Business context and reporting period
General Electric Company’s unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the same period in 2016. GE reported industrial operations and GE Capital separately; the company continued its plan to shrink GE Capital and refocus on industrial businesses. Results reflect major portfolio changes, including the Appliances sale in 2016.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Consolidated revenue | $27.660 billion | $27.845 billion |
| Continuing earnings attributable to GE common shareowners | $858 million | $248 million |
| Net earnings attributable to GE common shareowners | $619 million | Loss of $61 million |
| Diluted EPS from continuing operations | $0.10 | $0.03 |
| Diluted net EPS | $0.07 | Loss of $0.01 |
| Operating earnings (non-GAAP) | $1.234 billion | $581 million |
| Industrial operating earnings (non-GAAP) | $1.281 billion | $1.473 billion |
| Industrial segment profit margin | 13.9% | 12.8% |
| Industrial operating profit margin (non-GAAP) | 12.6% | 11.3% |
| Industrial CFOA (non-GAAP) | Use of $1.630 billion | Generation of $402 million |
Consolidated continuing earnings improved primarily because GE Capital’s continuing loss narrowed to $47 million from $892 million. Industrial operating earnings declined 13%, despite higher industrial segment profit, in part because of increased corporate restructuring charges and lower disposal gains. The diluted weighted-average share count was 6% lower year over year, supporting EPS.
At March 31, 2017, consolidated cash and equivalents were $41.6 billion, down $6.6 billion from year-end 2016. GE reported $7.9 billion of cash and GE Capital $33.7 billion. GE Capital also reported $8.9 billion of high-quality investments and $0.8 billion of cash classified in discontinued operations. GE had $20.0 billion of committed unused credit lines and $5.1 billion of committed unused operating lines.
Total borrowings were $128.7 billion, down from $136.2 billion at December 31, 2016, mainly due to GE Capital debt repayments. GE reported $74.0 billion of external debt and GE Capital $55.8 billion; GE had assumed $54.4 billion of GE Capital debt and guaranteed $45.3 billion of GE Capital debt. GE Capital’s current portion of long-term debt was $16.3 billion.
Material changes versus the prior comparable period
- Consolidated revenue declined 1%. Industrial segment revenue rose 1%; organic industrial segment revenue increased 7%, while dispositions and foreign exchange offset much of that growth. GE Capital revenue declined 7%.
- Industrial segment profit increased 9% to $3.622 billion; reported margin rose 110 basis points, helped by productivity and simplification, partly offset by mix and inflation.
- Power revenue increased 17% and profit 39%; Aviation revenue increased 9% and profit 10%. Oil & Gas revenue fell 9% and profit 33%, reflecting weak market conditions, lower volume and pricing. Energy Connections & Lighting revenue fell 35%, principally due to the prior-year Appliances sale.
- Industrial CFOA moved from $402 million generated to $1.630 billion used. GE cited lower GE Capital dividends ($2.0 billion versus $7.5 billion), working-capital use, and a $1.9 billion increase in contract assets. Cash used for industrial operating activities was $1.6 billion.
- Restructuring and other charges rose to $1.0 billion from $0.7 billion; about $0.6 billion was paid in cash during the quarter. GE reported $1.020 billion of restructuring and other charges in corporate items.
Outlook, commentary, risks and unusual items
- GE expected its effective tax rate to rise as its earnings mix changes with the GE Capital Exit Plan; it expected GE’s full-year 2017 tax rate in the mid-teens. The filing references a 2018 EPS target but the supplied filing text does not provide a clear value.
- GE planned to issue long-term debt in 2017 to refinance existing debt, finance the Baker Hughes transaction and for other corporate purposes. GE Capital said it did not plan incremental senior unsecured term debt issuance until 2019.
- Planned transactions included combining Oil & Gas with Baker Hughes, with GE to hold 62.5% and contribute $7.4 billion to fund a cash payment to Baker Hughes shareholders; the transaction was expected to close mid-2017, subject to approvals and other conditions. GE also agreed to sell Water & Process Technologies for about $3.4 billion, expected to close mid-2017, and expected to sell Industrial Solutions within 12 months. GE acquired ServiceMax for about $0.9 billion; the LM Wind Power acquisition closed after quarter-end, on April 20, 2017, for an estimated $1.7 billion.
- Key uncertainties include execution and approvals for transactions, realization of synergies and cost savings, industrial cash conversion and working capital, GE Capital’s ability to fund obligations and pay dividends, credit ratings and funding costs, demand and pricing in served markets, currency movements, and litigation and investigations.
- WMC mortgage repurchase claims totaled $6.516 billion as stated loan balances; GE recorded a $626 million reserve and estimated possible additional loss of up to approximately $500 million above the reserve. That estimate excludes potential losses from adverse statute-of-limitations rulings or the DOJ FIRREA investigation, for which GE said it could not develop a meaningful estimate. GE also disclosed an Alstom legacy legal reserve of $858 million and said additional losses could exceed it, with no meaningful range estimate available.
- GE disclosed $2.550 billion of specific indemnifications to buyers of GE Capital assets, with $297 million of related liabilities recognized. The quarter also included a $239 million after-tax loss from discontinued operations.
Important facts for investors to verify
- Reconcile GAAP continuing earnings and net earnings with non-GAAP operating earnings, including the treatment of pension costs, restructuring charges and discontinued operations.
- Assess the sustainability of industrial cash generation: Industrial CFOA was negative, with working-capital use and rising contract assets among the cited drivers.
- Review GE’s debt, guarantees and liquidity availability, including the distinction between GE and GE Capital balances and any restrictions on cash transfers.
- Track Baker Hughes, Water and Industrial Solutions transaction completion, funding, regulatory approvals and expected financial effects.
- Monitor WMC claim outcomes and DOJ investigation developments, Alstom legacy matters, and whether recorded reserves adequately reflect potential exposure.
- Check subsequent filings for the stated tax outlook, any quantified earnings guidance, and progress against cost, restructuring and portfolio plans.