UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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| (Mark One) |
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þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172018 |
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¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from ____ to ____ |
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Commission file number 001-00035 |
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GENERAL ELECTRIC COMPANY (Exact name of registrant as specified in its charter) |
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| New York | | 14-0689340 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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| 41 Farnsworth Street, Boston, MA | | 02210 |
| (Address of principal executive offices) | | (Zip Code) |
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(Registrant’s telephone number, including area code) (617) 443-3000
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): |
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Large accelerated filer þ | Accelerated filer ¨ |
Non-accelerated filer ¨ | Smaller reporting company ¨ |
Emerging growth company ¨ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
There were 8,672,085,0008,698,115,000 shares of common stock with a par value of $0.06 per share outstanding at September 30, 2017.
2018.
TABLE OF CONTENTS
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| Non-GAAP Financial Measures | |
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| Risk Factors | |
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| FORWARD LOOKING STATEMENTS | | |
FORWARD LOOKING STATEMENTS
This document containsOur public communications and SEC filings may contain "forward-looking statements" - that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "see," "will," "would," “estimate,”"estimate," “forecast,” "target," "preliminary,"“preliminary,” or "range."“range.”
Forward-looking statements by their nature address matters that are, to different degrees, uncertain, such as statements about potential business or asset dispositions, including plans to separate GE Healthcare into a standalone company, the completiontiming and structure for that separation, the characteristics of the business to be separated and the expected benefits to GE; plans to exit our announced planequity ownership position in Baker Hughes, a GE company (BHGE) and the expected benefits to reduceGE; capital allocation, including our plans with respect to the size of our financial services businesses, including earnings per sharetiming and amount of GE dividends, organic investment and other priorities; our capital structure and access to funding, including leverage ratios and targets, debt repayment plans and credit ratings and outlooks; divestiture proceeds expectations; GE and GE Capital Global Holdings, LLC’s (GE Capital) retained businesses (Verticals); expected incomeliquidity; future corporate performance; leverage targets; future charges and Industrial operating profit;capital contributions that may be required in connection with GE Capital’s run-off insurance operations and related GE Capital portfolio actions; revenues; organic growth; cash flows and cash conversion, including the impact of working capital, contract assets and pension funding contributions; earnings per share, including the impact of the new revenue recognition standard; revenues; organic growth;accounting standard and U.S. tax reform; future business growth and productivity associated withgains; profit margins; the benefits of restructuring, the new GE operating system and the future cost profile and performance of Corporate; our Digital and Additive businesses; margins;businesses’ cost structurestructures and plans to reduce costs; restructuring, goodwill impairment or other financial charges; tax rates; transaction-related synergies, proceeds and gains; cash flows, including the impact of working capital, contract assets and pension funding contributions;or returns on capital and investment; capital expenditures; capital allocation, including dividends, share repurchases, acquisitions and liquidity; or capital structure, including leverage.
investment.
For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include:
our success in executing and completing, including obtaining regulatory approvals and satisfying other closing conditions for, GE Industrial and GE Capital business or asset dispositions or other announced transactions, including our planned separation of GE Healthcare and dispositions of GE Transportation and BHGE, the strategy, capital allocationpricing, gain or loss recognition, timing, and portfolio review being undertaken by our new chief executive officer;anticipated proceeds from those or other transactions and potential trailing liabilities;
our ability to convert Industrial earnings into cashGE’s liquidity and the amount and timing of our GE Industrial cash flows and earnings, which may be impacted by long-term services agreement dynamics, the amount and timing of dividends from GE Capitalcustomer, competitive, contractual and other conditions, all of which may affect our ability to pay our quarterly dividend at the planned level or to repurchase shares at planned levels;dynamics and conditions;
our abilitycapital allocation plans, as such plans may change including with respect to maintainthe timing and amount of GE dividends, organic investments, including research and development, investments in Digital and capital expenditures, the repayment or allocation of our outstanding debt obligations, pension funding contributions, acquisitions, joint ventures and other strategic actions;
further downgrades of our current short- and long-term credit ratingratings or ratings outlooks and the related impact on our funding profile, costs and competitive position ifposition;
customer actions or market developments such as reduced demand for equipment and services and other challenges in our Power business, other shifts in the competitive landscape for our products and services, changes in economic conditions, including oil prices, early aircraft retirements and other factors that may affect the level of demand and financial performance of the major industries and customers we do not do so;serve;
changes in law, economic and financial conditions, including the effect of enactment of U.S. tax reform or other tax law changes, trade policy and tariffs, interest and exchange rate volatility;volatility, commodity and equity prices and the value of financial assets;
GE Capital's capital and liquidity needs, including in connection with GE Capital’s run-off insurance operations, the amount and timing of required capital contributions and related strategic actions that we may pursue, the WMC-related matters described below, the impact of conditions in the financial and credit markets on GE Capital's ability to sell financial assets, GE Capital’s leverage and credit ratings, the availability and cost of GE Capital funding and GE Capital's exposure to counterparties;
pending and future mortgage loan repurchase claims, other litigation claims and the U.S. Department of Justice's investigation under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and other investigations in connection with WMC, which may affect our estimates of liability, including possible loss estimates;
GE Capital’s ability to pay dividends to GE at the planned level, which may be affected by GE Capital’s cash flows and earnings, claims and investigations relating to WMC, charges that may be required in connection with GE Capital’s run-off insurance operations, credit ratings and other factors;
our ability to launch new products in a cost-effective manner;
our ability to increase margins through implementation of the new GE operating system, restructuring and other cost reduction measures;
our ability to convert pre-order commitments/wins into orders/bookings;
and the price we realize on orders/bookings since commitments/wins are stated at list prices;
customer actions or market developments such as early aircraft retirements, reduced demand for equipment and services in the energy markets in which we operate or shifts in the competitive landscape for our products and services, changes in economic conditions, including oil prices, and other factors that may affect the level of demand and financial performance of the major industries and customers we serve;
the impact of regulation and regulatory, investigative and legal proceedings and legal compliance risks, including the impact of WMC, Alstom, SEC and other investigative and legal proceedings;
our capital allocation plans, as such plans may change including with respect to the timing and size of dividends, share repurchases, acquisitions, joint ventures, dispositions and other strategic actions;
our success in completing, including obtaining regulatory approvals and satisfying other closing conditions for, announced transactions, such as our announced plan to sell our Industrial Solutions business or other dispositions that we may pursue;
our success in integrating acquired businesses and operating joint ventures, including Baker Hughes, a GE company;
and our ability to realize revenue and cost synergies from announced transactions, acquired businesses and joint ventures, including Alstom and Baker Hughes;BHGE;
the impact of potential product failures and related reputational effects;
the impact of potential information technology, cybersecurity or data security breaches;
the other factors that are described in "Forward-Looking Statements" in Baker Hughes, a GE company'sBHGE’s most recent earnings release or Securities and Exchange Commission filing;SEC filings; and
the other factors that are described in “Risk Factors”"Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016.2017 and our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2018 and September 30, 2018.
