Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we assessed the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, our principal executive officer and principal financial officer concluded that our internal control over financial reporting was effective as of December 31, 2018. This conclusion is based on the recognition that there are inherent limitations in all systems of internal control. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

KPMG LLP, the Company's independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company's internal control over financial reporting.

/s/ LORENZO SIMONELLI Lorenzo Simonelli Chairman, President and Chief Executive Officer		/s/ BRIAN WORRELL Brian Worrell Chief Financial Officer		/s/ KURT CAMILLERI Kurt Camilleri Vice President, Controller and Chief Accounting Officer

Houston, Texas

February 19, 2019

BHGE 2018 FORM 10-K | 49

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors

Baker Hughes, a GE company:

Opinion on the Consolidated and Combined Financial Statements

We have audited the accompanying consolidated and combined statement of financial position of Baker Hughes, a GE company and subsidiaries (the "Company") as of December 31, 2018 and 2017, the related consolidated and combined statements of income (loss), comprehensive income (loss), changes in equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively, the "consolidated and combined financial statements"). In our opinion, the consolidated and combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 19, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the consolidated and combined financial statements, the Company has changed its method of accounting for revenue recognition in 2018 due to the adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers.

Basis for Opinion

These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated and combined financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated and combined financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated and combined financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated and combined financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 2017.

Houston, Texas

February 19, 2019

BHGE 2018 FORM 10-K | 50

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors

Baker Hughes, a GE Company:

We have audited the accompanying combined statements of income (loss), comprehensive income (loss), changes in equity, and cash flows of GE Oil & Gas (the "Company", a business within General Electric Company) for the year ended December 31, 2016. These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these combined financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined results of operations and cash flows for the Company for the year ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

Change in Accounting Principle

As discussed in Note 1 to the combined financial statements, the Company has changed its method of accounting for revenue recognition in 2018 due to the adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers.

/s/ KPMG S.p.A.

Florence, Italy

March 16, 2017, except as to Note 17 which is as of December 4, 2017, and Note 1 which is as of November 13, 2018.

BHGE 2018 FORM 10-K | 51

REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors

Baker Hughes, a GE company:

Opinion on Internal Control Over Financial Reporting

We have audited Baker Hughes, a GE company and subsidiaries’ (the "Company") internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated and combined statement of financial position of the Company as of December 31, 2018 and 2017, the related consolidated and combined statements of income (loss), comprehensive income (loss), changes in equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively, the "consolidated and combined financial statements"), and our report dated February 19, 2019, expressed an unqualified opinion on those consolidated and combined financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

Houston, Texas

February 19, 2019

BHGE 2018 FORM 10-K | 52

BAKER HUGHES, A GE COMPANY

CONSOLIDATED AND COMBINED STATEMENTS OF INCOME (LOSS)

	Year Ended December 31,
(In millions, except per share amounts)	2018			2017			2016
Revenue:
Sales of goods	$	13,113		$	11,062		$	9,462
Sales of services	9,764			6,117			3,620
Total revenue	22,877			17,179			13,082
Costs and expenses:
Cost of goods sold	11,524			9,486			7,829
Cost of services sold	7,367			4,657			2,321
Selling, general and administrative expenses	2,699			2,535			1,926
Restructuring, impairment and other	433			412			516
Merger and related costs	153			373			33
Total costs and expenses	22,176			17,463			12,625
Operating income (loss)	701			(284		)	457
Other non operating income, net	202			80			3
Interest expense, net	(223		)	(131		)	(102		)
Income (loss) before income taxes and equity in loss of affiliate	680			(335		)	358
Equity in loss of affiliate	(139		)	(11		)	—
Provision for income taxes	(258		)	(45		)	(173		)
Net income (loss)	283			(391		)	185
Less: Net income attributable to GE O&G pre-merger	—			42			254
Less: Net income (loss) attributable to noncontrolling interests	88			(330		)	(69		)
Net income (loss) attributable to Baker Hughes, a GE company	$	195		$	(103	)	$	—
Per share amounts:
Basic income (loss) per Class A common share	$	0.46		$	(0.24	)
Diluted income (loss) per Class A common share	$	0.45		$	(0.24	)
Cash dividend per Class A common share	$	0.72		$	0.35
Special dividend per Class A common share				$	17.50

See accompanying Notes to Consolidated and Combined Financial Statements

BHGE 2018 FORM 10-K | 53

BAKER HUGHES, A GE COMPANY

CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	Year Ended December 31,
(In millions)	2018			2017			2016
Net income (loss)	$	283		$	(391	)	$	185
Less: Net income attributable to GE O&G pre-merger	—			42			254
Less: Net income (loss) attributable to noncontrolling interests	88			(330		)	(69		)
Net income (loss) attributable to Baker Hughes, a GE company	195			(103		)	—
Other comprehensive income (loss):
Investment securities	(3		)	4			—
Foreign currency translation adjustments	(502		)	(14		)	(416		)
Cash flow hedges	(4		)	12			(8		)
Benefit plans	(64		)	55			54
Other comprehensive income (loss)	(573		)	57			(370		)
Less: Other comprehensive loss attributable to GE O&G pre-merger	—			(69		)	(356		)
Less: Other comprehensive income (loss) attributable to noncontrolling interests	(343		)	80			(14		)
Other comprehensive income (loss) attributable Baker Hughes, a GE company	(230		)	46			—
Comprehensive loss	(290		)	(334		)	(185		)
Less: Comprehensive loss attributable to GE O&G pre-merger	—			(27		)	(102		)
Less: Comprehensive loss attributable to noncontrolling interests	(255		)	(250		)	(83		)
Comprehensive loss attributable to Baker Hughes, a GE company	$	(35	)	$	(57	)	$	—

See accompanying Notes to Consolidated and Combined Financial Statements

BHGE 2018 FORM 10-K | 54

BAKER HUGHES, A GE COMPANY

CONSOLIDATED AND COMBINED STATEMENTS OF FINANCIAL POSITION

	December 31,
(In millions, except par value)	2018			2017
ASSETS
Current Assets:
Cash, cash equivalents and restricted cash (1)	$	3,723		$	7,030
Current receivables, net	5,969			6,015
Inventories, net	4,620			4,507
All other current assets	659			872
Total current assets	14,971			18,424
Property, plant and equipment, less accumulated depreciation	6,228			6,959
Goodwill	20,717			19,927
Other intangible assets, net	5,719			6,358
Contract and other deferred assets	1,894			2,044
All other assets	1,838			2,073
Deferred income taxes	1,072			715
Total assets (1)	$	52,439		$	56,500
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable	$	4,025		$	3,377
Short-term debt and current portion of long-term debt (1)	942			2,037
Progress collections and deferred income	1,765			1,775
All other current liabilities	2,288			2,038
Total current liabilities	9,020			9,227
Long-term debt	6,285			6,312
Deferred income taxes	143			490
Liabilities for pensions and other employee benefits	1,018			1,172
All other liabilities	960			889
Equity:
Class A common stock, $0.0001 par value - 2,000 authorized, 513 and 422 issued and outstanding as of December 31, 2018 and 2017, respectively	—			—
Class B common stock, $0.0001 par value - 1,250 authorized, 522 and 707 issued and outstanding as of December 31, 2018 and 2017, respectively	—			—
Capital in excess of par value	18,659			15,083
Retained earnings (loss)	25			(103		)
Accumulated other comprehensive loss	(1,219		)	(703		)
Baker Hughes, a GE company equity	17,465			14,277
Noncontrolling interests	17,548			24,133
Total equity	35,013			38,410
Total liabilities and equity	$	52,439		$	56,500

(1)

Total assets include $896 million and $1,124 million of assets held on behalf of GE, of which $747 million and $997 million is cash and cash equivalents and $149 million and $127 million is investment securities at December 31, 2018 and December 31, 2017, respectively, and a corresponding amount of liability is reported in short-term borrowings. See "Note 18. Related Party Transactions" for further details.

See accompanying Notes to Consolidated and Combined Financial Statements

BHGE 2018 FORM 10-K | 55

BAKER HUGHES, A GE COMPANY

CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN EQUITY

(In millions, except per share amounts)	Class A Common Stock			Class B Common Stock			Capital in Excess of Par Value			Parent's Net Investment			Retained Earnings (Loss)			Accumulated Other Comprehensive Loss			Non-controlling Interests			Total
Balance at December 31, 2015	$	—		$	—		$	—		$	15,920		$	—		$	(1,532	)	$	157		$	14,545
Effect of adoption of ASU 2014-09										(432		)										(432		)
Comprehensive income:																						—
Net income (loss)										254									(69		)	185
Other comprehensive loss																(356		)	(14		)	(370		)
Changes in Parent's net investment										259												259
Net activity related to noncontrolling interests																			93			93
Balance at December 31, 2016	—			—			—			16,001			—			(1,888		)	167			14,280
Comprehensive income:
Net income										42									4			46
Other comprehensive income (loss)																(69		)	3			(66		)
Changes in Parent's net investment										775						(13		)				762
Net activity related to noncontrolling interests																			4			4
Cash contribution received from GE										7,400												7,400
Conversion of Parent's net investment into noncontrolling interest and issuance of Class B common stock										(24,218		)							24,218			—
Issuance of Class A common stock on acquisition of Baker Hughes							24,798												76			24,874
Special dividend ($17.5 per share)							(7,498		)													(7,498		)
Reallocation of equity based on ownership of GE and previous Baker Hughes stockholders							(1,850		)							1,234			616			—
Activity after business combination of July 3, 2017:
Net loss													(103		)				(334		)	(437		)
Other comprehensive income																46			77			123
Stock-based compensation cost							37															37
Cash dividends to Class A common stock ($0.35 per share)							(155		)													(155		)
Dividends and paired distributions to GE (1)																			(251		)	(251		)
Net activity related to noncontrolling interests							(62		)							(13		)	(133		)	(208		)
Repurchase and cancellation of Class A and Class B common stock							(187		)										(314		)	(501		)
Balance at December 31, 2017	—			—			15,083			—			(103		)	(703		)	24,133			38,410
Effect of adoption of ASU 2016-16 on taxes													25						42			67
Comprehensive income (loss):
Net income													195						88			283
Other comprehensive loss																(230		)	(343		)	(573		)
Cash dividends to Class A common stock ($0.72 per share)							(224		)				(91		)							(315		)
Dividends and paired distributions to GE (1)																			(495		)	(495		)
Effect of exchange of BHGE LLC Units							4,043									(282		)	(3,761		)	—
Repurchase and cancellation of BHGE LLC Units and Class B common stock																			(2,087		)	(2,087		)
Repurchase and cancellation of Class A common stock							(374		)													(374		)
Stock-based compensation cost							121															121
Other							10						(1		)	(4		)	(29		)	(24		)
Balance at December 31, 2018	$	—		$	—		$	18,659		$	—		$	25		$	(1,219	)	$	17,548		$	35,013

(1) Cash payments made to GE for dividends on our class B common stock and paired distributions for BHGE LLC units.

See accompanying Notes to Consolidated and Combined Financial Statements

BHGE 2018 FORM 10-K | 56

BAKER HUGHES, A GE COMPANY

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
(In millions)	2018			2017			2016
Cash flows from operating activities:
Net income (loss)	$	283		$	(391	)	$	185
Adjustments to reconcile net income (loss) to net cash flows from (used in) operating activities:
Depreciation and amortization	1,486			1,103			550
Provision for deferred income taxes	(249		)	(333		)	(38		)
Gain on sale of Natural Gas Solution business	(171		)	—			—
Equity in loss of affiliate	139			11			—
Changes in operating assets and liabilities:
Current receivables	(204		)	(1,190		)	278
Inventories	(339		)	418			367
Accounts payable	794			303			(256		)
Progress collections and deferred income	(27		)	(293		)	(719		)
Contract and other deferred assets	129			(439		)	(88		)
Other operating items, net	(79		)	12			(17		)
Net cash flows from (used in) operating activities	1,762			(799		)	262
Cash flows from investing activities:
Expenditures for capital assets	(995		)	(665		)	(424		)
Proceeds from disposal of assets	458			172			20
Proceeds from business dispositions	453			20			—
Net cash paid for acquisitions	(89		)	(3,365		)	(1		)
Net cash paid for business interests	(505		)	(10		)	(15		)
Other investing items, net	100			(275		)	(52		)
Net cash flows used in investing activities	(578		)	(4,123		)	(472		)
Cash flows from financing activities:
Net repayments of short-term borrowings	(376		)	(663		)	(156		)
Proceeds from the issuance of long-term debt	—			3,928			—
Repayments of long-term debt	(684		)	(177		)	—
Dividends paid	(315		)	(155		)	—
Dividends and paired distributions to GE	(495		)	(251		)	—
Repurchase of Class A common stock	(387		)	(174		)	—
Repurchase of common units from GE by BHGE LLC	(2,099		)	(303		)	—
Net transfer from Parent	—			1,498			191
Contribution received from GE	—			7,400			—
Other financing items, net	(7		)	(184		)	(137		)
Net cash flows from (used in) financing activities	(4,363		)	10,919			(102		)
Effect of currency exchange rate changes on cash, cash equivalents and restricted cash	(128		)	52			(139		)
Increase (decrease) in cash, cash equivalents and restricted cash	(3,307		)	6,049			(451		)
Cash, cash equivalents and restricted cash, beginning of period	7,030			981			1,432
Cash, cash equivalents and restricted cash, end of period	$	3,723		$	7,030		$	981
Supplemental cash flows disclosures:
Income taxes paid, net of refunds	$	424		$	230		$	317
Interest paid	$	301		$	109		$	55

See accompanying Notes to Consolidated and Combined Financial Statements

BHGE 2018 FORM 10-K | 57

Baker Hughes, a GE company

Notes to 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 (the Company, BHGE, we, us, or our), was formed on October 28, 2016, for the purpose of facilitating the combination of Baker Hughes and GE O&G. BHGE 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 66,000 employees.

