercompany accounts and transactions have been eliminated. In the opinion of management, the condensed consolidated and combined 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, effective July 3, 2017, following consummation of the Transactions. 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 subsequent periods will also be presented on a consolidated basis. 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 and contributed to BHGE LLC as part of the Transactions (refer to "Note 3. Business Acquisition" for further details on the Transactions). Additionally, it also includes certain assets, liabilities and results of operations of other businesses of GE that were also contributed to BHGE LLC as part of the Transactions on a fully retrospective basis (in accordance with the guidance applicable to transactions between entities under common control) based on their carrying values, as reflected in the accounting records of GE. The condensed consolidated and combined statements of income (loss) reflect intercompany expense allocations made to us by GE for certain corporate functions and for shared services provided by GE. See "Note 16. Related Party Transactions" for further information on expenses allocated by GE. The historical financial results in the condensed consolidated and 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.
In the notes to unaudited condensed consolidated and combined financial statements, all dollar and unit amounts in tabulations are in millions of dollars and units, 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.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 7


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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Please refer to "Note 1. Basis of Presentation and Summary of Significant Accounting Policies," to our consolidated and combined financial statements from our Annual Report on Form 10-K for the year ended December 31, 2017 (2017 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, Cash Equivalents and Restricted Cash
As of September 30, 2018, and December 31, 2017, we had $1,119 million and $1,190 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 is $593 million and $764 million, as of September 30, 2018 and December 31, 2017, respectively, held on behalf of GE.
Cash, cash equivalents and restricted cash includes a total of $780 million and $997 million of cash at September 30, 2018 and December 31, 2017, 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.

As a result of adopting Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-18, Statement of Cash Flows: Restricted Cash, we reclassified our restricted cash of $7 million from ‘all other assets’ to cash, cash equivalents and restricted cash as of December 31, 2017. At September 30, 2018, such cash is no longer considered restricted in nature.
NEW ACCOUNTING STANDARDS ADOPTED
On January 1, 2018, we adopted the FASB ASU No. 2014-09, Revenue from Contracts with Customers, and the related amendments (ASC 606). We elected to adopt the new standard using the full retrospective method, where the standard was applied to each prior reporting period presented and the cumulative effect of applying the standard was recognized at January 1, 2016. In addition, we elected the practical expedient for contract modifications, which essentially means that the terms of the contract that existed at the beginning of the earliest period presented can be assumed to have been in place since the inception of the contract (i.e., not practical to separately evaluate the effects of all prior contract modifications). This standard requires us to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time based on when control of goods and services transfer to a customer. As a result of adoption of the standard, we changed the presentation of our financial statements, including: (1) timing of revenue recognition, and (2) changes in classification between revenue and costs. The standard has no cash impact and, as such, does not affect the economics of our underlying customer contracts. Our policy on recognizing revenue is as follows:
Revenue from Sale of Equipment
Performance Obligations Satisfied Over Time

We recognize revenue on agreements for sales of goods manufactured to unique customer specifications, including long-term construction projects, on an over-time basis utilizing cost inputs as the measurement criteria in assessing the progress toward completion. Our estimate of costs to be incurred to fulfill our promise to a customer is based on our history of manufacturing or constructing similar assets for customers and is updated routinely to reflect changes in quantity or pricing of the inputs. We begin to recognize revenue on these contracts when the contract specific inventory becomes customized for a customer, which is reflective of our initial transfer of control of the incurred costs. We provide for potential losses on any of these agreements when it is probable that we will incur the loss.


                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 8


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

Our billing terms for these over-time contracts vary, but are generally based on achieving specified milestones. The differences between the timing of our revenue recognized (based on costs incurred) and customer billings (based on contractual terms) results in changes to our contract asset or contract liability positions.
Performance Obligations Satisfied at a Point In Time

We recognize revenue for non-customized equipment at the point in time that the customer obtains control of the good, which is no earlier than when the customer has physical possession of the product. Equipment for which we recognize revenue at a point in time include goods we manufacture on a standardized basis for sale to the market. We use proof of delivery for certain large equipment with more complex logistics associated with the shipment, whereas the delivery of other equipment is determined based on historical data of transit times between regions.
  
On occasion we sell products with a right of return. We use our accumulated experience to estimate and provide for such returns when we record the sale. In situations where arrangements include customer acceptance provisions based on seller or customer-specified objective criteria, we recognize revenue when we have concluded that the customer has control of the goods and that acceptance is likely to occur.

Our billing terms for these point in time equipment contracts vary, but are generally based on shipment of the goods to the customer.

Revenue from Sale of Services
Performance Obligations Satisfied Over Time

Revenue on Oilfield Services is recognized on an overtime basis as performed. We also sell product services under long-term product maintenance or extended warranty agreements in our Turbomachinery & Process Solutions and Oilfield Equipment segments. These agreements require us to maintain the customers' assets over the service agreement contract terms, which generally range from 10 to 20 years. In general, these are contractual arrangements to provide services, repairs, and maintenance of a covered unit (gas turbines for mechanical drive or power generation, primarily on LNG applications, drilling rigs). These services are performed at various times during the life of the contract, thus the costs of performing services are incurred on other than a straight-line basis. We recognize related sales based on the extent of our progress toward completion measured by actual costs incurred in relation to total expected costs. We provide for any loss that we expect to incur on any of these agreements when that loss is probable. BHGE utilizes historical customer data, prior product performance data, statistical analysis, third-party data, and internal management estimates to calculate contract-specific margins. In certain contracts, the total transaction price is variable based on customer utilization, which is excluded from the contract margin until the period that the customer has utilized to appropriately reflect the revenue activity in the period earned.

Our billing terms for these contracts are generally based on the occurrence of a major maintenance event within the contract or asset utilization (i.e. usage per hour). The differences between the timing of our revenue recognized (based on costs incurred) and customer billings (based on contractual terms) results in changes to our contract asset or contract liability positions.
Performance Obligations Satisfied at a Point In Time

We sell certain tangible products, largely spare equipment, through our services business. We recognize revenues for this equipment at the point in time that the customer obtains control of the good, which is at the point in time we deliver the spare part to the customer. Our billing terms for these point in time service contracts vary, but are generally based on shipment of the goods to the customer.
Impact of Adoption
As a result of the adoption of the standard, the timing of revenue recognition on our long-term product service agreements is affected. Although we continue to recognize revenue over time on these contracts, there are

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 9


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

changes to how contract modifications, termination clauses and purchase options are accounted for by us. In particular, under the previous standard, the cumulative impact from a contract modification on revenue already recorded is recognized in the period in which the modification is agreed. Under the new standard, the impact from certain types of modifications is recognized over the remaining life of the contract.
The change in historical periods to our statements of income (loss) related to the adoption of the standard is summarized below:
 
Three Months Ended
 
Year Ended
 
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017

December 31, 2017
December 31, 2016
Revenue:
 
 
 
 
 
 
 
Sales of goods
$
86

$
13

$
37

$
27

 
$
163

$
(26
)
Sales of services
(50
)
(86
)
(33
)
(74
)
 
(243
)
(161
)
Total revenue
36

(73
)
4

(47
)
 
(80
)
(187
)
 
 
 
 
 
 
 
 
Operating loss
(14
)
(64
)
(6
)
(91
)
 
(175
)
(226
)
 
 
 
 
 
 
 
 
Net income (loss) and net income (loss) attributable to BHGE LLC
1

(84
)
(10
)
(57
)
 
(150
)
(149
)
The increase (decrease) to our statement of financial position related to the adoption of the standard is summarized below:

December 31, 2017
ASSETS
 
Current receivables, net
$
1

Inventories, net
(83
)
Contract and other deferred assets
(701
)
Deferred income taxes
233

 
 
LIABILITIES AND EQUITY
 
Progress collections and deferred income
$
394

All other current liabilities
(64
)
Deferred income taxes
(34
)
All other liabilities
(83
)
Total equity
(763
)

The cumulative impact to our retained earnings (included in our net parent investment) as of January 1, 2016 was a reduction of $432 million.
On January 1, 2018, we adopted the FASB ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. The ASU eliminated the deferral of tax effects of intra-entity asset transfers other than inventory. As a result, the tax expense from the intercompany sale of assets, other than inventory, and associated changes to deferred taxes are recognized when the sale occurs even though the pre-tax effects of the transaction have not been recognized. The effect of the adoption of the standard was an increase to retained earnings of $67 million as of January 1, 2018 with no other impact to our financial statements. Future earnings will be reduced in total by this amount. The effect of the change on future transactions will depend on the nature and amount of future transactions as it will affect the timing of recognition of both tax expenses and tax benefits, with no change in the associated cash flows.
On January 1, 2018, we adopted the FASB ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which changed the income statement presentation of

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 10


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

net periodic benefit cost by requiring separation between the service cost component and all other components. The service cost component is presented as an operating expense with other similar compensation costs arising for services rendered by the pertinent employees during the period. The non operating components are presented outside of income from operations.
The change in historical periods to our statements of income (loss) related to the adoption of ASU No. 2017-07 is summarized below:
 
Three Months Ended
 
Year Ended
 
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017

December 31, 2017
December 31, 2016
Operating income (loss)
$
(5
)
$
(7
)
$
9

$
2

 
$
(1
)
$
24

Non operating income (loss)
5

7

(9
)
(2
)
 
1

(24
)
NEW ACCOUNTING STANDARDS TO BE ADOPTED

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU provides that the stranded tax effects from the Tax Cuts and Jobs Act on the balance of other comprehensive earnings may be reclassified to retained earnings. The ASU is effective for periods beginning after December 15, 2018, with an election to adopt early. The ASU is not expected to have a material effect to our financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The ASU establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. Similarly, lessors will be required to classify leases as sales-type, finance or operating, with classification affecting the pattern of income recognition. Classification for both lessees and lessors will be based on an assessment of whether risks and rewards as well as substantive control have been transferred through a lease contract. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. In July 2018, the FASB issued an ASU that added an alternative transition method, which allows companies to apply the provisions of the new leasing standard on January 1, 2019 through recognition of a cumulative-effect adjustment to retained earnings as of January 1, 2019 (i.e. without retrospectively adjusting comparative periods). We intend to apply this alternative transition method. We are currently in the process of accumulating and evaluating all the necessary information required to properly account for our lease portfolio under the new standard. Additionally, we are implementing an enterprise-wide lease management system to support the ongoing accounting requirements. While we continue to evaluate the effect of the standard on our ongoing financial reporting, we anticipate that the adoption of the ASU is expected to result in the recognition of right of use asset and related liability in the range of approximately $600 million and $750 million with an estimated immaterial effect to our retained earnings and cash flows.

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.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 11


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

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 September 30,
Nine Months Ended September 30,
Total Revenue
2018
2017
2018
2017
U.S.
$
1,675

$
1,415

$
4,718

$
2,837

Non-U.S.
3,990

3,886

11,894

8,543

Total
$
5,665

$
5,301

$
16,612

$
11,380

REMAINING PERFORMANCE OBLIGATIONS
As of September 30, 2018, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $20.8 billion. We expect to recognize revenue of approximately 45%, 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. BUSINESS ACQUISITION
On July 3, 2017, we closed the Transactions to combine GE O&G and Baker Hughes. The Transactions were executed using a partnership structure, pursuant to which GE O&G and Baker Hughes each contributed their operating assets to the Company. The fair value of the consideration exchanged was $24,798 million.
The tables below present the fair value of assets acquired and liabilities assumed and the associated fair value of the noncontrolling interest related to the acquired net assets of Baker Hughes. The final determination of the fair value of assets and liabilities was concluded in the second quarter of 2018.
Identifiable assets acquired and liabilities assumed
Fair value at July 3, 2017
Assets
 
Cash and equivalents
$
4,133

Current receivables
2,342

Inventories
1,712

Property, plant and equipment
4,514

Intangible assets (1)
4,005

Deferred income taxes (2)
30

All other assets
1,335

Liabilities
 
Accounts payable
(1,213
)
Borrowings
(3,370
)
Liabilities for pension and other postretirement benefits
(654
)
All other liabilities
(1,670
)
Total identifiable net assets
$
11,164

Noncontrolling interest associated with net assets acquired
(35
)
Goodwill (3)
13,669

Total purchase consideration
$
24,798

(1) 
Intangible assets, as provided in the table below, are recorded at fair value, as determined by management based on available information. The estimated useful lives for intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 12


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

We consider the Baker Hughes trade name to be an indefinite life intangible asset, which will not be amortized and will be subject to an annual impairment test.
 