These or other uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements. This document includes certain forward-looking projected financial information that is based on current estimates and forecasts. Actual results could differ materially.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
PRESENTATION
The consolidated financial statements of General Electric Company (the Company) combine the industrial manufacturing and services businesses of General Electric Company (GE) with the financial services businesses of GE Capital Global Holdings, LLC (GE Capital or Financial Services) and its predecessor, General Electric Capital Corporation..
We believe that investors will gain a better understanding of our company if they understand how we measure and talk about our results. Because of the diversity in our businesses, we present our financial statements in a three-column format, which allows investors to see our industrial operations separately from our Financial Services operations. We believe that this provides useful information to investors. When used in this report, unless otherwise indicated by the context, we use the terms to mean the following:
General Electric or the Company – the parent company, General Electric Company.
GE – the adding together of all affiliates except GE Capital, whose continuing operations are presented on a one-line basis, giving effect to the elimination of transactions among such affiliates. As GE presents the continuing operations of GE Capital on a one-line basis, certain intercompany profits resulting from transactions between GE and GE Capital have been eliminated at the GE level. We present the results of GE in the center column of our consolidated statements of earnings (loss), financial position and cash flows. An example of a GE metric is GE Industrial free cash from operating activities (GE CFOA)flows (Non-GAAP).
General Electric Capital Corporation or GECC – predecessor to GE Capital Global Holdings, LLC.
GE Capital Global Holdings, LLC or GECGH – successorthe adding together of GECC.all affiliates of GECGH, giving effect to the elimination of transactions among such affiliates.
GE Capital or Financial Services – refers to GECGH or its predecessor GECC, and is the adding together of all affiliates of GE Capital giving effect to the elimination of transactions among such affiliates. We present the results of GE Capital in the right-side column of our consolidated statements of earnings (loss), financial position and cash flows.
GE consolidated – the adding together of GE and GE Capital, giving effect to the elimination of transactions between the two. We present the results of GE consolidated in the left-side column of our consolidated statements of earnings (loss), financial position and cash flows.
GE Industrial – GE excluding the continuing operations of GE Capital. We believe that this provides investors with a view as to the results of our industrial businesses and corporate items. An example of ana GE Industrial metric is GE Industrial CFOAfree cash flows (Non-GAAP), which is GE CFOA excluding the effects of dividends from GE Capital..
Industrial segment – the sum of our seven industrial reporting segments, without giving effect to the elimination of transactions among such segments and between these segments and our Financial Servicesfinancial services segment. This provides investors with a view as to the results of our industrial segments, without inter-segment eliminations and corporate items. An example of an industrial segment metric is industrial segment revenue growth.
Baker Hughes, a GE company or BHGE -– following the combination of our Oil & Gas business with Baker Hughes Incorporated, our Oil & Gas segment is comprised ofcomprises our ownership interest of approximately 62.5% in the new company formed in the transaction, Baker Hughes, a GE Company (BHGE). We consolidate 100% of BHGE's revenues and cash flows, while our Oil & Gas segment operating profit and net income are derived net of minority interest of approximately 37.5% attributable to BHGE's Class A shareholders. References to "Baker Hughes" represent legacy Baker Hughes Incorporated operating activities which, in certain cases, have been excluded from our results for comparative purposes.
Total segment – the sum of our seven industrial segments and one financial services segment, without giving effect to the elimination of transactions between such segments. This provides investors with a view as to the results of all of our segments, without inter-segment eliminations and corporate items.
Verticals or GE Capital Verticals – the adding together of GE Capital businesses that we expect to retain, principally its vertical financing businesses—GE Capital Aviation Services (GECAS), Energy Financial Services (EFS) and Industrial Finance (which includes Healthcare Equipment Finance, Working Capital Solutions and Industrial Financing Solutions)—that relate to the Company’s core industrial domain and other operations, including our run-off insurance activities, and allocated corporate costs.
