General Electric Company — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. GE is a diversified industrial company with a financial-services subsidiary; figures below are consolidated unless noted. The filing was signed February 26, 2019.
Financial performance and key metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $121.6 billion | $118.2 billion |
| Continuing loss attributable to GE common shareowners | $21.1 billion; diluted EPS $(2.43) | $8.6 billion; diluted EPS $(0.99) |
| Net loss attributable to GE common shareowners | $22.8 billion; diluted EPS $(2.62) | $8.9 billion; diluted EPS $(1.03) |
| Adjusted earnings (non-GAAP) | $5.7 billion; adjusted EPS $0.65 | $8.7 billion; adjusted EPS $1.00 |
| GE Industrial profit margin (GAAP) | (17.4)% | 1.3% |
| Adjusted GE Industrial profit margin (non-GAAP) | 9.0% | 10.1% |
| GE cash from operating activities (GE CFOA) | $2.3 billion | $11.0 billion |
| GE Industrial free cash flow (non-GAAP) | $4.8 billion | $4.3 billion |
| Consolidated borrowings at year-end | $110.0 billion | $134.6 billion |
| Cash, cash equivalents and restricted cash | $35.0 billion | $44.0 billion |
| Total assets / total equity at year-end | $309.1 billion / $51.5 billion | $369.2 billion / $73.5 billion |
Revenue increased 3%, but industrial segment organic revenue was approximately flat. Reported results were substantially affected by a $22.1 billion non-cash goodwill impairment charge, primarily in Power. The $5.7 billion adjusted earnings figure excludes specified charges and gains and is non-GAAP; it should not be read as GAAP profit.
Segment highlights
- Power: Revenue fell 22% to $27.3 billion; segment profit swung to an $0.8 billion loss from $1.9 billion profit. Management cited industry overcapacity, lower equipment utilization, pricing pressure and execution issues.
- Aviation: Revenue rose 13% to $30.6 billion and profit rose 20% to $6.5 billion, supported by services, volume and pricing.
- Oil & Gas: Revenue rose 33% to $22.9 billion, substantially reflecting Baker Hughes consolidation; segment profit was $0.4 billion.
- Healthcare: Revenue increased 4% to $19.8 billion and profit increased 6% to $3.7 billion.
- Capital: Revenue rose 5% to $9.6 billion; segment loss narrowed to $0.5 billion from $6.8 billion, mainly because major 2017 insurance and strategic-action charges did not recur.
Material changes and liquidity
- GE CFOA declined to $2.3 billion, primarily reflecting $6.0 billion of GE Pension Plan contributions versus $1.7 billion in 2017 and the absence of a GE Capital common dividend ($4.0 billion received in 2017). Management said it does not expect GE Capital common dividends for the foreseeable future.
- Consolidated borrowings declined by $24.6 billion, mainly through GE Capital repayments. GE Capital’s adjusted debt-to-equity ratio improved to 5.74:1 from 7.06:1.
- GE reported $20.5 billion of cash and restricted cash and $40.8 billion of net available committed credit facilities. However, $3.7 billion of the GE cash figure was held at BHGE and not freely available to GE; some other cash was subject to currency controls or regulatory restrictions.
- GE Industrial net debt, a non-GAAP measure, was $55.2 billion. GE’s stated financial-policy targets include a sustainable Single-A credit rating, industrial net debt/EBITDA below 2.5x and GE Capital debt-to-equity below 4:1.
- Credit agencies downgraded GE and GE Capital in 2018; GE moved from tier-1 to tier-2 commercial-paper status, reducing borrowing capacity. Fitch changed the outlook to negative in February 2019.
Outlook, significant actions and risks
- Portfolio and deleveraging: GE expected substantial proceeds over the following two years from the February 2019 Wabtec transaction, the announced BioPharma sale to Danaher for approximately $21.4 billion, and monetization of its remaining BHGE and Wabtec stakes. The BioPharma sale was expected to close in fourth-quarter 2019, subject to approvals and closing conditions. These proceeds and timelines were uncertain.
- Power outlook: GE expected the heavy-duty gas-turbine market to be 25–30 GW annually in 2019 and the foreseeable future. Management expected Power operations to stabilize in 2019, while acknowledging continued demand, pricing and execution risks. GE reorganized the business with a planned completion in the second half of 2019.
- Capital and insurance: GE expected approximately $4 billion of capital contributions to GE Capital in 2019. GE Capital expected to contribute approximately $9 billion more to run-off insurance subsidiaries through 2024, subject to regulator monitoring; additional contributions could be higher, lower or accelerated. The 2018 insurance reserve test produced a $0.1 billion pre-tax charge, and adverse assumption changes could require further reserve increases.
- Dividend: GE reduced its quarterly common dividend from $0.12 to $0.01 per share beginning with the December 2018 declaration, expecting to retain about $4 billion of cash annually versus the prior payout.
- Other significant items: GE recorded $3.6 billion of restructuring and other charges, including about $2.0 billion of cash expenditures. A $1.5 billion reserve was recorded for the WMC/DOJ investigation; GE announced an agreement in principle to pay a matching civil penalty in 2019. The filing also describes ongoing SEC and DOJ inquiries, shareholder litigation, Alstom legacy matters and environmental remediation.
- Accounting and estimates: Adoption of the new revenue standard materially changed timing and presentation; GE also changed U.S. inventory accounting from LIFO to FIFO. GE anticipated that the new long-duration insurance accounting standard would materially affect its financial statements when adopted.
- Governance and controls: H. Lawrence Culp became Chairman and CEO effective September 30, 2018. Management and the auditor reported effective internal control over financial reporting as of year-end; the auditor’s opinion was unqualified.
Investor verification priorities
- Reconcile GAAP losses and cash generation with management’s non-GAAP adjusted earnings, margins and free-cash-flow measures.
- Track whether planned disposals close on time and at expected values, and whether proceeds reduce debt as intended—especially the BioPharma sale and exits from BHGE and Wabtec.
- Monitor Power order trends, long-term service contract assumptions, project charges, warranty exposure and whether the stated 2019 stabilization outlook is achieved.
- Assess GE and GE Capital liquidity after rating actions, commercial-paper capacity, credit-facility reductions and planned debt maturities.
- Review insurance reserve assumptions, regulator-directed capital contributions and potential effects of the forthcoming insurance accounting standard.
- Follow the WMC settlement, SEC/DOJ inquiries, Alstom matters, shareholder cases and other contingencies for changes in reserves or cash exposure.