Fair Value
Estimated Weighted
Average Life (Years)
Trade name - Baker Hughes
$
2,100

Indefinite life
Customer relationships
1,240

15
Patents and technology
465

10
In-process research and development
70

Indefinite life
Capitalized software
64

2
Trade names - other
45

10
Favorable lease contracts & others
21

10
Total
$
4,005

 
(2) 
Includes approximately $83 million of net deferred tax liabilities related to the fair value of intangible assets included in the purchase consideration and approximately $113 million of other net deferred tax assets, including non-U.S. loss carryforwards net of valuation allowances partially offset by liabilities for unrecognized benefits.
(3) 
Goodwill represents the excess of the total purchase consideration over fair value of the net assets recognized and represents the future economic benefits that we believe will result from combining the operations of GE O&G and Baker Hughes, including expected future synergies and operating efficiencies. Goodwill resulting from the Transactions has been primarily allocated to the Oilfield Services segment, of which $67 million is deductible for tax purposes. See "Note 7. Goodwill and Other Intangible Assets" for allocation of goodwill to all the segments.

During the six months ended June 30, 2018, the Company made measurement period adjustments to reflect facts and circumstances in existence as of the acquisition date. These adjustments resulted in an increase in goodwill from December 31, 2017 of $891 million primarily due to a reduction in the fair value of property, plant and equipment of $362 million, equity method investments of $228 million, intangible assets of $123 million and an increase in other liabilities of $314 million primarily related to uncertain tax positions, warranty, and other sundry liabilities. As a result of the decrease in property, plant and equipment and intangible assets during the six months ended June 30, 2018, we recorded a cumulative decrease to depreciation and amortization expense of $33 million.  We reclassified certain balances to conform to our current presentation.
INCOME TAXES
BHGE LLC is treated as a partnership for U.S. federal income tax purposes. As such, we are is not subject to U.S. federal income tax under current U.S. tax laws. BHGE LLC's foreign subsidiaries, however, have incurred current and deferred foreign income taxes. Our members are each required to take into account for U.S. federal income tax purposes their distributive share of the items of income, gain, loss and deduction, which generally includes our U.S. operations. BHGE and GE are each taxed on their distributive share of income and gain, whether or not a corresponding amount of cash or other property is distributed to them. For assets held indirectly by us through subsidiaries, the taxes attributable to those subsidiaries will be reflected in our condensed consolidated and combined financial statements.
MERGER AND RELATED COSTS
Acquisition costs of $17 million and $159 million, during the three months ended September 30, 2018 and 2017, respectively, and $113 million and $310 million during the nine months ended September 30, 2018 and 2017, respectively, were expensed as incurred and were reported as merger and related costs. Such costs include professional fees of advisors and integration and synergy costs related to the combination of Baker Hughes and GE O&G.
UNAUDITED PRO FORMA INFORMATION
The following unaudited pro forma information has been presented as if the Transactions occurred on January 1, 2016. This information has been prepared by combining the historical results of GE O&G and historical results of

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 13


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

Baker Hughes. The unaudited pro forma combined financial data for all periods presented were adjusted to give effect to pro forma events that 1) are directly attributable to the Transactions, 2) factually supportable, and 3) expected to have a continuing impact on the consolidated results of operations. The adjustments are based on information available to the Company at this time. Accordingly, the adjustments are subject to change and the impact of such changes may be material. The unaudited pro forma results do not include any incremental cost savings that may result from the integration.
The unaudited combined pro forma information is for informational purposes only and is not necessarily indicative of what the combined company's results actually would have been had the acquisition been completed as of the beginning of the periods as indicated. In addition, the unaudited pro forma information does not purport to project the future results of the combined company.

Significant adjustments to the pro forma information below include recognition of non-recurring direct incremental acquisition costs in 2016 and exclusion of those costs from all other periods presented; amortization associated with an estimate of the acquired intangible assets and reduction of interest expense for fair value adjustments to debt.
 
Three Months Ended September 30, 2017
Nine Months Ended September 30, 2017
Revenue
$
5,301

$
16,042

Net loss
(200
)
(471
)
Net loss attributable to the Company
(202
)
(475
)
NOTE 4. BUSINESS HELD FOR SALE
On July 18, 2018, we announced the agreement to sell our Natural Gas Solutions (NGS) business for a sales price of $375 million. NGS is part of our Turbomachinery & Process Solutions (TPS) segment and provides commercial and industrial products such as gas meters, chemical injection pumps, pipeline repair products and electric actuators. As of September 30, 2018, the disposal group met the criteria to be classified as held for sale and was reported at its carrying amount which is lower than its fair value less costs to sell. The transactions closed during the first week of October 2018. The gain on sale will be recorded in the fourth quarter of 2018 after allocation of relevant foreign currency translation adjustments and goodwill related to this business.
The following table presents information related to the assets and liabilities of the NGS business that was classified as held for sale and reported in 'all other current assets' and 'all other current liabilities' in our condensed consolidated and combined statement of financial position as of September 30, 2018:
Assets and liabilities of business held for sale
Carrying value at September 30, 2018
Assets
 
Current receivables
$
26

Inventories
27

Property, plant and equipment
29

Intangible assets
42

All other assets
1

Total assets held for sale
$
125

 
 
Liabilities
 
Accounts payable
$
12

All other liabilities
10

Total liabilities held for sale
$
21

 
 
Total net assets held for sale
$
104


                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 14


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

NOTE 5. CURRENT RECEIVABLES
Current receivables are comprised of the following:
 
September 30, 2018
December 31, 2017
Customer receivables
$
4,789

$
4,700

Related parties
804

914

Other
674

844

Total current receivables
6,267

6,458

Less: Allowance for doubtful accounts
(329
)
(330
)
Total current receivables, net
$
5,938

$
6,128

Customer receivables are recorded at the invoiced amount. Related parties primarily consists of amounts owed to us by GE. The "Other" category primarily consists of advance payments to suppliers, indirect taxes and other tax receivables.
NOTE 6. INVENTORIES
Inventories, net of reserves of $455 million and $360 million as of September 30, 2018 and December 31, 2017, respectively, are comprised of the following:
 
September 30, 2018
December 31, 2017
Finished goods
$
2,626

$
2,577

Work in process and raw material
2,055

1,930

Total inventories, net
$
4,681

$
4,507

We recorded inventory impairments of $12 million in each of the three months ended September 30, 2018 and 2017, and $88 million and $31 million during the nine months ended September 30, 2018 and 2017, respectively, as a result of certain restructuring activities initiated by the Company. Charges for inventory impairments are reported in the "Cost of goods sold" caption of the condensed consolidated and combined statements of income (loss).

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 15


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

NOTE 7. 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, 2016, gross
$
2,779

$
3,852

$
1,814

$
1,989

$
10,434

Accumulated impairment at December 31, 2016
(2,633
)
(867
)
—

(254
)
(3,754
)
Balance at December 31, 2016
146

2,985

1,814

1,735

6,680

Acquisition (1)
12,778

—

—

—

12,778

Currency exchange and others
8

49

92

47

196

Balance at December 31, 2017
12,932

3,034

1,906

1,782

19,654

Purchase accounting adjustments (1)
(174
)
242

394

429

891

Currency exchange and others
2

(16
)
(24
)
(11
)
(49
)
Balance at September 30, 2018
$
12,760

$
3,260

$
2,276

$
2,200

$
20,496

(1) 
Includes goodwill associated with the acquisition of Baker Hughes. The final determination of fair value of the assets and liabilities and the related goodwill associated with the acquisition of Baker Hughes was concluded in the second quarter of 2018. Of the total goodwill of $13,669 million resulting from the acquisition of Baker Hughes, $12,604 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 of each year using data as of July 1 of that year, which would include consideration of any segment realignment. The impairment test consists of two steps: in step one, the carrying value of the reporting unit is compared with its fair value; in step two, which is applied only when the carrying value is more than its fair value, the amount of goodwill impairment, if any, is derived by deducting the fair value of the reporting unit's assets and liabilities from the fair value of its equity, and comparing that amount with the carrying amount of goodwill. We determined fair values for each of the reporting units using a combination of the market approach and the income approach. We assessed the valuation methodologies based upon the relevance and available data and have weighted the results appropriately.
Valuations using the market approach were derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses was based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services. A market approach is limited to reporting units for which there are publicly traded companies that have the characteristics similar to our businesses.
Under the income approach, fair value was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We used our internal forecasts to estimate future cash flows and included an estimate of long-term future growth rates based on our most recent views of the long-term outlook for each business. Actual results may differ from those assumed in our forecasts. We derived our discount rates using a capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the cost of equity financing. We used discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. Discount rates used in our reporting unit valuations ranged from 10% to 11.5%. Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. It is reasonably possible that the judgments and estimates described above could change in future periods.
We performed our annual impairment test of goodwill as of July 1, 2018 for all four of our reporting units.  The step one impairment test was performed considering macroeconomic and industry conditions, overall financial

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 16


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

performance of the reporting unit and long-term forecasts, among other factors, all of which require considerable judgment. Based on the results of our step one testing, the fair values of each of the four reporting units exceeded their carrying values; therefore, the second step of the impairment test was not required to be performed for any of our reporting units and no goodwill impairment was recognized. 
As of September 30, 2018, we believe that the goodwill is recoverable for all four reporting units, however, there can be no assurances that the goodwill will not be impaired in future periods.
OTHER INTANGIBLE ASSETS
Intangible assets are comprised of the following:
 
September 30, 2018
December 31, 2017
 
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
Accumulated
Amortization
Net
Technology
$
1,115

$
(517
)
$
598

$
1,177

$
(440
)
$
737

Customer relationships
3,120

(922
)
2,198

3,202

(819
)
2,383

Capitalized software
1,123

(800
)
323

1,130

(697
)
433

Trade names and trademarks
702

(225
)
477

757

(159
)
598

Other
14

(1
)
13

10

—

10

Finite-lived intangible assets
6,074

(2,465
)
3,609

6,276

(2,115
)
4,161

Indefinite-lived intangible assets (1)
2,222

—

2,222

2,197

—

2,197

Total intangible assets
$
8,296

$
(2,465
)
$
5,831

$
8,473

$
(2,115
)
$
6,358

(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 September 30, 2018 and 2017 was $112 million and $152 million, respectively, and $352 million and $301 million, for the nine months ended September 30, 2018 and 2017, respectively. In addition, we incurred $11 million and $80 million of accelerated amortization during the three and nine months ended September 30, 2018, respectively, primarily related to trade names and technology that we ceased to use during the nine months of 2018 as a result of the combination of Baker Hughes and GE O&G.
Estimated amortization expense for the remainder of 2018 and each of the subsequent five fiscal years is expected to be as follows:
Year
Estimated Amortization Expense
Remainder of 2018
$
89

2019
354

2020
316

2021
272

2022
233

2023
215


                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 17


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

NOTE 8. 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:
 
September 30, 2018
December 31, 2017
Long-term product service agreements
$
608

$
589

Long-term equipment contract revenue (1)
1,127

1,095

Contract assets (total revenue in excess of billings) (2)
1,735

1,684

Deferred inventory costs (3) 
251

360

Non-recurring engineering costs
15

—

Contract and other deferred assets
$
2,001

$
2,044

(1) 
Reflects revenue earned in excess of billings on our long-term contracts to construct technically complex equipment.
(2) 
Contract assets (total revenue in excess of billings) were $1,233 million as of January 1, 2017.
(3) 
Deferred inventory costs were $276 million as of January 1, 2017, 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 September 30, 2018 and 2017 from performance obligations satisfied (or partially satisfied) in previous periods related to our long-term service agreements was $3 million and $10 million, respectively, and $25 million and $50 million during the nine months ended September 30, 2018 and 2017, 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 9. 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:
 
September 30, 2018
December 31, 2017
Progress collections
$
1,433

$
1,456

Deferred income
154

319

Progress collections and deferred income (contract liabilities) (1)
$
1,587

$
1,775

(1) 
Progress collections and deferred income (contract liabilities) were $2,038 million at January 1, 2017.
Revenue recognized during the three months ended September 30, 2018 and 2017 that was included in the contract liabilities at the beginning of the period was $281 million and $254 million, respectively, and $1,287 million and $1,289 million, during the nine months ended September 30, 2018 and 2017, respectively.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 18


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

NOTE 10. BORROWINGS
Short-term and long-term borrowings are comprised of the following:
 
September 30, 2018
December 31, 2017
Short-term borrowings
 
 
Short-term bank borrowings
$
20

$
171

Current portion of long-term borrowings
—

639

Short-term borrowings from GE
936

1,124

Other borrowings
44

103

Total short-term borrowings
$
1,000

$
2,037

 
 
 
Long-term borrowings
 
 
3.2% Senior Notes due August 2021
$
524

$
526

   2.773% Senior Notes due December 2022
1,245

1,244

8.55% Debentures due June 2024
132

135

   3.337% Senior Notes due December 2027
1,342

1,342

6.875% Notes due January 2029
295

308

5.125% Notes due September 2040
1,307

1,311

4.08% Senior Notes due December 2047
1,336

1,337

Capital leases
107

87

Other long-term borrowings
5

22

Total long-term borrowings
6,293

6,312

Total borrowings
$
7,293

$
8,349

We have a five-year $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. During the nine months ended September 30, 2018, there were no borrowings under the 2017 Credit Agreement.