We integrate acquisitions as quickly as possible. Revenues and earnings from the date we complete the acquisition through the end of the fourth quarter following the acquisition are considered the acquisition effect of such businesses. However, in the case of BHGE, which was acquired on July 3, 2017, we consider the results to be organic for the third quarter of 2018.
Discussion of GE Capital’s total assets includes deferred income tax liabilities, which are presented within assets for purposes of our consolidated Statement of Financial Position presentations for this filing.
Amounts reported in billions in graphs within this report are computed based on the amounts in millions. As a result, the sum of the components reported in billions may not equal the total amount reported in billions due to rounding. Certain columns and rows within the tables may not add due to the use of rounded numbers. Percentages presented are calculated from the underlying numbers in millions.
Discussions throughout this MD&A are based on continuing operations unless otherwise noted.
The MD&A should be read in conjunction with the Financial Statements and Notes to the consolidated financial statements.
OTHER TERMS USED BY GE
Backlog and remaining performance obligation (RPO) – backlog is unfilled customer orders for products and product services (expected life of contract sales for product services). RPO, a defined term under GAAP, is backlog excluding any purchase order that provides the customer with the ability to cancel or terminate without incurring a substantive penalty, even if the likelihood of cancellation is remote based on historical experience. We plan to continue reporting backlog as we believe that it is a useful metric for investors, given its relevance to total orders.
Continuing earnings – unless otherwise indicated, we refer to the caption “earnings from continuing operations attributable to GE common shareowners” as continuing earnings or simply as earnings.
Continuing earnings per share (EPS)– unless otherwise indicated, when we refer to continuing earnings per share, it is the diluted per-share amount of “earnings from continuing operations attributable to GE common shareowners”.shareowners.”
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| • | Digital revenues – revenues related to internally developed software and associated hardware, including(including PredixTM) and associated hardware, and software solutions that improve our customers’ asset performance. In 2016, we reassessed the span of our digital product offerings, which now excludes software-enabled product upgrades. These revenues are largely generated from our operating businesses and are included in their segment results. Revenues of "Non-GE Verticals" refer to GE Digital revenues from customers operating in industries where GE does not have a presence. |
Equipment leased to others (ELTO) – rental equipment we own that is available to rent and is stated at cost less accumulated depreciation.
GE Capital Exit Plan– - our plan, announced on April 10, 2015, to reduce the size of our financial services businesses through the sale of most of the assets of GE Capital, and to focus on continued investment and growth in our industrial businesses.
Industrial marginGE Cash Flows from Operating Activities (GE CFOA) - unless otherwise indicated, GE CFOA is from continuing operations.
GE Industrial profit margin(GAAP) – GE total revenues andplus other income excluding GE Capital earnings (loss) from continuing operations (Industrial revenues) minus GE total costs and expenses less GE interest and other financial charges divided by IndustrialGE total revenues.
Industrial operating profit margin (Non-GAAP) – Industrial segment profit plus corporate items and eliminations (excluding gains, restructuring, and non-operating pension cost) divided by industrial segment revenues plus corporate items and eliminations (excluding gains and GE-GE Capital eliminations).
Industrial segment gross margin - industrial segment sales less industrial segment cost of sales divided by sales.
Net earnings (loss)– unless otherwise indicated, we refer to the caption “net earnings (loss) attributable to GE common shareowners” as net earnings.
Net earnings (loss) per share (EPS)– unless otherwise indicated, when we refer to net earnings (loss) per share, it is the diluted per-share amount of “net earnings attributable to GE common shareowners”.
Non-operating pension cost (Non-GAAP) – comprises the expected return on plan assets, interest cost on benefit obligations and net actuarial gain (loss) amortization for our principal pension plans.
Operating earnings (Non-GAAP) – GE earnings from continuing operations attributable to common shareowners excluding the impact of non-operating pension costs.
Operating earnings per share (Non-GAAP) – unless otherwise indicated, when we refer to operating earnings per share, it is the diluted per-share amount of “operating earnings”.
Operating pension cost (Non-GAAP) – comprises the service cost of benefits earned, prior service cost amortization and curtailment gain (loss) for our principal pension plans.
Organic revenues (Non-GAAP) – revenues excluding the effects of acquisitions, dispositions and translational foreign currency exchange.shareowners.”
Product services agreements – contractual commitments, with multiple-year terms, to provide specified services for products in our Power, Renewable Energy, Aviation, Oil & Gas and Transportation installed base – for example, monitoring, maintenance, service and spare parts for a gas turbine/generator set installed in a customer’s power plant.
Revenues – revenues comprise sales of goods, sales of services for our industrial businesses and GE Capital revenues from services for our financial services businesses.
Segment profit – refers to the profit of the industrial segments and the net earnings of the financial services segment, both of which include other income. See the Segment Operations section within the MD&A for a description of the basis for segment profits.
Services – for purposes of the financial statement display of sales and costs of sales in our Statement of Earnings (Loss), “goods” is required by SEC regulations to include all sales of tangible products, and “services” must include all other sales, including other services activities. In our MD&A section of this report, we refer to sales under product services agreements and sales of both goods (such as spare parts and equipment upgrades) and related services (such as monitoring, maintenance and repairs) as sales of “product services,“services,” which is an important part of our operations. We refer to “product services” simply as “services” within the MD&A.
