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2018: Building a Better BHGE

2018 was a year of change, transition and progress for us.

We moved beyond the initial integration phase into the next chapter for BHGE. We continued our efforts to strengthen our execution and improve operations. We are running BHGE better and striving to be the most customer-centric Company we can be.

2018 reminded us of the volatility in our industry, marking the first time since 2015 that oil prices ended the year lower than at the beginning of the year. Oil prices declined by nearly 40% in the fourth quarter, reinforcing the need for our industry to remain agile and deliver sustainable productivity.

Also in the fourth quarter, our majority shareholder, GE, took the first step in reducing its stake in our Company, decreasing its ownership from 62.5% to approximately 50.4%. As part of this process, we reached important commercial and technology agreements in areas where we work closely with GE. We will continue collaborating on critical rotating equipment, software solutions and a number of other areas important to our customers. We are very pleased with these steps. They position our Company for the future and enhance our fullstream offering.

A sincere thank you goes to all of our talented, hard-working and inventive employees. Without them, none of the progress we have achieved in 2018 would have been possible.

Delivering Strong Financial Performance*

Amid the changes in the environment, we executed consistently throughout 2018 and achieved strong results.

During the year, orders were $23.9 billion, up 10% from 2017. Revenue was $22.9 billion, up 5% year-over-year. We focused on getting closer to our customers, growing market share and re-building our equipment backlog.

Adjusted operating income was $1.4 billion, up 62% from 2017, with an adjusted operating margin of 6.1%. By lowering costs, managing our assets more efficiently and delivering on our synergy targets, we expanded our operating margin by 220 basis points year-over-year. We achieved approximately $800 million of cost and revenue synergies, ahead of our target.

In 2018, we returned $3.3 billion to shareholders through dividends and buybacks.

We delivered $1.2 billion of free cash flow in 2018. Our performance was driven by our working capital optimization initiatives and disciplined capital allocation. We have set the foundation to deliver on our target of 90% free cash flow conversion over time.

  • The variances versus 2017 throughout this letter are on a combined business basis, which is a non-GAAP measure. Adjusted Operating Income and Free Cash Flow are also non-GAAP measures. Please refer to the GAAP to non-GAAP measures table at the end of the 10-K for a reconciliation.

BHGE employee measuring petrophysical properties in a core holder to better understand the reservoir and optimize well placement for maximum returns.

Winning in the Market

In 2018, we secured key wins across our businesses. We continued to enhance our fullstream offering and gained traction with our integrated solutions.

In Oilfield Services (OFS), we increased our presence globally. Our teams won a number of major awards and launched unique partnerships with customers. OFS outpaced the rig count in North America, growing revenue by 17% in 2018 versus rig count growth of 13%. Internationally, we saw revenue growth of 9% versus rig count growth of 4% for the year.

In Oilfield Equipment (OFE), we re-built the equipment backlog and strengthened our competitive offering. We introduced Subsea Connect, a new approach to subsea developments. Subsea Connect improves offshore economics and has the potential to lower economic development costs by an average of 30%. We grew orders by 23% compared to 2017 and won 77 subsea trees in 2018, the highest total in three years.

In Turbomachinery & Process Solutions (TPS), orders increased by 12%. We are at the forefront of technology for critical applications in the upstream, midstream and liquefied natural gas (LNG) sectors. In 2018, we saw the re-emergence of the LNG market with the first major project sanctioned in several years. Our outlook for LNG projects to receive positive final investment decision (FID) in 2019 remains strong. We are well positioned for future growth.

In Digital Solutions (DS), we grew revenues by 3%. We gained traction with our hardware and software offerings. We launched partnerships to advance artificial intelligence and computing in the oil and gas industry, and expanded our predictive corrosion management offering.

Investing in Innovation

Leading technology is one of our key differentiators, with unmatched technical capabilities across our broad portfolio. We have adopted a disciplined approach to product development to continue our technology leadership and drive returns on our investments.

~2,700 global patents issued
100+ new product launches

In 2018, we increased our research and development (R&D) investment by 10% to $700 million, introduced more than 100 new products and received approximately 2,700 patents globally. We also launched our Energy Innovation Center in Oklahoma, U.S., a fully functional R&D center focused on commercializing new technology through a network of start-ups and incubators. Our teams have adopted an agile approach to develop, test and commercialize new technologies with speed.