We have 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 September 30, 2018, we had 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 us, on our registered debt securities.  This co-obligor is a 100%-owned finance subsidiary of us 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 us in a private placement and subsequently registered in January 2018.
The estimated fair value of total borrowings at September 30, 2018 and December 31, 2017 was $6,983 million and $8,466 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 LLC 2018 Third Quarter FORM 10-Q | 19


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

NOTE 11. EMPLOYEE BENEFIT PLANS
Certain of our U.S. employees are covered under various U.S. GE employee benefit plans, including GE's retirement plans (pension, retiree health and life insurance, and savings benefit 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 $46 million and $35 million in the three months ended September 30, 2018 and 2017, respectively, and $126 million and $106 million in the nine months ended September 30, 2018 and 2017, respectively.
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 seven 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 and nine months ended September 30, 2018 and 2017:

Three Months Ended September 30,
Nine Months Ended September 30,

2018
2017
2018
2017
Service cost
$
5

$
16

$
15

$
24

Interest cost
18

18

54

32

Expected return on plan assets
(30
)
(31
)
(90
)
(51
)
Amortization of net actuarial loss
2

4

6

9

Net periodic cost (benefit)
$
(5
)
$
7

$
(15
)
$
14


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 and combined statements of income (loss).

NOTE 12. INCOME TAXES
We are treated as a partnership for U.S. federal income tax purposes. As such, except for certain U.S. corporations owned by the Company, we are not subject to U.S. federal income tax under current U.S. tax laws. Our members are each required to take into account for U.S. federal income tax purposes their distributive share of our items of income, gain, loss and deduction, which generally includes the U.S. operations of both Baker Hughes and GE O&G. BHGE and GE are each taxed on their distributive share of income and gain, whether or not a corresponding amount of cash or other property is distributed to them. For assets held indirectly by us through subsidiaries, including both foreign and U.S., the taxes attributable to those subsidiaries are reflected in our condensed consolidated and combined financial statements.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (U.S. tax reform) that lowers the statutory tax rate on U.S. earnings, taxes historic foreign earnings previously deferred from U.S. taxation at a reduced rate of tax (transition tax), establishes a territorial tax system and enacts new taxes associated with global operations. The transition tax associated with our non-U.S. operations will be borne by our members. The impact of U.S. tax reform was recorded on a provisional basis as the legislation provides for additional guidance to be issued by the U.S. Department of the Treasury on several provisions including the computation of the transition tax which could impact the calculation of the transition tax charge and the revaluation of deferred taxes. In addition, analysis performed and conclusions reached as part of the tax return filing process and additional guidance on accounting for tax reform could affect the provisional amount.
Additionally, as part of U.S. tax reform, the U.S. has enacted a tax on "base eroding" payments from the U.S. and a minimum tax on foreign earnings (global intangible low-taxed income) that would be borne by our members.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 20


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

Due to the fact certain aspects of the new law and the effect on our operations are uncertain and the accounting rules associated with this provision have not been resolved, our members have not made a provisional accrual for the deferred tax aspects of this provision and have not yet made an accounting policy election on the deferred tax treatment of this tax.
For the quarter ended September 30, 2018, income tax expense was $108 million compared to a tax expense of $117 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 due to $82 million related to losses with no tax benefit due to valuation allowances. Since we are a partnership for U.S. federal tax purposes, any tax benefits associated with U.S. losses are recognized by our members and not reflected in our tax expense.
For the nine months ended September 30, 2018, income tax expense was $208 million compared to a tax expense of $115 million for the nine months ended September 30, 2017. The difference between the U.S. statutory tax rate of 21% and the current effective tax rate is primarily due to $168 million related to losses with no tax benefit due to valuation allowances and $22 million of withholding taxes in certain jurisdictions. Since we are a partnership for U.S. federal tax purposes, any tax benefits associated with U.S. losses are recognized by our members and not reflected in our tax expense. The first six months of the prior year period reflects 100% of the taxes associated with U.S. and non-U.S. earnings of the GE O&G business.
NOTE 13. MEMBERS' EQUITY
COMMON UNITS
The BHGE LLC Agreement provides that initially there is one class of common units, which are currently held by BHGE, indirectly through EHHC and CFC Holdings, LLC (CFC Holdings), and by GE and certain indirectly wholly-owned subsidiaries of GE. If BHGE issues a share of Class A common stock, including in connection with an equity incentive or similar plan, we will also issue a corresponding common unit to BHGE or one of its direct subsidiaries. For the three and nine months ended September 30, 2018, we issued 530 thousand and 1,454 thousand, respectively, of common units to BHGE in connection with the issuance of Class A common stock by BHGE. As of September 30, 2018, GE owns approximately 62.5% of our common units and BHGE owns approximately 37.5% of the common units.
The following table presents the changes in the number of common units outstanding (in thousands):
 
Common Units Held by BHGE
Common Units Held by GE
Balance at December 31, 2017
422,208

706,985

Issue of units to BHGE under equity incentive plan
1,454

—

Repurchase of common units (1)
(11,501
)
(19,241
)
Balance at September 30, 2018
412,161

687,743

(1)
On November 2, 2017, BHGE's board of directors authorized us to repurchase up to $3 billion of our common units from BHGE and GE. During the nine months ended September 30, 2018, we repurchased and canceled 30,742,152 units for a total of $1 billion.  We did not repurchase any common units during the three months ended September 30, 2018. At September 30, 2018, we had authorization remaining to repurchase up to approximately $1.5 billion of common units from BHGE and GE.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 21


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

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, 2017
$
1

$
(1,824
)
$
2

$
(60
)
$
(1,881
)
Other comprehensive income (loss) before reclassifications
(2
)
(312
)
(1
)
5

(310
)
Amounts reclassified from accumulated other comprehensive income (loss)
—

—

—

—

—

Deferred taxes
(1
)
—

—

(2
)
(3
)
Other comprehensive income (loss)
(3
)
(312
)
(1
)
3

(313
)
Less: Other comprehensive loss attributable to noncontrolling interests
—

(1
)
—

—

(1
)
Balance at September 30, 2018
$
(2
)
$
(2,135
)
$
1

$
(57
)
$
(2,193
)

 
Investment Securities
Foreign Currency Translation Adjustments
Cash Flow Hedges
Benefit Plans
Accumulated Other Comprehensive Loss
Balance at December 31, 2016
$
—

$
(1,795
)
$
(10
)
$
(83
)
$
(1,888
)
Other comprehensive income (loss) before reclassifications
40

202

12

(11
)
243

Amounts reclassified from accumulated other comprehensive income (loss)
(39
)
—

9

(1
)
(31
)
Deferred taxes
1

(10
)
(4
)
6

(7
)
Other comprehensive income (loss)
2

192

17

(6
)
205

Less: Other comprehensive income attributable to noncontrolling interests
1

1

—

2

4

Less: Other adjustments
—

—

—

13

13

Balance at September 30, 2017
$
1

$
(1,604
)
$
7

$
(104
)
$
(1,700
)
The amounts reclassified from accumulated other comprehensive loss during the nine months ended September 30, 2018 and 2017 represent realized gains on investment securities, foreign exchange contracts on our cash flow hedges (see "Note 14. Financial Instruments" for additional details) and amortization of net actuarial gain (loss) and prior service credit, which are included in the computation of net periodic pension cost (see "Note 11. Employee Benefit Plans" for additional details). These reclassifications are recorded across the various cost and expense line items within the condensed consolidated and combined statements of income (loss).

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 22


Baker Hughes, a GE company, LLC
Notes to Unaudited Condensed Consolidated and Combined 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.
 
September 30, 2018
December 31, 2017
 
Level 1
Level 2
Level 3
Net Balance
Level 1
Level 2
Level 3
Net Balance
Assets
 

 

 

 
 
 
 
 
Derivatives
$
—

$
72

$
—

$
72

$
—

$
150

$
—

$
150

   Investment securities
63

—

296

359

81

8

304

393

Total assets
63

72

296

431

81

158

304

543

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Derivatives
—

(77
)
—

(77
)
—

(95
)
—

(95
)
Total liabilities
$
—

$
(77
)
$
—

$
(77
)
$
—

$
(95
)
$
—

$
(95
)
There were no transfers between Level 1, 2 and 3 during the nine months ended September 30, 2018.
The following table provides a reconciliation of recurring Level 3 fair value measurements for investment securities:
Balance at December 31, 2017
$
304

Purchases
47

Proceeds at maturity
(55
)
Balance at September 30, 2018
$
296

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 and combined statement of income (loss) on account of any Level 3 instrument still held at the reporting date. At September 30, 2018 and December 31, 2017, we held $156 million and $127 million, respectively, of these investment securities on behalf of GE.
 
September 30, 2018
December 31, 2017
 
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 (a)
$
296

$
—

$
—

$
296

$
310

$
2

$
—

$
312

  Equity securities (b)
63

—

—

63

81

—

—

81

Total
$
359

$
—

$
—

$
359

$
391

$
2

$
—

$
393

(a)    All of our non-U.S. debt securities are classified as available for sale instruments and mature within three years.
(b)    These securities have readily determinable fair values and subsequent to the adoption of ASU 2016-01 on January 1, 2018, changes in fair value are recorded to earnings. Gross unrealized gains (losses) recorded to earnings related to these securities were $(9) million and $41 million for the nine months ended September 30, 2018 and 2017, respectively.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Our financial instruments include cash, cash equivalents and restricted cash, current receivables, investments,

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 23


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

accounts payable, short and long-term debt, and derivative financial instruments. Except for long-term debt, the estimated fair value of these financial instruments at September 30, 2018 and December 31, 2017 approximates their carrying value as reflected in our condensed consolidated and combined financial statements. For further information on the fair value of our debt, see "Note 10. Borrowings."
DERIVATIVES AND HEDGING
We use derivatives to manage our risks and do not use derivatives for speculation.
The table below summarizes the fair value of all derivatives, including hedging instruments and embedded derivatives.
 