Product services agreements – contractual commitments, with multiple-year terms, to provide specified services for products in our Power, Renewable Energy, Oil & Gas, Aviation and Transportation installed base – for example, monitoring, maintenance, service and spare parts for a gas turbine/generator set installed in a customer’s power plant.
Revenues – unless otherwise indicated, we refer to captions such as “revenues and other income” simply as revenues.
Segment profit – refers to the operating profit of the industrial segments and the net earnings of the Financial Services segment. See the Segment Operations section within the MD&A for a description of the basis for segment profits.
NON-GAAP FINANCIAL MEASURES
In the accompanying analysis of financial information, we sometimes use information derived from consolidated financial data but not presented in our financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). Certain of these data are considered “non-GAAP financial measures” under the U.S. Securities and Exchange Commission (SEC) rules. Specifically, we have referred, in various sections of this report, to:
Industrial segment organic revenues and Industrial segment organic revenues excluding Power and Oil & Gas
Operating and non-operating pension cost
Adjusted corporate costs (operating)
GE pre-tax earnings from continuing operations, excluding GE Capital earnings (loss) from continuing operations and the corresponding effective tax rates
Industrial operating earnings and GE Capital earnings (loss) from continuing operations and EPS
Industrial operating + Verticals earnings and EPS
Industrial operating profit and operating profit margin (excluding certain items)
Industrial operating profit excluding Power and Oil & Gas
Industrial cash flows from operating activities (Industrial CFOA) and Industrial CFOA excluding deal taxes and GE Pension Plan funding
The reasons we use these non-GAAP financial measures and the reconciliations to their most directly comparable GAAP financial measures are included in the Supplemental Information section within the MD&A. Non-GAAP financial measures referred to in this report are either labeled as “non-GAAP” or designated as such with an asterisk (*).
OUR OPERATING SEGMENTS
We are a global digital industrial company, transforming industry with software-defined machines and solutions that are connected, responsive and predictive, with products and services ranging from aircraft engines, locomotives, power generation and oil and gas production equipment to medical imaging, financing and industrial products. Operational and financial overviews for our operating segments are provided in the “Segment Operations” section within this MD&A.
OUR INDUSTRIAL OPERATING SEGMENTS
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| Power | | PowerOil & Gas(a)
| | Aviation | | Lighting(a) |
| Renewable Energy | | Healthcare | | |
| Oil & Gas(b)
Aviation | | Transportation | | |
OUR FINANCIAL SERVICES OPERATING SEGMENT
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| (a) | Beginning in the third quarter of 2017, the Energy Connections business within the former Energy Connections & Lighting segment was combined with the Power segment and presented as one reporting segment called Power. As a result of this combination, our GE Lighting and Current, powered by GE (Current) businesses are now reported as a separate segment called Lighting. |
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(b) | Beginning in the third quarter of 2017, our Oil & Gas segment is comprised ofcomprises our ownership interest of approximately 62.5% in BHGE. We consolidate 100% of BHGE's revenues and cash flows, while our Oil & Gas segment operating profit and net income are derived net of minority interest of approximately 37.5% attributable to BHGE's Class A shareholders. |
CORPORATE INFORMATION
GE’s Internet address at www.ge.com,, Investor Relations website at www.ge.com/investor-relations and our corporate blog at www.gereports.com,, as well as GE’s Facebook page and Twitter accounts and other social media, including @GE_Reports, contain a significant amount of information about GE, including financial and other information for investors. GE encourages investors to visit these websites from time to time, as information is updated and new information is posted.
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| MD&A | KEY PERFORMANCE INDICATORS | |
KEY PERFORMANCE INDICATORS
(Dollars in billions; per-share amounts in dollars)
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| 2018 REVENUES PERFORMANCE | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| Industrial Segment | (5 | )% | | 2 | % |
| Industrial Segment Organic (Non-GAAP) | 1 | % | | (3 | )% |
| Financial Services | 3 | % | | (6 | )% |
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| Industrial Segment | 10% | 3% |
| Industrial Segment Organic* | (1)% | 2% |
| Capital | (8)% | (9)% |
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| GE INDUSTRIAL ORDERS | | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
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| 2017 |
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| Orders | | | | | |
| Equipment | $ | 15.9 |
| $ | 14.0 |
| | $ | 44.2 |
| $ | 40.1 |
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| Services | 15.6 |
| 15.4 |
| | 45.7 |
| 42.3 |
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| Total | $ | 31.4 |
| $ | 29.3 |
| | $ | 89.9 |
| $ | 82.4 |
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| GE INDUSTRIAL BACKLOG | |
| (In billions) | September 30, 2018 |
| September 30, 2017 |
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| Backlog | | |
| Equipment | $ | 89.0 |
| $ | 84.1 |
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| Services | 289.9 |
| 272.2 |
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| Total | $ | 378.9 |
| $ | 356.3 |
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■ ■ Industrial CFOA(a)* ■■ GE Capital Dividend
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(a) 2016 included deal taxes of $(1.1) billion related to the sale of our Appliances business and in 2017 included deal taxes of $(0.1) billion related to the Baker Hughes transaction and GE Pension Plan funding of $(1.4) billion. |