Enhancing our Culture and our Values

We are one BHGE team and have built our own, unique culture that guides everything we do. We have focused on integrating our teams, fostering an inclusive environment and strengthening our learning and development programs. In 2018, we established clear criteria within our executive incentive compensation plan for how we measure and assess our leaders on performance, culture, and diversity and inclusion. We also launched recruiting campaigns to attract a more diverse workforce.

We achieved 153 Perfect HSE Days.

Our culture is built on safety, compliance and integrity, and quality. We believe in doing the right thing every time. And we strive to make every day one without injuries, accidents, illness or harm to the environment. We call it the “Perfect Health, Safety, Environment (HSE) Day.” In 2018, we achieved 153 Perfect HSE Days, a 20% improvement compared to 2017.

Taking Energy Forward

Our 2018 results provide a strong foundation for our Company, as we prepare for a future that will be shaped by three themes:

Demand for More Efficient Energy Systems. Growing populations and an expanding middle class globally are creating the need for more energy. New social and geopolitical dynamics are requiring more from energy. These changes are creating new challenges and opportunities, but it is clear: energy must become cheaper, cleaner and more efficient.

The International Energy Agency predicts energy demand will grow by more than 25% by 2040, which will require more than $2 trillion a year of investment in new supply.

Technology Disruption. The convergence of new technologies, digitalization and new business models is transforming how we operate and invest. Technology is also becoming more accessible and affordable, reducing the barriers of entry and creating a more competitive space.

The World Economic Forum states that $1 trillion of opportunity is still at stake for the digitalization of the oil and gas industry, and less than 3% of all data generated is analyzed.

Cleaner Energy Solutions. Carbon reduction targets are not only being driven by governments, but also by consumers and our industry. This focus is leading to changes in demand patterns and low carbon initiatives. While total energy demand will continue to increase, we see the share of energy consumption shifting to more gas over the coming decades. As an industry, we must find ways to be part of the carbon solution.

According to multiple international industry sources, 50 gigatons of CO2 equivalent emissions are generated each year. Our industry contributes 10% of the total emissions.

Delivering Today and Positioning the Company for Tomorrow

We will meet these challenges and take advantage of the opportunities they present. BHGE plays an important role in making energy more productive. We are taking energy forward with our portfolio, our long-term strategy and our focus on cleaner energy solutions.

We have developed a comprehensive long-term strategy… 50-50-50

Our strategy includes bold targets to deliver a step-change in productivity across the industry. It is based on three core pillars:

50
Building Market Leading Product Companies
50% improvement in core competitiveness

We are reducing our product and service costs by driving best-in-class efficiency in our internal processes and eliminating unnecessary complexity and design variations. We are also building efficiencies through innovative new technologies, new materials and processes, such as additive manufacturing, and new supply chain solutions to reduce cycle time.

50
Developing Integrated Service Modules
50% improvement in productivity and efficiency

We are creating more value by reducing the number of interfaces as we deliver projects and services. This cuts complexity, drives speed and increases execution efficiency.

50
Unlocking the Power of Fullstream
50% increase in industrial yield

We are bringing the promise of fullstream to life with innovative commercial models and through stronger partnerships with our customers, our suppliers and within our own teams.

We are holding ourselves to a higher standard… a net-zero emissions future

Today, our industry is focused on reducing the impacts of climate change and preparing for the future. We believe we have an important role to play in society as an industry leader and partner to our customers.

Since 2012, we have reduced our own emissions by 26%. At the beginning of 2019, we made a commitment to further reduce our CO2 equivalent emissions by 50% by 2030, and to net-zero CO2 equivalent emissions by 2050.

We are also committed to helping our customers reduce their carbon footprint. We are expanding our low-carbon solutions, including our differentiated gas offering. With more than 500 compressors and 440 gas turbines in LNG applications, we are the leader in global LNG liquefaction. We are well positioned as the overall demand for gas increases.

In Conclusion

2018 was a year of significant change in which we made great progress toward our strategic and financial goals. In 2019, we have a renewed sense of purpose and determination to support our customers and take energy forward.

I want to thank the BHGE team and our customers for a successful 2018. I also want to express my deep gratitude to our shareholders, who have invested in us and in our future.

Sincerely,

Lorenzo Simonelli
Chairman, President and Chief Executive Officer