General Electric Company — 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016; it is not a standalone fourth-quarter filing. GE reported industrial businesses and a substantially reduced GE Capital, following the announced plan to exit most financial services businesses. GE operated in approximately 180 countries and employed about 295,000 people.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Consolidated revenue | $123.7 billion | $117.4 billion |
| Earnings from continuing operations attributable to GE common shareowners | $9.1 billion | $1.7 billion |
| Net earnings (loss) attributable to GE common shareowners | $8.2 billion | $(6.1) billion |
| Diluted EPS from continuing operations | $1.00 | $0.17 |
| Diluted net EPS | $0.89 | $(0.61) |
| Industrial segment profit | $17.6 billion | $18.0 billion |
| Industrial segment operating margin | 15.6% | 16.5% |
| Consolidated borrowings | $136.2 billion | $197.6 billion |
| Cash and equivalents | $48.1 billion | $70.5 billion |
Revenue grew 5%, but industrial segment organic revenue was approximately flat. Industrial segment operating margin was 16.8% excluding Alstom, versus 17.0% in 2015. GE’s non-GAAP industrial operating margin was 14.0%, down from 14.8% (15.0% versus 15.3% excluding Alstom).
Reported continuing-operations cash from operating activities for GE was $30.0 billion, including $20.1 billion of dividends from GE Capital. GE’s non-GAAP Industrial CFOA, excluding those dividends, was $9.9 billion; excluding deal-related taxes and pension funding, it was $11.6 billion. The consolidated cash flow statement reported operating cash outflow of $0.2 billion, reflecting discontinued operations. GE-defined free cash flow was $27.3 billion; it includes GE Capital dividends and is a non-GAAP measure.
At year-end, consolidated assets were $365.2 billion, down from $493.1 billion, largely reflecting GE Capital disposals. GE reported $10.5 billion of GE cash and $50.5 billion of GE Capital liquidity sources, the latter including high-quality investments and cash classified in discontinued operations. GE paid $8.5 billion in common dividends and repurchased $22.0 billion of stock. Its long-term ratings were A1 from Moody’s and AA- from S&P and Fitch, all with stable outlooks; S&P had lowered its rating from AA+ during 2016.
Material changes and notable items
- GE Capital had signed agreements to sell $197 billion of ending net investment, measured from the 2014 base and excluding liquidity; $190 billion had closed by year-end. GE Capital assets declined 63% from $500 billion at December 31, 2014 to $183 billion at December 31, 2016. The plan had generated $22.0 billion of charges since inception; management did not expect total after-tax charges to exceed its initial $23 billion estimate.
- GE sold Appliances to Haier for $5.6 billion and recorded a $1.8 billion after-tax gain. The sale, together with other disposals, contributed to higher corporate gains and makes headline earnings less representative of recurring operations.
- Alstom contributed $13.0 billion of 2016 revenue and an operating loss of $0.3 billion, including purchase-accounting and acquisition-related charges. GE recorded $3.6 billion of restructuring and other charges, versus $1.7 billion in 2015.
- Industrial segment profit fell 2%; weakness in Oil & Gas, Energy Connections & Lighting, and Transportation outweighed gains in other segments. Oil & Gas revenue fell 22% and profit fell 43%, amid lower customer activity and oil prices.
- 2016 continuing earnings benefited from a consolidated income tax benefit: the effective tax rate was negative 5.1%, reflecting global tax items and tax benefits. The prior-year result included substantial GE Capital Exit Plan tax charges.
Outlook, risks, and contingencies
- GE’s 2017 non-GAAP Industrial operating plus Verticals EPS target was $1.60–$1.70. The filing did not provide a comparable GAAP EPS range, citing uncertainty in GE Capital’s remaining exit costs and other items.
- GE planned to fund the Baker Hughes transaction, refinance debt, and pursue other corporate purposes with new long-term debt in 2017. The proposed combination of Oil & Gas with Baker Hughes, including GE’s planned $7.4 billion cash contribution, remained subject to shareholder, regulatory, and other closing conditions. Planned transactions also included the LM Wind Power acquisition and sales of Water & Process Technologies and Industrial Solutions.
- GE expected approximately $1.7 billion of contributions to its principal pension plan in 2017; the plan’s GAAP deficit was $19.1 billion at year-end. Management expected 2017 postretirement benefit plan costs to be about the same as 2016.
- Key risks include global economic and currency volatility, low oil and gas demand, execution and integration of acquisitions and divestitures, customer demand and pricing, cybersecurity, credit-market access and ratings, and legal and regulatory exposure.
- WMC mortgage repurchase claims totaled $6.5 billion in stated loan balances; GE had a $626 million reserve and estimated reasonably possible losses of up to $500 million above that reserve. The estimate excluded potential losses from an adverse statute-of-limitations decision or the ongoing U.S. Department of Justice investigation, for which GE could not provide a meaningful estimate.
- GE recorded an $858 million reserve for Alstom legacy legal and compliance matters but could not estimate a meaningful range of additional losses. Environmental remediation and asbestos reserves totaled $1.8 billion. GE considered its Housatonic River reserves adequate, while appeals of the EPA remedy remained pending.
- GE planned to adopt the new revenue standard in 2018 using full retrospective application. It estimated a non-cash $4 billion reduction to January 1, 2016 retained earnings and approximately $0.10 lower restated 2016 EPS; estimated 2018 EPS dilution was approximately $0.05. These estimates remained subject to change.
Investor verification priorities
- Reconcile GAAP earnings and cash flow to GE’s non-GAAP operating earnings, Industrial CFOA, and free cash flow, including the effects of GE Capital dividends, disposals, restructuring, and taxes.
- Check progress, final costs, cash proceeds, and remaining liabilities under the GE Capital Exit Plan, including indemnifications and GE guarantees.
- Track Oil & Gas operating trends and the closing, financing, regulatory approvals, and expected synergies of the Baker Hughes transaction.
- Assess pension funding requirements and sensitivity to discount rates, asset returns, and other actuarial assumptions.
- Monitor WMC claims and investigation outcomes, Alstom legacy matters, environmental obligations, and the sufficiency of recorded reserves.
- Review the final revenue-standard transition adjustments and their effects on reported historical results and future comparisons.