Business context and reporting period
General Electric Company’s Form 10-K covers the fiscal year ended December 31, 2015; it is an annual filing, not a standalone fourth-quarter report. GE operated industrial businesses and GE Capital, serving customers in about 180 countries. The year was dominated by GE’s plan to sell most GE Capital assets and refocus on its industrial businesses.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Consolidated revenue and other income | $117.4 billion | $117.2 billion |
| Earnings from continuing operations attributable to GE common shareowners | $1.7 billion; diluted EPS $0.17 | $9.5 billion; diluted EPS $0.94 |
| Net earnings (loss) attributable to GE common shareowners | $(6.1) billion; diluted EPS $(0.61) | $15.2 billion; diluted EPS $1.50 |
| Cash from operating activities, continuing and discontinued operations | $19.9 billion | $27.7 billion |
| GE cash from operating activities (continuing operations) | $16.4 billion | $15.2 billion |
| Industrial CFOA (non-GAAP) | $12.1 billion | $12.2 billion |
| GE free cash flow (non-GAAP) | $13.5 billion | $11.8 billion |
| Cash and equivalents, continuing operations | $70.5 billion | $70.0 billion |
| Total borrowings, including non-recourse securitization debt | $198.3 billion | $261.4 billion |
Industrial segment revenue fell about 1%, while organic revenue grew 3%. Industrial segment profit increased 1%; reported segment margin improved 30 basis points. Excluding Alstom, industrial segment margin was 17.0%. GE reported a $7.5 billion after-tax loss from discontinued operations, principally reflecting GE Capital asset-sale losses and impairments. GE Capital assets fell 38%, from $501 billion to $312 billion. The consolidated tax provision was $6.5 billion, including substantial GE Capital Exit Plan-related tax expense.
Material changes versus the prior year
- GE recorded $22.0 billion of after-tax charges related to the GE Capital Exit Plan: $7.7 billion in continuing operations and $14.3 billion in discontinued operations. The charges included disposal losses, tax expense and asset impairments.
- GE signed agreements to sell approximately $157 billion of GE Capital ending net investment (ENI), excluding liquidity; approximately $104 billion had closed by year-end. GE Capital paid $4.3 billion in dividends to GE. Its ENI, excluding liquidity, was $81.9 billion, versus $363.0 billion at year-end 2014 on the filing’s stated basis.
- GE completed the Synchrony Financial split-off, exchanging 671.4 million GE shares and recording a $3.4 billion after-tax gain in discontinued operations. GE acquired Alstom’s Thermal, Renewables and Grid businesses for approximately $10.1 billion and sold its Signaling business for $0.8 billion.
- A stronger U.S. dollar reduced consolidated revenue by $4.9 billion and earnings by $0.7 billion. Industrial segment performance varied: Aviation profit rose, while Oil & Gas revenue declined 14% amid lower oil prices and weaker demand.
Outlook, commentary, risks and unusual items
- GE expected to largely complete the GE Capital Exit Plan by the end of 2016 and anticipated approximately $35 billion in GE Capital dividends, subject to regulatory approval. Management planned to retain about $90 billion of GE Capital ENI; year-end 2015 ENI excluding liquidity was about $82 billion.
- GE targeted an early-2016 application to rescind GE Capital’s nonbank SIFI designation; approval and timing were uncertain. GE Capital remained subject to heightened regulation, including liquidity requirements.
- Management expected excess GE Capital interest costs while asset sales outpaced debt maturities and an elevated liquidity position through the disposal period. GE Capital’s senior debt and commercial paper guarantees, approximately $85.8 billion at year-end, make the parent directly exposed to specified GE Capital obligations.
- Key business risks included low oil prices, currency volatility, soft demand in some industrial markets, execution and integration of Alstom, transaction approvals and sale prices, customer credit risk, and the ability to maintain credit ratings and planned dividends or repurchases.
- Contingencies include WMC mortgage repurchase litigation: $875 million reserved, with a stated reasonably possible loss estimate of up to $500 million above the reserve. That estimate excluded potential outcomes of a U.S. Department of Justice FIRREA investigation for which GE said it could not yet make a meaningful estimate. Environmental remediation and legacy Alstom legal matters also remain relevant.
- GE’s principal pension plans were underfunded by $23.0 billion at year-end. GE estimated no required minimum contribution to its principal pension plan in 2016, but expected contributions to other pension and retiree benefit plans. Management expected postretirement benefit plan costs to decrease by about $1.0 billion in 2016.
- GE reported effective internal control over financial reporting and received an unqualified audit opinion. The Alstom businesses were excluded from management’s 2015 internal-control assessment.
Important facts for investors to verify
- Track the timing, proceeds, final losses and remaining obligations from GE Capital disposals, including the targeted 2016 completion and expected dividends to GE.
- Reconcile GAAP earnings and cash flows with the large Exit Plan charges and GE’s non-GAAP operating, Industrial CFOA and free-cash-flow measures.
- Assess GE’s post-reorganization debt, the GE guarantee of GE Capital obligations, near-term maturities, liquidity needs and credit-rating outlook.
- Monitor Alstom integration, preliminary purchase accounting, expected synergies and joint-venture redemption rights; the filing said the purchase-price allocation remained preliminary.
- Follow WMC claims, the DOJ investigation, environmental exposures and Alstom legacy proceedings, including liabilities that may exceed recorded reserves.