September 30, 2018
December 31, 2017
 
Assets
(Liabilities)
Assets
(Liabilities)
Derivatives accounted for as hedges
 
 
 
 
Currency exchange contracts
$
—

$
(2
)
$
6

$
—

 
 
 
 
 
Derivatives not accounted for as hedges
 
 
 
 
Currency exchange contracts
72

(73
)
144

(95
)
Commodity derivatives
—

(2
)
—

—

Total derivatives
$
72

$
(77
)
$
150

$
(95
)
Derivatives are classified in the captions "All other current assets," "All other assets," "All other current liabilities," and "All other liabilities" depending on their respective maturity date.
RISK MANAGEMENT STRATEGY
We buy, manufacture and sell components and products as well as provide services across global markets. These activities expose us to changes in foreign currency exchange rates and commodity prices, which can adversely affect revenues earned and costs of operating our business. When the currency in which we sell equipment differs from the primary currency (known as its functional currency) and the exchange rate fluctuates, it will affect the revenue we earn on the sale. These sales and purchase transactions also create receivables and payables denominated in foreign currencies, along with other monetary assets and liabilities, which expose us to foreign currency gains and losses based on changes in exchange rates. Changes in the price of a raw material that we use in manufacturing can affect the cost of manufacturing. We use derivatives to mitigate or eliminate these exposures.
FORMS OF HEDGING
Cash Flow Hedges
We use cash flow hedging primarily to reduce or eliminate the effects of foreign exchange rate changes on purchase and sale contracts. Accordingly, the vast majority of our derivative activity in this category consists of currency exchange contracts. We also use commodity derivatives to reduce or eliminate price risk on raw materials purchased for use in manufacturing.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 24


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

Economic Hedges
These derivatives are not designated as hedges from an accounting standpoint (and therefore we do not apply hedge accounting to the relationship) but otherwise serve the same economic purpose as other hedging arrangements. Some economic hedges are used when changes in the carrying amount of the hedged item are already recorded in earnings in the same period as the derivative, making hedge accounting unnecessary. For some other types of economic hedges, changes in the fair value of the derivative are recorded in earnings currently but changes in the value of the forecasted foreign currency cash flows are only recognized in earnings when they occur. As a result, even though the derivative is an effective economic hedge, there is a net effect on earnings in each period due to differences in the timing of earnings recognition between the derivative and the hedged item. These derivatives are marked to fair value through earnings each period.
NOTIONAL AMOUNT OF DERIVATIVES
The notional amount of a derivative is the number of units of the underlying (for example, the notional principal amount of the debt in an interest rate swap). A substantial majority of the outstanding notional amount of $7.2 billion and $10.2 billion at September 30, 2018 and December 31, 2017, respectively, is related to hedges of anticipated sales and purchases in foreign currency, commodity purchases, and contractual terms in contracts that are considered embedded derivatives and for intercompany borrowings in foreign currencies. We generally disclose derivative notional amounts on a gross basis to indicate the total counterparty risk. Where we have gross purchase and sale derivative contracts for a particular currency, we look to execute these contracts with the same counterparty to reduce our exposure. The corresponding net notional amounts were $2.8 billion and $3.3 billion at September 30, 2018 and December 31, 2017, respectively.
The table below provides additional information about how derivatives are reflected in our condensed consolidated and combined financial statements.
Carrying amount related to derivatives
September 30, 2018
December 31, 2017
Derivative assets
$
72

$
150

Derivative liabilities
(77
)
(95
)
Net derivatives
$
(5
)
$
55

EFFECTS OF DERIVATIVES ON EARNINGS
All derivatives are marked to fair value on our condensed consolidated and combined statement of financial position, whether they are designated in a hedging relationship for accounting purposes or are used as economic hedges. As discussed in the previous sections, each type of hedge affects the financial statements differently. In some economic hedges, both the hedged item and the hedging derivative offset in earnings in the same period. In other economic hedges, the hedged item and the hedging derivative offset in earnings in different periods. In cash flow, the effective portion of the hedging derivative is offset in separate components of equity and ineffectiveness is recognized in earnings. The table below summarizes these offsets and the net effect on pre-tax earnings.
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
Cash Flow Hedges
Economic Hedges
Cash Flow Hedges
Economic Hedges
 
2018
2017
2018
2017
2018
2017
2018
2017
Effect on hedging instrument
$
(2
)
$
9

$
(13
)
$
144

$
(1
)
$
12

$
(6
)
$
145

Effect on underlying
2

(9
)
1

(174
)
1

(12
)
(24
)
(174
)
Effect on earnings (1)
$
—

$
—

$
(12
)
$
(30
)
$
—

$
—

$
(30
)
$
(29
)
(1) 
For cash flow hedges, the effect on earnings, if any, is primarily related to ineffectiveness. For economic hedges on forecasted transactions, the effect on earnings is substantially offset by future earnings on economically hedged items.


                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 25


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

Changes in the fair value of cash flow hedges are recorded in a separate component of equity (referred to below as Accumulated Other Comprehensive Income, or AOCI) and are recorded in earnings in the period in which the hedged transaction occurs. The table below summarizes this activity by hedging instrument.
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
Gain (Loss) Recognized in AOCI
Gain (Loss) Reclassified from AOCI to Earnings
Gain (Loss) Recognized in AOCI
Gain (Loss) Reclassified from AOCI to Earnings
 
2018
2017
2018
2017
2018
2017
2018
2017
Currency exchange contracts
$
(2
)
$
9

$
—

$
—

$
(1
)
$
12

$
—

$
(9
)
We expect to transfer $1 million to earnings as an expense in the next 12 months contemporaneously with the earnings effects of the related forecast transactions. At September 30, 2018 and December 31, 2017, the maximum term of derivative instruments that hedge forecast transactions was two-years and three-years, respectively. See "Note 13. Members' Equity" for additional information about reclassification out of accumulated other comprehensive income.
For cash flow hedges, the amount of ineffectiveness in the hedging relationship and amount of the changes in fair value of the derivatives that are not included in the measurement of ineffectiveness were insignificant for each reporting period.
COUNTERPARTY CREDIT RISK
Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our agreements) on an individual counterparty basis.
NOTE 15. SEGMENT INFORMATION
Our operating segments are organized based on the nature of markets and customers. We report our operating results through four operating segments that consists of similar products and services within each segment as described below.
OILFIELD SERVICES (OFS)

OFS provides products and services for onshore and offshore operations across the lifecycle of a well, ranging from drilling, evaluation, completion, production and intervention. Products and services include diamond and tri-cone drill bits, drilling services, including directional drilling technology, measurement while drilling & logging while drilling, downhole completion tools and systems, wellbore intervention tools and services, wireline services, drilling and completions fluids, oilfield and industrial chemicals, pressure pumping, and artificial lift technologies, including electrical submersible pumps.
OILFIELD EQUIPMENT (OFE)

OFE provides a broad portfolio of products and services required to facilitate the safe and reliable flow of hydrocarbons from the subsea wellhead to the surface. Products and services include pressure control equipment and services, subsea production systems and services, drilling equipment, and flexible pipeline systems. OFE designs and manufactures onshore and offshore drilling and production systems and equipment for floating production platforms and provides a full range of services related to onshore and offshore drilling activities.
TURBOMACHINERY & PROCESS SOLUTIONS (TPS)
TPS provides equipment and related services for mechanical-drive, compression and power-generation applications across the oil and gas industry as well as products and services to serve the downstream segments of

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 26


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

the industry including refining, petrochemical, distributed gas, flow and process control and other industrial applications.  The TPS portfolio includes drivers (aero-derivative gas turbines, heavy-duty gas turbines and synchronous and induction electric motors), compressors (centrifugal and axial, direct drive high speed, integrated, subsea compressors, turbo expanders and reciprocating), turn-key solutions (industrial modules and waste heat recovery), pumps, valves, and compressed natural gas (CNG) and small-scale liquefied natural gas (LNG) solutions used primarily for shale oil and gas field development.
DIGITAL SOLUTIONS (DS)
DS provides equipment and services for a wide range of industries, including oil & gas, power generation, aerospace, metals, and transportation. The offerings include sensor-based measurement, non-destructive testing and inspection, turbine, generator and plant controls and condition monitoring, as well as pipeline integrity solutions.
SEGMENT RESULTS
Summarized financial information is shown in the following tables. Consistent accounting policies have been applied by all segments within the Company, for all reporting periods. The results of operations for the nine months ended September 30, 2018 may not be comparable to the results of operations for the nine months ended September 30, 2017 as it excludes the results of Baker Hughes prior to the date of the business combination.
 
Three Months Ended September 30,
Nine Months Ended September 30,
Segments revenue
2018
2017
2018
2017
Oilfield Services
$
2,993

$
2,661

$
8,554

$
3,101

Oilfield Equipment
631

613

1,912

2,011

Turbomachinery & Process Solutions
1,389

1,414

4,233

4,644

Digital Solutions
653

614

1,913

1,624

Total
$
5,665

$
5,301

$
16,612

$
11,380


The performance of our operating segments is evaluated based on segment operating income (loss), which is defined as income (loss) before income taxes and equity in loss of affiliate and before the following: net interest expense, net other non operating income (loss), corporate expenses, restructuring, impairment and other charges, inventory impairments, merger and related costs and certain gains and losses not allocated to the operating segments.
 
Three Months Ended September 30,
Nine Months Ended September 30,
Segment income (loss) before income taxes
2018
2017
2018
2017
Oilfield Services
$
231

$
88

$
561

$
(35
)
Oilfield Equipment
6

(41
)
(12
)
26

Turbomachinery & Process Solutions
132

134

364

508

Digital Solutions
106

77

275

240

Total segment
475

258

1,189

739

Corporate
(98
)
(89
)
(294
)
(279
)
Inventory impairment (1)
(12
)
(12
)
(88
)
(31
)
Restructuring, impairment and other
(66
)
(191
)
(374
)
(292
)
Merger and related costs
(17
)
(159
)
(113
)
(310
)
Other non operating income, net
6

4

51

62

Interest expense, net
(55
)
(41
)
(164
)
(75
)
Total
$
233

$
(230
)
$
206

$
(186
)

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 27


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

(1)
Charges for inventory impairments are reported in the "Cost of goods sold" caption of the condensed consolidated and combined statements of income (loss).
 
 
 
NOTE 16. RELATED PARTY TRANSACTIONS
Following the Transactions, GE and its affiliates have provided and continue to provide a variety of services to us.
In connection with the Transactions on July 3, 2017, we entered into various agreements with GE and its affiliates that govern our relationship with GE following the Transactions including an Intercompany Services Agreement pursuant to which GE and its affiliates and the Company provide certain services to each other. GE provides certain administrative services, GE proprietary technology and use of certain GE trademarks in consideration for a payment of $55 million per year. Costs of $14 million and $42 million, respectively, related to the Intercompany Services Agreement were incurred during the three and nine months ended September 30, 2018. GE may also provide us with certain additional administrative services under the Intercompany Services Agreement, not included as consideration for the $55 million per year payment, and the fees for such services are based on actual usage of such services and historical GE intercompany pricing. In addition, we provide GE and its affiliates with confidential access to certain of our proprietary technology and related developments and enhancements thereto related to GE's operations, products or service offerings.
Prior to the Transactions, GE and its affiliates provided a variety of services and funding to us. The cost of these services was either (a) recognized through our allocated portion of GE's corporate overhead; or (b) billed directly to us. Costs of $76 million for the nine months ended September 30, 2017 were recorded in our condensed consolidated and combined statement of income (loss) in respect of services provided by GE and its affiliates prior to the close of the Transactions.
We sold $74 million and $133 million of products and services to GE and its affiliates during the three months ended September 30, 2018 and 2017, respectively, and $258 million and $507 million, during the nine months ended September 30, 2018 and 2017, respectively. Purchases from GE and its affiliates were $347 million and $345 million during the three months ended September 30, 2018 and 2017, respectively, and $1,273 million and $1,026 million during the nine months ended September 30, 2018 and 2017, respectively.
EMPLOYEE BENEFITS
Certain of our employees are covered under various GE sponsored employee benefit plans, including GE's retirement plans (pension, retiree health and life insurance, and savings benefit plans) and active health and life insurance benefit plans. Further details are provided in "Note 11. Employee Benefit Plans."
RELATED PARTY BALANCES
In connection with the Transactions, we were required to repay any cash in excess of $100 million, net of any third-party debt in GE O&G, to GE. We continue to hold this cash on behalf of GE as such cash cannot be released, transferred or otherwise converted into a non-restricted market currency due to the lack of market liquidity, capital controls or similar monetary or exchange limitations by a Government entity of the jurisdiction in which such cash is situated. Accordingly, on July 3, 2017, we executed a promissory note with GE.  There is no maturity date on the promissory note, but we remain obligated to repay GE such excess cash together with any income or loss we may incur on it, therefore, this obligation is reflected as short-term borrowings. As of September 30, 2018, of the amount due to GE of $936 million, $780 million was held in the form of cash and $156 million was held in the form of investment securities. A corresponding liability is reported in short-term borrowings in the condensed consolidated and combined statements of financial position.
Additionally, the Company has $508 million and $575 million of accounts payable at September 30, 2018 and December 31, 2017, respectively, for services provided by GE in the ordinary course of business. The company has $127 million of current receivable at September 30, 2018 from BHGE.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 28