BASIS OF PRESENTATION

On July 3, 2017, we closed the business combination (the Transactions) of GE O&G and Baker Hughes (refer to "Note 3. Business Acquisition and Disposition" for further details on the Transactions). As a result, substantially all of the business of GE O&G and of Baker Hughes were transferred to a subsidiary of the Company, Baker Hughes, a GE company, LLC (BHGE LLC). As of December 31, 2018, GE has approximately 50.4% of economic interest in BHGE LLC and the Company has approximately 49.6% of the economic interest in BHGE LLC. Although we hold a minority economic interest in BHGE LLC, we conduct and exercise full control over all its activities, therefore, we consolidate the financial results of BHGE LLC and report a noncontrolling interest in our consolidated and combined financial statements for the economic interest in BHGE LLC not held by us. We consider BHGE LLC to be a consolidated variable interest entity (VIE). We are a holding company and have no material assets other than our ownership interest in BHGE LLC and certain intercompany and tax related balances. BHGE LLC is a Securities and Exchange Commission (SEC) Registrant with separate filing requirements with the SEC and its separate financial information can be obtained from www.sec.gov. The current year results, and balances, may not be comparable to prior years as the prior years include the results of Baker Hughes from July 3, 2017 forward.

The accompanying 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 annual financial information. All intercompany accounts and transactions have been eliminated.

The Company's financial statements have been prepared on a consolidated basis, effective July 3, 2017. 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. 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 consolidated and combined statements of income reflect intercompany expense allocations made to us by GE for certain corporate functions and for shared services provided by GE. Where possible, these allocations were made on a specific identification basis, and in other cases, these expenses were allocated by GE based on relative percentages of net operating costs or some other basis depending on the nature of the allocated cost. See "Note 18. Related Party Transactions" for further information on expenses allocated by GE. The historical financial results in the 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.

Merger and related costs includes all costs associated with the Transactions described in Note 3. Refer to "Note 3. Business Acquisition and Disposition" for further details. In 2018, merger and related costs also include costs incurred in connection with the finalization of the Master Agreement Framework and costs related to the anticipated separation from GE. See "Note 18. Related Party Transactions" for further information on the Master Agreement Framework.

In the Company's financial statements and notes, certain amounts have been reclassified to conform with the current year presentation. In the notes to the consolidated and combined financial statements, all dollar and share

BHGE 2018 FORM 10-K | 58

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

amounts in tabulations are in millions of dollars and shares, respectively, unless otherwise indicated. Certain columns and rows in our financial statements and notes thereto may not add due to the use of rounded numbers.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of any contingent assets or liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates and judgments on historical experience and on various other assumptions and information that we believe to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be perceived with certainty, and accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. While we believe that the estimates and assumptions used in the preparation of the consolidated and combined financial statements are appropriate, actual results could differ from those estimates. Estimates are used for, but are not limited to, determining the following: allowance for doubtful accounts and inventory valuation reserves; recoverability of long-lived assets, including revenue recognition on long-term contracts, valuation of goodwill; useful lives used in depreciation and amortization; income taxes and related valuation allowances; accruals for contingencies; actuarial assumptions to determine costs and liabilities related to employee benefit plans; stock-based compensation expense; valuation of derivatives and the fair value of assets acquired and liabilities assumed in acquisitions; and expense allocations for certain corporate functions and shared services provided by GE.

Foreign Currency

Assets and liabilities of non-U.S. operations with a functional currency other than the U.S. dollar have been translated into U.S. dollars at the quarterly exchange rates, and revenue, expenses, and cash flows have been translated at average rates for the respective periods. Any resulting translation gains and losses are included in other comprehensive income (loss).

Gains and losses from foreign currency transactions, such as those resulting from the settlement of receivables or payables in the non-functional currency and those resulting from remeasurements of monetary items, are included in the consolidated and combined statement of income (loss).

Investments in Equity Securities

Investments in equity securities (of entities in which we do not have a controlling financial interest, most often because we hold a voting interest of 0% to 20%) with readily determinable fair values are measured at fair value with changes in fair value recognized in earnings and reported in the "other non operating income, net" caption in the consolidated and combined statements of income (loss). Equity securities that do not have readily determinable fair values are recorded at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar equity securities of the same issuer. We perform a qualitative impairment assessment for equity securities without readily determinable fair values. When a qualitative assessment indicates that impairment exists, that equity security is impaired to fair value.

Associated companies are entities in which we do not have a controlling financial interest, but over which we have significant influence, most often because we hold a voting interest of 20% to 50%. Associated companies are accounted for as equity method investments. Results of associated companies are presented on a one-line basis in the caption "Equity in loss of affiliate" in our consolidated and combined statements of income (loss). Investments in, and advances to, associated companies are presented on a one-line basis in the caption "All other assets" in our consolidated and combined statement of financial position.

BHGE 2018 FORM 10-K | 59

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

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.

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 asset utilization (i.e. usage per hour) or the occurrence of a major maintenance event within the contract. The differences between the timing of our revenue

BHGE 2018 FORM 10-K | 60

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

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.

Research and Development

Research and development costs are expensed as incurred and relate to the research and development of new products and services. These costs amounted to $700 million, $501 million and $352 million for the years ended December 31, 2018, 2017 and 2016, respectively. Research and development expenses were reported in cost of goods sold and cost of services sold.

Cash, Cash Equivalents and Restricted Cash

Short-term investments with original maturities of three months or less are included in cash equivalents unless designated as available-for-sale and classified as investment securities.

As of December 31, 2018 and December 31, 2017, we had $1,208 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 are $461 million and $764 million, as of December 31, 2018 and December 31, 2017, respectively, held on behalf of GE.

Cash, cash equivalents and restricted cash includes a total of $747 million and $997 million of cash at December 31, 2018 and December 31, 2017, respectively, held on behalf of GE, and a corresponding liability is reported in short-term borrowings. See "Note 18. Related Party Transactions" for further details.

As a result of adopting FASB 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.

Allowance for Doubtful Accounts

We establish an allowance for doubtful accounts based on various factors including the payment history and financial condition of our debtors and the economic environment. Provisions for doubtful accounts are recorded based on the aging status of the debtor accounts or when it becomes evident that the debtor will not make the required payments at either contractual due dates or in the future.

Concentration of Credit Risk

We grant credit to our customers who primarily operate in the oil and natural gas industry. Although this concentration affects our overall exposure to credit risk, our current receivables are spread over a diverse group of customers across many countries, which mitigates this risk. We perform periodic credit evaluations of our customers' financial conditions, including monitoring our customers' payment history and current credit worthiness to manage this risk. We do not generally require collateral in support of our current receivables, but we may require payment in advance or security in the form of a letter of credit or a bank guarantee.

BHGE 2018 FORM 10-K | 61

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

Inventories

All inventories are stated at the lower of cost or net realizable values and they are measured on a first-in, first-out (FIFO) basis or average cost basis. As necessary, we record provisions and maintain reserves for excess, slow moving and obsolete inventory. To determine these reserve amounts, we regularly review inventory quantities on hand and compare them to estimates of future product demand, market conditions, production requirements and technological developments.

Property, Plant and Equipment (PP&E)

Property, plant and equipment is initially stated at cost and is depreciated over its estimated economic life. Subsequently, property, plant and equipment is measured at cost less accumulated depreciation and impairment losses. We manufacture a substantial portion of our tools and equipment and the cost of these items, which includes direct and indirect manufacturing costs, is capitalized and carried in inventory until it is completed.

Other Intangible Assets

We amortize the cost of other intangible assets over their estimated useful lives unless such lives are deemed indefinite. The cost of intangible assets is generally amortized on a straight-line basis over the asset's estimated economic life. Amortizable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. In these circumstances, they are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested annually for impairment and written down to fair value as required. Refer to the Impairment of Goodwill and Other Long-Lived Assets accounting policy.

Impairment of Goodwill and Other Long-lived Assets

We perform an annual impairment test of goodwill on a qualitative or quantitative basis for each of our reporting units as of July 1, or more frequently when circumstances indicate an impairment may exist at the reporting unit level. When performing the annual impairment test we have the option of first performing a qualitative assessment to determine the existence of events and circumstances that would lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If such a conclusion is reached, we would then be required to perform a quantitative impairment assessment of goodwill. However, if the assessment leads to a determination that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then no further assessments are required. A quantitative assessment for the determination of impairment is made by comparing the carrying amount of each reporting unit with its fair value, which is generally calculated using a combination of market, comparable transaction and discounted cash flow approaches. See "Note 7. Goodwill and Other Intangible Assets" for further information on valuation methodology and impairment of goodwill.

We review PP&E, intangible assets and certain other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable and at least annually for indefinite-lived intangible assets. When testing for impairment, we group our long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (or asset group). The determination of recoverability is made based upon the estimated undiscounted future net cash flows. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value of the related assets.

Financial Instruments

Our financial instruments include cash and equivalents, current receivables, investments, accounts payables, short and long-term debt, and derivative financial instruments.

We monitor our exposure to various business risks including commodity prices and foreign currency exchange rates and we regularly use derivative financial instruments to manage these risks. At the inception of a new derivative, we designate the derivative as a hedge or we determine the derivative to be undesignated as a hedging

BHGE 2018 FORM 10-K | 62

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

instrument. We document the relationships between the hedging instruments and the hedged items, as well as our risk management objectives and strategy for undertaking various hedge transactions. We assess whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged item at both the inception of the hedge and on an ongoing basis.

We have a program that utilizes foreign currency forward contracts to reduce the risks associated with the effects of certain foreign currency exposures. Under this program, our strategy is to have gains or losses on the foreign currency forward contracts mitigate the foreign currency transaction and translation gains or losses to the extent practical. These foreign currency exposures typically arise from changes in the value of assets (for example, current receivables) and liabilities (for example, current payables) which are denominated in currencies other than the functional currency of the respective entity. We record all derivatives as of the end of our reporting period in our consolidated and combined statement of financial position at fair value. For the forward contracts held as undesignated hedging instruments, we record the changes in fair value of the forward contracts in our consolidated and combined statements of income (loss) along with the change in the fair value, related to foreign exchange movements, of the hedged item. Changes in the fair value of forward contracts designated as cash flow hedging instruments are recognized in other comprehensive income until the hedged item is recognized in earnings. If derivatives designated as a cash flow hedge are determined to be ineffective, the ineffective portion of that derivative's change in fair value is recognized in earnings.

Fair Value Measurements

For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.

Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:

•	Level 1 - Quoted prices for identical instruments in active markets.

•	Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

•	Level 3 - Significant inputs to the valuation model are unobservable.

We maintain policies and procedures to value instruments using the best and most relevant data available. In addition, we perform reviews to assess the reasonableness of the valuations. With regard to Level 3 valuations (including instruments valued by third parties), we perform a variety of procedures to assess the reasonableness of the valuations. Such reviews include an evaluation of instruments whose fair value change exceeds predefined thresholds (and/or does not change) and consider the current interest rate, currency and credit environment, as well as other published data, such as rating agency market reports and current appraisals.

Recurring Fair Value Measurements

Derivatives

When we have Level 1 derivatives, which are traded either on exchanges or liquid over-the-counter markets, we use closing prices for valuation. The majority of our derivatives are valued using internal models and are included in Level 2. These internal models maximize the use of market observable inputs including interest rate curves and both forward and spot prices for currencies and commodities. Derivative assets and liabilities included in Level 2 primarily represent foreign currency and commodity forward contracts for the Company.

BHGE 2018 FORM 10-K | 63

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

Investments in Debt and Equity Securities

When available, we use quoted market prices to determine the fair value of investment securities, and they are included in Level 1. Level 1 securities primarily include publicly traded equity securities.

