GE 2018 Second-Quarter Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. GE combines industrial operations with GE Capital; the filing reports them separately as well as on a consolidated basis. Amounts below are in U.S. dollars.
Financial results and key metrics
| Metric | Q2 2018 | Comparable period |
|---|---|---|
| Consolidated revenue | $30.1 billion | $29.1 billion; up 3% |
| Industrial segment organic revenue (non-GAAP) | Down 6% | Down 5% for the first half |
| Continuing earnings attributable to GE common shareowners | $736 million; $0.08 per share | $1.028 billion; $0.12 per share |
| Net earnings attributable to GE common shareowners | $615 million; $0.07 per share | $875 million; $0.10 per share |
| Adjusted earnings per share (non-GAAP) | $0.19 | $0.21 |
| GE CFOA, six months (GAAP) | $(0.8) billion | $3.6 billion |
| GE Industrial free cash flow, six months (non-GAAP) | $(1.7) billion | $(2.4) billion |
| Adjusted GE Industrial free cash flow, six months (non-GAAP) | $(1.4) billion | $(2.4) billion |
Q2 GAAP GE Industrial margin was 9.7%, versus 9.3% a year earlier; adjusted margin was 10.4%, versus 12.0%. Industrial segment profit fell 14% to $3.2 billion and its margin declined to 11.0% from 13.3%. For the six months, consolidated revenue rose 5% to $58.8 billion, while continuing earnings were $1.1 billion, broadly unchanged. Net loss attributable to common shareowners was $568 million, principally reflecting $1.673 billion of discontinued-operations losses.
Revenue growth included $2.8 billion of incremental Baker Hughes revenue in Q2 and a $0.6 billion favorable currency effect. Excluding acquisitions, dispositions and currency, industrial segment revenue declined. Corporate costs benefited from disposition gains and unrealized investment gains; underlying industrial segment profit weakened, particularly in Power and Oil & Gas.
Cash, debt and liquidity
- Consolidated cash, cash equivalents and restricted cash were $27.7 billion at June 30, down $16.3 billion since year-end. GE reported $13.8 billion, including $4.9 billion at BHGE that GE said was not freely available; GE Capital reported $13.9 billion.
- Consolidated borrowings were $115.6 billion, down about $19.0 billion from December 31, 2017. GE reported $41.7 billion and GE Capital $76.4 billion of debt originally issued and outstanding, under the filing’s presentation.
- GE had $40.3 billion of net available committed credit lines. GE’s cash excluding BHGE and cash subject to currency controls was $6.0 billion.
- GE’s operating cash flow was pressured by the absence of GE Capital dividends, higher working-capital use and pension contributions. GE Capital paid no common dividend in the first half and did not expect to do so for the foreseeable future.
Material changes, outlook and risks
- Portfolio actions: GE completed the sale of Industrial Solutions to ABB, recording a $0.3 billion pretax gain. It announced the sale of Distributed Power for $3.3 billion and the Transportation combination with Wabtec, expected to close in early 2019. GE planned to separate Healthcare within 12–18 months and pursue an orderly separation from BHGE over two to three years. These announced strategic actions did not yet qualify for held-for-sale accounting.
- Targets and operating outlook: GE targeted $15 billion of on-balance-sheet cash by year-end 2018 and approximately $25 billion of GE Industrial net-debt reduction by the end of 2020. It expected at least $500 million in corporate savings by 2020. Aviation remained on track to ship 1,100–1,200 LEAP engines in 2018 after 436 first-half deliveries. GE said the 2018 market for new heavy-duty gas orders was trending below 30 GW.
- GE Capital insurance exposure: GE Capital contributed $3.5 billion to insurance subsidiaries in Q1 and expected approximately $11 billion more through 2024, subject to regulatory monitoring and reserve testing. The filing says adverse assumptions could require additional reserves or capital; illustrative sensitivities include a 5% rise in future claim costs adding $1.5 billion to reserves.
- Legal and contingent items: GE recorded a $1.5 billion discontinued-operations reserve in Q1 for the DOJ’s WMC/FIRREA investigation. Separate WMC mortgage repurchase reserves were $294 million; GE estimated reasonably possible additional losses of up to about $500 million above that reserve, excluding certain exposures it could not meaningfully estimate. The filing also describes a TMI trial, Alstom legacy matters and shareholder litigation.
- Credit and market risks: Moody’s and Fitch had negative outlooks; S&P placed GE and GE Capital on CreditWatch with negative implications. Fitch lowered long-term ratings to A; S&P affirmed A and Moody’s affirmed A2. Further downgrades could affect funding costs, commercial-paper access, collateral requirements and liquidity.
- Unusual accounting and costs: Q2 included $0.7 billion of restructuring and other charges, a $0.3 billion ABB gain and $0.3 billion of unrealized gains on the Pivotal Software investment. GE adopted ASC 606 retrospectively, materially changing revenue timing and reducing previously reported January 1, 2016 retained earnings by $4.24 billion; GE said contract economics and cash impacts were unchanged.
Important facts for investors to verify
- Whether operating cash flow and free cash flow improve without GE Capital dividends, and how much of reported cash is accessible to GE.
- Execution, timing, proceeds and potential retained liabilities for announced disposals and separations, alongside the $25 billion net-debt reduction target.
- Power demand, orders, pricing and margins, and whether Aviation can meet its LEAP delivery target without further margin pressure.
- Insurance reserve adequacy, required capital contributions and any changes in long-term-care assumptions or reinsurance arrangements.
- Developments in the DOJ/FIRREA matter, WMC claims and litigation, and whether recorded reserves remain adequate.
- Whether GE can preserve credit ratings and liquidity while funding pension obligations, debt maturities, dividends and the announced portfolio plan.