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

TRADE PAYABLES ACCELERATED PAYMENT PROGRAM
Our North American operations participate in accounts payable programs with GE Capital. Invoices are settled with vendors per our payment terms to obtain cash discounts. GE Capital provides funding for the period from the date at which an invoice is eligible for a cash discount through the final termination date for invoice settlement. Our liability associated with the funded participation in the accounts payable programs, which is presented as accounts payable within the condensed consolidated and combined statements of financial position, was $467 million and $293 million as of September 30, 2018 and December 31, 2017, respectively.
OTHER
Prior to the Transactions, GE provided guarantees, letters of credit, and other support arrangements on our behalf. We provide guarantees to GE Capital on behalf of some customers who have entered into financing arrangements with GE Capital.
INCOME TAXES
At closing, BHGE, GE and BHGE LLC entered into a Tax Matters Agreement. The Tax Matters Agreement governs the administration and allocation between the parties of tax liabilities and benefits arising prior to, as a result of, and subsequent to the Transactions, including certain restructuring transactions in connection therewith, and the respective rights, responsibilities and obligations of GE and BHGE, with respect to various other tax matters. GE is responsible for certain taxes related to the formation of the transaction undertaken by GE and Baker Hughes and their respective subsidiaries. GE has assumed approximately $33 million of tax obligations of Baker Hughes related to the formation of the transaction.
Following the closing of the Transactions, BHGE or BHGE LLC (or their respective subsidiaries) may be included in group tax returns with GE. To the extent included in such group tax returns, (i) BHGE or BHGE LLC is required to make tax sharing payments to GE in an amount intended to approximate the amount that such entity would have paid if it had not been included in such group tax returns and had filed separate tax returns, and (ii) GE is required to pay BHGE or BHGE LLC to the extent such separate tax returns include net operating losses that are used to reduce taxes payable by GE with respect to the applicable group tax return.
The Tax Matters Agreement also provides for the sharing of certain tax benefits (i) arising from the Transactions, including restructuring transactions, and (ii) resulting from allocations of tax items by BHGE LLC. GE is entitled to 100% of these tax benefits to the extent that GE has borne certain taxes related to the formation of the transaction. Thereafter, these tax benefits will be shared by GE and BHGE in accordance with their economic ownership of BHGE LLC, which will initially be approximately 62.5% and approximately 37.5%, respectively. The sharing of tax benefits generally is expected to result in cash payments by BHGE LLC to its members. Any such cash payments may be subject to adjustment based on certain subsequent events, including tax audits or other determinations as to the availability of the tax benefits with respect to which such cash payments were previously made.
NOTE 17. COMMITMENTS AND CONTINGENCIES
LITIGATION
We are subject to a number of lawsuits and claims arising out of the conduct of our business. The ability to predict the ultimate outcome of such matters involves judgments, estimates and inherent uncertainties. We record a liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, including accruals for self-insured losses which are calculated based on historical claim data, specific loss development factors and other information.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 29


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

A range of total possible losses for all litigation matters cannot be reasonably estimated. Based on a consideration of all relevant facts and circumstances, we do not expect the ultimate outcome of currently pending lawsuits or claims against us, other than those discussed below, will have a material adverse effect on our financial position, results of operations or cash flows, however, there can be no assurance as to the ultimate outcome of these matters.
With respect to the litigation matters below, if there was an adverse outcome individually or collectively, there could be a material impact on our business, financial condition and results of operations expected for the year. These litigation matters are subject to inherent uncertainties and management's view of these matters may change in the future. Therefore, there can be no assurance as to the ultimate outcome of these matters.
During 2014, we received notification from a customer related to a possible equipment failure in a natural gas storage system in Northern Germany, which includes certain of our products. The customer initiated arbitral proceedings against us on June 19, 2015, under the rules of the German Institute of Arbitration e.V. (DIS). On August 3, 2016, the customer amended its claims and alleged damages of €202 million plus interest at an annual rate of prime + 5%. Hearings before the arbitration panel were held January 16, 2017 through January 23, 2017, and March 20, 2017 through March 21, 2017. In addition, on September 21, 2015, TRIUVA Kapitalverwaltungsgesellschaft mbH filed a lawsuit in the United States District Court for the Southern District of Texas, Houston Division against the Company and Baker Hughes Oilfield Operations, Inc. alleging that the plaintiff is the owner of gas storage caverns in Etzel, Germany in which the Company provided certain equipment in connection with the development of the gas storage caverns. The plaintiff further alleges that the Company supplied equipment that was either defectively designed or failed to warn of risks that the equipment posed, and that these alleged defects caused damage to the plaintiff's property. The plaintiff seeks recovery of alleged compensatory and punitive damages of an unspecified amount, in addition to reasonable attorneys' fees, court costs and pre-judgment and post-judgment interest. The allegations in this lawsuit are related to the claims made in the June 19, 2015 German arbitration referenced above. On June 7, 2018, the DIS arbitration panel issued a confidential Arbitration Ruling which addressed all claims asserted by the customer. The estimated financial impact of the Arbitration Ruling has been reflected in the Company's financial statements and did not have a material impact. The Company is vigorously contesting the claims made by TRIUVA in the Houston Federal Court. At this time, we are not able to predict the outcome of the claims asserted in the Houston Federal Court.
On July 31, 2015, Rapid Completions LLC filed a lawsuit in federal court in the Eastern District of Texas against Baker Hughes Incorporated, Baker Hughes Oilfield Operations, Inc., and others claiming infringement of U.S. Patent Nos. 6,907,936; 7,134,505; 7,543,634; 7,861,774; and 8,657,009.  On August 6, 2015, Rapid Completions amended its complaint to allege infringement of U.S. Patent No. 9,074,451.  On September 17, 2015, Rapid Completions and Packers Plus Energy Services Inc. sued Baker Hughes Canada Company in the Canada Federal Court on the related Canadian patent 2,412,072. On April 1, 2016, Rapid Completions removed U.S. Patent No. 6,907,936 from its claims in the lawsuit. On April 5, 2016, Rapid Completions filed a second lawsuit in federal court in the Eastern District of Texas against Baker Hughes Incorporated, Baker Hughes Oilfield Operations, Inc. and others claiming infringement of U.S. Patent No. 9,303,501. These patents relate primarily to certain specific downhole completions equipment. The plaintiff has requested a permanent injunction against further alleged infringement, damages in an unspecified amount, supplemental and enhanced damages, and additional relief such as attorney's fees and costs.  During August and September 2016, the United States Patent and Trademark Office (USPTO) agreed to institute an inter-partes review of U.S. Patent Nos 7,861,774; 7,134,505; 7,543,634; 6,907,936; 8,657,009; and 9,074,451. On August 29, 2017, the USPTO issued its final written decisions in the inter-partes reviews of U.S. Patent Nos. 8,657,009 and 9,074,451 finding that all claims of those patents were unpatentable. On August 31, 2017, the USPTO issued its final written decision in the inter-partes review of U.S. Patent 6,907,936 - the patent dropped from the lawsuit by the plaintiffs - finding that all claims of this patent were patentable. On October 27, 2017, Rapid Completions filed its notices of appeal of the USPTO’s final written decision in the inter-partes review of U.S. Patent Nos. 8,657,009 and 9,074,451. On September 26, 2018, the USPTO issued its final written decision in the inter-partes review of U.S. Patent No. 7,134,505 finding all of the challenged claims unpatentable.  On September 27, 2018, the USPTO issued its final written decision in the inter-partes review of U.S. Patent No. 7,543,634 finding all of the challenged claims unpatentable. Trial on the validity of asserted claims from Canada patent 2,412,072, was completed March 9, 2017. On December 7, 2017, the Canadian Court issued its judgment finding the patent claims asserted from Canada patent 2,412,072 against Baker Hughes Canada

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 30


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

Company were invalid. On January 5, 2018, Rapid Completions filed its Notice of Appeal of the Canadian Court’s judgment of invalidity. At this time, we are not able to predict the outcome of these claims.
Following consummation of the Transactions, two purported holders of shares of Baker Hughes common stock, representing a total of 1,875,000 shares of common stock of Baker Hughes, filed petitions in the Court of Chancery of the State of Delaware seeking appraisal for their shares pursuant to Section 262 of the Delaware General Corporation Law.  The action is captioned as follows: GKC Strategic Value Master Fund, LP F/K/A GKC Appraisal Rights Master Fund, LP and Walleye Trading LLC v. Baker Hughes Incorporated, Case No. 2017-0769. On July 12, 2018, the parties entered a Confidential Settlement Agreement and Release of all claims asserted by the two shareholders. The Settlement Agreement does not have a material impact on the Company's financial statements.
On February 17, 2017, GE Infrastructure Sensing, Inc. (now known as GE Infrastructure Sensing, LLC) (GEIS), a subsidiary of the Company, was served with a lawsuit filed in the Eastern District of New York by a company named Saniteq LLC claiming compensatory damages totaling $500 million plus punitive damages of an unspecified amount. The complaint is captioned Saniteq LLC v. GE Infrastructure Sensing, Inc., No. 17-cv-771 (E.D.N.Y 2017). The complaint generally alleges that GEIS breached a contract being negotiated between the parties and misappropriated unspecified trade secrets. On September 13, 2018, the District Court entered an Order granting GEIS’ Motion for Summary Judgment dismissing Saniteq LLC’s claims in their entirety as a matter of law.  Saniteq LLC filed a notice of appeal from the District Court’s Judgment. At this time, we are not able to predict the outcome of these claims.
In January 2013, INEOS and Naphtachimie initiated expertise proceedings in Aix-en-Provence, France arising out of a fire at a chemical plant owned by INEOS in Lavera, France, which resulted in a 15-day plant shutdown and destruction of a steam turbine, which was part of a compressor train owned by Naphtachimie. The most recent quantification of the alleged damages is €250 million. Two of the Company's subsidiaries (and 17 other companies) were notified to participate in the proceedings. The proceedings are ongoing, and at this time, there is no indication that the Company's subsidiaries were involved in the incident. Although the outcome of the claims remains uncertain, BHGE's insurer has accepted coverage and is defending the Company in the expertise proceeding.

In late November 2017, staff of the Boston office of the SEC notified GE that they are conducting an investigation of GE’s revenue recognition practices and internal controls over financial reporting related to long-term service agreements. The scope of the SEC’s request may include some BHGE contracts, expected to be mainly in our TPS business. We have provided documents to GE and are cooperating with them in their response to the SEC. At this time, we are not able to predict the outcome of this review.