For investment securities for which market prices are observable for identical or similar investment securities but not readily accessible for each of those investments individually (that is, it is difficult to obtain pricing information for each individual investment security at the measurement date), we use pricing models that are consistent with what other market participants would use. The inputs and assumptions to the models are derived from market observable sources including: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market-related data. Thus, certain securities may not be priced using quoted prices, but rather determined from market observable information. These investments are included in Level 2. When we use valuations that are based on significant unobservable inputs we classify the investment securities in Level 3.

Non-Recurring Fair Value Measurements

Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments only in certain circumstances. These assets can include long-lived assets that have been reduced to fair value when they are held for sale, equity securities without readily determinable fair value and equity method investments and long-lived assets that are written down to fair value when they are impaired and the remeasurement of retained investments in formerly consolidated subsidiaries upon a change in control that results in a deconsolidation of a subsidiary, if we sell a controlling interest and retain a noncontrolling stake in the entity. Assets that are written down to fair value when impaired and retained investments are not subsequently adjusted to fair value unless further impairment occurs.

Investments in Equity Securities

Investments in equity securities are valued using market observable data such as quoted prices when available. When market observable data is unavailable, investments are valued using a discounted cash flow model, comparative market multiples or a combination of both approaches as appropriate and other third-party pricing sources.

Long-lived Assets

Fair values of long-lived assets, including real estate, are primarily derived internally and are based on observed sales transactions for similar assets. In other instances, for example, collateral types for which we do not have comparable observed sales transaction data, collateral values are developed internally and corroborated by external appraisal information. Adjustments to third-party valuations may be performed in circumstances where market comparables are not specific to the attributes of the specific collateral or appraisal information may not be reflective of current market conditions due to the passage of time and the occurrence of market events since receipt of the information.

Income Taxes

We file U.S. federal and state income tax returns which after the closing of the Transactions primarily includes our distributive share of items of income, gain, loss and deduction of BHGE LLC which is treated as a partnership for U.S. tax purposes. As such, BHGE LLC will not itself be subject to U.S. federal income tax under current U.S. tax laws. Non-U.S. current and deferred income taxes owed by the subsidiaries of BHGE LLC are reflected in the financial statements.

Prior to the closing of the Transactions, GE O&G was included in the consolidated U.S. federal, foreign and state income tax returns of GE, where allowable by law. Our prior year current and deferred taxes were determined based upon the separate return method (i.e., as if we were a taxpayer separate from GE).

BHGE 2018 FORM 10-K | 64

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

We account for taxes under the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial statement and tax return bases of assets and liabilities as well as from net operating losses and tax credit carryforwards, based on enacted tax rates expected to be in effect when taxes actually are paid or recovered and other provisions of the tax law. The effect of a change in tax laws or rates on deferred tax assets and liabilities is recognized in income in the period in which such change is enacted. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not, and a valuation allowance is established for any portion of a deferred tax asset that management believes may not be realized.

We provide U.S. deferred taxes on our outside basis difference in our investment in BHGE LLC. In determining the basis difference, we exclude non-deductible goodwill and the basis difference related to certain foreign corporations owned by BHGE LLC where the undistributed earnings of the foreign corporation have been, or will be, reinvested indefinitely.

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. Indefinite reinvestment is determined by management’s judgment about and intentions concerning the future operations of the Company. Most of these earnings have been reinvested in active non-U.S. business operations. It is not practicable to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.

Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. We operate in more than 120 countries and our tax filings are subject to audit by the tax authorities in the jurisdictions where we conduct business. These audits may result in assessments of additional taxes that are resolved with the tax authorities or through the courts. We have provided for the amounts that we believe will ultimately result from these proceedings. We recognize uncertain tax positions that are “more likely than not” to be sustained if the relevant tax authority were to audit the position with full knowledge of all the relevant facts and other information. For those tax positions that meet this threshold, we measure the amount of tax benefit based on the largest amount of tax benefit that has a greater than 50% chance of being realized in a final settlement with the relevant authority. We classify interest and penalties associated with uncertain tax positions as income tax expense. The effects of tax adjustments and settlements from taxing authorities are presented in the combined financial statements in the period they are recorded.

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). In 2018, we made an accounting policy election to account for these taxes as period costs.

Environmental Liabilities

We are involved in numerous remediation actions to clean up hazardous waste as required by federal and state laws. Liabilities for remediation costs exclude possible insurance recoveries and, when dates and amounts of such costs are not known, are not discounted. When there appears to be a range of possible costs with equal likelihood, liabilities are based on the low end of such range. It is reasonably possible that our environmental remediation exposure will exceed amounts accrued. However, due to uncertainties about the status of laws, regulations, technology and information related to individual sites, such amounts are not reasonably estimable. The determination of the required accruals for remediation costs is subject to uncertainty, including the evolving nature of environmental regulations and the difficulty in estimating the extent and type of remediation activity that is necessary.

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

BHGE 2018 FORM 10-K | 65

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

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.

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 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 consolidated and combined statements of income (loss) related to the adoption of the standard is summarized below (in millions, except per share amounts):

		Year Ended
		December 31, 2017			December 31, 2016
Revenue:
Sales of goods		$	163		$	(26	)
Sales of services		(243		)	(161		)
Total revenue		(80		)	(187		)
Operating loss		(175		)	(226		)
Net income (loss)		(150		)	(149		)
Net income (loss) attributable to BHGE		(30		)	—
Per share amounts:
Basic and diluted loss per Class A common stock		(0.07		)

The increase (decrease) to our historical 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		)
Baker Hughes, a GE company equity	(432		)
Noncontrolling interests	(331		)

BHGE 2018 FORM 10-K | 66

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

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 $25 million and an increase to noncontrolling interest of $42 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 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 consolidated and combined statements of income (loss) related to the adoption of ASU No. 2017-07 is summarized below:

	Year Ended
	December 31, 2017			December 31, 2016
Operating income (loss)	$	(1	)	$	24
Non operating income (loss)	1			(24		)

On October 1, 2018, we elected to early adopt 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 income (OCI) may be reclassified to retained earnings. The effect of the adoption of the standard was a reclassification of the tax effect recorded within accumulated other comprehensive income (AOCI) associated primarily with the change in tax rate under U.S tax reform to retained earnings. The adoption had no impact on our consolidated financial statements.

The following notes have been updated subsequent to the filing of the Form 10-K for the year ended December 31, 2017 to reflect a change due to the retrospective adoption of the new accounting standards: Notes 1, 2, 3, 4, 5, 8, 9, 12, 14, 15, and 17.

NEW ACCOUNTING STANDARDS TO BE ADOPTED

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 salestype, 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. In preparation for adoption of the standard, we have implemented internal controls and key system functionality to enable the preparation of financial information. The standard will have a material impact on our consolidated statement of financial position, but will not have a material impact on our consolidated income statements and consolidated cash flow statements. The most significant impact will be the recognition of ROU assets and lease liabilities for operating leases, while our accounting for capital leases remains substantially

BHGE 2018 FORM 10-K | 67

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

unchanged. Adoption of the standard will result in the recognition of additional ROU assets and lease liabilities for operating leases of approximately $0.8 billion as of January 1, 2019.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses. The ASU introduces a new accounting model, the Current Expected Credit Losses model (CECL), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for loans and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current GAAP, which generally require that a loss be incurred before it is recognized. The new standard will also apply to receivables arising from revenue transactions such as contract assets and accounts receivables and is effective for fiscal years beginning after December 15, 2019. We continue to evaluate the effect of the standard on our consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The ASU is effective for periods beginning after December 15, 2018, with an election to adopt early. The ASU requires certain changes to the presentation of hedge accounting in the financial statements and some new or modified disclosures. The ASU also simplifies the application of hedge accounting and expands the strategies that qualify for hedge accounting. ASU will not have a material effect on our consolidated financial statements.

All other new accounting pronouncements that have been issued but not yet effective are currently being evaluated and at this time are not expected to have a material impact on our financial position or results of operations.

NOTE 2. REVENUE RELATED TO CONTRACTS WITH CUSTOMERS

DISAGGREGATED REVENUE

We disaggregate our revenue from contracts with customers by primary geographic markets.

Total Revenue	2018			2017			2016
U.S.	$	6,576		$	4,409		$	3,156
Non-U.S.	16,301			12,770			9,926
Total	$	22,877		$	17,179		$	13,082

REMAINING PERFORMANCE OBLIGATIONS

As of December 31, 2018 and December 31, 2017, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $21.0 billion in each year, respectively. As of December 31, 2018, we expect to recognize revenue of approximately 45%, 63% and 88% 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 AND DISPOSITION

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 a newly formed partnership, BHGE LLC. The fair value of the consideration exchanged was $24,798 million.

BHGE 2018 FORM 10-K | 68

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

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.

Preliminary identifiable assets acquired and liabilities assumed	Estimated 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
All other assets	1,335
Liabilities
Accounts payable	$	(1,213	)
Borrowings	(3,370		)
Deferred income taxes (2)	(258		)
Liabilities for pension and other postretirement benefits	(654		)
All other liabilities	(1,676		)
Total identifiable net assets	$	10,870
Noncontrolling interest associated with net assets acquired	(35		)
Goodwill (3)	13,963
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. 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.

	Estimated Fair Value			Estimated Weighted Average Life (Years)
Trademarks - 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 $500 million of net deferred tax liabilities related to the fair value of intangible assets included in the purchase consideration and approximately $242 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 $911 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

BHGE 2018 FORM 10-K | 69

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

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, BHGE LLC is not itself 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. The members of BHGE LLC 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 of BHGE LLC, 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 BHGE LLC through subsidiaries, the taxes attributable to those subsidiaries will be reflected in our consolidated and combined financial statements.

MERGER AND RELATED COSTS

During 2018, 2017 and 2016, acquisition costs of $153 million, $373 million and $33 million, 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. In 2018, such costs also include costs incurred in connection with the finalization of the Master Agreement Framework and costs related to the anticipated separation from GE. See "Note 18. Related Party Transactions" for further details on the Master Agreement Framework.

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 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.

	2017			2016
Revenue	$	21,841		$	22,915
Net loss	(485		)	(2,883		)
Net loss attributable to the Company	(147		)	(1,005		)
Loss per Class A share - basic and diluted (1)	(0.34		)	(2.35		)

(1)	The calculation of diluted loss per Class A share excludes shares potentially issuable under stock-based incentive compensation plans and the exchange of Class B shares with Class A shares under the Exchange Agreement, as their effect, if included, would be antidilutive.

BHGE 2018 FORM 10-K | 70

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

BUSINESS DISPOSITION

In October 2018, the Company completed the sale of its Natural Gas Solution (NGS) business for a sales price of $375 million. NGS was part of our TPS segment and provided commercial and industrial products such as gas meters, chemical injection pumps, pipeline repair products and electric actuators. The sale resulted in a gain before income tax of $171 million reported in the "Other non operating income, net" caption of the consolidated and combined statements of income (loss).

NOTE 4. CURRENT RECEIVABLES

Current receivables are comprised of the following at December 31:

	2018			2017
Customer receivables	$	4,974		$	4,700
Related parties	653			801
Other	669			844
Total current receivables	6,296			6,345
Less: Allowance for doubtful accounts	(327		)	(330		)
Total current receivables, net	$	5,969		$	6,015

Customer receivables are recorded at the invoiced amount. Related parties consists primarily of amounts owed to us by GE. The "Other" category consists primarily of indirect taxes, customer retentions, other tax receivables and advance payments to suppliers.

NOTE 5. INVENTORIES

Inventories, net of reserves of $430 million and $360 million in 2018 and 2017, respectively, are comprised of the following at December 31:

	2018			2017
Finished goods	$	2,575		$	2,577
Work in process and raw materials	2,045			1,930
Total inventories, net	$	4,620		$	4,507

During 2018 and 2017, we recorded $105 million and $157 million of inventory impairments 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 consolidated and combined statements of income (loss).

BHGE 2018 FORM 10-K | 71

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

NOTE 6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are comprised of the following at December 31:

	Useful Life	2018			2017
Land and improvements (1)	8 - 20 years (1)	$	432		$	413
Buildings, structures and related equipment	5 - 40 years	2,854			3,168
Machinery, equipment and other	2 - 20 years	6,567			6,195
Total cost		9,853			9,776
Less: Accumulated depreciation		3,625			2,817
Property, plant and equipment, less accumulated depreciation		$	6,228		$	6,959

(1)	Useful life excludes land.

Depreciation expense relating to property, plant and equipment was $1,031 million, $716 million and $311 million in 2018, 2017 and 2016, respectively. See "Note 20. Restructuring, impairment and other" for additional information on property, plant and equipment impairments.

NOTE 7. GOODWILL AND 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
Acquisitions and purchase accounting adjustments (1)	13,052			—			—			—			13,052
Currency exchange and others	7			49			92			47			195
Balance at December 31, 2017	13,205			3,034			1,906			1,782			19,927
Acquisitions and purchase accounting adjustments (1)	(136		)	293			394			429			980
Currency exchange and others	(26		)	(17		)	(114		)	(33		)	(190		)
Balance at December 31, 2018	$	13,043		$	3,310		$	2,186		$	2,178		$	20,717

(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 $13,963 million resulting from the acquisition of Baker Hughes, $12,898 million is allocated to our Oilfield Services segment and the remainder to our other segments based on the expected benefit from the synergies of the acquisition.