(b) Included $(0.2) billion related to Baker Hughes and a $0.5 billion correction to operating cash flows for the settlement of certain derivative instruments during the six months ended June 30, 2017. |
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| GE COSTS (GAAP) AND GE INDUSTRIAL STRUCTURAL COSTS (NON-GAAP) |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
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| 2017 |
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| GE total costs and expenses (GAAP) | $ | 50.4 |
| $ | 30.0 |
| | $ | 104.4 |
| $ | 81.0 |
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| GE Industrial structural costs (Non-GAAP) | 5.7 |
| 6.1 |
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| 19.0 |
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| GE INDUSTRIAL PROFIT MARGIN (GAAP) AND ADJUSTED GE INDUSTRIAL PROFIT MARGIN (NON-GAAP) |
| | Three months ended September 30 | | Nine months ended September 30 |
| | 2018 |
| 2017 |
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| 2017 |
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| GE Industrial profit margin (GAAP) | (83.0 | )% | 3.3 | % | | (25.1 | )% | 2.9 | % |
| Adjusted GE Industrial profit margin (Non-GAAP) | 8.1 | % | 9.9 | % | | 9.6 | % | 10.5 | % |
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| EARNINGS | | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In billions; per-share amounts in dollars; attributable to GE common shareowners) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
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| Continuing earnings (loss) (GAAP) | $ | (22.8 | ) | $ | 1.4 |
| | $ | (21.7 | ) | $ | 2.6 |
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| Net earnings (loss) (GAAP) | (22.8 | ) | 1.3 |
| | (23.4 | ) | 2.1 |
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| Adjusted earnings (loss) (Non-GAAP) | 1.2 |
| 1.8 |
| | 4.2 |
| 4.9 |
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| Continuing earnings (loss) per share (GAAP) | $ | (2.63 | ) | $ | 0.16 |
| | $ | (2.50 | ) | $ | 0.29 |
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| Net earnings (loss) per share (GAAP) | (2.62 | ) | 0.15 |
| | (2.69 | ) | 0.24 |
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| Adjusted earnings (loss) per share (Non-GAAP) | 0.14 |
| 0.21 |
| | 0.49 |
| 0.56 |
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| GE CFOA (GAAP) AND GE INDUSTRIAL AND ADJUSTED GE INDUSTRIAL FREE CASH FLOWS (NON-GAAP) |
| | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
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| GE CFOA (GAAP) | $ | (4.1 | ) | $ | 4.1 |
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| GE Industrial free cash flows (Non-GAAP) | (0.7 | ) | (1.9 | ) |
| Adjusted GE Industrial free cash flows (Non-GAAP) | (0.3 | ) | (1.2 | ) |
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■■ Services ■■ Equipment
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(a) Included $2.5 billion related to Baker Hughes |
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INDUSTRIAL PROFIT & MARGINS |
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INDUSTRIAL OPERATING PROFIT & MARGINS
(NON-GAAP)(a)
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(a) Excluded gains on disposals, non-operating pension cost, restructuring and other charges and noncontrolling interests |
*Non-GAAP Financial Measure
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MD&A | KEY PERFORMANCE INDICATORS | |
KEY PERFORMANCE INDICATORS
(Dollars in billions; per-share amounts in dollars and diluted; attributable to GE common shareowners)
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OPERATING EARNINGS (NON-GAAP) |
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OPERATING EARNINGS PER SHARE (NON-GAAP) |
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INDUSTRIAL OPERATING + VERTICALS EARNINGS(NON-GAAP) |
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INDUSTRIAL OPERATING + VERTICALS EPS
(NON-GAAP)
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CONSOLIDATED RESULTS
20172018 SIGNIFICANT DEVELOPMENTS
LEADERSHIP CHANGES
As announced on June 12, 2017, Jeffery R. Immelt retired as Chief Executive Officer (CEO) on July 31, 2017 and John L. Flannery succeeded Mr. Immelt as CEO effective August 1, 2017. Mr. Flannery also joinedDuring the Board of Directors on that date. Mr. Immelt remained Chairman of the Board for a transition period through October 2, 2017, at which point Mr. Flannery succeeded Mr. Immelt as Chairman.
On October 6, 2017, we announced that, effective November 1, 2017, Jamie S. Miller, will become Chief Financial Officer, succeeding Jeffrey S. Bornstein. Mr. Bornstein will remain a Vice Chairman through December 31, 2017. Ms. Miller also serves as a director at Baker Hughes, a GE company.
On October 9, 2017, we announced that Robert Lane retired from the Company’s Board of Directors (the Board) after 12 years of service, effective that same date. In addition, the Board elected Edward P. Garden as a director to fill the resulting vacancy, effective on that date. Mr. Garden is the Chief Investment Officer and a Founding Partner of Trian Fund Management, L.P. (Trian), an investment management firm.
2017 SIGNIFICANT TRANSACTIONS
On January 10, 2017, we completed the acquisition of ServiceMax, a leader in cloud-based field service management (FSM) solutions, for $0.9 billion, net of cash acquired.
On April 20, 2017, we completed the acquisition of LM Wind Power, one of the world’s largest wind turbine blade manufacturers for approximately $1.6 billion, net of cash acquired.
On July 3, 2017, we completed the transaction to create BHGE. Under the terms of the deal, which we announced in October 2016, we combined our Oil & Gas business and Baker Hughes Incorporated (Baker Hughes) to create a new company in which GE holds an ownership interest of approximately 62.5% and former Baker Hughes shareholders hold an ownership interest of approximately 37.5%. Baker Hughes shareholders also received a cash dividend funded by a $7.5 billion cash contribution from GE. The completion of the transaction followed the approval of Baker Hughes shareholders, regulatory approvals and other customary closing conditions. Effective July 3, 2017, the operations of Baker Hughes are reported in our Oil & Gas segment.