On July 31, 2018, International Engineering & Construction S.A. (IEC) initiated arbitration proceedings in New York administered by the International Center for Dispute Resolution (ICDR) against the Company and its subsidiaries arising out of a series of sales and service contracts entered between IEC and the Company’s subsidiaries for the sale and installation of LNG plants and related power generation equipment in Nigeria (“Contracts”).   Prior to the filing of the IEC Arbitration, the Company’s subsidiaries made demands for payment due under the Contracts.   On August 15, 2018, the Company’s subsidiaries initiated a separate demand for ICDR arbitration against IEC for claims of additional costs and amounts due under the Contracts.   On October 10, 2018, IEC filed a Petition to Compel Arbitration in the United States District Court for the Southern District of New York against the Company seeking to compel non-signatory BHGE entities to participate in the arbitration filed by IEC. The complaint is captioned International Engineering & Construction S.A. et al. v. Baker Hughes, a GE Company LLC, et al. No. 18-cv-09241 (S.D.N.Y 2018).   IEC alleges breach of contract and other claims against the Company and its subsidiaries and seeks recovery of alleged compensatory damages, in addition to reasonable attorneys' fees, expenses and arbitration costs. IEC alleges that its total damages may exceed $500 million.  The Company intends to vigorously contest the claims made by IEC in the arbitration and litigation proceedings.  At this time, we are not able to predict the outcome of these claims.
We insure against risks arising from our business to the extent deemed prudent by our management and to the extent insurance is available, but no assurance can be given that the nature and amount of that insurance will be sufficient to fully indemnify us against liabilities arising out of pending or future legal proceedings or other claims. Most of our insurance policies contain deductibles or self-insured retentions in amounts we deem prudent and for which we are responsible for payment. In determining the amount of self-insurance, it is our policy to self-insure

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 31


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

those losses that are predictable, measurable and recurring in nature, such as claims for automobile liability, general liability and workers compensation.
PRODUCT WARRANTIES
We provide for estimated product warranty expenses when we sell the related products. Because warranty estimates are forecasts that are based on the best available information, primarily historical claims experience, claims costs may differ from amounts provided. An analysis of changes in the liability for product warranties are as follows:
Balance at December 31, 2017, and 2016, respectively
$
164

$
74

Provisions
26

27

Expenditures
(83
)
(33
)
Other (1)
128

97

Balance at September 30, 2018, and 2017, respectively
$
235

$
165

(1) 
Primarily related to the acquisition of Baker Hughes.
OTHER
In the normal course of business with customers, vendors and others, we have entered into off-balance sheet arrangements, such as surety bonds for performance, letters of credit and other bank issued guarantees, which totaled approximately $3.5 billion at September 30, 2018. It is not practicable to estimate the fair value of these financial instruments. None of the off-balance sheet arrangements either has, or is likely to have, a material effect on our financial position, results of operations or cash flows.
NOTE 18. RESTRUCTURING, IMPAIRMENT AND OTHER
We recorded restructuring, impairment and other charges of $66 million and $191 million during the three months ended September 30, 2018 and 2017, respectively, and $374 million and $292 million during the nine months ended September 30, 2018 and 2017. Details of these charges are discussed below.
RESTRUCTURING AND IMPAIRMENT CHARGES
In the current and prior periods, we approved various restructuring plans globally, mainly to consolidate manufacturing and service facilities, rationalize product lines and rooftops, and reduce headcount across various functions. As a result, we recognized a charge of $49 million and $191 million for the three months ended September 30, 2018 and 2017, respectively, and $242 million and $264 million for the nine months ended September 30, 2018 and 2017, respectively. These restructuring initiatives will generate charges post September 30, 2018, and the related estimated remaining charges are approximately $107 million.
The amount of costs not included in the reported segment results is as follows:
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2018
2017
2018
2017
Oilfield Services
$
20

$
118

$
119

$
141

Oilfield Equipment
8

31

26

41

Turbomachinery & Process Solutions
17

16

56

38

Digital Solutions
2

13

18

27

Corporate
2

13

23

17

Total
$
49

$
191

$
242

$
264


                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 32


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

These costs were primarily related to product line terminations, plant closures and related expenses such as property, plant and equipment impairments, contract terminations and costs of assets' and employees' relocation, employee-related termination benefits, and other incremental costs that were a direct result of the restructuring plans.

Three Months Ended September 30,
Nine Months Ended September 30,

2018
2017
2018
2017
Property, plant & equipment, net
$
18

$
68

$
55

$
80

Employee-related termination expenses
15

87

114

126

Asset relocation costs
7

2

20

7

Environmental remediation costs
—

1

3

8

Contract termination fees
5

16

33

21

Other incremental costs
4

17

17

22

Total
$
49

$
191

$
242

$
264

OTHER CHARGES

Other charges included in "Restructuring, impairment and other" of the condensed consolidated and combined statements of income (loss) were $17 million and nil in the three months ended September 30, 2018 and 2017, respectively, and $132 million and $28 million in the nine months ended September 30, 2018 and 2017, respectively. Other charges primarily include accelerated amortization of $11 million and $80 million for the three and nine months ended September 30, 2018, respectively, related to trade names and technology in our Oilfield Services segment. During the nine months ended September 30, 2018, other charges also includes $25 million related to litigation matters recorded at Corporate and costs of $12 million to exit certain operations that impacted our TPS and OFS segments. During the nine months ended September 30, 2017, other charges include currency devaluation charges of $12 million largely driven by significant currency devaluations in Angola and Nigeria.
NOTE 19. SUBSEQUENT EVENTS

On July 18, 2018, the Company announced the agreement to sell its Natural Gas Solution (NGS) business for a sales price of $375 million.  NGS is part of our TPS segment and provides commercial and industrial products such as gas meters, chemical injection pumps, pipeline repair products and electric actuators. The transactions closed during the first week of October 2018.

On October 8, 2018, the Company and Abu Dhabi National Oil Company (ADNOC) signed a strategic partnership agreement. As part of the agreement, the Company will acquire a five percent stake in ADNOC Drilling for a cash consideration of $500 million. This acquisition is expected to close in the fourth quarter of 2018 subject to customary closing conditions and appropriate regulatory approvals.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 33


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the condensed consolidated and combined financial statements and the related notes included in Item 1 thereto.
EXECUTIVE SUMMARY
On July 3, 2017, we closed the Transactions to combine GE O&G and Baker Hughes, creating a fullstream oilfield technology provider that has a unique mix of integrated oilfield products, services and digital solutions. The Transactions were executed using a partnership structure, pursuant to which GE O&G and Baker Hughes each contributed their operating assets to the Company. GE holds an approximate 62.5% controlling interest in us and former Baker Hughes shareholders hold an approximate 37.5% interest through the ownership of 100% of Class A common stock of BHGE. GE's interest is held through a voting interest of Class B Common Stock in BHGE and its economic interest through a corresponding number of our common units. The results of operations for the Company include the results of Baker Hughes from July 3, 2017 onward, therefore, the results for the nine months ended September 30, 2018 may not be comparable to the results for the nine months ended September, 2017. The majority of the Baker Hughes business operations are included in the Oilfield Services segment. We operate through our four business segments: Oilfield Services (OFS), Oilfield Equipment (OFE), Turbomachinery & Processing Solutions (TPS), and Digital Solutions (DS). As of September 30, 2018, BHGE LLC employs approximately 65,000 employees and operates in more than 120 countries.
In the third quarter of 2018, we generated revenue of $5,665 million, compared to $5,301 million for the third quarter of 2017. The increase in revenue was primarily driven by increased activity in OFS, and to a lesser extent, by DS and OFE, partially offset by declines in TPS. Income before income taxes and equity in loss of affiliate was $233 million for the third quarter of 2018, and included restructuring and impairment charges of $66 million and merger and related costs of $17 million. The restructuring and impairment charges were recorded as a result of our continued actions to adjust our operations and cost structure. For the third quarter of 2017, loss before income taxes and equity in loss of affiliate was $230 million, which also included restructuring and impairment charges of $191 million, and merger and related costs of $159 million.
In June 2018, GE announced their intention for a full separation from BHGE in an orderly fashion over the next 2 to 3 years.
OUTLOOK
Our business is exposed to a number of different macro factors, which influence our expectations and outlook. 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: in the third quarter of 2018, we experienced an increase in the rig count, as compared to the third quarter of 2017. We expect the increased activity in North America to continue to grow for the remainder of 2018. We remain optimistic about the outlook.
•
International onshore activity: we have seen a moderate increase in rig count activity in the third quarter of 2018 and expect this growth to continue for the remainder of the year, at a moderate rate. We have seen signs of improvement with the increase in commodity prices, but due to continued volatility, we remain cautious as to growth expectations.
•
Offshore projects: as commodity prices have stabilized, we have begun to see increasing customer activity on offshore projects and more final investment decisions being made. Subsea tree awards increased in 2017 and through the first three quarters of 2018, and we expect tree awards to increase for the remainder of 2018 and in 2019, though still at levels well below prior 2012 & 2013 peaks. We expect this growth in offshore projects to positively impact orders.
•
Liquefied Natural Gas (LNG) projects: we have seen two final investment decisions for new LNG capacity thus far in 2018 as customers position to fill the projected supply-demand imbalance in the early to middle

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 34


part of the next decade. We continue to view the long-term economics of the LNG industry as positive given our outlook for supply and demand.
•
Refinery, petrochemical and industrial projects: in refining, we believe large, complex refineries should gain advantage in a more competitive, oversupplied landscape in 2018 as the industry globalizes and refiners position to meet local demand and secure export potential. In petrochemicals, we continue to see healthy demand and cost-advantaged supply driving projects forward in 2018. The industrial market continues to grow as outdated infrastructure is replaced, policy changes come into effect and power is decentralized. We continue to see growing demand across these markets into 2019.
We have other segments in our portfolio that are more correlated with different industrial metrics such as our Digital Solutions business, which we expect to grow at or above global Gross Domestic Product (GDP). Overall, we believe our portfolio is uniquely positioned to compete across the value chain, and deliver unique solutions for our customers. We remain optimistic about the long-term economics of the industry, but are continuing to operate with flexibility given our expectations for volatility and changing assumptions in the near term.
In 2016, solar and wind net additions exceeded coal and gas for the first time. This also occurred in 2017.  Governments may change or may not continue incentives for renewable energy additions.  In the long term, renewables' cost decline may accelerate to compete with new-built fossil capacity, however, we do not anticipate any significant impacts to our business in the foreseeable future.
Despite the near-term volatility, the long-term outlook for our industry remains strong. We believe the world’s demand for energy will continue to rise, and the supply of energy will continue to increase in complexity, requiring greater service intensity and more advanced technology from oilfield service companies. As such, we remain focused on delivering innovative cost-efficient solutions that deliver step changes in operating and economic performance for our customers.
BUSINESS ENVIRONMENT
The following discussion and analysis summarizes the significant factors affecting our results of operations, financial condition and liquidity position as of and for the nine months ended September 30, 2018 and 2017, and should be read in conjunction with the condensed consolidated and combined financial statements and related notes of the Company.
We operate in more than 120 countries helping customers find, evaluate, drill, produce, transport and process hydrocarbon resources. Our revenue is predominately generated from the sale of products and services to major, national, and independent oil and natural gas companies worldwide, and is dependent on spending by our customers for oil and natural gas exploration, field development and production. This spending is driven by a number of factors, including our customers' forecasts of future energy demand and supply, their access to resources to develop and produce oil and natural gas, their ability to fund their capital programs, the impact of new government regulations and most importantly, their expectations for oil and natural gas prices as a key driver of their cash flows.
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,

2018
2017
2018
2017
Brent oil price ($/Bbl) (1)
$
75.07

$
52.10

$
72.17

$
51.75

WTI oil price ($/Bbl) (2)
69.69

48.18

66.93

49.30

Natural gas price ($/mmBtu) (3)
2.93

2.95

2.95

3.01

(1) 
Energy Information Administration (EIA) Europe Brent Spot Price per Barrel
(2) 
EIA Cushing, OK WTI (West Texas Intermediate) spot price

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 35


(3) 
EIA Henry Hub Natural Gas Spot Price per million British Thermal Unit
Outside North America, customer spending is most heavily influenced by Brent oil prices, which increased during the quarter, ranging from a low of $68.38/Bbl in August 2018 to a high of $82.72/Bbl in September 2018. For the nine months ended September 30, 2018, Brent oil prices averaged $72.17/Bbl, which represented an increase of $20.42/Bbl from the same period last year.
In North America, customer spending is highly driven by WTI oil prices, which declined during the quarter before recovering at quarter end. Overall, WTI oil prices ranged from a high of $74.19/Bbl in July 2018 to a low of $65.07/Bbl in August 2018. For the nine months ended September 30, 2018, WTI oil prices averaged $66.93/Bbl, which represented an increase of $17.63/Bbl from the same period last year.
In North America, natural gas prices, as measured by the Henry Hub Natural Gas Spot Price, averaged $2.93/mmBtu in the third quarter of 2018, representing a 0.68% decrease over the prior year. Throughout the quarter, Henry Hub Natural Gas Spot Prices ranged from a low of $2.73/mmBtu in July 2018 to a high of $3.12/mmBtu in September 2018. For the nine months ended September 30, 2018, natural gas prices averaged $2.95/mmBtu, which represented a decrease of $0.06/mmBtu from the same period last year.
Baker Hughes Rig Count
The Baker Hughes rig counts are an important business barometer for the drilling industry and its suppliers. When drilling rigs are active they consume products and services produced by the oil service industry. Rig count trends are driven by the exploration and development spending by oil and natural gas companies, which in turn is influenced by current and future price expectations for oil and natural gas. The counts may reflect the relative strength and stability of energy prices and overall market activity; however, these counts should not be solely relied on as other specific and pervasive conditions may exist that affect overall energy prices and market activity.
We have been providing rig counts to the public since 1944. We gather all relevant data through our field service personnel, who obtain the necessary data from routine visits to the various rigs, customers, contractors and other outside sources as necessary. We base the classification of a well as either oil or natural gas primarily upon filings made by operators in the relevant jurisdiction. This data is then compiled and distributed to various wire services and trade associations and is published on our website. We believe the counting process and resulting data is reliable; however, it is subject to our ability to obtain accurate and timely information. Rig counts are compiled weekly for the U.S. and Canada and monthly for all international rigs. Published international rig counts do not include rigs drilling in certain locations, such as Russia, the Caspian region, and onshore China because this information is not readily available.
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,
 