We test goodwill for impairment annually in the third quarter of each year using data as of July 1 of that year, which would include consideration of any segment realignment. Our reporting units are the same as our four reportable segments. 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

BHGE 2018 FORM 10-K | 72

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

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 and July 1, 2017 for all four of our reporting units. The step one impairment test was performed considering macroeconomic and industry conditions, overall financial 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.

In addition to our annual impairment testing, we also test goodwill for impairment between annual impairment testing dates whenever events or circumstances occur that, in our judgment, could more likely than not reduce the fair value of one or more reporting units below its carrying amount. In assessing the possibility that a reporting unit’s fair value has been reduced below its carrying amount due to the occurrence of events or circumstances between annual impairment testing dates, we consider all available evidence, including, but not limited to, (i) the results of our impairment testing at the prior annual impairment testing date, in particular the magnitude of the excess of fair value over carrying value observed, (ii) downward revisions to internal forecasts, and the magnitude thereof, if any, (iii) the impact of the separation from GE, if any, and (iv) declines in our market capitalization below our book value, and the magnitude and duration of those declines, if any. Between July 1, 2018 and December 31, 2018, we have not identified any events or circumstances that could more likely than not reduce the fair value of one or more of our reporting units below its carrying amount.

As of December 31, 2018, we believe that the goodwill is recoverable, however, there can be no assurances that further sustained declines in macroeconomic or business conditions affecting our industry and business will not occur. The impairment testing discussed above involves significant management judgment and are based on assumptions about future commodity pricing, supply and demand for our goods and services, and market conditions, which are difficult to forecast in volatile economic environments. If actual results materially differ from the estimated assumptions utilized in our forecasts, we may need to record impairment charges in future periods.

BHGE 2018 FORM 10-K | 73

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

OTHER INTANGIBLE ASSETS

Intangible assets are comprised of the following at December 31:

	2018									2017
	Gross Carrying Amount			Accumulated Amortization			Net			Gross Carrying Amount			Accumulated Amortization			Net
Technology	$	1,107		$	(526	)	$	581		$	1,177		$	(440	)	$	737
Customer relationships	3,085			(944		)	2,141			3,202			(819		)	2,383
Capitalized software	1,118			(824		)	294			1,130			(697		)	433
Trade names and trademarks	698			(229		)	469			757			(159		)	598
Other	14			(2		)	12			10			—			10
Finite-lived intangible assets	6,022			(2,525		)	3,497			6,276			(2,115		)	4,161
Indefinite-lived intangible assets (1)	2,222			—			2,222			2,197			—			2,197
Total intangible assets	$	8,244		$	(2,525	)	$	5,719		$	8,473		$	(2,115	)	$	6,358

(1)	Indefinite-lived intangible assets principally comprise trade names and trademarks acquired in business combinations.

Indefinite-lived intangible assets as of December 31, 2018 and 2017 are comprised primarily of the Baker Hughes trade name, which was valued at $2,100 million using the relief-from-royalty method.

Intangible assets are generally amortized on a straight-line basis with estimated useful lives ranging from one to 30 years. Amortization expense for the years ended December 31, 2018, 2017 and 2016 was $455 million, $387 million and $239 million, respectively.

Estimated amortization expense for each of the subsequent five fiscal years is expected to be as follows:

Year	Estimated Amortization Expense
2019	$	348
2020	316
2021	267
2022	225
2023	213

BHGE 2018 FORM 10-K | 74

Baker Hughes, a GE company

Notes to 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 at December 31:

	2018			2017
Long-term product service agreements	$	609		$	589
Long-term equipment contracts (1)	1,085			1,095
Contract assets (total revenue in excess of billings) (2)	1,694			1,684
Deferred inventory costs (3)	179			360
Non-recurring engineering costs	21			—
Contract and other deferred assets	$	1,894		$	2,044

(1)	Reflects revenue earned in excess of billings on our long-term contracts to construct technically complex equipment and certain other service agreements.

(2)	Contract assets (total revenue in excess of billings) were $1,233 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 for which the criteria for revenue recognition has not yet been met.

Revenue recognized during the year ended December 31, 2018 and 2017 from performance obligations satisfied (or partially satisfied) in previous years related to our long-term service agreements was $26 million and $44 million, respectively. This includes revenue recognized from revisions to cost or billing estimates that may affect a contract’s total estimated profitability resulting in an adjustment of earnings.

NOTE 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:

	2018			2017
Progress collections	$	1,600		$	1,456
Deferred income	165			319
Progress collections and deferred income (contract liabilities) (1)	$	1,765		$	1,775

(1)	Progress collections and deferred income (contract liabilities) were $2,038 million at January 1, 2017.

Revenue recognized during the year ended December 31, 2018 and 2017 that was included in the contract liabilities at the beginning of the year was $1,392 million and $1,525 million, respectively.

BHGE 2018 FORM 10-K | 75

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

NOTE 10. BORROWINGS

Short-term and long-term borrowings are comprised of the following at December 31:

	2018					2017
	Amount			Weighted Average Rate(1)		Amount			Weighted Average Rate(1)
Short-term borrowings
Short-term bank borrowings	$	—		n/a		$	171		12.6	%
Current portion of long-term borrowings	—			n/a		639			2.1	%
Short-term borrowings from GE	896			n/a		1,124			n/a
Other short-term borrowings	46			9.9	%	103			7.6	%
Total short-term borrowings	942					2,037
Long-term borrowings
3.2% Senior Notes due August 2021 (2)	523			2.5	%	526			2.5	%
2.773% Senior Notes due December 2022	1,245			2.9	%	1,244			2.9	%
8.55% Debentures due June 2024 (2)	131			4.1	%	135			3.9	%
3.337% Senior Notes due December 2027	1,343			3.4	%	1,342			3.4	%
6.875% Notes due January 2029 (2)	294			3.9	%	308			3.9	%
5.125% Notes due September 2040 (2)	1,306			4.2	%	1,311			4.1	%
4.080% Senior Notes due December 2047	1,336			4.1	%	1,337			4.1	%
Capital leases	103			5.4	%	87			7.0	%
Other long-term borrowings	4			3.8	%	22			1.9	%
Total long-term borrowings	6,285					6,312
Total borrowings	$	7,227				$	8,349

(1)	Weighted average effective interest rate is based on the carrying value including step-up adjustments, as applicable, recorded upon the acquisition of Baker Hughes as of December 31, 2018 and 2017.

(2)	Represents long-term fixed rate debt obligations assumed in connection with the acquisition of Baker Hughes, net of amounts repurchased subsequent to the closing of the Transactions.

The estimated fair value of total borrowings at December 31, 2018 and December 31, 2017 was $6,629 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.

Maturities of debt for each of the five years in the period ended December 31, 2023, and in the aggregate thereafter, are listed in the table below:

	2019			2020			2021			2022			2023			Thereafter
Total debt	$	942		$	34		$	549		$	1,256		$	11		$	4,435

In July 2017, BHGE LLC entered into a new 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 year ended December 31, 2018, there were no borrowings under the 2017 Credit Agreement.

BHGE 2018 FORM 10-K | 76

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

In November 2017, BHGE LLC entered into 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 December 31, 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 BHGE LLC, on our registered debt securities. This co-obligor is a 100%-owned finance subsidiary of BHGE LLC that was incorporated for the sole purpose of serving as a co-obligor of debt securities and has no assets or operations other than those related to its sole purpose. Baker Hughes Co-Obligor, Inc. is also a co-obligor of the $3,950 million senior notes issued on December 11, 2017 by BHGE LLC in a private placement.

Certain Senior Notes contain covenants that restrict BHGE LLC's ability to take certain actions, including, but not limited to, the creation of certain liens securing debt, the entry into certain sale-leaseback transactions and engaging in certain merger, consolidation and asset sale transactions in excess of specified limits.

In January 2018, BHGE LLC redeemed all remaining aggregate principal amount of the 2018 Senior Notes of $615 million. Also in January 2018, BHGE LLC commenced an offering to exchange $3,950 million of all the outstanding, unregistered senior notes that were issued in a private offering on December 11, 2017, for identical, registered 2.773% Senior Notes due 2022, 3.337% Senior Notes due 2027 and 4.080% Senior Notes due 2047. The exchange offer was completed on January 31, 2018.

See "Note 18. Related Party Transactions" for additional information on the short-term borrowings from GE, and see "Note 16. Financial Instruments" for additional information about borrowings and associated swaps.

NOTE 11. EMPLOYEE BENEFIT PLANS

GE MULTI-EMPLOYER 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 $158 million, $132 million and $140 million in the years ended December 31, 2018, 2017 and 2016, respectively. In November 2018, the Company entered into an agreement with GE whereby GE will transfer the assets and liabilities of the GE UK Pension Plan related to the oil & gas businesses to BHGE on what is intended to be a fully funded basis. Subsequent to this transfer, BHGE shall cease to participate in the GE UK Pension Plan. This transfer is expected to close in 2019. Additionally, beginning in 2019, legacy GE O&G U.S. employees will cease to participate in the GE U.S. plans above.

DEFINED BENEFIT PLANS

In addition to these GE plans, certain of our employees are also covered by company sponsored pension plans. Our primary pension plans in 2018 included four U.S. plans and six non-U.S. pension plans, primarily in the UK, Germany, and Canada, all with pension 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; however, over half of these plans are either frozen or closed to new entrants. We also provide certain postretirement health care benefits (Other Postretirement Benefits), through an unfunded plan, to a closed group of U.S. employees who retire and meet certain age and service requirements.

Funded Status

The funded status position represents the difference between the benefit obligation and the plan assets. The projected benefit obligation (PBO) for pension benefits represents the actuarial present value of benefits attributed to employee services and compensation and includes an assumption about future compensation levels. The

BHGE 2018 FORM 10-K | 77

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

accumulated benefit obligation (ABO) is the actuarial present value of pension benefits attributed to employee service to date and present compensation levels. The ABO differs from the PBO in that the ABO does not include any assumptions about future compensation levels. Below is the reconciliation of the beginning and ending balances of benefit obligations, fair value of plan assets and the funded status of our plans.

	Pension Benefits						Other Postretirement Benefits
	2018			2017			2018			2017
Change in benefit obligation:
Benefit obligation at beginning of year	$	2,418		$	820		$	187		$	117
Service cost	21			37			2			2
Interest cost	71			51			5			6
Plan amendment	20			—			1			(23		)
Actuarial loss (gain)	(93		)	41			(23		)	—
Benefits paid	(67		)	(65		)	(21		)	(13		)
Curtailments	(7		)	(45		)	(5		)	5
Settlements	(59		)	(10		)	—			—
Business acquisition (1)	—			1,546			—			93
Other	16			(2		)	(39		)	—
Foreign currency translation adjustments	(59		)	45			—			—
Benefit obligation at end of year	2,261			2,418			107			187
Change in plan assets:
Fair value of plan assets at beginning of year	2,059			567			—			—
Actual return on plan assets	(60		)	152			—			—
Employer contributions	51			50			21			13
Benefits paid	(67		)	(65		)	(21		)	(13		)
Settlements	(59		)	(10		)	—			—
Business acquisition (1)	—			1,342			—			—
Other	(9		)	(2		)	—			—
Foreign currency translation adjustments	(49		)	25			—			—
Fair value of plan assets at end of year	1,866			2,059			—			—
Funded status - underfunded at end of year	$	(395	)	$	(359	)	$	(107	)	$	(187	)
Accumulated benefit obligation	$	2,225		$	2,373		$	107		$	187

(1)	Relates to the acquisition of Baker Hughes on July 3, 2017.

The amounts recognized in the consolidated and combined statements of financial position consist of the following at December 31:

	Pension Benefits						Other Postretirement Benefits
	2018			2017			2018			2017
Noncurrent assets	$	47		$	46		$	—		$	—
Current liabilities	(13		)	(10		)	(19		)	(24		)
Noncurrent liabilities	(429		)	(395		)	(88		)	(163		)
Net amount recognized	$	(395	)	$	(359	)	$	(107	)	$	(187	)

BHGE 2018 FORM 10-K | 78

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

Information for the plans with ABOs in excess of plan assets is as follows at December 31:

	Pension Benefits						Other Postretirement Benefits
	2018			2017			2018			2017
Projected benefit obligation	$	1,621		$	1,692		n/a			n/a
Accumulated benefit obligation	$	1,585		$	1,647		$	107		$	187
Fair value of plan assets	$	1,179		$	1,286		n/a			n/a

Net Periodic Cost (Income)

The components of net periodic cost (income) are as follows for the years ended December 31:

	Pension Benefits												Other Postretirement Benefits
	2018				2017				2016				2018			2017			2016
Service cost	$	21			$	37			$	18			$	2		$	2		$	2
Interest cost	71				51				34				5			6			5
Expected return on plan assets	(121		)		(81		)		(46		)		—			—			—
Amortization of prior service credit	—				—				—				(5		)	(3		)	(2		)
Amortization of net actuarial loss (gain)	10				12				14				(2		)	(2		)	—
Curtailment / settlement loss (gain)	2				(45		)	(2)	(26		)	(1)	(5		)	2			(2		)
Net periodic cost (income)	$	(17	)		$	(26	)		$	(6	)		$	(5	)	$	5		$	3

(1)	Primarily associated with two UK plans merging into the GE UK Pension Plan.

