General Electric Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 1, 2018. GE combines industrial businesses and GE Capital financial services. Comparisons are with Q1 2017 unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Consolidated revenue | $28.7 billion | $26.9 billion |
| Continuing earnings attributable to GE common shareholders | $369 million; $0.04/share | $122 million; $0.01/share |
| Net loss attributable to GE common shareholders | $1.184 billion; $(0.14)/share | $117 million; $(0.01)/share |
| Adjusted earnings (non-GAAP) | $1.418 billion; $0.16/share | $1.224 billion; $0.14/share |
| GE Industrial operating margin (GAAP) | 7.7% | 5.2% |
| Adjusted GE Industrial operating margin (non-GAAP) | 10.2% | 9.6% |
| GE cash from operating activities (GE CFOA) | $(1.0) billion | $0.4 billion |
| GE Industrial free cash flow (non-GAAP) | $(1.7) billion | $(2.7) billion |
Consolidated cash from operating activities was $1.4 billion, versus cash used of $82 million in Q1 2017. Consolidated cash, cash equivalents and restricted cash fell $11.8 billion from year-end to $32.1 billion. At March 31, GE reported $13.1 billion of cash (including $5.6 billion at BHGE) and GE Capital reported $19.0 billion.
Consolidated borrowings were $125.8 billion, down from $134.6 billion at December 31, 2017. Total assets were $358.1 billion and total liabilities were $281.4 billion. GE also had $20.3 billion of committed bilateral operating lines and $20.0 billion of committed unused syndicated credit lines.
Material changes and business performance
- Reported consolidated revenue rose 7%, substantially reflecting acquisitions, currency and the inclusion of Baker Hughes, a GE company (BHGE). Industrial segment organic revenue declined 4%; adjusted consolidated revenue excluding incremental BHGE revenue declined 3%.
- Industrial segment profit fell 5% to $2.7 billion and its margin decreased 130 basis points to 9.8%. Lower Power and Oil & Gas results were partly offset by Aviation and Healthcare growth. Corporate costs improved significantly, supporting the higher GE Industrial margin.
- Power revenue declined 9% and profit declined 38%, amid softer gas-turbine demand, fewer unit sales and pricing pressure. Oil & Gas revenue rose 74%, principally due to BHGE, but the segment reported a $144 million loss including restructuring charges; profit excluding restructuring and other charges was $181 million.
- Aviation revenue increased 7% and profit 26%; Healthcare revenue increased 9% and profit 11%. Transportation revenue declined 11%, while profit increased 37%. Lighting profit fell 90%.
- Industrial orders were $27.4 billion, compared with $25.1 billion; backlog increased to $372.3 billion from $346.5 billion. Remaining performance obligations were $252.5 billion.
- GE CFOA declined from $0.4 billion to negative $1.0 billion, primarily because GE Capital paid no common dividend (versus $2.0 billion in Q1 2017), alongside working-capital use, lower Power and Oil & Gas earnings, and $0.3 billion of pension contributions.
Outlook, risks and unusual items
- The filing states that consolidated continuing results were in line with expectations, but gives no specific full-year earnings or revenue guidance in the provided text. GE expected up to $6.0 billion of incremental long-term debt in 2018, primarily to fund the GE Pension Plan.
- GE Capital made a $3.5 billion contribution to insurance subsidiaries in Q1 and expected approximately $11 billion of additional contributions through 2024, subject to regulatory monitoring. GE Capital does not expect to pay common dividends to GE for the foreseeable future and planned no incremental senior unsecured term debt issuance until 2020.
- GE expected approximately $15 billion of cash from GE Capital asset-reduction actions over the next two years. GE also announced plans to reduce GE Capital’s Energy Financial Services and Industrial Finance businesses over 24 months.
- GE recorded a $1.5 billion reserve in discontinued operations for the DOJ’s ongoing FIRREA investigation involving WMC and GE Capital. The company said it could not meaningfully estimate additional potential loss; ultimate liability could exceed the reserve. WMC mortgage repurchase claims had a separate $342 million reserve, with an estimated reasonably possible loss of up to approximately $500 million above that reserve, excluding certain unestimable exposures.
- GE Capital’s run-off insurance assumptions remain sensitive: the filing illustrates that a 5% increase in future claim costs could increase future policy benefit reserves by $1.5 billion, while a 25-basis-point decline in expected investment yield could increase them by $1.0 billion.
- Moody’s changed its outlook for GE and GE Capital to negative on April 25, 2018, while affirming ratings; S&P and Fitch ratings and outlooks were unchanged.
- GE adopted ASC 606 retrospectively in 2018. It materially changed timing and classification of revenue and reduced previously reported 2017 revenue by $2.2 billion and continuing earnings by $2.7 billion. The quarter also included $0.6 billion of restructuring and other charges and a provisional U.S. tax-reform framework; the reported consolidated tax benefit was insignificant.
- Other disclosed uncertainties include Power market weakness, execution and proceeds from planned dispositions, Alstom joint-venture redemption rights, ongoing SEC scrutiny of revenue recognition and insurance reserves, shareholder litigation, and potential goodwill impairment in challenging Power and Oil & Gas markets. GE reported disclosure controls as effective at March 31, 2018.
Important facts for investors to verify
- Reconcile GAAP continuing earnings and adjusted earnings, and assess the $1.5 billion discontinued-operations reserve and any subsequent developments in the DOJ/FIRREA matter.
- Track GE Industrial cash generation, working capital, pension funding and whether planned debt issuance and asset sales support liquidity without GE Capital dividends.
- Review insurance reserve assumptions, required capital contributions and regulatory conditions, including sensitivity to claims and investment yields.
- Assess whether Power and Oil & Gas demand, pricing, orders and margins stabilize, and whether backlog converts to revenue and cash as expected.
- Monitor the effects of ASC 606 estimates on long-term service agreements, contract assets and reported earnings, together with the SEC investigation and litigation disclosures.
- Confirm the timing, proceeds and liabilities associated with announced asset sales and Alstom redemption rights, and watch the negative Moody’s outlook.