GENERAL ELECTRIC CO quarterly report, Q2 FY2017

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Business context and reporting period

General Electric Company’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2017. Results combine industrial businesses and GE Capital; figures below are U.S. dollars unless noted. Comparisons are with the corresponding 2016 periods. GE announced a CEO transition: John Flannery was to succeed Jeffrey Immelt effective August 1, 2017.

Financial performance and position

MetricQ2 2017Q2 2016Six months 2017Six months 2016
Revenue$29.6B$33.5B$57.2B$61.3B
Continuing earnings attributable to GE common shareholders$1.34B$3.30B$2.20B$3.55B
Net earnings attributable to GE common shareholders$1.19B$2.76B$1.80B$2.70B
Diluted EPS from continuing operations$0.15$0.36$0.25$0.38
Diluted net EPS$0.13$0.30$0.20$0.29

Revenue and margins: Consolidated revenue declined 12% in Q2 and 7% year to date. Industrial segment organic revenue, a non-GAAP measure, increased 2% and 4%, respectively. Industrial segment margin was 14.1% in Q2 (14.4% prior year) and 14.0% year to date (13.6%). Industrial operating profit margin, excluding specified items and a non-GAAP measure, was 13.2% in Q2 (13.1%) and 12.9% year to date (12.2%).

Cash flow: Consolidated cash from operating activities was $2.5B for the first half, versus cash used of $2.8B in 2016; continuing-operations operating cash flow was $3.4B versus $2.0B. GE cash from operating activities (GE CFOA) was $3.6B, down from $10.8B, largely reflecting GE Capital dividends to GE of $4.0B versus $11.0B. Industrial CFOA, excluding GE Capital dividends, was negative $431M; excluding deal taxes and GE pension funding, it was negative $163M, versus positive $467M in 2016. These are non-GAAP measures. Contract assets rose $3.8B to $28.9B, primarily from contract cost estimates and billing timing.

Liquidity and debt: At June 30, cash and equivalents were $44.0B, including $14.2B at GE and $29.8B at GE Capital. GE Capital reported $36.9B of liquidity sources, including cash, investments and discontinued-operations cash. Consolidated borrowings totaled $134.4B, down from $136.2B at year-end 2016. GE Capital’s current portion of long-term debt was $17.8B; it did not plan to issue incremental senior unsecured term debt before 2019. GE issued €8.0B of senior unsecured notes during Q2. GE also had $20.0B of committed unused syndicated credit lines.

Other metrics: Total assets were $355.5B and total equity was $75.8B. The six-month consolidated effective tax rate was 1.3%; GE expected its full-year 2017 effective tax rate, excluding GE Capital, to be approximately 10%. GE declared common dividends of $0.24 per share in Q2 and $0.48 for the first half.

Material changes versus the prior comparable period

  • The sharp Q2 earnings decline chiefly reflects the nonrecurrence of the prior-year $3.1B pre-tax gain on the Appliances sale to Haier. Consolidated continuing earnings fell 59% for Q2 and 38% for the first half; the first-half decline also reflects lower disposal gains.
  • Industrial segment profit declined 4% in Q2 but increased 2% for the first half. Aviation profit rose 11% in both periods; Oil & Gas profit fell 52% in Q2 and 43% year to date. Transportation and Energy Connections & Lighting also reported lower Q2 segment profit.
  • GE Capital’s segment losses narrowed to $172M in Q2 from $600M and to $219M for the first half from $1.5B, mainly from lower treasury, headquarters, preferred-dividend and restructuring costs associated with the GE Capital Exit Plan. Capital revenue nevertheless declined 12% in Q2 and 9% year to date.
  • GE completed the $0.9B ServiceMax acquisition and the approximately $1.6B LM Wind Power acquisition. On July 3, after quarter-end, GE completed the Baker Hughes combination, contributing $7.4B cash for a 62.5% economic interest. The filing had not yet completed purchase accounting or provided pro forma results.

Outlook, commentary, risks and unusual items

  • GE agreed to sell Water & Process Technologies for approximately $3.4B, with closing expected in the second half of 2017, subject to approvals and customary conditions. Industrial Solutions was classified as held for sale, with sale expected by the end of Q1 2018.
  • Management said GE Capital would maintain elevated liquidity while completing asset sales, with a return toward more normalized levels expected in 2019. GE Capital’s ability to pay dividends to GE, GE’s cash conversion, working capital and contract-asset trends remain important uncertainties.
  • Elevated long-term-care insurance claims could reveal a reserve deficiency; GE said a charge could be recorded in the second half of 2017 after its annual review.
  • WMC mortgage-related claims totaled $6.454B, based on loan balances and not net of potential collateral recoveries. Reserves were $636M; GE estimated reasonably possible losses of up to approximately $500M above the reserve, excluding FIRREA investigation outcomes and certain statute-of-limitations risks. The Department of Justice investigation remained ongoing.
  • GE had an $858M reserve for legacy Alstom legal and compliance matters and could not meaningfully estimate possible additional losses. Separately, the European Commission issued preliminary objections concerning information provided in its LM Wind review; a potential fine could reach 1% of GE annual revenue if a violation is found to be intentional or negligent.
  • GE planned to adopt the new revenue recognition standard retrospectively on January 1, 2018; management said estimates of its earnings effects remained subject to refinement. Adoption of the new lease standard was expected to materially affect the statement of financial position.
  • Other stated risks include market and currency conditions, GE Capital funding and credit exposure, credit-rating effects, litigation and investigations, transaction approvals and integration, cost reductions, and cybersecurity. The filing reported effective disclosure controls and no material quarterly change in internal control over financial reporting.

Most important facts for investors to verify

  1. How much of the earnings and revenue comparisons reflects the prior-year Appliances gain, portfolio changes and discontinued operations versus underlying operating trends.
  2. Whether industrial operating cash flow improves, including the effects of contract assets, working capital, pension funding and reduced GE Capital dividends.
  3. Progress and final terms of the Baker Hughes combination and planned business sales, including cash requirements, purchase accounting and realized proceeds.
  4. GE Capital’s ability to fund debt maturities, sustain liquidity and remit dividends as asset sales proceed; also monitor consolidated debt and GE’s credit rating.
  5. Developments in the long-term-care insurance reserve review, WMC claims and FIRREA investigation, Alstom matters, and the EC LM Wind investigation.
  6. Implementation effects of revenue recognition and lease accounting, and whether reported non-GAAP measures reconcile appropriately to GAAP results.