General Electric Company — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. GE combines industrial operations with GE Capital, which was being substantially reduced under the GE Capital Exit Plan. Figures below are in U.S. dollars.
Financial performance
| Metric | Q2 2016 | Six months 2016 |
|---|---|---|
| Consolidated revenue | $33.5bn, up 15% year over year | $61.3bn, up 11% |
| Continuing earnings attributable to GE common shareowners | $3.28bn vs. $1.68bn | $3.49bn vs. a $2.87bn loss |
| Continuing diluted EPS | $0.36 vs. $0.17 | $0.38 vs. $(0.29) |
| Net earnings attributable to GE common shareowners | $2.74bn vs. a $1.36bn loss | $2.64bn vs. a $14.93bn loss |
| Net diluted EPS | $0.30 vs. $(0.13) | $0.28 vs. $(1.48) |
| Industrial operating profit margin* | 14.2%, unchanged | 13.5% vs. 13.4% |
Revenue growth largely reflected the Alstom acquisition and the Appliances divestiture gain, rather than underlying growth: industrial segment organic revenue declined 1% in both periods. Industrial segment profit fell 5% in Q2 and 6% year to date; excluding Alstom, segment margin was 15.6% in Q2 versus 16.2%, and 15.1% year to date versus 15.5%. The Appliances sale generated a $3.1bn pretax gain and $1.8bn after-tax gain in Q2. *Non-GAAP measure.
Cash flow, debt and liquidity
- Consolidated operating cash flow was a use of $2.9bn for the first half, versus a $12.4bn source in 2015. Continuing-operations operating cash flow was $1.9bn, while discontinued operations used $4.8bn.
- GE operating cash flow from continuing operations was $10.7bn, including $11.0bn of GE Capital dividends. GE’s non-GAAP Industrial CFOA, excluding those dividends, was negative $0.3bn; excluding $0.7bn of Appliances-sale taxes, it was positive $0.4bn.
- Consolidated borrowings were $156.4bn at June 30, down from $197.6bn at year-end 2015. GE Capital borrowings declined substantially as the exit plan progressed; GE Capital also repurchased $10.2bn of debt in the first half, incurring a $0.5bn pretax loss.
- Cash and equivalents were $52.1bn consolidated ($9.9bn at GE and $42.2bn at GE Capital); GE Capital also reported $9.2bn of high-quality investments. GE cited $55.6bn of GE Capital liquidity sources, including cash classified in discontinued operations, and $20bn of committed unused credit lines.
- Total assets were $401.5bn, down from $493.1bn at December 31, 2015, primarily reflecting asset dispositions. GE returned $18.0bn to shareholders in the first half through $13.7bn of share repurchases and $4.3bn of dividends.
Material changes and management outlook
- GE completed the $5.6bn Appliances sale to Haier on June 6. Alstom contributed $6.0bn of first-half revenue, an operating loss of $0.4bn and operating cash outflow of $0.9bn; its purchase-price allocation remained preliminary, with further adjustments expected in Q3 and completion by year-end.
- GE had signed agreements covering $181bn of GE Capital ending net investment (ENI), excluding liquidity, and $158bn had closed as of June 30. GE expected to largely complete the exit plan by year-end 2016 and said total after-tax charges were not expected to exceed its initial $23bn estimate. GE received $11bn of GE Capital dividends in the first half; an additional $4bn was received in July, after the reporting date. Future dividends remain subject to regulatory approval.
- On June 28, the FSOC rescinded GE Capital’s nonbank SIFI designation. GE Capital nevertheless remained subject to U.K. regulatory supervision for its international operations.
- Management reported continued weakness in Oil & Gas: orders declined approximately 39% through the first half amid subdued industry activity. GE expected restructuring investment to rise from $350m to approximately $500m to pursue an $800m cost-reduction target; lower volume could limit savings realized.
- No broad revenue or earnings guidance is stated in the supplied filing text. The filing cautions that asset-sale timing and pricing, funding and interest costs, industrial demand, Alstom integration, foreign exchange, litigation, and regulatory or tax matters could cause actual results to differ from expectations.
Risks, contingencies and unusual items
- WMC mortgage repurchase claims totaled $10.0bn in stated loan balances, against an $860m reserve. GE estimated a reasonably possible additional loss of up to $500m above the reserve, but said this estimate excludes possible effects of adverse statute-of-limitations rulings and the DOJ investigation.
- Fourteen WMC lawsuits were pending, and the DOJ was investigating potential FIRREA violations related to historical mortgage activity. GE said the investigation was at an early stage and it was cooperating.
- GE disclosed $1.5bn of indemnifications to buyers of GE Capital assets, with $0.2bn of related liabilities recognized, plus $0.1bn of credit support. The filing also describes continued excess GE Capital interest expense as asset sales outpace debt maturities.
- The large improvement in year-to-date earnings versus 2015 was substantially affected by the absence of prior-year GE Capital Exit Plan charges and related tax charges. Q2 earnings also benefited from the Appliances-sale gain; per-share comparisons benefited from a lower share count.
Most important facts for investors to verify
- Underlying industrial performance: organic revenue trends, segment margins excluding Alstom, and Oil & Gas orders and restructuring outcomes.
- Whether GE Capital asset sales close at expected values and on schedule, and whether remaining exit-plan costs stay within the stated estimate.
- Cash generation excluding GE Capital dividends and one-time sale-related items, alongside debt maturities, refinancing needs and liquidity availability.
- WMC reserve adequacy and developments in the lawsuits and DOJ investigation, including exposures excluded from management’s quantified loss range.
- Alstom’s operating contribution, cash use, integration progress and final purchase accounting; also the sustainability of earnings excluding the Appliances gain and prior-year comparison effects.