In October 2016, we announced our plan to sell our Water & Process Technologies business. In March 2017, we announced an agreement to sell the business to Suez Environnement S.A. (Suez), a French-based utility company operating primarily in the water treatment and waste management sectors. On September 29, 2017, we completed the sale for consideration of $3.0 billion, net of obligations assumed and cash transferred (including $0.1 billion from sale of receivables originated in our Water business and sold from GE Capital to Suez), and recognized an after-tax gain of approximately $1.9 billion.
In the firstthird quarter of 2017,2018, we classifiedrecognized a non-cash pre-tax goodwill impairment charge of $22.0 billion related to our IndustrialPower Generation and Grid Solutions businessbusinesses within our Power segment as held for sale. In September 2017, we announced an agreement to sell the business for approximately $2.6 billion to ABB, a Swiss-based engineering company operating primarily in the robotics, power, heavy electrical equipment and automation technology sectors. The deal is expected to close in mid-2018, subject to customary closing conditions and regulatory approval.
THIRD QUARTER 2017 RESULTS
Overall, our consolidated results in the third quarter were below our expectations. Consolidated revenues (after adjusting for the Water gain of $1.9 billion and the impact of incremental Baker Hughes revenues of $2.5 billion*) were $29.0 billion, down $0.2 billion or 1%. The decline in revenues was a result of lower Industrial segment revenues of 1% organically* driven principally by our Power and Oil & Gas segments. For all other Industrial segments, revenues increased 2% organically* as Aviation and Healthcare experienced revenue growth versus the prior year period. Continuing earnings per share was $0.22, down 4% from the prior year. Industrial operating plus Verticals earnings per share* was $0.29, down 9% versus the prior year, driven substantially by a 10% decrease in Industrial segment operating profit*.
Restructuring and other charges were $0.21 per share, including $0.02 per share related to BHGE integration and synergy investment. In total, restructuring and other items were $2.4 billion before tax, with restructuring charges totaling about $0.8 billion (including $0.2 billion related to BHGE) and $0.3 billion of businesses development charges, primarily related to the Baker Hughes transaction. Restructuring charges were higher than originally planned, driven by the accelerated restructuring actions taken at Corporate. Additionally, within restructuring and other charges, we recognized two significant impairments in the quarter totaling $0.13 per share, which included non-cash pre-tax impairment charges of $0.9 billion related to goodwill in our Power Conversion business and $0.3 billion related to a power plant asset.segment. See Note 8 to the consolidated financial statements for further informationinformation.
On October 30, 2018 we announced plans to reduce our quarterly dividend from $0.12 cents to $0.01 cent per share beginning with the Board’s next dividend declaration, which is expected to occur in December 2018. This change will allow us to retain approximately $3.9 billion of cash per year compared to the prior payout level.
On October 1, 2018, we announced that H. Lawrence Culp, Jr. was named Chairman and Chief Executive Officer (CEO), succeeding John L. Flannery, effective September 30, 2018. Additionally, Thomas W. Horton was elected as lead director, succeeding Mr. Culp, effective that same date.
On July 26, 2018, we announced that Jan R. Hauser, GE's Vice President, Controller and Chief Accounting Officer, had communicated her intention to retire from GE. Thomas S. Timko, formerly the Chief Accounting Officer of General Motors Company, was appointed as her successor, effective September 10, 2018.
ANNOUNCED TRANSACTIONS
In April 2018, we announced an agreement to sell our Enterprise Financial Management, Ambulatory Care Management and Workforce Management assets, comprising our Healthcare segment’s Value-Based Care Division, to Veritas Capital, a private equity investment firm, for net proceeds of approximately $1.0 billion in cash. This transaction closed on July 10, 2018 and resulted in the recognition of a pre-tax gain of approximately $0.7 billion in the third quarter of 2018.
In May 2018, we announced an agreement to merge our Transportation segment with Wabtec Corporation, a U.S. rail equipment manufacturer. Under the agreement, which has been approved by the Boards of Directors of Wabtec and GE, GE will receive $2.9 billion in cash at closing, and GE and its shareholders will receive a 50.1% ownership interest in the combined company, with GE holding 9.9% and GE shareholders holding the remaining 40.2%. Wabtec shareholders will retain 49.9% of the combined company. The deal is expected to close in early 2019, subject to customary closing conditions and regulatory approval.
In June 2018, we announced an agreement to sell our Distributed Power business within our Power segment to Advent International, a global private equity investor, for $3.3 billion. The deal is expected to close by the fourth quarter of 2018, subject to customary closing conditions and regulatory approvals.
In June 2018, we announced the results of our annual goodwill impairment testing.strategic review and our intention to focus on our Power, Renewable Energy and Aviation businesses. We plan to separate GE Healthcare into a standalone company over the next 12 to 18 months, pursue an orderly separation from BHGE over the next two to three years and substantially reduce GE Industrial net debt*. In addition, we announced our plan for a smaller corporate headquarters focused primarily on strategy, capital allocation, talent and governance, a move which is expected to generate at least $500 million in corporate savings by the end of 2020. While we announced the strategic portfolio actions for Transportation, GE Healthcare and BHGE, these businesses have not met the accounting criteria for held for sale classification. That classification will depend on the nature and timing of the transaction.
