Baker Hughes (BKR) 2025 — GE Merger Legacy Goodwill, Clean Cash Flow

Grade: C — Some Red Flags, Investigate

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed February 5, 2026, FY ended December 31, 2025) + Yahoo Finance

Auditor: KPMG LLP — Unqualified opinion (1 critical audit matter: revenue recognition on over-time equipment contracts)

One-line verdict: Baker Hughes should not be flagged for elimination, but warrants investigation. The filing reports $2.6B net income, $3.8B operating cash flow, and an M-Score of -2.68 comfortably below the manipulation threshold. The single red flag is structural: goodwill plus intangibles at $10.2B represent 54% of equity, a legacy of the 2017 GE Baker Hughes merger. Cash covers only 61% of $6.1B in debt. However, CFFO/NI of 1.47 is robust, DSO is *improving* (78 to 73 days), and the pending $7.8B Chart Industries acquisition will add substantially more goodwill to an already intangible-heavy balance sheet. The company's pivot from oilfield services toward LNG, gas infrastructure, and data center power creates a genuinely differentiated business mix — but the balance sheet carries scars from past dealmaking that are not yet healed.

Two Segments, Two Stories: OFSE vs. IET

Baker Hughes operates through two segments that are moving in opposite directions. The 10-K breaks out the divergence clearly:

Per the MD&A: "OFSE revenue decreased $1,304 million, or 8%, driven by a decline in revenue in all regions." International OFSE revenue was $10,551M, down from $11,529M. The culprit is clear: global rig counts fell from an average of 1,948 in 2024 to 1,818 in 2025, with both North America (738 vs. 787) and international (1,080 vs. 1,161) declining.

IET tells the opposite story. Gas Technology Equipment revenue rose to $6,075M from $5,675M. Gas Technology Services jumped to $3,769M from $3,141M (+20%). Climate Technology Solutions surged to $1,634M from $954M (+71%). The filing notes remaining performance obligations totaled $35.9B, of which IET accounted for $32.4B — a massive backlog that provides revenue visibility.

This segment divergence means Baker Hughes is increasingly an industrial technology company with an oilfield services business attached, not the other way around. The IET backlog alone represents more than a full year of total company revenue.

Profitability: Headline Numbers

Per the filing: "Net income was $2.6 billion, a decrease of $0.4 billion, or 13%, compared to 2024, with a decline in the mark-to-market adjustment for certain equity securities, change in mix, transaction related costs and lower volume, partially offset by cost out initiatives, net productivity and price."

The tax story is notable: "The difference between the U.S. statutory tax rate of 21% and the effective tax rate is primarily the net impact of $308 million and $664 million reversal of valuation allowances in 2025 and 2024, respectively." These are one-time benefits from the U.K. and U.S. moving into cumulative three-year profit positions. As these reversals normalize, the effective tax rate will rise, pressuring net income.

Restructuring charges were $215M in 2025 (vs. $260M in 2024), "primarily related to employee termination expenses and footprint consolidation." Transaction costs of $107M related to business acquisition and disposal activities further depressed earnings.

Cash Flow: Strong and Improving

From the consolidated statements of cash flows:

CFFO/NI of 1.47 is excellent — well above the 1.0 threshold. Free cash flow increased 24% to $2.5B despite flat revenue and declining net income, driven by working capital improvements: current receivables released $358M of cash (vs. consuming $159M in 2024) and inventories released $79M (vs. consuming $102M).

The cash flow reconciliation shows D&A of $1,188M, stock-based compensation of $203M, and a $702M deferred tax benefit. The deferred tax benefit is a red flag component in isolation — it inflates net income without cash — but the strong CFFO/NI ratio confirms that cash generation more than compensates.

The 18-Point Screening

Revenue Quality

Revenue quality is clean. DSO improved from 78 to 73 days over two years (from 86 days three years ago). Accounts receivable actually *declined* 6.5% while revenue was essentially flat — the opposite of a manipulation signal. Cash flow growth far outpaced revenue, confirming genuine cash collection.

Expense Quality

Expense quality is uniformly clean. SG&A decreased $71M or 3% to $2,387M. R&D decreased $43M or 7% to $600M. Per the filing, the R&D decrease reflects portfolio rationalization. Gross margin has improved for four consecutive years: 20.8% (2022) to 23.1% (2023) to 23.3% (2024) to 23.6% (2025) — a slow but steady march reflecting the mix shift toward higher-margin IET.

Cash Flow Quality

C4 — Cash coverage. Cash of $3.7B covers only 61% of total debt of $6.1B. The filing shows interest expense of $304M (offset by $82M interest income for net $222M). Interest coverage is strong at 16.0x EBIT, so debt service is not a concern. But the gap between cash and debt becomes more relevant in the context of the pending Chart acquisition.

The negative accruals ratio of -3.0% is a healthy signal — it means operating cash flow exceeds net income after adjusting for non-cash charges, indicating conservative accounting.

Balance Sheet

D1 is the sole red flag. Goodwill of $6.1B and intangible assets of $4.1B together represent 54% of total stockholders' equity of $18.8B. This is a legacy of the 2017 GE-Baker Hughes combination and subsequent acquisitions. Per the filing, the company "performs an annual impairment test of goodwill on a qualitative or quantitative basis for each of its reporting units as of July 1." The fair value was determined "using a combination of market, comparable transactions, and discounted cash flow approaches."