 
2018
2017
% Change
2018
2017
% Change
North America
1,260

1,154

9
%
1,214

1,068

14
%
International
1,003

947

6
%
980

948

3
%
Worldwide
2,263

2,101

8
%
2,194

2,016

9
%
Overall rig count was 2,263 for the third quarter of 2018, an increase of 8% as compared to the same period last year due primarily to North America activity, and a slower increase internationally. Within North America, the

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 36


increase was primarily driven by the land rig count, which was up 9% and to a lesser extent, offshore rig count, which was up 3%. Internationally, the rig count increase was driven primarily by increases in the Africa region which was up 23%, the Asia-Pacific and Latin America region, which were up 16% and 2%, respectively, partially offset by the Europe region, which was down 3%.
Overall rig count was 2,194 for the nine months ended September 30, 2018, an increase of 9% as compared to the same period last year due primarily to North America activity, and a slower increase internationally. Within North America, the increase was primarily driven by the land rig count, which was up 14%, partially offset by a decrease in the offshore rig count of 8%. Internationally, the rig count increase was driven primarily by increases in the Africa region which was up 15%, the Asia-Pacific and Latin America region, which were up 11% and 2%, respectively, partially offset by the Europe region, which was down 10%.
RESULTS OF OPERATIONS
The discussions below relating to significant line items from our condensed consolidated and combined 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 and combined 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 its operations. We refer to "product services" simply as "services" within the Business Environment section of Management's Discussion and Analysis.
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.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 37


Orders and Remaining Performance Obligations
Orders: For the three months ended September 30, 2018, we recognized orders of $5.7 billion, flat year-over- year. Service orders were up 6% and equipment orders were down 8%. For the nine months ended September 30, 2018, we recognized orders of $17.0 billion, an increase of $5.6 billion, or 49%, from the nine months ended September 30, 2017. The increase in orders was driven by the acquisition of Baker Hughes which contributed $5.4 billion. Service orders were up 51% and equipment orders were up 45%.
Remaining Performance Obligations (RPO): As of September 30, 2018, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $20.8 billion.
Revenue and Segment Operating Income (Loss) Before Tax
Revenue and segment operating income (loss) for each of our four operating segments is provided below.
 
Three Months Ended September 30,
$ Change
Nine Months Ended September 30,
$ Change
 
2018
2017
2018
2017
Revenue:
 
 
 
 
 
 
Oilfield Services
$
2,993

$
2,661

$
332

$
8,554

$
3,101

$
5,453

Oilfield Equipment
631

613

18

1,912

2,011

(99
)
Turbomachinery & Process Solutions
1,389

1,414

(25
)
4,233

4,644

(411
)
Digital Solutions
653

614

39

1,913

1,624

289

Total
$
5,665

$
5,301

$
364

$
16,612

$
11,380

$
5,232


                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 38


The performance of our operating segments is evaluated based on segment operating income (loss), which is defined as income (loss) before income taxes and equity in loss of affiliate and before the following: net interest expense, net other non operating income, corporate expenses, restructuring, impairment and other charges, inventory impairments, merger and related costs, and certain gains and losses not allocated to the operating segments.
 
Three Months Ended September 30,
$ Change
Nine Months Ended September 30,
$ Change
 
2018
2017
2018
2017
Segment operating income (loss):
 
 
 
 
 
 
Oilfield Services
$
231

$
88

$
143

$
561

$
(35
)
$
596

Oilfield Equipment
6

(41
)
47

(12
)
26

(38
)
Turbomachinery & Process Solutions
132

134

(2
)
364

508

(144
)
Digital Solutions
106

77

29

275

240

35

Total segment operating income
475

258

217

1,189

739

449

Corporate
(98
)
(89
)
(9
)
(294
)
(279
)
(15
)
Inventory impairment
(12
)
(12
)
—

(88
)
(31
)
(57
)
Restructuring, impairment and other
(66
)
(191
)
125

(374
)
(292
)
(82
)
Merger and related costs
(17
)
(159
)
142

(113
)
(310
)
197

Operating income (loss)
282

(193
)
475

319

(173
)
492

Other non operating income, net
6

4

2

51

62

(11
)
Interest expense, net
(55
)
(41
)
(14
)
(164
)
(75
)
(89
)
Income (loss) before income taxes and equity in loss of affiliate
233

(230
)
463

206

(186
)
392

Equity in loss of affiliate
(85
)
(13
)
(72
)
(139
)
(13
)
(126
)
Provision for income taxes
(108
)
(117
)
9

(208
)
(115
)
(93
)
Net income (loss)
$
40

$
(360
)
$
400

$
(141
)
$
(314
)
$
173

Segment Revenues and Segment Operating Income
Third Quarter of 2018 Compared to the Third Quarter of 2017
Revenue increased $364 million, or 7%, primarily driven by increased activity in Oilfield Services. Oilfield Services increased $332 million, Digital Solutions increased $39 million and Oilfield Equipment increased $18 million, partially offset with the decrease in Turbomachinery & Process Solutions of $25 million.
Total segment operating income increased $217 million. The increase was primarily driven by Oilfield Services, which increased $143 million, Oilfield Equipment which increased $47 million and Digital Solutions which increased $29 million, partially offset by Turbomachinery & Process Solutions, which decreased $2 million.
Oilfield Services
Oilfield Services revenue increased $332 million in the third quarter of 2018 compared to the third quarter of 2017, as a result of increased activity. North America revenue was $1,212 million and International revenue was $1,781 million in the third quarter of 2018.
Oilfield Services segment operating income was $231 million in the third quarter of 2018 compared to $88 million of segment operating income in the third quarter of 2017. The increase was primarily driven by synergy benefits and to a lesser extent by volume increases.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 39


Oilfield Equipment
Oilfield Equipment revenue increased $18 million, or 3%, in the third quarter of 2018 compared to the third quarter of 2017. The increase was driven by higher volume in the Subsea Production Systems business, Subsea Drilling Systems business, and Surface Pressure Control business. These increases were partially offset by lower volume in the Flexible Pipe business.
Oilfield Equipment segment operating income was $6 million in the third quarter of 2018 compared to segment operating loss of $41 million in the third quarter of 2017. The increase in income was driven primarily by higher cost productivity and to a lesser extent by lower impact from foreign exchange movements and higher volume.
Turbomachinery & Process Solutions
Turbomachinery & Process Solutions revenue of $1,389 million decreased $25 million, or 2%, in the third quarter of 2018 compared to the third quarter of 2017. The decrease was driven by lower volume in the New Units business, partially offset by an increase in volume in the Services as well as the Flow and Process Technologies businesses. Equipment revenue in the quarter represented 38%, and service revenue represented 62% of total revenue. Equipment revenue was down 16% year-over-year, and service revenue was up 9%.
Turbomachinery & Process Solutions segment operating income was $132 million in the third quarter of 2018 compared to segment operating income of $134 million in the third quarter of 2017. The decline in profitability was driven primarily by lower volume, partially offset by deflation benefits and favorable cost productivity.
Digital Solutions
Digital Solutions revenue increased $39 million, or 6%, in the third quarter of 2018 compared to the third quarter of 2017, driven primarily by the Bently and Pipeline and Process Solutions businesses, partially offset with lower volume in the Controls business.
Digital Solutions segment operating income was $106 million in the third quarter of 2018 compared to segment operating income of $77 million in the third quarter of 2017. The increase in profitability was driven primarily by increased productivity including synergy realization, and to a lesser extent by higher volume.
Corporate
Corporate expenses in the third quarter of 2018 totaled $98 million, an increase of $9 million compared to the third quarter of 2017, primarily due to foreign exchange movements, partially offset by realized synergies.
Restructuring, Impairment and Other
For the third quarter of 2018, we recognized $66 million in restructuring and impairment charges, a decrease of $125 million from the third quarter of 2017, primarily from reduced activity as we finalize our restructuring plans.
Merger and Related Costs
For the third quarter of 2018, we incurred merger and related costs of $17 million, a decrease of $142 million from the third quarter of 2017, as we finalize our merger and related activities.
Equity in Loss of Affiliate
For the third quarter of 2018, we recorded a loss of $85 million related to our equity method investment in BJ Services. As a result, we will discontinue applying the equity method.  We will resume application of the equity method only after our share of unrecognized net income equals our share of net loss not recognized during the period the equity method was suspended.  There was no cash impact to us.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 40


Interest Expense, Net
For the third quarter of 2018, we incurred interest expense, net of interest income, of $55 million, an increase of $14 million from the third quarter of 2017, primarily driven by $3.95 billion of debt issued in the fourth quarter of 2017, partially offset by the reduction in interest expense as we ceased participation in the GE monetization program.
Income Taxes
For the quarter ended September 30, 2018, income tax expense was $108 million compared to a tax expense of $117 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 due to $82 million related to losses with no tax benefit due to valuation allowances. Since we are a partnership for U.S. federal tax purposes, any tax benefits associated with U.S. losses are recognized by our members and not reflected in our tax expense.
The First Nine Months of 2018 Compared to the First Nine Months of 2017
Revenue increased $5,232 million, or 46%, primarily driven by the acquisition of Baker Hughes. Oilfield Services increased $5,453 million, and Digital Solutions increased $289 million, partially offset with the decrease in Turbomachinery & Process Solutions of $411 million and Oilfield Equipment of $99 million.
Total segment operating income increased $449 million. The increase was primarily driven by Oilfield Services, which increased $596 million, and Digital Solutions, which increased $35 million, partially offset by Turbomachinery & Process Solutions, which decreased $144 million, and Oilfield Equipment, which decreased $38 million.
Oilfield Services
Oilfield Services revenue increased $5,453 million in the first nine months of 2018 compared to the first nine months of 2017, as a result of the acquisition of Baker Hughes which added $5,170 million of revenue.
Oilfield Services segment operating income was $561 million in the first nine months of 2018 compared to a loss of $35 million in the first nine months of 2017. The additional contribution from the acquisition of Baker Hughes, and to a lesser extent synergy benefits, drove the increase in operating income.
Oilfield Equipment
Oilfield Equipment revenue decreased $99 million, or 5%, in the first nine months of 2018 compared to the first nine months of 2017. The decrease was driven by lower throughput as a result of decreasing RPO in the Subsea Production Systems business, as well as lower convertible orders across the Flexible Pipe and Drilling Systems businesses, partially offset with higher volume in the Surface Pressure Control and Services businesses.
Oilfield Equipment segment operating loss was $12 million in the first nine months of 2018 compared to segment operating income of $26 million in the first nine months of 2017. The loss was driven primarily by a negative mix of long-term projects, and to a lesser extent by lower cost productivity and volume.
Turbomachinery & Process Solutions
Turbomachinery & Process Solutions revenue of $4,233 million decreased $411 million, or 9%, in the first nine months of 2018 compared to the first nine months of 2017. The decrease was driven by lower volume for the New Units and Services businesses in the upstream segment, partially offset by increased volume in the businesses that serve the downstream segments. Equipment revenue in the first nine months of 2018 represented 39%, and Service revenue represented 61% of total revenue.
Turbomachinery & Process Solutions segment operating income was $364 million in the first nine months of 2018 compared to segment operating income of $508 million in the first nine months of 2017. The decline in profitability was driven primarily by lower volume, and to a lesser extent by negative cost productivity, as well as

