GENERAL ELECTRIC CO quarterly report, Q3 FY2017

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GE Q3 2017 Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2017. GE combines industrial operations with GE Capital; the statements are unaudited. Comparisons below are against 2016.

Financial performance

  • Revenue: Q3 consolidated revenue was $33.5 billion, up 14%. The increase included a $1.9 billion pre-tax gain on the Water business sale and $2.5 billion of incremental Baker Hughes revenue. Excluding these items, revenue was about $29.0 billion, down 1%. Nine-month revenue was $90.7 billion, essentially flat; excluding the Water and prior-year Appliances sale gains and incremental Baker Hughes revenue, it was down about 1%.
  • Earnings: Q3 continuing earnings attributable to GE common shareowners were $1.9 billion, down 9%; diluted continuing EPS was $0.22 versus $0.23. Net earnings attributable to common shareowners were $1.8 billion versus $2.0 billion; diluted net EPS was $0.21 versus $0.22. Nine-month continuing earnings were $4.1 billion, down 27%, and diluted continuing EPS was $0.47 versus $0.61. Nine-month net earnings were $3.6 billion versus $4.7 billion; diluted net EPS was $0.41 versus $0.51.
  • Adjusted earnings measures: Q3 operating EPS (non-GAAP) was $0.26 versus $0.27; Industrial operating plus Verticals EPS was $0.29 versus $0.32. These measures exclude specified items and should be considered alongside GAAP results.
  • Profit and margins: Q3 Industrial profit was $2.4 billion and its GAAP margin was 7.6%, down from 10.0%. Non-GAAP Industrial operating margin was 11.8% versus 14.0%. Nine-month Industrial profit was $6.3 billion, with a 7.4% GAAP margin versus 11.2%; non-GAAP operating margin was 12.5% versus 12.8%.
  • Cash flow: Nine-month GE cash from operating activities was $4.05 billion versus $18.34 billion, mainly reflecting GE Capital dividends of $4.0 billion versus $16.1 billion in 2016. Industrial CFOA, a non-GAAP measure excluding GE Capital dividends, was $34 million versus $2.29 billion; excluding deal taxes and GE Pension Plan funding, it was $1.58 billion versus $3.37 billion. The filing cites weaker earnings, working-capital performance, higher contract assets, and $1.4 billion of pension contributions as additional pressures.
  • Liquidity and debt: Cash and equivalents were $39.9 billion at September 30, down $8.3 billion from year-end 2016. GE reported $12.8 billion of cash; GE Capital reported $27.0 billion and $5.5 billion of other stated liquidity sources, for $32.5 billion in total liquidity sources. Consolidated borrowings were $136.4 billion, little changed from year-end. GE reported $20.0 billion of committed unused credit lines. GE Capital had $15.6 billion of current long-term debt maturities.

Material changes and business developments

  • Power revenue declined 4% and segment profit fell 51% in Q3. Management cited weaker service activity and outages, fewer upgrades and aeroderivative shipments, unfavorable mix, project delays, quality-related costs, and a Venezuelan customer reserve. It expected challenging market conditions to continue through Q4 and into 2018.
  • Oil & Gas Q3 revenue rose 81% to $5.4 billion, largely because GE began consolidating 100% of BHGE revenue after the July 3 combination. Excluding Baker Hughes, Oil & Gas revenue was $2.8 billion, down 7%; segment profit excluding restructuring and other charges was $231 million.
  • Industrial segments outside Power and Oil & Gas recorded 2% organic revenue growth in Q3 and 23% growth in adjusted operating profit, according to GE’s non-GAAP measures. Aviation and Healthcare reported higher Q3 revenue and profit.
  • GE completed the Water business sale for approximately $3.0 billion net of specified obligations and cash transferred, recognizing an after-tax gain of about $1.9 billion. It agreed to sell Industrial Solutions to ABB for approximately $2.6 billion, with closing targeted for mid-2018, subject to conditions and approval.
  • GE completed the Baker Hughes combination, retaining approximately 62.5% ownership and contributing $7.5 billion in cash. The transaction added substantial goodwill and assets and created a 37.5% noncontrolling interest.
  • CEO John Flannery took office August 1. Management said its review had identified more than $20 billion of assets to exit over the next one to two years, and expected additional restructuring and asset-exit charges. A November 13 investor presentation was scheduled to address the review and 2018 outlook.

Outlook, risks, and unusual items

  • Q3 included $2.4 billion of pre-tax restructuring and other charges, including a $0.9 billion non-cash Power Conversion goodwill impairment and a $0.3 billion power-plant asset impairment. Nine-month charges totaled $4.1 billion. The filing also cites $0.3 billion of business-development charges primarily related to Baker Hughes.
  • GE’s annual goodwill review identified Power Conversion impairment; Grid Solutions goodwill had only about 3% fair-value headroom. GE cautioned that further deterioration in relevant markets, execution, synergies, discount rates, or market multiples could lead to additional impairment.
  • GE Capital’s run-off insurance review was prompted by elevated long-term-care claims. At September 30, reserves included $19.2 billion of future policy benefits and $4.9 billion of claim reserves, with substantial long-term-care components. The review was expected to finish in Q4; any potential deficiency charge was not reasonably estimable at the filing date. GE deferred a decision on additional GE Capital dividends until the review is complete.
  • S&P placed GE and GE Capital ratings on CreditWatch Negative; Fitch changed their outlooks to Negative. GE identified ratings, funding costs, cash conversion, GE Capital dividends, market conditions, and execution of portfolio actions as uncertainties.
  • GE disclosed ongoing WMC mortgage repurchase litigation and a U.S. Department of Justice FIRREA investigation. WMC had a $647 million reserve and estimated reasonably possible additional loss of up to approximately $500 million, excluding certain outcomes it could not estimate. GE also cited Alstom legacy legal matters and a new GE retirement-plan class action seeking $700 million.
  • GE’s net exposure to a Venezuelan customer was approximately $260 million. Delayed payments and country conditions could require further adjustments, although GE said it believed the carrying values were recoverable.
  • GE expected to adopt the new revenue-recognition standard in 2018 using full retrospective application. It estimated a non-cash $4.3 billion reduction to retained earnings as of January 1, 2016 and approximately $0.13 lower restated 2016 EPS; 2017 earnings were also expected to be lower, but the impact was not yet finalized. GE said the change would not affect cash or contract economics.

Important facts for investors to verify

  • Whether Industrial cash generation, working capital, and contract-asset growth improve, and how cash conversion compares with reported earnings.
  • The final Q4 long-term-care insurance reserve assessment and its effect on earnings, capital, and GE Capital dividend capacity.
  • Power and Oil & Gas demand, margins, service activity, and Baker Hughes integration performance, including the impact of consolidating BHGE revenue and cash flows.
  • Actual proceeds, timing, and costs of announced asset exits, restructuring actions, and the Industrial Solutions sale.
  • Credit-rating developments, borrowing costs, debt maturities, and the availability of liquidity under stressed conditions.
  • Final revenue-standard transition estimates, WMC and Alstom legal outcomes, and potential further impairments or Venezuela-related credit losses.