(2)

As a result of the acquisition of Baker Hughes, we obtained a non-contributory pension plan (the Baker Hughes Incorporated Pension Plan or BHIPP). In 2017, the Compensation Committee of the Board of Directors approved amendments to the BHIPP to close the plan to new participants and freeze accruals of future service-related benefits effective as of December 31, 2017. As a result of these actions, the Company recorded a curtailment gain of $45 million. The curtailment was recorded by the Company during the fourth quarter of 2017 and included in the “Other non-operating income (loss), net” caption of the consolidated and combined statements of income (loss).

The service cost component of the net periodic cost (benefit) is included in "operating income (loss)" and all other components are included in "Other non operating income, net" caption of the consolidated and combined statements of income (loss).

Assumptions Used in Benefit Calculations

Accounting requirements necessitate the use of assumptions to reflect the uncertainties and the length of time over which the pension obligations will be paid. The actual amount of future benefit payments will depend upon when participants retire, the amount of their benefit at retirement and how long they live. To reflect the obligation in today’s dollars, we discount the future payments using a rate that matches the time frame over which the payments will be made. We also need to assume a long-term rate of return that will be earned on investments used to fund these payments.

Weighted average assumptions used to determine benefit obligations for these plans are as follows for the years ended December 31:

	Pension Benefits				Other Postretirement Benefits
	2018		2017		2018		2017
Discount rate	3.43	%	2.99	%	3.92	%	3.32	%
Rate of compensation increase	3.78	%	3.82	%	n/a		n/a

BHGE 2018 FORM 10-K | 79

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

Weighted average assumptions used to determine net periodic cost for these plans are as follows for the years ended December 31:

	Pension Benefits						Other Postretirement Benefits
	2018		2017		2016		2018		2017		2016
Discount rate	2.99	%	3.24	%	3.83	%	3.32	%	3.72	%	4.25	%
Expected long-term return on plan assets	5.94	%	6.26	%	6.86	%	n/a		n/a		n/a

We determine the discount rate using a bond matching model, whereby the weighted average yields on high-quality fixed-income securities have maturities consistent with the timing of benefit payments. Lower discount rates increase the size of the benefit obligations and pension expense in the following year; higher discount rates reduce the size of the benefit obligation and subsequent-year pension expense. The compensation assumption is used in our active plans to estimate the annual rate at which pay of plan participants will grow. If the rate of growth assumed increases, the size of the pension obligations will increase.

The expected return on plan assets is the estimated long-term rate of return that will be earned on the investments used to fund the pension obligations. To determine this rate, we consider the current and target composition of plan investments, our historical returns earned, and our expectations about the future.

Assumed health care cost trend rates can have a significant effect on the amounts reported for Other Postretirement Benefits. As of December 31, 2018, the health care cost trend rate was 6.50%, declining gradually each successive year until it reaches 4.68%. A one percentage point change in assumed health care cost trend rates would have been immaterial in 2018.

Accumulated Other Comprehensive Loss

The amount recorded before-tax in accumulated other comprehensive loss related to employee benefit plans consists of the following at December 31:

	Pension Benefits						Other Postretirement Benefits
	2018			2017			2018			2017
Net actuarial loss (gain)	$	177		$	117		$	(29	)	$	(16	)
Net prior service cost (credit)	20			—			(18		)	(25		)
Total	$	197		$	117		$	(47	)	$	(41	)

The estimated net actuarial loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss and included in net periodic benefit cost in 2019 is $15 million and $1 million, respectively. The estimated net actuarial gain and prior service credit for the other postretirement benefits that will be amortized from accumulated other comprehensive loss and included in net periodic benefit cost in 2019 is $7 million and $3 million, respectively.

Plan Assets

We have investment committees that meet regularly to review the portfolio returns and to determine asset-mix targets based on asset/liability studies. Third-party investment consultants assist such committees in developing asset allocation strategies to determine our expected rates of return and expected risk for various investment portfolios. The investment committees considered these strategies in the formal establishment of the current asset-mix targets based on the projected risk and return levels for all major asset classes.

BHGE 2018 FORM 10-K | 80

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

The table below presents the fair value of the pension assets at December 31:

	2018			2017
Equity securities
U.S. equity securities (1)	$	215		$	207
Global equity securities (1)	338			551
Debt securities
Fixed income and cash investment funds	937			658
U.S. corporate	—			70
Other debt securities	4			55
Private equities	60			107
Real estate	35			44
Other investments (2)	277			367
Total plan assets	$	1,866		$	2,059

(1)	Include direct investments and investment funds.

(2)	Substantially all represented hedge fund and asset allocation fund investments.

Plan assets valued using Net Asset Value (NAV) as a practical expedient amounted to $1,802 million and $1,684 million as of December 31, 2018 and 2017, respectively. The percentages of plan assets valued using NAV by investment fund type for equity securities, fixed income and cash, and alternative investments were 30%, 48%, and 19% as of December 31, 2018, respectively, and 30%, 28%, and 24% as of December 31, 2017, respectively. Those investments that were measured at fair value using NAV as practical expedient were excluded from the fair value hierarchy. The practical expedient was not applied for investments with a fair value of $64 million and $375 million as of December 31, 2018 and 2017, respectively. There were no investments classified within Level 3 in 2018. Investments classified within Level 3 in 2017 were $86 million. The remaining investments were considered Level 1 and 2.

Funding Policy

The funding policy for our Pension Benefits is to contribute amounts sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws plus such additional amounts as we may determine to be appropriate. In 2018, we contributed approximately $51 million. We expect to contribute approximately $22 million to our pension plans in 2019.

We fund our Other Postretirement Benefits on a pay-as-you-go basis. In 2018, we contributed $21 million to these plans. In 2019, we expect to contribute approximately $19 million to fund such benefits.

The following table presents the expected benefit payments over the next 10 years. The U.S. and non-U.S. pension benefit payments are made by the respective pension trust funds.

Year	Pension Benefits					Other Postretirement Benefits
2019		$	113				$	19
2020		109					17
2021		112					12
2022		113					9
2023		113					8
2024-2028		594					31

BHGE 2018 FORM 10-K | 81

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

Defined Contribution Plans

Our primary defined contribution plan during 2018 was the Company sponsored U.S. 401(k) plan (401(k) Plan). The 401(k) Plan allows eligible employees to elect to contribute portions of their eligible compensation to an investment trust. Employee contributions are matched by the Company in cash at the rate of $1.00 per $1.00 employee contribution for the first 5% of the employee's eligible compensation, and such contributions vest immediately. In addition, we make cash contributions for all eligible employees of 4% of their eligible compensation and such contributions are fully vested to the employee after three years of employment. During 2018 and 2017, the legacy Baker Hughes employees participated in the 401(k) Plan whereas the legacy GE O&G employees continued to participate in the GE sponsored plan. The 401(k) Plan provides several investment options, for which the employee has sole investment discretion, however, the 401(k) Plan does not offer the Company's common stock as an investment option. Our costs for the 401(k) Plan and several other U.S. and non-U.S. defined contribution plans amounted to $137 million and $71 million, in 2018 and 2017, respectively. Beginning in 2019, certain legacy GE O&G employees are eligible to participate in our defined contribution plans, including our 401(k) Plan.

Other

We have two non-qualified defined contribution plans that are invested through trusts. The assets and corresponding liabilities were $233 million and $278 million at December 31, 2018 and 2017, respectively, and are included in "All other assets" and "Liabilities for pensions and other employee benefits" captions in our consolidated and combined statements of financial position.

NOTE 12. INCOME TAXES

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 impact of U.S. tax reform was initially recorded on a provisional basis as the legislation provided for additional guidance to be issued by the U.S. Department of the Treasury on several provisions including the computation of the transition tax. Based on guidance received to date, finalization of purchase accounting for the Baker Hughes acquisition, and finalization of our 2017 U.S. income tax returns, we have recorded a $107 million tax benefit in 2018 for the impact of tax reform primarily related to the revaluation of deferred taxes.

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). We have made an accounting policy election to account for these taxes as period costs.

The provision or benefit for income taxes is comprised of the following for the years ended December 31:

	2018			2017			2016
Current:
U.S.	$	35		$	(33	)	$	(114	)
Foreign	472			411			325
Total current	507			378			211
Deferred:
U.S.	(24		)	(266		)	(5		)
Foreign	(225		)	(67		)	(33		)
Total deferred	(249		)	(333		)	(38		)
Provision for income taxes	$	258		$	45		$	173

BHGE 2018 FORM 10-K | 82

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

The geographic sources of income (loss) before income taxes, inclusive of equity in loss of affiliate are as follows for the years ended December 31:

	2018			2017			2016
U.S.	$	(672	)	$	(1,189	)	$	(487	)
Foreign	1,213			843			845
Income (loss) before income taxes, inclusive of equity in loss of affiliate	$	541		$	(346	)	$	358

The benefit or provision for income taxes differs from the amount computed by applying the U.S. statutory income tax rate to the loss or income before income taxes for the reasons set forth below for the years ended December 31:

	2018			2017			2016
Income (loss) before income taxes, inclusive of equity in loss of affiliate	$	541		$	(346	)	$	358
Taxes at the U.S. federal statutory income tax rate	114			(121		)	125
Effect of foreign operations	103			(19		)	(2		)
Tax impact of partnership structure	80			171			—
Change in valuation allowances	87			169			28
Tax Cuts and Jobs Act enactment	(107		)	(132		)	—
Other - net	(19		)	(23		)	22
Provision for income taxes	$	258		$	45		$	173
Actual income tax rate	47.7		%	(13.0		)%	48.3		%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss and tax credit carryforwards.

The tax effects of our temporary differences and carryforwards are as follows at December 31:

	2018			2017
Deferred tax assets:
Receivables	$	117		$	98
Inventory	79			63
Property	191			144
Goodwill and other intangibles	132			—
Employee benefits	97			64
Investment in partnership	228			74
Other accrued expenses	74			91
Operating loss carryforwards	1,525			1,376
Tax credit carryforwards	653			554
Other	232			498
Total deferred income tax asset	3,328			2,962
Valuation allowances	(2,372		)	(2,484		)
Total deferred income tax asset after valuation allowance	956			478
Deferred tax liabilities:
Goodwill and other intangibles	—			(202		)
Undistributed earnings of foreign subsidiaries	(9		)	—
Other	(18		)	(51		)
Total deferred income tax liability	(27		)	(253		)
Net deferred tax asset	$	929		$	225

BHGE 2018 FORM 10-K | 83

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

At December 31, 2018, we had approximately $141 million of non-U.S. tax credits which may be carried forward indefinitely under applicable foreign law, $466 million of foreign tax credits and $46 million of other credits, the majority of which will expire after tax year 2027 under U.S. tax law. Additionally, we had $1,525 million of net operating loss carryforwards, of which approximately $319 million will expire within five years, $186 million will expire between six and 20 years, and the remainder can be carried forward indefinitely.

We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. At December 31, 2018, $2,372 million of valuation allowances are recorded against various deferred tax assets, including foreign net operating losses (NOL) of $1,253 million, U.S. federal and foreign tax credit carryforwards of $607 million, other U.S. NOL's and tax credit carryforwards of $84 million, and certain other U.S. and foreign deferred tax assets of $428 million. There are $206 million of deferred tax assets related to foreign net operating loss carryforwards without a valuation allowance as we expect that the deferred tax assets will be realized within the carryforward period.

Substantially all of our undistributed earnings of our foreign subsidiaries are indefinitely reinvested. 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. Indefinite reinvestment is determined by management’s intentions concerning the future operations of the Company. Most of these earnings have been reinvested in active non-U.S. business operations. However, as a result of U.S. tax reform, substantially all of our prior unrepatriated foreign earnings were subject to U.S. tax and accordingly we expect to have the ability to repatriate those earnings without incremental U.S. federal tax cost. As a result of U.S. tax reform, we changed our intent regarding certain cash repatriations and have accrued an additional $9 million of foreign withholding taxes. As of December 31, 2018, the cumulative amount of indefinitely reinvested foreign earnings is approximately $6.3 billion. Computation of the potential deferred tax liability associated with these undistributed earnings and any other basis differences is not practicable.

