GENERAL ELECTRIC CO quarterly report, Q2 FY2019

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GE 2019 Second-Quarter Form 10-Q

Reporting period: Quarter and six months ended June 30, 2019. GE operates industrial businesses including Power, Renewable Energy, Aviation, Healthcare and Oil & Gas, alongside GE Capital. Comparisons below are with the corresponding 2018 period unless noted.

Financial performance and key metrics

  • Revenue: Q2 consolidated revenue was $28.8 billion, down 1%; six-month revenue was $56.1 billion, down 1%. Industrial segment organic revenue increased 7% in Q2 and 6% in the first half, excluding acquisitions, dispositions and foreign exchange.
  • Earnings: Q2 continuing earnings attributable to GE common shareholders were a loss of $291 million, or $0.03 per diluted share, versus earnings of $679 million, or $0.08 per share, a year earlier. Adjusted EPS, a non-GAAP measure, was $0.17 versus $0.18. First-half continuing earnings were $663 million, or $0.07 per diluted share, versus $940 million, or $0.11.
  • Profit and margins: Q2 GE Industrial GAAP profit was a loss of $362 million, with a negative 1.3% margin; adjusted profit was $2.0 billion, with a 7.6% margin. Industrial segment profit fell 21% to $2.4 billion, with organic profit down 17%. Power, Renewable Energy and Aviation profit declined; Healthcare and Oil & Gas improved. Renewable Energy reported a $184 million segment loss.
  • Cash flow: GE cash from operating activities from continuing operations was negative $842 million for the first half, broadly flat with negative $850 million in 2018. Adjusted GE Industrial free cash flow, non-GAAP, was negative $2.2 billion versus negative $1.4 billion. GE cited lower earnings and increased working-capital and employee-benefit cash use. Consolidated cash from operating activities, including discontinued operations, was $20 million.
  • Liquidity and debt: Consolidated cash, cash equivalents and restricted cash were $32.0 billion at June 30, 2019; GE held $20.1 billion and GE Capital $11.9 billion. Consolidated borrowings were $105.8 billion, down from $109.9 billion at December 31, 2018. GE Industrial net debt, non-GAAP, was $54.4 billion versus $55.3 billion at year-end. GE reported $35.3 billion of net available credit facilities.
  • Other metrics: GE Industrial backlog increased 11% year over year to $396.5 billion. Consolidated remaining performance obligations were $251.4 billion. GE Capital’s debt-to-equity ratio was 4.5:1, down from 5.7:1 at year-end.

Material changes and significant items

  • GE completed the Transportation spin-off and merger with Wabtec in February, recording a $3.5 billion pre-tax gain in discontinued operations. It sold Wabtec shares in May for $1.8 billion and held approximately 11.8% afterward.
  • GE agreed to sell Healthcare’s BioPharma business to Danaher for approximately $21.4 billion, subject to adjustments and closing conditions; closing was expected in Q4 2019. The business was classified as held for sale.
  • GE recorded a $744 million non-cash goodwill impairment for Renewable Energy’s Grid Solutions equipment and services reporting unit. Q2 results also reflected higher losses on disposed or held-for-sale businesses and unrealized investment losses.
  • GE paid a $1.5 billion civil penalty to the U.S. government under a settlement concluding the DOJ investigation concerning WMC and GE Capital; GE did not admit liability or wrongdoing.
  • In June, the IRS completed its 2012–2013 audit, producing a $0.4 billion continuing-operations tax benefit and $0.1 billion net interest benefit. These benefits contributed $0.06 to continuing EPS. The Q2 reported loss also benefited from the tax resolution.

Outlook, risks and contingencies

  • Power: Management cited industry overcapacity, pricing pressure, uncertain deal timing and execution challenges. GE said the business showed early signs of stabilization and expected incremental improvement in 2020, accelerating in 2021 and beyond.
  • 737 MAX: The grounding reduced GE CFOA by an estimated $0.3 billion in Q2 and $0.6 billion in the first half. If the grounding continued, GE estimated an approximately $0.4 billion quarterly CFOA impact in each of the second-half 2019 quarters. GE reported $2.1 billion of net assets related to the program and no impairment in the first half.
  • GE Capital and insurance: GE Capital expected about $10 billion of asset reductions in 2019 and approximately $2.5 billion in additional capital contributions from GE by year-end. GE Capital expected to contribute approximately $9 billion to insurance subsidiaries through 2024; timing and amount could change based on reserve testing or regulatory decisions. Annual insurance premium-deficiency testing was expected in Q3. GE warned that lower interest rates could increase insurance and pension liabilities; a 25-basis-point discount-rate reduction could increase insurance reserves by up to $1.0 billion pre-tax, holding other assumptions constant.
  • Other risks: GE highlighted execution and market risks, planned divestiture conditions, credit-rating and liquidity risks, tariffs, legal matters and sensitivity of pension and insurance obligations to interest rates. Ratings were unchanged from Q1; Fitch outlooks were negative for GE and GE Capital.
  • Legal and operational matters: WMC entered Chapter 11 in April; GE reported $211 million of liabilities for anticipated resolution of claims. Alstom-related legal and compliance reserves were $872 million, and GE said additional losses could exceed the reserve but could not be reasonably estimated. U.S. labor agreements were extended temporarily while ratification remained pending.

Important facts for investors to verify

  1. Reconcile GAAP continuing losses and cash use with the company’s adjusted, non-GAAP profit, EPS and free-cash-flow measures, including the exclusions used.
  2. Track industrial cash generation, working capital, receivables sales and the expected effect of the 737 MAX grounding on second-half cash flow.
  3. Monitor GE’s debt reduction, asset-sale proceeds, credit ratings and progress toward its leverage targets; distinguish GE cash from GE Capital, restricted cash and BHGE-held cash.
  4. Confirm the BioPharma sale’s closing, proceeds and use of funds, and assess the timing and financial impact of planned BHGE and Wabtec monetizations.
  5. Review Q3 insurance reserve testing and sensitivity to interest rates, along with the level and timing of required insurance capital contributions.