GE 2018 Third-Quarter Form 10-Q Summary
Business context and reporting period
General Electric Company filed this unaudited Form 10-Q for the quarter ended September 30, 2018. GE reports industrial operations separately from GE Capital; consolidated figures combine both. The filing also includes subsequent events through October 30, 2018.
Key financial metrics
| Metric | Q3 2018 | Nine months ended September 30, 2018 | Comparison |
|---|---|---|---|
| Consolidated revenue | $29.6 billion | $88.3 billion | Down 4% for the quarter; up 2% year to date. Industrial organic revenue was up 1% and down 3%, respectively. |
| Continuing earnings attributable to GE common shareowners (GAAP) | Loss of $22.8 billion; $(2.63) per share | Loss of $21.7 billion; $(2.50) per share | Prior-year comparable periods reported earnings of $1.4 billion and $2.6 billion. |
| Adjusted earnings (non-GAAP) | $1.2 billion; $0.14 per share | $4.2 billion; $0.49 per share | Down 35% and 14% from the respective 2017 periods. |
| GE Industrial profit margin | GAAP: (83.0)%; adjusted: 8.1% | GAAP: (25.1)%; adjusted: 9.6% | Adjusted margins were 9.9% and 10.5% in 2017. |
| GE cash from operating activities (CFOA) | Not stated here for the quarter | Use of $4.1 billion | Compared with $4.1 billion generated in the 2017 nine-month period. GE Industrial free cash flow was negative $0.7 billion. |
| Cash, cash equivalents and restricted cash | $26.9 billion consolidated at September 30 | GE reported $13.9 billion, including $4.8 billion at BHGE; GE Capital reported $13.1 billion. | |
| Borrowings | $115.0 billion consolidated at September 30 | Down $19.6 billion from December 31, 2017. |
The $22.0 billion pre-tax goodwill impairment was non-cash and related principally to Power Generation and Grid Solutions; the filing reports $22.2 billion after tax. Excluding that and other specified items, adjusted measures were substantially stronger than GAAP results, but adjusted earnings and margins still declined year over year.
Material changes and segment performance
- Power: Q3 revenue fell 33% to $5.7 billion and the segment recorded a $0.6 billion loss, versus $0.5 billion profit in Q3 2017. Nine-month revenue declined 21%; profit was $64 million versus $1.9 billion. The market outlook weakened, and lower turbine volume, pricing, warranty/project costs and execution challenges weighed on results.
- Aviation: Q3 revenue rose 12% to $7.5 billion and segment profit rose 25% to $1.7 billion. GE shipped 739 LEAP engines in the first nine months and said it remained on track for 1,100–1,200 in 2018.
- Healthcare: Q3 revenue was flat at $4.7 billion; nine-month revenue rose 5% to $14.4 billion. GE completed the sale of its Value-Based Care Division in July for approximately $1.0 billion net proceeds and recorded a $0.7 billion pre-tax gain.
- Renewable Energy: Q3 revenue increased 15%, but profit fell 72% amid pricing pressure and negative productivity. Oil & Gas: Q3 revenue rose 7%; reported segment profit was $180 million, with results affected by restructuring, synergies and noncontrolling interests.
- Q3 consolidated revenue declined 4%, mainly reflecting the absence of Water and Industrial Solutions after their sales, partly offset by growth in Aviation, Renewable Energy and Oil & Gas. Nine-month industrial organic revenue declined 3% despite reported growth, which benefited from acquisitions and currency.
Outlook, liquidity, risks and unusual items
- GE announced a quarterly dividend reduction from $0.12 to $0.01 per share, expected to begin with the next Board declaration in December 2018; GE estimated annual cash retention of approximately $3.9 billion.
- GE announced plans to separate Healthcare as a standalone company within 12–18 months, pursue an orderly separation from BHGE over two to three years, reduce GE Industrial net debt, and deliver at least $500 million of corporate savings by the end of 2020. These plans remained subject to execution and transaction conditions.
- Management described Power’s outlook as deteriorating because of industry overcapacity, lower market penetration, uncertain deal timing, project execution problems, operational challenges, and competition from energy efficiency and renewables. GE recorded additional Power charges, including approximately $0.2 billion for turbine blade issues and approximately $0.4 billion for project execution and partner/customer challenges.
- GE targeted a sustainable credit rating in the single-A range and net debt/EBITDA of 2.5x or less. On October 2, S&P lowered GE and GE Capital ratings to BBB+ long term and A-2 short term; Moody’s and Fitch placed their ratings under review or on negative watch. GE said the short-term downgrade would reduce commercial paper capacity and increase reliance on revolving credit facilities and funding costs. Net available committed credit facilities were $40.8 billion at quarter-end.
- GE had $13.9 billion of reported GE cash, but this included BHGE cash that GE said was not freely available and cash subject to currency controls. Excluding those amounts, GE reported $6.5 billion. GE received no common dividend from GE Capital in 2018 and did not expect one for the foreseeable future.
- GE Capital contributed $3.5 billion to its run-off insurance subsidiaries in Q1 and expected to contribute approximately $11 billion more through 2024, subject to monitoring and reserve testing. Adverse assumptions could require additional contributions.
- GE recorded a $1.5 billion reserve in discontinued operations for the DOJ’s WMC/FIRREA investigation. The filing says any additional loss beyond that reserve could not be reasonably estimated. WMC mortgage repurchase claims had a recorded reserve of $245 million and an estimated reasonably possible additional loss range of up to approximately $500 million, excluding further FIRREA exposure.
- The Power goodwill impairment was an estimate; GE had not completed its valuation analysis and said it would recognize any difference when it finalized the test in Q4. GE also disclosed SEC and DOJ investigations involving revenue recognition, long-term service agreement controls, insurance reserves and the Power impairment, as well as shareholder litigation.
- GE adopted ASC 606 retrospectively, which materially changed the timing and presentation of revenue and reduced previously reported 2017 revenue and continuing earnings by $2.2 billion and $2.7 billion, respectively. GE was also evaluating whether a cash-flow presentation change might be required for the deferred purchase price under its receivables facility.
Most important facts for investors to verify
- Final Power goodwill impairment amount and the assumptions underlying Power’s updated earnings and cash-flow forecasts.
- GE’s operating cash generation, working-capital trends, pension funding needs and progress toward its leverage target.
- Effects of the ratings downgrade on commercial paper access, borrowing costs and liquidity, including the availability of cash reported at BHGE and in currency-controlled countries.
- Required future GE Capital insurance contributions, reserve adequacy test results and potential exposure beyond the WMC/FIRREA reserve.
- Execution, timing, proceeds and liabilities associated with announced portfolio actions, including Healthcare separation and the planned BHGE separation.
- Reconciliation of non-GAAP adjusted earnings, margins and free cash flow to GAAP results, and the effects of ASC 606 on comparability.