At December 31, 2018, we had $472 million of tax liabilities for total gross unrecognized tax benefits related to uncertain tax positions. In addition to these uncertain tax positions, we had $91 million and $34 million related to interest and penalties, respectively, for total liabilities of $597 million for uncertain positions. If we were to prevail on all uncertain positions, the net effect would result in an income tax benefit of approximately $516 million. The remaining $81 million compromised of $21 million for deferred tax assets that represent tax benefits that would be received in different taxing jurisdictions in the event that we did not prevail on all uncertain tax positions and increased valuation allowances of $60 million.

The following table presents the changes in our gross unrecognized tax benefits included in the consolidated and combined statements of financial position.

Asset / (Liability)	2018			2017
Balance at beginning of year	$	(395	)	$	(94	)
Balance acquired from Baker Hughes	(142		)	(326		)
Additions for tax positions of the current year	(21		)	(13		)
Additions for tax positions of prior years	(95		)	(19		)
Reductions for tax positions of prior years	101			32
Settlements with tax authorities	35			14
Lapse of statute of limitations	45			11
Balance at end of year	$	(472	)	$	(395	)

BHGE 2018 FORM 10-K | 84

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

It is expected that the amount of unrecognized tax benefits will change in the next twelve months due to expiring statutes, audit activity, tax payments, and competent authority proceedings related to transfer pricing or final decisions in matters that are the subject of litigation in various taxing jurisdictions in which we operate. At December 31, 2018, we had approximately $96 million of tax liabilities, net of $1 million of tax assets, related to uncertain tax positions, each of which are individually insignificant, and each of which are reasonably possible of being settled within the next twelve months.

We conduct business in more than 120 countries and are subject to income taxes in most taxing jurisdictions in which we operate. All Internal Revenue Service examinations have been completed and closed through year end 2015 for the most significant U.S. returns. We believe there are no other jurisdictions in which the outcome of unresolved issues or claims is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties.

NOTE 13. STOCK-BASED COMPENSATION

In July 2017, we adopted the BHGE 2017 Long-Term Incentive Plan (LTI Plan) under which we may grant stock options and other equity-based awards to employees and non-employee directors providing services to the Company and our subsidiaries. A total of up to 57.4 million shares of Class A common stock are authorized for issuance pursuant to awards granted under the LTI Plan over its term which expires on the date of the annual meeting of the Company in 2027. A total of 46.2 million shares of Class A common stock are available for issuance as of December 31, 2018.

Stock-based compensation cost was $121 million and $37 million in 2018 and 2017, respectively. Stock-based compensation cost is measured at the date of grant based on the calculated fair value of the award and is generally recognized on a straight-line basis over the vesting period of the equity grant. The compensation cost is determined based on awards ultimately expected to vest; therefore, we have reduced the cost for estimated forfeitures based on historical forfeiture rates. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. There were no stock-based compensation costs capitalized as the amounts were not material.

Stock Options

We may grant stock options to our officers, directors and key employees. Stock options generally vest in equal amounts over a three-year vesting period provided that the employee has remained continuously employed by the Company through such vesting date. The fair value of each stock option granted is estimated using the Black-Scholes option pricing model. The following table presents the weighted average assumptions used in the option pricing model for options granted under the LTI Plan. The expected life of the options represents the period of time the options are expected to be outstanding. The expected life is based on a simple average of the vesting term and original contractual term of the awards. The expected volatility is based on the historical volatility of our five main competitors over a six year period. The risk-free interest rate is based on the observed U.S. Treasury yield curve in effect at the time the options were granted. The dividend yield is based on a five year history of dividend payouts in Baker Hughes.

	2018			2017
Expected life (years)	6			6
Risk-free interest rate	2.5		%	2.1		%
Volatility	33.7		%	36.4		%
Dividend yield	2		%	1.2		%
Weighted average fair value per share at grant date	$	10.34		$	12.32

BHGE 2018 FORM 10-K | 85

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

The following table presents the changes in stock options outstanding and related information (in thousands, except per option prices):

	Number of Options		Weighted Average Exercise Price Per Option
Outstanding at December 31, 2017	7,841		$	35.59
Granted	1,248		35.53
Exercised	(683	)	25.59
Forfeited	(184	)	36.59
Expired	(684	)	54.41
Outstanding at December 31, 2018	7,538		$	34.76
Exercisable at December 31, 2018	5,389		$	34.27

The weighted average remaining contractual term for options outstanding and options exercisable at December 31, 2018 were 4.7 years and three years, respectively. The maximum contractual term of options outstanding is 9.6 years.

There were 505 thousand options that vested in 2018. As of December 31, 2018, there was $18 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 1.8 years.

The total intrinsic value of stock options (defined as the amount by which the market price of our common stock on the date of exercise exceeds the exercise price of the option) exercised in 2018 was $6 million. There is no income tax benefit realized from stock options exercised in 2018.

The total intrinsic value of stock options outstanding at December 31, 2018 was $1 million, all of which relates to options vested and exercisable. The intrinsic value of stock options outstanding is calculated as the amount by which the quoted price of $21.50 of our common stock as of the end of 2018 exceeds the exercise price of the options.

Restricted Stock

In addition to stock options, our officers, directors and key employees may be granted restricted stock awards (RSA), which is an award of common stock with no exercise price, or restricted stock units (RSU), where each unit represents the right to receive, at the end of a stipulated period, one unrestricted share of stock with no exercise price. Certain RSAs and RSUs are subject to cliff or graded vesting, generally ranging over a three year period, or over a one year period for non-employee directors. Cash dividend equivalents are accrued on RSUs and are payable upon vesting of the awards. We determine the fair value of restricted stock awards and restricted stock units based on the market price of our common stock on the date of grant, discounted by the present value of future dividends.

The following table presents the changes of RSUs and related information (in thousands, except per unit prices):

	Number of Units		Weighted Average Grant Date Fair Value Per Unit
Unvested balance at December 31, 2017	3,286		$	38.01
Granted	5,269		35.47
Vested	(1,212	)	37.45
Forfeited	(462	)	35.12
Unvested balance at December 31, 2018	6,882		$	36.18

BHGE 2018 FORM 10-K | 86

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

In 2018, the total intrinsic value of RSUs vested (defined as the market value of shares awarded at vesting date) was $41 million and unvested RSUs was $148 million. The total fair value of RSUs vested in 2018 was $45 million. As of December 31, 2018, there was $166 million of total unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted average period of 1.9 years.

Performance Share Units

During 2018, we initiated a new plan where we grant performance share units (PSUs) to certain officers and key employees. The PSUs are stock-based awards tied to predefined company metrics which determine the number of units to be received. PSUs generally cliff vest after a three-year service period. Cash dividend equivalents are accrued on PSUs and are payable upon vesting of the awards. The fair value of the awards are based on the market price of our common stock on the date of grant. During 2018, we granted 952 thousand PSUs at a weighted average grant date fair value of $35.13. At December 31, 2018, we had 927 thousand PSUs unvested and outstanding.

The total intrinsic value of PSUs (defined as the value of the shares awarded at the year end market price) outstanding was $20 million as of December 31, 2018. Total unrecognized compensation cost related to unvested PSUs, which is expected to be recognized over a weighted average period of 2.2 years, was $23 million as of December 31, 2018.

NOTE 14. EQUITY

COMMON STOCK

We are authorized to issue 2 billion shares of Class A common stock, 1.25 billion shares of Class B common stock and 50 million shares of preferred stock each of which have a par value of $0.0001 per share. The number of shares of Class A common stock and Class B common stock outstanding at December 31, 2018 is 513 million and 522 million, respectively. We have not issued any preferred stock. GE owns all the issued and outstanding Class B common stock. Each share of Class A and Class B common stock and the associated membership interest in BHGE LLC form a paired interest. While each share of Class B common stock has equal voting rights to a share of Class A common stock, it has no economic rights, meaning holders of Class B common stock have no right to dividends and any assets in the event of liquidation of the Company.

During 2018 and 2017, the Company declared and paid aggregate regular dividends of $0.72 per share and $0.35 per share, respectively, to holders of record of the Company's Class A common stock. In addition, in 2017 former Baker Hughes stockholders, immediately after the completion of the Transactions, received a special one-time cash dividend of $17.50 per share paid by the Company to holders of record of the Company's Class A common stock.

The following table presents the changes in the number of shares outstanding (in thousands):

	2018				2017
	Class A Common Stock		Class B Common Stock		Class A Common Stock		Class B Common Stock
Balance at beginning of year	422,208		706,985		—		—
Issue of shares on business combination at July 3, 2017	—		—		427,709		717,111
Issue of shares upon vesting of restricted stock units (1)	835		—		290		—
Issue of shares on exercises of stock options (1)	657		—		256		—
Exchange of Class B Common Stock for Class A Common Stock (2)	101,200		(101,200	)	—		—
Stock repurchase program (3) (4)	(11,501	)	(84,241	)	(6,047	)	(10,126	)
Balance at end of year	513,399		521,543		422,208		706,985

BHGE 2018 FORM 10-K | 87

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

(1)	Share amounts reflected above are net of shares withheld to satisfy the employee's tax withholding obligation.

(2)

In November 2018, we completed an underwritten secondary public offering in which GE and its affiliates sold 101.2 million shares of our Class A common stock. We did not receive any proceeds from the shares sold by GE and its affiliates in this offering. The offering included the exchange of BHGE LLC Units (together with the corresponding shares of Class B common stock) for Class A common stock by GE and its affiliates per the Exchange Agreement.

(3)	In November 2017, our board of directors authorized BHGE LLC to repurchase up to $3 billion of its common units from the Company and GE. The $3 billion repurchase authorization is the aggregate authorization for repurchases of Class A common stock and Class B common stock together with its paired common unit. As of December 31, 2018, the stock repurchase program has been substantially completed.

(4)

During 2018, we repurchased and canceled 11,500,992 shares of Class A common stock for a total of $374 million and 19,241,160 shares of Class B common stock from GE together with the paired common units of BHGE LLC for $626 million. Additionally, in November 2018, we also repurchased 65 million of BHGE LLC Units from GE and its affiliates for an aggregate of $1,461 million, or $22.48 per share, which is the same per share price, net of discounts and commissions paid by the underwriters to GE and its affiliates in the underwritten public offering. In connection with this repurchase, the corresponding shares of Class B common stock held by GE and its affiliates were canceled.

As a result of the exchange of shares in the secondary offering and the BHGE LLC Units repurchased in November 2018, GE's economic interest in BHGE LLC reduced during the fourth quarter of 2018 from approximately 62.5% to approximately 50.4%. The effect of this change in ownership resulted in a decrease in noncontrolling interests of $3,761 million and accumulated other comprehensive income of $282 million with a corresponding increase in capital in excess of par value totaling $4,043 million.

BHGE 2018 FORM 10-K | 88

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

ACCUMULATED OTHER COMPREHENSIVE LOSS (AOCL)

The following table presents 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, 2016	$	—		$	(1,795	)	$	(10	)	$	(83	)	$	(1,888	)
Other comprehensive income (loss) before reclassifications	41			(4		)	8			45			90
Amounts reclassified from accumulated other comprehensive loss	(39		)	—			7			1			(31		)
Deferred taxes	2			(10		)	(3		)	9			(2		)
Other comprehensive income (loss)	4			(14		)	12			55			57
Less: Other comprehensive income attributable to noncontrolling interests	3			38			2			37			80
Less: Other adjustments	—			—			—			13			13
Less: Reallocation of AOCL based on ownership of GE and previous Baker Hughes stockholders	—			(1,170		)	(1		)	(63		)	(1,234		)
Less: Activity related to noncontrolling interest	—			5			—			8			13
Balance at December 31, 2017	1			(682		)	1			(23		)	(703		)
Other comprehensive loss before reclassifications	(1		)	(502		)	(6		)	(70		)	(579		)
Amounts reclassified from accumulated other comprehensive loss	—			—			1			5			6
Deferred taxes	(2		)	—			1			1			—
Other comprehensive loss	(3		)	(502		)	(4		)	(64		)	(573		)
Less: Other comprehensive loss attributable to noncontrolling interests	(2		)	(303		)	(2		)	(36		)	(343		)
Less: Reallocation of AOCL based on change in ownership of BHGE LLC Units	—			271			—			11			282
Less: Activity related to noncontrolling interest	—			—			—			4			4
Balance at December 31, 2018	$	—		$	(1,152	)	$	(1	)	$	(66	)	$	(1,219	)

The amounts reclassified from accumulated other comprehensive loss during the years ended December 31, 2018 and 2017 represent (i) realized gains (losses) on investment securities recorded in other non operating income, net (ii) gains (losses) reclassified on cash flow hedges when the hedged transaction occurs and (iii) the amortization of net actuarial loss and prior service credit, and curtailments which are included in the computation of net periodic pension cost (see "Note 11. Employee Benefit Plans" for additional details). Net periodic pension cost is recorded across the various cost and expense line items within the consolidated and combined statements of income (loss).