In August 2018, we announced an agreement to sell Energy Financial Services' (EFS) debt origination business within our Capital segment for proceeds of approximately $2.0 billion to Starwood Property Trust, Inc., an affiliate of a leading global private investment firm, Starwood Capital Group. In September 2018, we completed the sale and recognized a pre-tax gain of approximately $0.3 billion in the third quarter of 2018. In addition, we completed the sale of various EFS equity investments and recognized a pre-tax gain of approximately $0.2 billion in the third quarter of 2018.
In September 2018, we announced an agreement to sell our Middle River Aircraft Systems business within our Aviation segment to Singapore Technologies Engineering, a global technology, defense and engineering group, for $0.6 billion. The deal is expected to close early 2019, subject to customary closing conditions and regulatory approvals.
In October 2018, we announced an agreement to sell a portfolio of approximately $1.0 billion, including certain assumed obligations, of predominately equity investments in energy assets to Apollo Global Management, LLC. This EFS portfolio within our Capital segment comprises investments in renewable energy, contracted natural gas-fired generation and midstream energy infrastructure assets, primarily in the U.S. The deal is expected to close in the fourth quarter of 2018, subject to customary closing conditions and regulatory approvals.
*Non-GAAP Financial Measure
108 20172018 3Q FORM 10-Q
THIRD QUARTER 2018 RESULTS
Consolidated revenues were $29.6 billion, down $1.1 billion, or 4%, for the quarter. The decline in revenues was largely a result of the absence of Water following the sale in September 2017 and Industrial profit was $2.4 billion and industrial margins were 7.6%, downSolutions following the sale in June 2018. Industrial segment organic revenues* increased $0.3 billion or 240 basis points, versusdriven principally by our Aviation, Renewable Energy, Oil & Gas and Healthcare segments, partially offset by our Power, Lighting and Transportation segments.
Continuing earnings per share was $(2.63) primarily due to non-cash after-tax impairment charges of $22.2 billion related to goodwill in our Power Generation and Grid Solutions businesses, as well as decreased net gains on business dispositions of $1.7 billion and decreased industrial segment profit of $0.6 billion. Excluding the goodwill impairment charge and other items, Adjusted earnings per share* was $0.14.
As previously disclosed, the Power market as well as its operating environment continues to be challenging. Our outlook for Power has continued to deteriorate driven by the significant overcapacity in the industry, lower market penetration as well as the uncertain timing of deal closures due to financing and the complexities of working in emerging markets. In addition, our near-term earnings outlook has been negatively impacted by project execution and our own underlying operational challenges. Finally, market factors such as increasing energy efficiency and renewable energy penetration continue to impact our view of long-term demand. These conditions have resulted in downward revisions of our forecasts on current and future projected earnings and cash flows at these businesses. As a result, during the third quarter, we recorded our best estimate of 2016 primarily driven by a reduction in Industrial segment profitnon-cash pre-tax impairment loss of $0.7 billion, or 16%. After adjusting segment operating profit of $3.6 billion for restructuring charges of $0.3$22.0 billion related to Oil & Gas, which, subsequentgoodwill in our Power Generation and Grid Solutions businesses. Included in this amount is a non-cash impairment loss of $0.8 billion related to goodwill recorded at Corporate associated with our Digital acquisitions that was previously allocated to our Power Generation and Grid Solutions reporting units. The aforementioned charges were all recorded at Corporate. See the Corporate Items and Eliminations section within this MD&A and Note 8 to the Baker Hughes transaction, are recorded inconsolidated financial statements for further information.
For the segment rather than at Corporate, adjustedthree months ended September 30, 2018, GE Industrial segment operating profit*loss was $22.8 billion and GE Industrial profit margins were (83.0)%, down $23.8 billion, driven by increased non-cash goodwill impairment charges of $21.0 billion, decreased net gains from disposed or held for sale businesses of $1.7 billion, increased restructuring and other costs of $0.4 billion, including non-cash intangible asset and property, plant and equipment impairment charges at our Power Conversion business of $0.6 billion, and unrealized losses on investments of $0.1 billion, partially offset by decreased adjusted Corporate operating costs* of $0.2 billion. Industrial segment profit decreased $0.6 billion, or 10%. The decline in adjusted Industrial segment operating profit* was21%, primarily due to lower results within our Power and Oil & GasRenewable Energy segments, partially offset by the performance of our remaining industrial segments, which had increases in organic revenues* of 2% and adjusted Industrial segment operating profit* of 23%, including lower Corporate costs.
Beginning in the third quarter of 2017, the Energy Connections business within the former Energy Connections & Lighting segment was combined with the Power segment and presented as one reporting segment called Power. The Power segment experienced a revenue decline of 4% and an operating profit decline of 51% versus the third quarter of 2016. Power revenues were $8.7 billion, with equipment revenues down 3% and service revenues down 4%.
The decline in Power segment results was primarily driven by three factors:
A decline in year-over-year results, principally in our service business, lower shipments of our aeroderivative products, and performance of our Power Conversion business. Within services, we sold fewer Advanced Gas Path (AGP) upgrades and experienced lower outages. Services outages were down 18% versus the third quarter of 2016. Aeroderivative units were down 32 versus the third quarter of 2016. Our markets have also been challenged by the increasing penetration of renewables, fleet penetration for AGPs, lower capacity payments, utilization, and outages. We expect these conditions to persist through the fourth quarter and into 2018.
