GE 2019 Third-Quarter Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. GE operates industrial businesses—Power, Renewable Energy, Aviation and Healthcare—and financial services through GE Capital. Results below are generally for continuing operations unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Consolidated revenue | $23.4B | $23.4B | $69.0B | $70.5B |
| Continuing earnings attributable to GE common shareholders | $(1.325)B | $(22.956)B | $(0.707)B | $(21.947)B |
| Continuing diluted EPS | $(0.15) | $(2.64) | $(0.08) | $(2.53) |
| Net loss attributable to GE common shareholders, including discontinued operations | $(9.465)B | $(22.808)B | $(5.977)B | $(23.376)B |
| Adjusted EPS (non-GAAP) | $0.15 | $0.11 | $0.43 | $0.42 |
Quarterly industrial segment organic revenue rose 7%; reported industrial segment profit increased 25% to $2.45B, with an 11.5% margin. Adjusted GE Industrial profit margin was 10.0%, versus 8.5% a year earlier. For the first nine months, industrial segment organic revenue increased 6%, but organic segment profit fell 3%; the reported margin declined to 11.4% from 12.0%.
Q3 GAAP continuing results included a $0.74B goodwill impairment charge, while Q3 2018 included $21.97B of goodwill impairments. GE recorded $1.48B of goodwill impairments in the first nine months of 2019. The large prior-year impairments make headline earnings comparisons less representative of underlying operations. The Q3 net loss also reflects an $8.19B after-tax loss on Baker Hughes deconsolidation, reported in discontinued operations.
Cash flow, debt and liquidity
- GE cash from operating activities from continuing operations was $0.08B for the first nine months, compared with cash used of $4.46B in 2018. GE Industrial free cash flow, a non-GAAP measure, was $(1.56)B versus $(0.30)B; working-capital use more than offset some improvements.
- Consolidated cash, cash equivalents and restricted cash was $27.8B at September 30, 2019; GE reported $16.7B and GE Capital $11.2B. GE had $35.3B of net available committed credit facilities.
- Consolidated borrowings were $93.2B, down from $103.6B at December 31, 2018. GE Industrial net debt, a non-GAAP measure, was $49.0B, versus $55.3B at year-end 2018. GE’s debt tender repurchased $4.8B principal amount for $5.0B cash and generated a $0.3B pre-tax loss.
- GE Capital’s debt-to-equity ratio was 4.7:1, compared with 5.7:1 at year-end 2018. GE’s stated targets include a sustainable long-term credit rating in the single-A range, GE Industrial net debt/EBITDA below 2.5x, and GE Capital debt-to-equity below 4:1.
Material changes and segment trends
- Portfolio actions: GE reduced its Baker Hughes ownership from 50.2% to 36.8%, received $3.0B net cash, and deconsolidated the business. It sold its remaining Wabtec common shares in Q3; the Transportation spin-off and merger had been completed earlier in 2019. BioPharma was classified as held for sale under an agreement for approximately $21.4B consideration, with closing expected in Q1 2020 subject to regulatory approval.
- Power: Q3 revenue fell 14% and the segment reported a $0.14B loss, but the loss narrowed from $0.68B. Management described the market as challenging, citing overcapacity, pricing pressure and execution risks, while noting early signs of stabilization. It expects incremental improvement in 2020 and further acceleration from 2021 onward.
- Renewable Energy: Q3 revenue grew 13%, but the segment recorded a $0.10B loss. Lower profitability reflected project execution, pricing, tariffs and losses in Grid Solutions, Hydro and Offshore Wind. Goodwill impairments of $0.74B at Grid Solutions and $0.74B at Hydro were recorded during 2019.
- Aviation: Q3 revenue rose 8% and segment profit rose 3%; backlog reached $252.9B, up 20% year over year. The 737 MAX grounding affected GE CFOA by an estimated $0.3B in Q3 and $1.0B for the first nine months. GE anticipated a further approximately $0.4B CFOA impact in Q4 if grounding continued. GE reported $2.5B of net assets related to the program and no impairment through September, believing them recoverable.
- Healthcare: Q3 revenue rose 5% and profit rose 13%. The planned BioPharma sale is a significant pending portfolio change.
- GE Capital and insurance: GE Capital revenue declined 15% in Q3, and its segment loss was $0.65B, primarily reflecting a $1.0B pre-tax run-off insurance premium deficiency charge. Insurance liabilities and annuity benefits were $40.1B at September 30, 2019.
Outlook, risks and unusual items
- The annual insurance premium deficiency test produced a $0.97B non-cash pre-tax charge (approximately $0.8B after tax). Lower discount-rate assumptions were the main adverse factor; management reset the test margin to zero and said future net adverse assumption changes could result in further charges. A 25-basis-point reduction in the overall discount rate was estimated to increase reserves by $1.0B, all else equal.
- GE Capital expected about $10B of asset reductions in 2019 and approximately $2.5B of additional capital contributions from GE in Q4. GE Capital also expected to contribute approximately $9B to insurance subsidiaries through 2024; amounts and timing remain subject to regulatory monitoring and reserve testing.
- In October, GE announced pension changes and plans to pre-fund approximately $4B–$5B of estimated 2021–2022 minimum funding requirements in 2020. Management expected approximately $0.6B of additional pre-tax non-operating benefit costs in Q4 2019; a separate lump-sum pension offer could create an additional settlement loss.
- Key risks include insurance reserve assumptions and long-term-care claims, Power and Renewable Energy execution and market conditions, 737 MAX disruption, completion and proceeds of planned dispositions, liquidity and credit-rating changes, pension funding, tariffs, and legal or regulatory proceedings. GE’s credit ratings were Baa1/BBB+/BBB+ for long-term debt, with Fitch maintaining a negative outlook; ratings were unchanged from the end of Q1.
- GE paid a $1.5B civil penalty in April 2019 to settle the DOJ FIRREA investigation without admitting liability or wrongdoing. Other proceedings include WMC mortgage litigation and bankruptcy, Alstom legacy matters and shareholder suits. The filing states that some legal exposures cannot be reasonably estimated.
- No consolidated full-year revenue, earnings or cash-flow guidance is stated in the provided filing text. Management’s outlook statements are principally business-specific and subject to the risks described above.
Important facts for investors to verify
- Whether the BioPharma sale closes on expected terms and timing, and the eventual proceeds and use of funds.
- Future marks or sale proceeds for GE’s remaining Baker Hughes stake, and the resulting earnings volatility after fair-value accounting.
- Quarterly industrial cash generation, working-capital trends and the 737 MAX impact relative to management’s estimates.
- Run-off insurance reserve assumptions, future premium deficiency results, and the amount and timing of required capital contributions.
- Progress against debt, leverage and asset-reduction targets, including the effect of pension remeasurement and funding.
- Power and Renewable Energy order quality, margins, project execution and any further impairment charges.