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 41


unfavorable equipment and services mix. In addition, a one-time charge of $30 million to remediate quality issues specific to a long-term equipment project was recorded in the second quarter of 2018.
Digital Solutions
Digital Solutions revenue increased $289 million, or 18%, in the first nine months of 2018 compared to the first nine months of 2017, driven primarily by the acquisition of Baker Hughes which added $195 million of revenue.
Digital Solutions segment operating income was $275 million in the first nine months of 2018 compared to segment operating income of $240 million in first nine months of 2017. The increase in profitability was driven by positive cost productivity, including synergy benefits.
Corporate
Corporate expenses in the first nine months of 2018 totaled $294 million, an increase of $15 million compared to the first nine months of 2017, primarily from the additional expenses related to the acquisition of Baker Hughes partially offset by realized synergies.
Restructuring, Impairment and Other
In the first nine months of 2018, we recognized $374 million in restructuring and impairment charges, an increase of $82 million from the first nine months of 2017. This increase was primarily due to costs driven by the implementation of our synergy plans.
Merger and Related Costs
In the first nine months of 2018, we incurred merger and related costs of $113 million, a decrease of $197 million from the first nine months of 2017. This decrease was primarily due to a decline in merger and integration costs as we finalize our merger related activities.
Interest Expense, Net
In the first nine months of 2018, we incurred interest expense, net of interest income, of $164 million, an increase of $89 million from the first nine months of 2017, primarily driven by $3.95 billion of debt issued in the fourth quarter of 2017 and debt obtained in the Baker Hughes acquisition, partially offset by the reduction in interest expense as we ceased participation in the GE monetization program.
Equity in Loss of Affiliate
In the first nine months of 2018, we recorded a loss of $139 million related to our equity method investment in BJ Services. As a result, we will discontinue applying the equity method.  We will resume application of the equity method only after our share of unrecognized net income equals our share of net loss not recognized during the period the equity method was suspended. There is no cash impact to us.
Income Taxes
For the nine months ended September 30, 2018, income tax expense was $208 million compared to a tax expense of $115 million for the nine months ended September 30, 2017. The difference between the U.S. statutory tax rate of 21% and the current effective tax rate is primarily due to $168 million related to losses with no tax benefit due to valuation allowances and $22 million of withholding taxes in certain jurisdictions. Since we are a partnership for U.S. federal tax purposes, any tax benefits associated with U.S. losses are recognized by our members and not reflected in our tax expense. The first six months of the prior year period reflects 100% of the taxes associated with U.S. and non-U.S. earnings of the GE O&G business.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 42


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. At September 30, 2018, we had cash, cash equivalents and restricted cash of $4,741 million compared to $7,026 million at December 31, 2017.
At September 30, 2018, approximately $3.2 billion of our cash and equivalents was held by foreign subsidiaries compared to approximately $3.2 billion at December 31, 2017. A substantial portion of the cash held by foreign subsidiaries at September 30, 2018 has been reinvested in active non-U.S. business operations. At September 30, 2018, our intent is, among other things, to use this cash to fund the operations of our foreign subsidiaries, and we have not changed our indefinite reinvestment decision as a result of U.S. tax reform but will reassess this during the course of 2018. If we decide at a later date to repatriate those funds to the U.S., we may be required to provide taxes on certain of those funds, however, due to the enactment of U.S. tax reform, repatriations of foreign earnings will generally be free of U.S. federal tax but may incur other taxes such as withholding or state taxes.

BHGE LLC has a five-year $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. At September 30, 2018, we were in compliance with all of the credit facility's covenants.
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 September 30, 2018, we had 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. 
On November 6, 2017, BHGE announced that its board of directors authorized us to repurchase up to $3 billion of our common units from the GE and BHGE. During the nine months ended September 30, 2018, we repurchased 30.7 million of our common units for a total consideration of $1 billion. At September 30, 2018, we had authorization remaining to repurchase up to approximately $1.5 billion of our common units from BHGE and GE.
On December 15, 2017, BHGE LLC and Baker Hughes Co-Obligor, Inc. jointly filed a shelf registration statement on Form S-3 with the SEC in order 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 securities to be sold will be described in supplemental filings with the SEC. The registration statement will expire in 2020.
During the nine months ended September 30, 2018, we used cash to fund a variety of activities including certain working capital needs and restructuring costs, capital expenditures, repurchase of our common units and distribution to members. We believe that cash on hand, cash flows generated from operations 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)
2018
2017
Operating activities
$
671

$
(585
)
Investing activities
(204
)
(3,879
)
Financing activities
(2,665
)
8,210

Operating Activities
Our largest source of operating cash is payments from customers, of which the largest component is collecting cash related to sales of products and services including advance payments or progress collections for work to be performed. The primary use of operating cash is to pay our suppliers, employees, tax authorities and others for a wide range of material and services.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 43


Cash flows from operating activities generated cash of $671 million in the nine months ended September 30, 2018. These cash inflows were primarily driven by our net loss adjusted for certain noncash items (depreciation, amortization and provision for deferred taxes) partially offset by cash usage of approximately $361 million related to restructuring and merger related payments. Net working capital usage was $51 million in the nine months ended September 30, 2018, mainly due to higher inventory to sustain expected volume growth partially offset by higher payables to suppliers.
Investing Activities
Cash flows from investing activities used cash of $204 million and $3,879 million for the nine months ended September 30, 2018 and 2017, 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 $653 million and $417 million for the nine months ended September 30, 2018 and 2017, respectively, partially offset by proceeds from the sale of property, plant and equipment of $330 million and $76 million for the nine months ended September 30, 2018 and 2017, respectively. We also received cash proceeds from the sale of businesses of $81 million and $25 million for the nine months ended September 30, 2018 and 2017, respectively, which is included in the "Other investing items, net" caption in the condensed consolidated and combined statement of cash flows.
Financing Activities
Cash flows from financing activities used cash of $2,665 million and generated cash of $8,210 million for the nine months ended September 30, 2018 and 2017, respectively.
Repayment of long-term debt during the nine months ended September 30, 2018, consisted primarily of the repayment of certain Senior Notes for a total consideration of $647 million.
As part of the authorization to repurchase $3 billion of our common units, during the nine months ended September 30, 2018, we also used cash of $1,025 million to repurchase our common units, on a pro rata basis from BHGE and GE. Additionally, we made a distribution to our members of $638 million.
Other Factors Affecting Liquidity
If market conditions were to change and our revenue was reduced significantly or operating costs were to increase, our cash flows and liquidity could be reduced. Additionally, it could cause the rating agencies to lower our credit rating. 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 2017 Credit Agreement.
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, 2018, 21% of our gross trade receivables were from customers in the United States. Other than the United States, no other country or single customer accounted for more than 10% of our gross trade receivables at this date. As of December 31, 2017, 20% of our gross trade receivables were from customers in the United States.
International operations: Our cash that is held outside the U.S. is 68% of the total cash balance as of September 30, 2018. 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.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 44


OTHER ITEMS
Iran Threat Reduction And Syria Human Rights Act Of 2012
The Company is making the following disclosure pursuant to Section 13(r) of the Securities Exchange Act of 1934. Under Section 13(r) of the Securities Exchange Act of 1934, enacted in 2012, BHGE is required to disclose in its periodic reports if it or any of its affiliates knowingly engaged in business activities relating to Iran, even if those activities are conducted in accordance with authorizations subsequently issued by the U.S. Government. Reportable activities include investments that significantly enhance Iran’s ability to develop petroleum resources valued at $20 million or more in the aggregate during a twelve-month period. Reporting is also required for transactions related to Iran’s domestic production of refined petroleum products or Iran’s ability to import refined petroleum products valued at $5 million or more in the aggregate during a twelve-month period.
In January 2016, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) issued General License H authorizing U.S.-owned or controlled foreign entities to engage in transactions with Iran if these entities meet the requirements of the general license. On May 8, 2018, President Trump announced that the United States will cease participation in the Joint Comprehensive Plan of Action (JCPOA) and begin re-imposing the U.S. nuclear-related sanctions. On June 27, 2018, OFAC revoked General License H and added Section 560.537 to the Iranian Transactions and Sanctions Regulations (ITSR), which authorizes all transactions and activities that are ordinarily incident and necessary to the winding down of activities previously approved under General License H through November 4, 2018. Prior to May 8, 2018, certain non-U.S. affiliates of BHGE conducted limited activities as described below in accordance with General License H. Non-U.S. affiliates of BHGE expect to wind down activities in Iran by November 4, which may include the collection of payments for previously completed work. These activities are conducted in accordance with all applicable laws and regulations.
A non-U.S. affiliate of BHGE attributed €3.8 million ($4.4 million) in gross revenues and €0.7 million ($0.8 million) in net profits during the quarter ending September 30, 2018 against previously reported transactions related to the sale of valves and parts for industrial machinery and equipment used in gas plants, petrochemical plants and gas production projects in Iran. A second non-U.S. affiliate of BHGE revised four previously received purchase orders during the third quarter of 2018 in order to reflect a reduction in scope to only spare parts that can be delivered prior to November 4, 2018.  Each of the four previously reported purchase orders are now valued at less than €0.1 million ($0.1 million).  This non-U.S. affiliate attributed less than €0.1 million ($0.1 million) in gross revenues and less than €0.1 million ($0.1 million) in net profits during the quarter ending September 30, 2018 against previously reported transactions. 
These non-U.S. affiliates do not intend to continue the activities described above beyond November 4, 2018. The Company will wind down all of these activities by that date in full compliance with U.S. sanctions.
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," "endeavor," "seek," "anticipate," "estimate," "overestimate," "underestimate," "believe," "could," "project," "predict," "continue," "target" or other similar words or expressions. Forward-looking statements are based upon current plans, estimates and expectations that are subject to risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. The inclusion of such statements should not be regarded as a representation that such plans, estimates or expectations will be achieved. Important factors that could cause actual results to differ materially from such plans, estimates or expectations include, among others, the risk factors identified in the "Risk Factors" section of Part II of Item 1A contained herein, the risk factors in the "Risk Factors" section of Part I of Item 1A of our 2017 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.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 45


Any forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. The Company does not undertake any obligation to update any forward-looking statements, whether as a result of new information or developments, future events or otherwise, except as required by law. Readers are cautioned not to place undue reliance on any of these forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk affecting us, see Item 7A. “Quantitative and Qualitative Disclosures about Market Risk,” in our 2017 Annual Report. Our exposure to market risk has not changed materially since December 31, 2017.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (as defined in Rule 15d-15(e) of the Exchange Act) were effective at a reasonable assurance level.

Effective January 1, 2018, we adopted the new revenue guidance under ASC Topic 606, Revenue from Contracts with Customers, using the full retrospective method of adoption. The adoption of this guidance required the implementation of new accounting policies and processes, including changes to our information systems, which changed the Company’s internal controls over financial reporting for revenue recognition and related disclosures for both our restated historical financial statements and current period reporting.


                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 46


PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS

See discussion of legal proceedings in "Note 17. Commitments And Contingencies" of the Notes to Unaudited Condensed Consolidated and Combined Financial Statements in this Quarterly Report, Item 3 of Part I of our 2017 Annual Report and Note 15 of the Notes to Consolidated Financial Statements included in Item 8 of our 2017 Annual Report.
ITEM 1A. RISK FACTORS
As of the date of this filing, the Company and its operations continue to be subject to the risk factors previously disclosed in our “Risk Factors” contained in the 2017 Annual Report and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018. 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
We have no mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K to report for the current quarter.
ITEM 5. OTHER INFORMATION
None.

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 47


ITEM 6. EXHIBITS
Each exhibit identified below is filed as a part of this report. Exhibits designated with an "*" are filed as an exhibit to this Quarterly Report on Form 10-Q and Exhibits designated with an "**" are furnished as an exhibit to this Quarterly Report on Form 10-Q. Exhibits designated with a "+" are identified as management contracts or compensatory plans or arrangements. Exhibits previously filed as indicated below are incorporated by reference.
 
 
 
 
 
 
101.INS*
 
XBRL Instance Document
101.SCH*
 
XBRL Schema Document
101.CAL*
 
XBRL Calculation Linkbase Document
101.LAB*
 
XBRL Label Linkbase Document
101.PRE*
 
XBRL Presentation Linkbase Document
101.DEF*
 
XBRL Definition Linkbase Document


                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 48


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
Baker Hughes, a GE company, LLC
(Registrant)
 
 
 
 
Date:
October 30, 2018
By:
/s/ BRIAN WORRELL
 
 
 
Brian Worrell
 
 
Chief Financial Officer
 
 
 
 
Date:
October 30, 2018
By:
/s/ KURT CAMILLERI
 
 
 
Kurt Camilleri
 
 
Vice President, Controller and Chief Accounting Officer

                                                
BHGE LLC 2018 Third Quarter FORM 10-Q | 49

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