No goodwill impairment was recorded in FY2025. However, the risk here is forward-looking: if the OFSE segment continues to decline or energy prices deteriorate further, the goodwill allocated to OFSE reporting units could face impairment triggers. The filing lists potential impairment indicators including "downward revisions to internal forecasts" and "declines in the Company's market capitalization below its book value."

D2 — Leverage is healthy. Debt/EBITDA of 1.4x is conservative for an industrial company. The filing shows $6.1B total debt with interest rates that are manageable given $3.8B operating cash flow. But this ratio will increase post-Chart acquisition.

Acquisition Risk

Acquisitions consumed $830M of cash in 2025 (primarily Continental Disc Corporation), still leaving $2.5B in free cash flow. Goodwill was stable year-over-year. But the pending Chart Industries acquisition changes this picture entirely.

Manipulation Score

M-Score of -2.68 is comfortably clean. All eight components are benign: DSRI 0.938 (receivables declining), GMI 0.987 (margin stable), AQI 0.980 (asset quality stable), SGI 0.997 (revenue flat), DEPI 0.995, SGAI 0.974, TATA -0.030 (negative total accruals — healthy), LVGI 0.954. No manipulation signals whatsoever.

Altman Z-Score: 1.95 (grey zone). This places Baker Hughes between the distress threshold (1.81) and the safe threshold (2.99). For an industrial company with significant tangible assets and moderate leverage, this is typical. The low retained earnings component (-0.08) reflects the company's history of losses prior to its turnaround.

Key Risks from the 10-K

1. The Chart Industries Acquisition — A $7.8B Balance Sheet Transformation

Per the MD&A: "Chart shareholders approved the acquisition of Chart by the Company on October 6, 2025. With regulatory reviews still underway in certain jurisdictions, we presently expect closing in the second quarter of 2026." This is a transformational deal.

Chart Industries manufactures equipment for LNG, hydrogen, water treatment, and industrial gases. The deal is strategically logical — it deepens Baker Hughes' IET capabilities in LNG and clean energy. But financially, it will add billions in goodwill to a balance sheet that already has $10.2B. The 54% goodwill-to-equity ratio that triggered the D1 red flag will likely increase substantially post-close.

Post-acquisition leverage, integration execution, and the risk of overpaying during a period of LNG cycle peak all warrant careful monitoring.

2. OPEC+ and Oil Price Exposure

Per the filing: "During 2025, we saw a decline in global upstream capital spending as a result of ongoing geopolitical tensions, uncertainty around international trade policy, and operator concerns about the accelerated return of idled supply from OPEC+." The MD&A forecasts "modest declines in global upstream spending" for 2026.

Brent oil averaged $69.14/bbl in 2025 (vs. $80.52 in 2024 and $82.49 in 2023). WTI averaged $65.39 (vs. $76.63). Rig counts declined to 1,818 from 1,948. The OFSE segment, still half of revenue, is directly exposed to continued oil price weakness.

3. Energy Transition Uncertainty

The Risk Factors section devotes unusual attention to the *slowdown* of energy transition: "Recent developments indicate a potential slowdown in energy transition efforts, with sustained or increased demand for traditional oil and gas in certain markets." This cuts both ways — it protects OFSE but may slow demand for Baker Hughes' clean energy investments (CCUS, hydrogen, geothermal), where Climate Technology Solutions revenue grew 71% to $1.6B.

4. Revenue Recognition Complexity — KPMG's Critical Audit Matter

KPMG identified revenue recognition on over-time equipment contracts as the sole critical audit matter: "Complex auditor judgment was required in evaluating the Company's long-term estimates of the expected costs to be incurred in order to complete these contracts." Revenue from equipment manufactured to unique customer specifications is recognized using percentage-of-completion based on actual vs. estimated total costs. The risk: management can adjust estimated total costs to accelerate or defer revenue recognition.

5. Geopolitical Concentration

Baker Hughes conducts business in over 120 countries. The Risk Factors warn of exposure to "political instability, civil unrest, war, acts of terrorism" and "expropriation or nationalization of assets." OFSE international revenue of $10.6B (74% of OFSE total) includes significant exposure to the Middle East, Sub-Saharan Africa, and former Soviet Union countries.

Summary

Grade: C. Should not be flagged for elimination, but investigate the goodwill exposure and pending acquisition.

Baker Hughes' earnings quality is fundamentally sound: CFFO/NI of 1.47, negative accruals ratio, improving DSO, stable gross margins, and an M-Score of -2.68. The sole red flag — goodwill plus intangibles at 54% of equity — is a legacy issue, not a sign of current manipulation. The watch item on cash-to-debt coverage (61%) is manageable given 1.4x Debt/EBITDA and 16x interest coverage.

The forward-looking risk is the Chart Industries acquisition: if it closes, the balance sheet will become substantially more goodwill-laden, leverage will increase, and integration execution risk is real. Baker Hughes' strategic pivot toward IET (LNG, gas infrastructure, data centers, clean energy) is working — IET revenue grew 14% and its $32.4B backlog provides visibility — but the financial structure still carries the weight of past acquisitions. Watch the post-Chart balance sheet closely.