General Electric Company — FY2017 Form 10-K
Business context and reporting period. GE filed this annual report for the fiscal year ended December 31, 2017. The diversified industrial and financial-services company reported across Power, Renewable Energy, Oil & Gas, Aviation, Healthcare, Transportation, Lighting and Capital. In July 2017, GE combined its Oil & Gas business with Baker Hughes; GE held approximately 62.5% and consolidated 100% of BHGE revenue and cash flows. CEO John Flannery succeeded Jeff Immelt in August, and Jamie Miller became CFO in November.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Consolidated revenue and other income | $122.1 billion | $123.7 billion |
| Continuing earnings attributable to GE common shareowners (GAAP) | $(5.9) billion; $(0.68) per diluted share | $9.1 billion; $1.00 per diluted share |
| Net loss attributable to GE common shareowners (GAAP) | $(6.2) billion; $(0.72) per diluted share | $8.2 billion; $0.89 per diluted share |
| GE CFOA (GAAP) | $11.0 billion | $30.0 billion |
| GE Industrial CFOA (non-GAAP) | $7.0 billion | $9.9 billion |
| Adjusted GE Industrial CFOA / GE Industrial free cash flow (non-GAAP) | $9.7 billion / $5.6 billion | $11.6 billion / $7.1 billion |
| GE Industrial margin (GAAP) / operating margin (non-GAAP) | 5.7% / 12.1% | 11.4% / 14.0% |
Consolidated assets were $377.9 billion and total borrowings were $134.6 billion at year-end. Cash and equivalents were $43.3 billion consolidated, including $18.2 billion at GE (of which $7.0 billion was at BHGE) and $25.1 billion at GE Capital. GE Capital reported a $6.8 billion segment loss, including major insurance and portfolio impairment charges. The filing does not provide a consolidated current ratio or a single comparable measure of operating margin.
Industrial segment revenue rose 3% to $116.2 billion, but segment profit fell 16% to $14.7 billion and margin declined to 13.3% from 15.6%. Aviation revenue and profit increased to $27.4 billion and $6.6 billion; Healthcare revenue and profit increased to $19.1 billion and $3.4 billion. Power revenue declined 2% to $36.0 billion and profit fell 45% to $2.8 billion. Oil & Gas revenue rose 34% to $17.2 billion, largely reflecting BHGE consolidation, while reported profit was $220 million. GE reported $1.7 billion of structural-cost reductions, excluding acquisition and disposition effects.
Material changes versus the prior year
- Continuing earnings swung from $9.1 billion profit to a $5.9 billion loss. Industrial profit fell $6.5 billion, Financial Services losses increased $5.5 billion, and GE Industrial margin contracted 570 basis points.
- Revenue declined 1%; industrial organic revenue was approximately flat. Reported growth in Oil & Gas reflected the BHGE combination, while Power and Transportation faced weaker conditions.
- GE CFOA fell $18.9 billion, primarily because GE Capital dividends to GE dropped to $4.0 billion from $20.1 billion, alongside lower industrial cash generation and higher pension contributions. GE reported no GE Capital common-share dividend in the second half and did not expect distributions for the foreseeable future.
- Cash and equivalents decreased $4.8 billion. Total borrowings decreased $1.6 billion, while GE Capital borrowings continued to be reduced; GE also issued substantial new debt during the year.
- GE completed the $3.1 billion net sale of its Water business, recognizing a $1.9 billion pre-tax gain, and classified additional Lighting, Aviation, Healthcare and Power businesses as held for sale. It announced a plan to exit at least $20 billion of assets over the following one to two years.
Outlook, significant items and risks
- Insurance and GE Capital: A review of run-off long-term-care and other insurance assumptions led to an $8.9 billion increase in future policy-benefit reserves and a $6.2 billion after-tax fourth-quarter charge. GE Capital expects to contribute approximately $15 billion to insurance subsidiaries over seven years, including about $3.5 billion in 2018; the timing and amounts are subject to regulatory monitoring. GE Capital does not expect to pay common dividends to GE for the foreseeable future.
- Other fourth-quarter charges: GE recorded a $3.3 billion provisional tax-reform expense, $1.8 billion of after-tax impairment charges tied to GE Capital strategic actions, and $1.4 billion of pre-tax held-for-sale losses for Lighting and two Aviation businesses. Power recorded $0.9 billion of fourth-quarter charges, including inventory-related costs and litigation/distributor matters. Full-year restructuring and other charges were $5.3 billion before tax.
- 2018 framework: Management set a non-GAAP adjusted EPS target of $1.00–$1.07 and projected GE Industrial free cash flow of approximately $6–$7 billion. Its framework included approximately $6 billion of pension-plan funding and deal taxes, partly offset by Oil & Gas cash flow and a BHGE shareholder dividend. GE said it could not provide an equivalent GAAP guidance range without unreasonable effort because restructuring and portfolio actions made relevant items uncertain.
- Business conditions: GE expected the market for new gas orders in 2018 to be below 35 GW and was preparing for a market as low as 30 GW; Power restructuring was expected to continue into 2019. Oil & Gas customer spending and project awards remained uncertain despite improved rig counts and late-year oil prices. Renewable Energy faced sustained pricing pressure.
- Liquidity, ratings and obligations: GE planned up to $6 billion of incremental long-term debt in 2018, primarily for pension funding. GE and GE Capital ratings were downgraded during 2017. GE Capital’s liquidity and planned insurance funding depend in part on asset reductions and portfolio actions. GE’s GE Pension Plan was 74% funded on a GAAP basis; GE planned a $6.0 billion contribution in 2018.
- Accounting and control matters: GE expected adoption of the new revenue standard in 2018 to produce a non-cash $4.2 billion reduction to opening 2016 retained earnings and lower restated 2017 EPS by an estimated $0.16, before tax-reform effects; management said there would be no cash or contract-economics impact. The SEC was investigating revenue recognition and internal controls for long-term service agreements, later expanding its inquiry to the insurance reserve increase. Management reported effective internal control, and the auditor gave an unqualified opinion on the financial statements and controls.
- Contingencies: The filing describes WMC mortgage litigation and a DOJ FIRREA investigation for which a meaningful potential-loss range could not be estimated; WMC’s recorded reserve was $416 million, with an estimated reasonably possible loss of up to approximately $500 million above that reserve, excluding the DOJ matter. GE also identified legacy Alstom legal exposures, environmental remediation matters and shareholder litigation. A proposed Housatonic River remedy remained subject to further EPA action and possible appeals.
Key facts for investors to verify
- How much of the 2017 loss and cash-flow decline reflects recurring operations versus insurance reserving, tax reform, impairment, restructuring and disposal effects.
- The assumptions underlying the $8.9 billion insurance-reserve increase, future claims experience, reinsurance recoverability and the timing and funding of the approximately $15 billion statutory capital contributions.
- Whether GE can meet its 2018 adjusted EPS and free-cash-flow framework while funding the planned pension contribution and executing asset sales.
- The impact of Power-market weakness, Oil & Gas demand, BHGE integration and minority-interest accounting on future segment revenue, margins and cash generation.
- Progress and realized proceeds from the planned portfolio exits, and any associated liabilities, closing conditions or further held-for-sale impairments.
- Developments in the SEC investigation, WMC/DOJ and Alstom matters, and the extent to which these could affect reported results, controls or liquidity.
- The effect of GE’s ratings changes, debt maturities, pension obligations and Alstom joint-venture redemption rights on funding needs and capital allocation.