General Electric Company — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in U.S. dollars; financial results discussed are generally from continuing operations. GE now reports Aerospace, Renewable Energy and Power. GE HealthCare was spun off on January 3, 2023 and is reported as discontinued operations.
Key financial results
| Metric | Q2 2023 | Comparable period |
|---|---|---|
| Revenue | $16.7 billion, up 18% | $14.1 billion in Q2 2022 |
| Continuing earnings attributable to GE common shareholders | $996 million; diluted EPS $0.91 | Loss of $1.201 billion; diluted EPS $(1.09) |
| Adjusted earnings and adjusted diluted EPS (non-GAAP) | $748 million; $0.68 | $391 million; $0.36 |
| GAAP profit margin / adjusted profit margin (non-GAAP) | 8.3% / 8.8% | (6.8)% / 7.6% |
| Net earnings attributable to GE common shareholders, including discontinued operations | Loss of $23 million | Loss of $949 million |
Six-month revenue was $31.2 billion, up 16%. Continuing earnings attributable to common shareholders were $7.099 billion, or diluted EPS of $6.46, versus a loss of $2.476 billion, or $(2.25), in the first half of 2022. Adjusted earnings were $1.042 billion, or $0.95 per share, compared with $289 million, or $0.26. The substantial GAAP earnings improvement chiefly reflects gains on retained and sold ownership interests, not just operating performance: those gains were $6.266 billion for the first half, versus losses of $1.751 billion a year earlier.
For Q2, GE reported $1.9 billion more in gains on retained and sold ownership interests than in the prior-year quarter, alongside a $0.4 billion increase in segment profit. These items, and the adjusted measures that exclude them, should be distinguished when assessing earnings quality.
Segments
| Segment | Q2 revenue | Q2 segment profit (loss) | Q2 margin | Year-over-year context |
|---|---|---|---|---|
| Aerospace | $7.860 billion | $1.479 billion | 18.8% | Revenue +28%; profit +29% |
| Renewable Energy | $3.849 billion | $(359) million | (9.3)% | Revenue +24%; loss narrowed from $419 million |
| Power | $4.152 billion | $377 million | 9.1% | Revenue down 1%; profit +18% |
Aerospace benefited from stronger commercial engine and services activity, including higher spare-parts shipments, shop visits and pricing. Renewable Energy’s higher volume, pricing and cost actions reduced losses, but Offshore Wind continued to face Haliade-X ramp-up and project costs. Power’s service growth and productivity improved profit, partly offset by lower Aeroderivative shipments and the continued exit from new-build coal.
Cash flow, liquidity and debt
- Continuing-operations cash from operating activities for the first half was $465 million, versus cash used of $434 million in 2022. Free cash flow, a non-GAAP measure, was $517 million, versus $(976) million. The filing attributes improvement mainly to higher earnings adjusted for non-cash ownership-interest gains and lower working-capital cash use.
- Capital expenditures and internal-use software additions were $663 million in the first half. Free cash flow excludes specified insurance cash flows, separation and Corporate restructuring expenditures, and taxes related to business sales.
- Cash, cash equivalents and restricted cash were $12.8 billion at June 30, including $3.7 billion in the U.S. and $9.1 billion outside the U.S. The filing identifies $1.7 billion held in countries with currency controls and $0.4 billion of restricted-use cash; $0.7 billion held in run-off Insurance was classified elsewhere.
- Total borrowings were $21.8 billion, down $2.3 billion from December 31, 2022, principally due to $2.6 billion of net maturities and repayments. GE had $13.5 billion of committed revolving credit facilities available and said it met the applicable net-debt-to-EBITDA covenant.
- Credit ratings at filing were Moody’s Baa1 with a negative outlook, S&P BBB+ with a stable outlook, and Fitch BBB with a stable outlook.
Material changes and management outlook
- Total remaining performance obligations were $245.8 billion, up 4% from year-end 2022, primarily reflecting orders at Renewable Energy, Aerospace and Power. Services represented $192.2 billion of the total.
- GE continued to plan a spin-off of its energy businesses as GE Vernova. It completed the GE HealthCare spin-off and held approximately 13.5% of GE HealthCare at June 30 after selling shares in Q2. GE also continued to monetize its AerCap stake and fully sold its Baker Hughes position.
- Management reported persistent supply-chain inflation, delays in obtaining key materials and skilled-labor shortages, which constrained conversion of backlog to revenue and pressured margins. GE cited productivity initiatives, supplier engagement and pricing actions as mitigations.
- Management described commercial aviation demand as recovering: global commercial departures were up 21% year over year in Q2 and approximately 98% of 2019 levels. It noted continuing production and delivery constraints. For Power, management expected gas-power generation to grow at a low-single-digit rate over the next decade, while noting financing and deal-timing uncertainty in emerging markets.
- Renewable Energy’s outlook depends on improving Onshore Wind quality and fleet availability, executing cost reductions and pricing actions, and managing Offshore Wind product and project execution. Management said IRA incentives could support U.S. wind demand and reduce costs for qualifying U.S.-manufactured turbines, but identified potential further Haliade-X cost and execution challenges.
- GE expected to complete the sale of part of Steam Power to EDF in the second half of 2023, subject to approvals and other closing conditions; completion was expected to result in a significant gain. The filing does not provide a clear quantified full-year guidance figure in the supplied text.
Risks, contingencies and unusual items
- GE recorded a $190 million Q2 charge related to expanded Russia and Ukraine sanctions, primarily in Power, and said remaining net asset exposure to Russia was not material.
- Bank BPH borrower litigation is reported in discontinued operations. GE and the bank approved a borrower settlement program in July 2023; estimated total litigation losses reached $2.632 billion as of June 30, including an additional $1.014 billion charge. GE said no incremental cash contribution was then required, but adverse legal, regulatory or settlement developments could increase losses and potentially require future funding.
- GE reported $421 million of reserves for Alstom legacy legal and compliance matters and said it could not meaningfully estimate reasonably possible additional losses. It also disclosed ongoing GE Retirement Savings Plan litigation and other legal matters.
- GE had made $13.2 billion of capital contributions to its run-off insurance subsidiaries and expected a final contribution of up to $1.8 billion in Q1 2024, subject to completion of the year-end statutory reporting process.
- Q2 and first-half earnings included substantial separation and restructuring costs: $226 million and $431 million of separation expense, respectively. GE also reported $144 million and $305 million of restructuring and other charges for those periods.
- GE redeemed $3.0 billion of preferred stock in Q1 and, after quarter-end, announced an intention to redeem the remaining preferred shares on September 15, 2023 for approximately $2.8 billion. The filing also reported $0.6 billion of common-stock repurchases in the first half.
Important facts for investors to verify
- How much of reported earnings growth is repeatable operating improvement versus volatile, largely non-cash gains on GE HealthCare and AerCap holdings.
- Whether Aerospace growth and backlog convert into revenue and cash despite supplier, labor and delivery constraints.
- Whether Renewable Energy can reduce losses and address Onshore Wind quality and Offshore Wind project execution without additional charges.
- Progress and conditions for the planned EDF Steam Power sale and GE Vernova separation, including transaction timing and costs.
- Potential changes in Bank BPH litigation estimates, settlement participation and any future GE funding requirements.
- Insurance reserve assumptions, the expected final insurance capital contribution, and GE’s cash availability after planned preferred-stock redemption and other obligations.