BHGE 2018 FORM 10-K | 89

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

NONCONTROLLING INTEREST

Noncontrolling interests represent the portion of net assets in consolidated entities that are not owned by the Company. As a result of the exchange of shares in the secondary offering and the BHGE LLC Units repurchased in November 2018, GE's economic interest in BHGE LLC reduced during the fourth quarter of 2018 from approximately 62.5% to approximately 50.4%. The effect of this change in ownership resulted in a decrease in noncontrolling interests of $3,761 million and accumulated other comprehensive income of $282 million with a corresponding increase in capital in excess of par value totaling $4,043 million.

As of December 31, 2018 and December 31, 2017, GE owned approximately 50.4% and 62.5%, respectively, of BHGE LLC and this represents the majority of the noncontrolling interest balance reported within equity.

	2018			2017
GE's interest in BHGE LLC	$	17,438		$	23,993
Other noncontrolling interests	110			140
Total noncontrolling interests	$	17,548		$	24,133

NOTE 15. EARNINGS PER SHARE

Basic and diluted net income (loss) per share of Class A common stock is presented below:

(In millions, except per share amounts)	2018			2017			2016
Net income (loss)	$	283		$	(391	)	$	185
Less: Net income attributable to GE O&G pre-merger	—			42			254
Less: Net income (loss) attributable to noncontrolling interests	88			(330		)	(69		)
Net income (loss) attributable to BHGE	$	195		$	(103	)	$	—
Weighted average shares outstanding:
Class A basic	427			427
Class A diluted	429			427
Net income (loss) per share attributable to common stockholders:
Class A basic	$	0.46		$	(0.24	)
Class A diluted	$	0.45		$	(0.24	)

The allocation of net income (loss) to holders of shares of Class A common stock began following the close of the Transactions. Therefore, the earnings per share is nil for 2016. Please refer to "Note 3. Business Acquisition and Disposition" for pro forma earnings per share.

On July 3, 2017, GE, BHGE and BHGE LLC entered into an Exchange Agreement under which GE is entitled to exchange its holding in Class B common stock and units of BHGE LLC for Class A common stock on a one-for-one basis (subject to adjustment in accordance with the terms of the Exchange Agreement) or, at the option of BHGE, an amount of cash equal to the aggregate value of the shares of Class A common stock that would have otherwise been received by GE in the exchange. In computing the dilutive effect, if any, that the aforementioned exchange would have on net income (loss) per share, net income (loss) attributable to holders of Class A common stock would be adjusted due to the elimination of the noncontrolling interests associated with the Class B common stock (including any tax impact). For the year ended December 31, 2018 and 2017, such exchange is not reflected in diluted net income (loss) per share as the assumed exchange is not dilutive.

For the year ended December 31, 2018, Class A diluted shares include the dilutive impact of equity awards, primarily stock options and RSU's. For the year ended December 31, 2017, we excluded outstanding stock options and RSUs from the computation of diluted net income (loss) per share because their effect is antidilutive.

Shares of our Class B common stock do not share in earnings or losses of the Company and are not considered in the calculation of basic or diluted earnings per share (EPS). As such, separate presentation of basic

BHGE 2018 FORM 10-K | 90

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

and diluted EPS of Class B under the two class method has not been presented.

NOTE 16. 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.

	2018												2017
	Level 1			Level 2			Level 3			Net Balance			Level 1			Level 2			Level 3			Net Balance
Assets
Derivatives	$	—		$	74		$	—		$	74		$	—		$	150		$	—		$	150
Investment securities	39			—			288			327			81			8			304			393
Total assets	39			74			288			401			81			158			304			543
Liabilities
Derivatives	—			(82		)	—			(82		)	—			(95		)	—			(95		)
Total liabilities	$	—		$	(82	)	$	—		$	(82	)	$	—		$	(95	)	$	—		$	(95	)

There were no transfers between Level 1, 2 and 3 during 2018.

The following table provides a reconciliation of recurring Level 3 fair value measurements for investment securities:

	2018			2017
Balance at beginning of year	$	304		$	—
Additions as a result of business combination	—			179
Purchases	75			186
Proceeds at maturity	(90		)	(62		)
Unrealized gains (losses) recognized in accumulated other comprehensive income (loss)	(1		)	1
Balance at end of year	$	288		$	304

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 consolidated and combined statement of income (loss) on account of any Level 3 instrument still held at the reporting date. We hold $149 million and $127 million of these investment securities on behalf of GE at December 31, 2018 and December 31, 2017, respectively.

	2018												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 (1)	$	288		$	—		$	—		$	288		$	310		$	2		$	—		$	312
Equity securities (2)	39			—			—			39			81			—			—			81
Total	$	327		$	—		$	—		$	327		$	391		$	2		$	—		$	393

(1)	All of our investment securities are classified as available for sale instruments. Non-U.S. debt securities mature in four years.

(2)	Net unrealized gains (losses) recorded to earnings related to these securities were $(25) million and $30 million for the

BHGE 2018 FORM 10-K | 91

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

years ended December 31, 2018 and 2017, respectively.

FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS

Our financial instruments include cash and equivalents, current receivables, investments, 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 December 31, 2018 and December 31, 2017 approximates their carrying value as reflected in our 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.

	2018						2017
	Assets			(Liabilities)			Assets			(Liabilities)
Derivatives accounted for as hedges
Currency exchange contracts	$	—		$	(7	)	$	6		$	—
Derivatives not accounted for as hedges
Currency exchange contracts	74			(75		)	144			(95		)
Total derivatives	$	74		$	(82	)	$	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 revenue 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.

Under hedge accounting, the derivative carrying amount is measured at fair value each period and any resulting gain or loss is recorded in a separate component of equity. Differences between the derivative and the hedged item may cause changes in their fair values to not offset completely, which is referred to as ineffectiveness. When the hedged transaction occurs, these amounts are released from equity, in order that the transaction will be reflected in earnings at the rate locked in by the derivative. The effect of the hedge is reported in the same financial statement line item as the earnings effects of the hedged transaction.

BHGE 2018 FORM 10-K | 92

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

The following table explains the effect of changes in market rates on the fair value of derivatives we use most commonly in cash flow hedging arrangements.

Currency forwards/swaps		U.S. dollar strengthens		U.S. dollar weakens
Pay U.S. dollars/receive foreign currency		Fair value decreases		Fair value increases

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. The effects are reported in "Selling, general and administrative expenses" in the consolidated and combined statement of income (loss). In general, the income (loss) effects of the hedged item are recorded in the same consolidated and combined financial statement line as the derivative. The income (loss) effect of economic hedges, after considering offsets related to income (loss) effects of hedged assets and liabilities, is substantially offset by changes in the fair value of forecasted transactions that have not yet affected income (loss).

The table below explains the effects of market rate changes on the fair value of derivatives we use most commonly as economic hedges.

Currency forwards/swaps		U.S. dollar strengthens		U.S. dollar weakens
Pay U.S. dollars/receive foreign currency		Fair value decreases		Fair value increases
Receive U.S. dollars/pay foreign currency		Fair value increases		Fair value decreases
Commodity derivatives		Price increases		Price decreases
Receive commodity/ pay fixed price		Fair value increases		Fair value decreases

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 $6.4 billion and $10.2 billion at December 31, 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 at December 31, 2018 and $3.3 billion at December 31, 2017.

The table below provides additional information about how derivatives are reflected in our consolidated and combined financial statements.

Carrying amount related to derivatives	2018			2017
Derivative assets	$	74		$	150
Derivative liabilities	(82		)	(95		)
Net derivatives	$	(8	)	$	55

BHGE 2018 FORM 10-K | 93

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

EFFECTS OF DERIVATIVES ON EARNINGS

All derivatives are marked to fair value on our 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.

	2018						2017						2016
	Cash Flow Hedges			Economic Hedges			Cash Flow Hedges			Economic Hedges			Cash Flow Hedges			Economic Hedges
Effect on hedging instrument	$	(6	)	$	(4	)	$	8		$	121		$	38		$	(272	)
Effect on underlying	6			(34		)	(8		)	(152		)	(38		)	102
Effect on earnings (1)	—			(38		)	—			(31		)	—			(170		)

(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.

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.

	Gain (Loss) Recognized in AOCI									Gain (Loss) Reclassified from AOCI to Earnings
	2018			2017			2016			2018			2017			2016
Currency exchange contracts	$	(6	)	$	8		$	(38	)	$	(1	)	$	(7	)	$	(37	)

We expect to transfer a loss of $3 million to earnings in the next 12 months contemporaneously with the earnings effects of the related forecast transactions. At December 31, 2018 and 2017, the maximum term of derivative instruments that hedge forecast transactions was two-years and three-years, respectively. See "Note 14. 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 17. SEGMENT INFORMATION

Our reportable segments, which are the same as our operating segments, are organized based on the nature of markets and customers. We report our operating results through our four operating segments that consist of similar products and services within each segment as described below.

BHGE 2018 FORM 10-K | 94

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

OILFIELD SERVICES

Oilfield Services 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

Oilfield Equipment 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. Oilfield Equipment 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

Turbomachinery & Process Solutions 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 the industry including refining, petrochemical, distributed gas, flow and process control and other industrial applications. The Turbomachinery & Process Solutions 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

Digital Solutions 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 current year results, and balances, may not be comparable to prior years as the current year includes the results of Baker Hughes from July 3, 2017.

Segment revenue	2018			2017			2016
Oilfield Services	$	11,617		$	5,881		$	788
Oilfield Equipment	2,641			2,661			3,540
Turbomachinery & Process Solutions	6,015			6,295			6,668
Digital Solutions	2,604			2,342			2,086
Total	$	22,877		$	17,179		$	13,082

BHGE 2018 FORM 10-K | 95

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

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, goodwill impairments and certain gains and losses not allocated to the operating segments.

Segment income (loss) before income taxes	2018			2017			2016
Oilfield Services	$	785		$	67		$	(207	)
Oilfield Equipment	—			26			305
Turbomachinery & Process Solutions	621			665			1,058
Digital Solutions	390			357			363
Total segment	1,796			1,115			1,519
Corporate	(405		)	(370		)	(375		)
Inventory impairment and related charges (1)	(105		)	(244		)	(138		)
Restructuring, impairment and other	(433		)	(412		)	(516		)
Merger and related costs	(153		)	(373		)	(33		)
Other non operating income, net	202			80			3
Interest expense, net	(223		)	(131		)	(102		)
Total	$	680		$	(335	)	$	358

(1)	Inventory impairments and related charges are reported in the "Cost of goods sold" caption of the consolidated and combined statements of income (loss). 2017 includes $87 million of adjustments to write-up the acquired inventory to its estimated fair value on acquisition of Baker Hughes as this inventory was used or sold in the six months ended December 31, 2017.

The following table presents total assets by segment at December 31:

Segment assets	2018			2017
Oilfield Services	$	30,941		$	32,841
Oilfield Equipment	7,298			7,613
Turbomachinery & Process Solutions	8,529			9,147
Digital Solutions	4,063			3,830
Total segment	50,831			53,431
Corporate and eliminations (1)	1,608			3,069
Total	$	52,439		$	56,500

(1)	Corporate and eliminations in total segment assets includes adjustments of intercompany investments and receivables that are reflected within the total assets of the four reportable segments.

The following table presents depreciation and amortization by segment for the years ended December 31:

Segment depreciation and amortization	2018			2017			2016
Oilfield Services	$	1,003		$	613		$	132
Oilfield Equipment	173			187			154
Turbomachinery & Process Solutions	156			174			186
Digital Solutions	112			119			78
Total Segment	1,444			1,093			550
Corporate	42			10			—
Total	$	1,486		$	1,103		$	550

BHGE 2018 FORM 10-K | 96

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

The following table presents net property, plant and equipment by its geographic location at December 31:

Property, plant and equipment - net	2018			2017			2016
U.S.	$	2,654		$	3,369		$	833
Non-U.S.	3,574			3,590			1,492
Total	$	6,228		$	6,959		$	2,325

NOTE 18. RELATED PARTY TRANSACTIONS

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 will 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. 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. We recognized a cost of $55 million and $28 million for the year ended December 31, 2018 and December 31, 2017, respectively, for services provided by GE and its affiliates subsequent to the close of the Transactions. Under the terms of the Master Agreement Framework, entered into on November 13, 2018, the annual intercompany services fee of $55 million that we agreed to pay GE as part of the Transactions will be reduced by 50% to $27.5 million per year beginning on January 1, 2019. The intercompany services agreement will terminate 90 days following the Trigger Date. See further discussion below.

We sold products and services to GE and its affiliates for $363 million, $639 million and $374 million during the years ended December 31, 2018, 2017 and 2016, respectively. Purchases from GE and its affiliates were $1,791 million, $1,512 million and $978 million during the years ended December 31, 2018, 2017 and 2016, respectively.

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 $103 million and $210 million for the year ended December 31, 2017 and 2016, respectively, were recorded in our consolidated and combined statements of income (loss) in respect of services provided by GE and its affiliates prior to the close of the Transactions.

