GE 2019 First-Quarter Form 10-Q Summary
Business context and period. General Electric Company reported unaudited results for the three months ended March 31, 2019, compared with the three months ended March 31, 2018. The consolidated results include GE’s industrial businesses and GE Capital. Transportation is reported as discontinued operations following its February 2019 spin-off and merger with Wabtec.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change or context |
|---|---|---|---|
| Consolidated revenue | $27.3 billion | $27.8 billion | Down 2%; industrial organic revenue rose 5% (non-GAAP). |
| Continuing earnings attributable to GE common shareowners | $954 million; $0.11 per diluted share | $261 million; $0.03 per diluted share | Higher primarily on stronger GE Industrial results and reduced GE Capital losses. |
| Net earnings attributable to GE common shareowners | $3.5 billion; $0.40 per diluted share | $(1.2) billion; $(0.14) per diluted share | 2019 includes the Wabtec-related discontinued-operations gain. |
| Adjusted earnings / adjusted diluted EPS | $1.2 billion / $0.14 | $1.3 billion / $0.15 | Down 6% and 7%, respectively; non-GAAP. |
| GE Industrial profit margin | 4.8% GAAP; 8.8% adjusted | 2.3% GAAP; 10.0% adjusted | GAAP margin benefited from disposition gains and lower restructuring charges; adjusted margin declined. |
| GE cash from operating activities (CFOA) | $(0.9) billion | $(1.1) billion | Less cash used, but working capital and contract assets were offsets. |
| Adjusted GE Industrial free cash flow | $(1.2) billion | $(1.8) billion | Non-GAAP; cash use improved year over year. |
| Total borrowings | $107.5 billion | $109.9 billion at Dec. 31, 2018 | Quarter-end balance declined by $2.4 billion. |
Segments and operating indicators
- Aviation: Revenue increased 12% to $8.0 billion and segment profit rose 4% to $1.7 billion. Backlog was $223.5 billion.
- Power: Revenue fell 22% to $5.7 billion; segment profit declined 71% to $80 million. Management cited market overcapacity, operational challenges and uncertain project timing.
- Renewable Energy: Revenue was $1.6 billion; segment reported a $162 million loss, versus $77 million profit a year earlier. Project cost overruns, liquidated damages, tariffs and investment spending weighed on results.
- Oil & Gas: Revenue rose 4% to $5.6 billion; segment profit was $163 million versus a $144 million loss. Lower restructuring charges and volume growth contributed.
- Healthcare: Revenue was $4.7 billion and profit increased 6% to $781 million. GE agreed to sell BioPharma, which was classified as held for sale.
- Orders and backlog: GE Industrial orders totaled $26.2 billion, compared with $25.9 billion. Industrial backlog was $374.2 billion, versus $353.5 billion.
Liquidity, debt and capital
- At March 31, consolidated cash, cash equivalents and restricted cash were $34.9 billion; GE reported $20.1 billion and GE Capital $14.8 billion. Some balances are restricted or not freely transferable.
- GE reported $35.3 billion of net available committed credit facilities, after offset provisions.
- GE Industrial net debt was $54.3 billion, a non-GAAP measure, compared with $55.4 billion at December 31, 2018. Management’s stated target is an industrial net debt/EBITDA ratio below 2.5x and a sustainable Single-A-range credit rating.
- GE Capital’s debt-to-equity ratio was 5.4:1, down from 5.7:1 at year-end. GE Capital expects about $10 billion of asset reductions in 2019 and approximately $9 billion of further contributions to insurance subsidiaries through 2024.
- Fitch changed its outlook for GE and GE Capital to Negative in February 2019; Moody’s and S&P outlooks were Stable. GE’s reported ratings were Baa1/BBB+/BBB+ long term.
Material changes, outlook and risks
- Portfolio actions: GE completed the Transportation/Wabtec transaction, received about $2.9 billion in cash and retained an approximately 24.9% Wabtec interest. The transaction generated a $3.5 billion pretax discontinued-operations gain ($2.5 billion after tax). GE also agreed to sell BioPharma to Danaher for approximately $21.4 billion, subject to adjustments; closing was expected in Q4 2019, subject to approvals and conditions.
- BHGE separation: GE’s economic interest was 50.4% at the filing date. Falling below 50% would cause GE to lose control and deconsolidate BHGE. GE warned of a potential significant accounting loss; using BHGE’s April 26 share price, it estimated an incremental loss of about $7.3 billion upon deconsolidation from a sale.
- 737 MAX exposure: GE reported approximately $1.5 billion of net assets related to the program and no Q1 impairment, stating it believed the assets were recoverable. The grounding and Boeing’s production-rate reduction could affect timing of related cash flows.
- Legal and regulatory matters: In April 2019, after quarter-end, GE entered a definitive $1.5 billion DOJ settlement concerning WMC, without admitting liability or wrongdoing; GE Capital paid GE to indemnify it. WMC also had remaining mortgage-related claims and commenced Chapter 11 proceedings in April. GE disclosed continuing Alstom legacy matters and other shareholder litigation; it reported a potential UK tax matter of approximately $1 billion, which it is contesting.
- Management outlook: The filing gives no clear numerical full-year earnings or revenue guidance. Management described Power market and execution challenges, anticipated further restructuring, expected approximately $10 billion of GE Capital asset reductions in 2019, and targeted BioPharma closing in Q4 2019.
- Other risks and unusual items: GE identified product safety and failure risks, including potential effects of fleet groundings. Its long-duration insurance accounting is expected to be materially affected by a new standard effective after 2020. GE also reported that the 2019 consolidated effective tax rate was 17.4%, versus negative 18.1% in 2018.
Most important facts for investors to verify
- Whether cash generation and working capital improve, given negative CFOA and adjusted industrial free cash flow.
- Progress on debt reduction, credit ratings, available facilities and planned divestiture proceeds.
- BioPharma sale timing and proceeds, and the timing, structure and accounting impact of GE’s BHGE exit.
- Power and Renewable Energy operational performance, including project costs, backlog conversion and restructuring execution.
- Insurance subsidiary capital requirements, WMC claim resolution, and outcomes of Alstom, tax and shareholder proceedings.
- The assumptions underlying adjusted/non-GAAP earnings, margin, free cash flow and net-debt measures, and the substantial contribution of the Wabtec gain to reported net earnings.