GE 2016 Third-Quarter 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. GE reported industrial operations and GE Capital separately; comparisons below are with the corresponding 2015 periods unless noted. Amounts are U.S. dollars.
Financial performance
| Metric | Third quarter 2016 | Nine months 2016 |
|---|---|---|
| Consolidated revenue | $29.3 billion, up 4% | $90.6 billion, up 9% |
| Continuing earnings attributable to GE common shareowners | $2.10 billion, up 7%; diluted EPS $0.23 | $5.65 billion versus a $0.90 billion loss; diluted EPS $0.61 versus $(0.09) |
| Net earnings attributable to GE common shareowners | $1.99 billion versus $2.51 billion; diluted EPS $0.22 versus $0.25 | $4.69 billion versus a $12.43 billion loss; diluted EPS $0.51 versus $(1.23) |
| Operating earnings / EPS (non-GAAP) | $2.43 billion / $0.27; EPS up 13% | $6.64 billion / $0.72; prior-year operating earnings were $0.45 billion |
| Industrial segment operating margin | 15.8% versus 17.3%; 17.3% excluding Alstom, unchanged | 14.4% versus 16.1%; 15.8% excluding Alstom versus 16.1% |
| Cash from operating activities | Quarterly amount not clearly stated in the provided text | Consolidated cash used was $1.9 billion; GE continuing-operations cash from operations was $18.3 billion, including $16.1 billion of GE Capital dividends. Industrial CFOA was $2.3 billion, or $3.4 billion excluding Appliances-sale taxes (both non-GAAP). |
Industrial segment revenue rose 4% in the quarter, while segment profit fell 5%; for nine months, revenue rose 6% and profit fell 6%. GE’s reported consolidated net income and cash flows include discontinued operations and significant disposition-related effects.
Balance sheet, liquidity and capital allocation
- At September 30, cash and equivalents were $52.5 billion, including $10.6 billion at GE and $41.9 billion at GE Capital. GE Capital also reported $12.2 billion of high-quality investments; GE had $20.0 billion of committed unused bank credit lines.
- Total borrowings were $149.4 billion, down $48.2 billion from year-end 2015. GE Capital borrowings declined substantially amid asset sales and debt repayment. GE had guaranteed approximately $53.5 billion of GE Capital debt; the filing also reports $64.8 billion of GE Capital debt assumed by GE.
- GE Capital ending net investment excluding liquidity was $79.1 billion, down from $176.1 billion at September 30, 2015. GE Capital assets fell 59% from December 2014 to $203 billion.
- GE repurchased $18.1 billion of shares and paid $6.4 billion in dividends during the first nine months. GE Capital paid GE $16.1 billion in common dividends during that period. GE declared $0.23 per common share for the quarter.
- Consolidated total assets were $387.7 billion and total equity was $83.5 billion at September 30, 2016.
Material changes and unusual items
- Revenue growth was heavily acquisition-influenced: industrial revenue increased 4% in the quarter, but organic growth was 1%; nine-month industrial organic revenue was slightly lower year over year. Alstom contributed $9.2 billion of revenue for the nine months.
- GE completed the Appliances sale for $5.6 billion of proceeds and recorded an after-tax gain of about $1.9 billion. GE Asset Management was sold for $0.4 billion of proceeds and generated a $0.3 billion after-tax gain.
- Nine-month continuing earnings improved significantly from 2015, principally because GE Capital did not repeat major 2015 exit-plan tax charges. The 2016 nine-month discontinued-operations loss was $1.0 billion, compared with an $11.3 billion loss in 2015.
- GE Capital’s exit plan had $193 billion of signed asset-sale agreements and $173 billion closed, measured against the plan’s stated original ENI basis. GE expected to largely complete the plan by year-end 2016; cumulative charges were $22.9 billion, with total after-tax charges expected not to exceed the original $23 billion estimate.
- Oil & Gas remained under pressure: nine-month revenue fell 21% and segment profit fell 43%. Management cited subdued activity, delayed investment and lower orders; orders were down approximately 34% through September. Restructuring investment was expected to rise to about $0.5 billion to pursue $0.7–$0.8 billion of cost reductions.
- After quarter-end, GE announced a proposed combination of Oil & Gas with Baker Hughes, under which GE would hold 62.5% and contribute $7.4 billion to fund a special payment to Baker Hughes shareholders. The transaction remained subject to approvals and closing conditions. GE also announced planned acquisitions in wind and 3-D printing; the SLM Solutions offer subsequently lapsed.
Outlook, risks and contingencies
- The filing provides no clear consolidated full-year earnings or revenue guidance in the supplied text. It does state GE’s expectation to largely complete the GE Capital exit plan by year-end and to maintain elevated GE Capital liquidity until levels normalize, expected in 2019.
- Key risks include executing and pricing remaining GE Capital asset sales, GE Capital funding costs and excess interest expense as asset sales outpace maturities, maintaining GE’s credit rating, and completing and realizing benefits from announced transactions.
- WMC faced mortgage repurchase litigation and a Department of Justice investigation. Recorded repurchase reserves were $665 million; GE estimated reasonably possible losses of up to approximately $500 million above reserves, excluding outcomes it could not meaningfully estimate.
- GE recorded $1.6 billion of specific indemnifications related to GE Capital asset sales, with $0.2 billion of associated liabilities. The filing says GE believes its Housatonic River remediation reserves are adequate, while noting the EPA decision remained subject to appeal.
- Goodwill impairment testing identified limited headroom in several reporting units, including Energy Financial Services, Power Conversion, and Alstom-related Grid Solutions and Hydro. No impairment was recorded, but future impairment could result if assumptions or business performance deteriorate.
Investor verification priorities
- Reconcile GAAP earnings and cash generation to non-GAAP operating earnings, Industrial CFOA, and the large GE Capital dividends and asset-sale proceeds.
- Track whether GE Capital disposals close on expected terms and whether debt repayment, liquidity levels and exit-plan charges meet management’s stated expectations.
- Assess underlying industrial demand and margins apart from Alstom, particularly the sustained weakness in Oil & Gas and the reported declines in Transportation.
- Monitor completion, financing, approvals and expected economics of the Baker Hughes transaction and other announced acquisitions.
- Review exposure to WMC litigation and investigations, Alstom legacy legal matters, and goodwill valuation assumptions.