GE HealthCare Technologies Inc. 2023 Q1 Form 10-Q Summary
Business context and reporting period
GE HealthCare is a global medical technology, pharmaceutical diagnostics, and digital solutions company operating through Imaging, Ultrasound, Patient Care Solutions, and Pharmaceutical Diagnostics. The filing covers the three months ended March 31, 2023, compared with March 31, 2022. GE completed the spin-off of approximately 80.1% of GE HealthCare on January 3, 2023; therefore, 2023 results reflect the standalone public company, while prior-period results are historical carve-out results and may not be indicative of standalone costs or performance.
Financial performance and key metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $4.707 billion | $4.343 billion | 8% reported; 12% organic |
| Gross profit | $1.891 billion | $1.678 billion | 13% |
| Operating income | $559 million | $509 million | 10% |
| Operating margin | 11.9% | 11.7% | Up 20 basis points |
| Net income attributable to GE HealthCare | $372 million | $389 million | Down 4% |
| Net income margin | 7.9% | 9.0% | Down 110 basis points |
| Net income attributable to common stockholders | $189 million | $389 million | Down 51% |
| Diluted EPS | $0.41 | $0.86 | Down $0.45 |
| Adjusted EBIT | $664 million | $599 million | Up 11% |
| Adjusted EBIT margin | 14.1% | 13.8% | Up 30 basis points |
| Adjusted net income | $388 million | $437 million | Down 11% |
Revenue growth occurred across all segments: Imaging revenue was $2.496 billion, Ultrasound $859 million, Patient Care Solutions $781 million, and Pharmaceutical Diagnostics $558 million. Organic revenue growth was strongest in Pharmaceutical Diagnostics at 19%, followed by Imaging at 12%, Patient Care Solutions at 11%, and Ultrasound at 10%.
Operating performance benefited from pricing, productivity initiatives, sales volume, and improved supply-chain fulfillment. SG&A increased by $131 million and research and development increased by $32 million, primarily reflecting standalone-company costs, commercial investments, and planned product investments. Interest and other financial charges increased to $136 million from $4 million, primarily due to GE HealthCare’s newly issued debt.
Cash flow, liquidity, debt, and balance sheet
- Cash from operating activities was $468 million, unchanged from Q1 2022.
- Free cash flow was $325 million, down 12% from $371 million, primarily due to higher benefit payments, increased capital expenditures, and lower accounts payable effects.
- Capital expenditures were $143 million, compared with $100 million in the prior-year period.
- Cash used in investing activities was $266 million, including $127 million for the acquisition of Caption Health and $143 million of capital expenditures.
- Cash, cash equivalents, and restricted cash totaled $2.327 billion at March 31, 2023, compared with $1.445 billion at December 31, 2022.
- Total debt was approximately $10.239 billion, compared with $8.250 billion at year-end 2022. The increase primarily reflects the $2.0 billion Term Loan Facility drawdown at the spin-off.
- The company had $3.5 billion of revolving credit capacity with no outstanding borrowings under those facilities at March 31, 2023. Average interest rates on the notes and credit facilities were 5.94% during the quarter.
- Long-term debt fair value was $10.819 billion versus carrying value of $10.239 billion.
- Management stated that cash, operating cash generation, capital-market access, and existing credit facilities are expected to meet operating, tax, debt-service, and investment needs for at least the next 12 months.
Material changes versus the prior comparable period
- The company became an independent public company following the January 3, 2023 spin-off, with new standalone corporate, treasury, reporting, and governance functions.
- Revenue increased 8% reported and 12% organically, while operating income increased 10%.
- Net income attributable to GE HealthCare declined 4% despite higher operating income because of substantially higher interest expense, while non-operating pension-related income partially offset the increase.
- Net income attributable to common stockholders and diluted EPS were further reduced by a $183 million deemed preferred stock dividend associated with the remeasurement of redeemable noncontrolling interests.
- Non-operating benefit increased to $115 million from $2 million, primarily due to pension plans transferred from GE.
- Contract liabilities increased to $2.681 billion from $2.526 billion, and remaining performance obligations increased 1% sequentially to $14.490 billion.
- GE HealthCare acquired Caption Health for $127 million upfront, with a $10 million future holdback and potential earn-out payments valued at $13 million. The acquisition added $105 million of goodwill and $60 million of intangible assets.
- Spin-off and separation costs were $58 million in Q1 2023. Restructuring expense was $12 million, with approximately $71 million of additional restructuring expenses expected, primarily during 2023.
- The company recorded a $3.099 billion increase in net deferred tax assets primarily from assets and liabilities transferred from GE and changes in tax attributes and valuation.
Guidance, outlook, commentary, and risks
The filing does not provide specific full-year revenue, earnings, or cash-flow guidance. Management highlighted continued opportunities from product introductions, pricing, productivity, supply-chain improvement, and demand across the company’s segments. Remaining performance obligations totaled $14.490 billion, including $4.966 billion of product obligations and $9.524 billion of service obligations.
Key risks include supply-chain disruption and inflation, foreign-exchange and interest-rate volatility, reimbursement and payer changes, intense competition, cybersecurity and data-security incidents, product liability, regulatory and tax matters, the Russia-Ukraine conflict, and the challenges of operating as a newly independent company. The company reported $158 million of assets in or directly related to Russia and Ukraine and $78 million of Q1 revenue from customers in those countries.
Material contingencies include approximately $675 million of unused letters of credit, bank guarantees, bid bonds, and surety bonds; approximately $164 million of performance-guarantee exposure subject to reimbursement by GE; product warranty liabilities of $193 million; and ongoing litigation involving contracts with the Iraqi Ministry of Health. The filing states that a meaningful loss estimate for the litigation is not currently available. An Israeli environmental matter involves a proposed administrative fine of approximately $0.6 million.
The company expects approximately $255 million of additional 2023 benefit payments to defined benefit pension and postretirement plans and has no required minimum cash pension contribution obligation for its U.S. plans in 2023. The board subsequently declared a quarterly cash dividend of $0.03 per share, payable June 15, 2023.
Most important facts for investors to verify
- Assess the sustainability of reported operating improvement after separating recurring productivity and pricing benefits from temporary supply-chain and mix effects.
- Monitor debt-service requirements, refinancing needs beginning with the 2024 notes maturity, and the effect of the 5.94% average borrowing cost on earnings and free cash flow.
- Reconcile GAAP net income and EPS with adjusted measures, particularly the $183 million deemed dividend, pension-related non-operating benefit, separation costs, and tax adjustments.
- Evaluate whether cash generation is sufficient to fund debt service, pension obligations, the $222 million redeemable-interest payment expected in Q2, dividends, acquisitions, and restructuring costs.
- Track execution of the standalone-company transition and the expiration of GE transition services, indemnities, and tax-related arrangements.
- Review exposure to supply-chain constraints, foreign currency, reimbursement changes, cybersecurity, litigation, guarantees, and the Russia-Ukraine conflict.