MASTER AGREEMENT FRAMEWORK

In June 2018, GE announced their intention to pursue an orderly separation from BHGE over time. On November 13, 2018, we entered into a Master Agreement and a series of related ancillary agreements and binding term sheets with GE and BHGE LLC (collectively, the Master Agreement Framework) designed to further solidify the commercial and technological collaborations between us and GE and to facilitate our ability to transition from operating as a controlled company. In particular, the Master Agreement Framework contemplates long-term agreements between us, BHGE LLC and GE on technology, fulfillment and other key areas to provide greater clarity to customers, employees and shareholders.

Key elements of the Master Agreement Framework include:

Secured long-term collaboration on critical rotating equipment

Under the terms of the Master Agreement Framework, we have defined the parameters for a long-term collaboration and strategic relationship with GE on certain critical rotating equipment products.

We have entered into an aero-derivative joint venture (JV) binding term sheet with GE to form a JV relating to the parties’ respective aero-derivative gas turbine products and services. The JV is expected to become effective, subject to regulatory clearances and other customary closing conditions, on the date (the Trigger Date) that is the

BHGE 2018 FORM 10-K | 97

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

later of (i) July 3, 2019 and (ii) the date on which GE and its affiliates cease to own more than 50% of the voting power of BHGE’s outstanding common stock. These jet engine aero-derivative products are mainly used in our LNG, onshore-offshore production, pipeline and industrial segments within our Turbomachinery & Process Solutions segment and by GE in its power generation business. GE and we will contribute certain assets, inventory and service facilities into the JV and both companies will jointly control operations. The JV will have a supply and technology development agreement with GE’s aviation business (GE Aviation), which will revise and extend pricing arrangements as compared to BHGE’s existing supply agreement, and which will become effective at the Trigger Date.

Additionally, we have entered into an industrial steam turbine binding term sheet with GE, which, among other things, sets forth the terms on which BHGE LLC would be granted an option, exercisable following completion of any applicable information and consultation processes with employee representative bodies, to transfer certain of its assets, liabilities and employees that are related to BHGE LLC’s existing business of developing, designing, engineering, marketing, supplying, installing and servicing certain industrial steam turbine product lines to GE.

In parallel, we have also entered into a binding term sheet for the long-term supply and related distribution arrangement with GE for heavy-duty gas turbine technology at the current pricing levels, which will become effective at the Trigger Date. The heavy-duty gas turbine technologies are important components of BHGE TPS’ offerings and the long-term agreements provide greater clarity on the commercial approach and customer fulfillment, and will enable BHGE and GE to jointly innovate on leading technology.

Preserved access to GE Digital software & technology

As part of the Master Agreement Framework, BHGE LLC has agreed with GE Digital to maintain, subject to certain conditions, BHGE LLC's current status as the exclusive reseller of GE Digital offerings in the oil & gas space, and BHGE LLC will continue to source exclusively from GE Digital for certain GE Digital offerings for oil and gas applications. As part of this agreement, BHGE LLC and GE Digital have revised and extended certain pricing arrangements and have established service level obligations.

Other key agreements

• GE and we agreed to maintain current operations and pricing levels with regards to Control upgrade services we offer through our Digitals Solution segment division for the four years commencing on the Trigger Date.

• GE will transfer to BHGE certain UK pension liabilities related to the oil and gas businesses of BHGE and certain specified former oil and gas businesses of GE on what is intended to be a fully funded basis (using agreed upon actuarial assumptions). No liabilities associated with GE’s broad-based U.S. defined benefit pension plan will be transferred to us.

• The Tax Matters Agreement with GE that was negotiated at the time of the Transactions will be clarified but otherwise will remain substantially in place, and both companies retain the ability to monetize certain tax benefits.

• Under the terms of the Master Agreement Framework, the annual intercompany services fee of $55 million that we agreed to pay GE as part of the Transactions will be reduced by 50% to $27.5 million per year beginning on January 1, 2019. The intercompany services agreement will terminate 90 days following the Trigger Date (except with respect to certain tools access).

In connection with the Master Agreement Framework, we have agreed to terminate the transfer restrictions previously applicable to GE under the Stockholders Agreement, dated as of July 3, 2017, by and between us and GE, as amended from time to time (the Stockholders Agreement). The transfer restrictions prohibited GE from transferring any shares of our common stock prior to July 3, 2019 (except to its affiliates) without the approval of the Conflicts Committee of our board of directors. Other provisions of the Stockholders Agreement, including continuing restrictions on certain private transfers of shares of our common stock by GE, and approval requirements for related party transactions, remain in effect.

BHGE 2018 FORM 10-K | 98

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

In addition, the Stockholders Agreement was amended and restated to provide that, following the Trigger Date and until GE and its affiliates own less than 20% of the voting power of our outstanding common stock, GE shall be entitled to designate one person for nomination to our board of directors.

OTHER RELATED PARTY

In connection with the Transactions, on July 3, 2017, we executed a promissory note with GE that represents certain cash that we are holding on GE's behalf due to the restricted nature of the cash. The restriction arises as the majority of the 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. There is no maturity date on the promissory note, but we remain obligated to repay GE, therefore, this obligation is reflected as short-term borrowings. As of December 31, 2018, of the $896 million due to GE, $747 million was held in the form of cash and $149 million was held in the form of investment securities. As of December 31, 2017, of the $1,124 million due to GE, $997 million was held in the form of cash and $127 million was held in the form of investment securities. A corresponding liability is reported in short-term borrowings in the consolidated and combined statements of financial position.

The Company has $538 million and $575 million of accounts payable at December 31, 2018 and 2017, respectively, for goods and services provided by GE in the ordinary course of business. The Company has $653 million and $801 million of current receivables at December 31, 2018 and 2017, respectively, for goods and services provided to GE in the ordinary course of business.

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.

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 invoices eligible for a cash discount. Our liability associated with the funded participation in the accounts payable programs, which is presented as accounts payable within the consolidated and combined statements of financial position, was $471 million and $293 million as of December 31, 2018 and December 31, 2017, respectively. On January 16, 2019, GE announced the sale of GE Capital’s accounts payable program platform to a third-party and their intent to start transitioning their existing program to an accounts payable program with that party. As a GE affiliate, we are covered under the agreement.

INCOME TAXES

At closing of the Transactions, 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 will be 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 $31 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) GE will be 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, and (ii) BHGE or BHGE LLC will be 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.

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

BHGE 2018 FORM 10-K | 99

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

which are currently estimated to be $31 million. Thereafter, these tax benefits will be shared by GE and BHGE in accordance with their economic ownership of BHGE LLC. 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 19. COMMITMENTS AND CONTINGENCIES

LEASES

At December 31, 2018, we had long-term non-cancelable operating leases covering certain facilities and equipment. The minimum annual rental commitments, net of amounts due under subleases, for each of the five years in the period ending December 31, 2023 are $186 million, $154 million, $108 million, $77 million and $55 million, respectively, and $266 million in the aggregate thereafter. Rent expense was $579 million, $360 million and $200 million for the years ended December 31, 2018, 2017 and 2016, respectively. We did not enter into any significant capital leases during the three years ended December 31, 2018.

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.

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.

BHGE 2018 FORM 10-K | 100

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

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 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. On February 6, 2019, the parties entered a Confidential Settlement Agreement and Release of all claims. The Settlement Agreement does not have a material impact on the Company's financial statements.

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

BHGE 2018 FORM 10-K | 101

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

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 those losses that are predictable, measurable and recurring in nature, such as claims for automobile liability, general liability and workers compensation.

ENVIRONMENTAL MATTERS

Estimated remediation costs are accrued using currently available facts, existing environmental permits, technology and enacted laws and regulations. Our cost estimates are developed based on internal evaluations and are not discounted. Accruals are recorded when it is probable that we will be obligated to pay for environmental site evaluation, remediation or related activities, and such costs can be reasonably estimated. As additional information becomes available, accruals are adjusted to reflect current cost estimates. Ongoing environmental compliance costs, such as obtaining environmental permits, installation of pollution control equipment and waste disposal are expensed as incurred. Where we have been identified as a potentially responsible party in a U.S. federal or state Comprehensive Environmental Response, Compensation and Liability Act (Superfund) site, we accrue our share of the estimated remediation costs of the site. This share is based on the ratio of the estimated volume of waste we contributed to the site to the total volume of waste disposed at the site.

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 $3.6 billion at December 31, 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. We also had commitments outstanding for purchase obligations for each of the five years in the period ending December 31, 2023 of $1,388 million, $51 million, $35 million, $20 million and $5 million, respectively, and $8 million in the aggregate thereafter.

NOTE 20. RESTRUCTURING, IMPAIRMENT AND OTHER

We recorded restructuring, impairment and other charges of $433 million, $412 million, and $516 million during the years ended December 31, 2018, 2017 and 2016, respectively. Details of these charges are discussed below.

BHGE 2018 FORM 10-K | 102

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

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 $304 million, $385 million and $293 million for the years ended December 31, 2018, 2017 and 2016, respectively. These restructuring initiatives are expected to generate charges of approximately $82 million as these restructuring plans come to completion.

These charges are included in the "Restructuring, impairment and other" caption in the consolidated and combined statements of income (loss).

The amount of costs not included in the reported segment results is as follows:

	2018			2017			2016
Oilfield Services	$	160		$	187		$	122
Oilfield Equipment	25			114			52
Turbomachinery & Process Solutions	71			21			58
Digital Solutions	17			34			34
Corporate	31			29			27
Total	$	304		$	385		$	293

These costs were primarily related to product line terminations, facility 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.

	2018			2017			2016
Property, plant & equipment, net	$	80		$	131		$	93
Employee-related termination expenses	123			186			111
Asset relocation costs	28			10			17
EHS remediation costs	6			9			20
Contract termination fees	44			26			37
Other incremental costs	23			23			15
Total	$	304		$	385		$	293

OTHER CHARGES

Other charges included in "Restructuring, impairment and other" caption of the consolidated and combined statements of income (loss) was $129 million, $27 million and $223 million for the years ended December 31, 2018, 2017 and 2016, respectively. In 2018, other charges consist primarily of accelerated amortization of $80 million related to trade names and technology in our OFS segment, litigation charges of $25 million in Corporate and costs of $13 million to exit certain operations that impacted our TPS and OFS segments. In 2017 and 2016, other charges primarily include currency devaluation charges of $12 million and $138 million, respectively, largely driven by significant currency devaluations in Angola and Nigeria.

BHGE 2018 FORM 10-K | 103

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

NOTE 21. SUPPLEMENTARY INFORMATION

All Other Current Liabilities

All other current liabilities as of December 31, 2018 and 2017 include $955 million and $881 million, respectively, of employee related liabilities.

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:

	2018			2017
Balance at beginning of year	$	164		$	74
Provisions	47			37
Expenditures	(96		)	(44		)
Other (1)	121			97
Balance at end of year	$	236		$	164

(1)	Primarily related to the acquisition of Baker Hughes.

Allowance for doubtful accounts

The change in allowance for doubtful accounts is as follows:

	2018			2017
Balance at beginning of year	$	330		$	186
Additions	47			159
Amounts written off	(43		)	(23		)
Other	(7		)	8
Balance at end of year	$	327		$	330

BHGE 2018 FORM 10-K | 104

Baker Hughes, a GE company

Notes to Consolidated and Combined Financial Statements

NOTE 22. QUARTERLY DATA (UNAUDITED)

(In millions, except per share amounts)	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total Year
2018
Revenue	$	5,399		$	5,548		$	5,665		$	6,264		$	22,877
Gross profit (1)	841			936			973			1,236			3,986
Restructuring, impairment and other (2)	162			146			66			59			433
Merger and related costs	46			50			17			41			153
Net income (loss) attributable to Baker Hughes, a GE company	70			(19		)	13			131			195
Basic earnings (loss) per Class A common share	0.17			(0.05		)	0.03			0.28			0.46
Diluted earnings (loss) per Class A common share	0.17			(0.05		)	0.03			0.28			0.45
Cash dividend per Class A common share	0.18			0.18			0.18			0.18			0.72
2017
Revenue	$	3,064		$	3,015		$	5,301		$	5,799		$	17,179
Gross profit (1)	687			539			952			858			3,036
Restructuring, impairment and other (2)	42			59			191			119			412
Merger and related costs	66			85			159			63			373
Net income (loss) attributable to Baker Hughes, a GE company	—			—			(134		)	31			(103		)
Basic earnings (loss) per Class A common share	—			—			(0.31		)	0.07			(0.24		)
Diluted earnings (loss) per Class A common share	—			—			(0.31		)	0.07			(0.24		)
Cash dividend per Class A common share	—			—			0.17			0.18			0.35

(1)	Represents revenue less cost of sales and cost of services.

(2)	Restructuring, impairment and other costs associated with asset impairments, workforce reductions, facility closures and contract terminations recorded during 2018 and 2017. See "Note 20. Restructuring, Impairment and Other" for further discussion.

BHGE 2018 FORM 10-K | 105