Second, we experienced project delays and incurred costs associated with certain quality matters. In addition, we recognized a bad debt reserve for a Venezuelan customer receivable. The net effect of these items amounted to approximately $0.1 billion.
Third, the mix effect of having lower volume in our high-margin aero and service businesses, and higher volume in low-margin grid and balance of plant revenues resulted in a substantial margin headwind.
Refer to the Power segment results section within this MD&A for further information.
Beginning in the third quarter of 2017, ourAviation, Oil & Gas, segment is comprised of our ownership interest of approximately 62.5% in the combined BHGE entity. We consolidate 100% of BHGE’s revenuesTransportation, Healthcare and cash flows while segment operating profit and net income are derived net of minority ownership interest of approximately 37.5% attributable to BHGE’s Class A shareholders. Also, the operating profit we report for our Oil & Gas segment is adjusted for GE reporting conventions, such as excluding restructuring and other charges. Therefore, our operating profit of approximately 62.5% will differ from BHGE's operating income as reported in its standalone financial statements.
During the third quarter of 2017, Oil & Gas reported revenues of $5.4 billion, an increase of 81% versus the third quarter of 2016, driven by the effects of the Baker Hughes transaction. Adjusting for the Baker Hughes transaction, segment revenues* were $2.8 billion in the quarter, down 5% due to continued weakness in the oil and gas market. Segment operating profit (loss) was $(36) million, or $231 million after adjusting for restructuring and other charges reported in the segment*. The decline in segment operating profit (after adjusting for restructuring and other charges reported in the segment*) of 35% was primarily driven by longer cycle oilfield equipment business. Refer to the Oil & Gas segment results section within this MD&A for further information.Lighting segments.
GE CFOA was $4.1$(4.1) billion and $18.3$4.1 billion for the nine months ended September 30, 20172018 and 2016,2017, respectively. The decline in GE CFOA is primarily due to a $12.0 billion decrease in dividends from GE Capital, reflecting a decrease in proceeds from GE Capital Exit Plan disposals. GE CFOA was also impacted by lower earnings from Power and Oil & Gas, as well as lower than expected working capital improvements. Additionally, GE CFOA was negatively impacted by GE Pension Plan paymentscontributions of $6.0 billion in 2018, compared to $1.4 billion in 2017 compared to zeroas well as a $4.0 billion decrease in the prior year period. Further, due to our ongoing insurance actuarial review, we have deferred the decision whethercommon dividends from GE Capital. GE did not receive a common dividend distribution from GE Capital will pay additional dividendsin 2018, and it does not expect to receive such dividend distributions from GE untilCapital for the review is completed.foreseeable future. Refer to the GE Cash Flows and Critical Accounting Estimates sectionssection within this MD&A for further information.
As noted in the second quarter of 2017 earnings release presentation, Mr. Flannery is conducting a comprehensive review of the Company, including a review of the Company’s business units, the GE Store and Corporate. Mr. Flannery provided an update on this review as part of the third quarter earnings release presentation, at which time he stated that management had identified $20 billion plus of assets that would be exited in the next one to two years. On November 13, 2017, Mr. Flannery will present to investors outlining, among other items, the results of the business assessment, cost reduction actions, capital allocation and 2018 outlook. We expect additional restructuring charges related to cost reduction actions, and held-for-sale and other associated charges related to the exit or sale of assets or businesses.
*Non-GAAP Financial Measure
20172018 3Q FORM 10-Q 119
|
| | | | | | | | | | | | | |
| REVENUES | | | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Consolidated revenues | $ | 29.6 |
| $ | 30.7 |
| | $ | 88.3 |
| $ | 86.6 |
|
| | | | | | |
| Industrial segment revenues(a) | 27.8 |
| 29.2 |
| | 83.8 |
| 82.0 |
|
| Corporate items and Industrial eliminations | (0.3 | ) | (0.4 | ) | | (1.4 | ) | (1.3 | ) |
| GE Industrial revenues(a) | $ | 27.5 |
| $ | 28.8 |
| | $ | 82.4 |
| $ | 80.7 |
|
| | | | | | |
| Financial services revenues | $ | 2.5 |
| $ | 2.4 |
| | $ | 7.1 |
| $ | 7.5 |
|
THREE AND NINE MONTHS ENDED SEPTEMBER 30
(Dollars in billions)
|
| | |
REVENUES(a) | | INDUSTRIAL AND FINANCIAL SERVICES REVENUESGE Industrial refers to GE excluding the continuing operations of GE Capital. Industrial segment refers to the sum of our seven industrial reporting segments, without giving effect to corporate items or the elimination of transactions among such segments and between these segments and our financial services segment. |
|
| | |
(a) Included $2.5 billion related to Baker Hughes
| | COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30 |
Consolidated revenues decreased $1.1 billion, or 4%, primarily driven by decreased industrial segment revenues of $1.4 billion, partially offset by an increase in Financial Services revenues of $0.1 billion. The overall impact of foreign currency movements on consolidated revenues was a decrease of $0.3 billion. Below are descriptions of the components:
GE Industrial revenues decreased $1.3 billion, or 5%.
Industrial segment revenues decreased $1.4 billion, or 5%, as decreases at Power, Lighting and Transportation were partially offset by increases at Aviation, Renewable Energy and Oil & Gas. This decrease was driven by the net effects of dispositions of $1.4 billion, primarily attributable to the absence of Water following its sale in the third quarter of 2017 and Industrial Solutions following its sale in the second quarter of 2018, and the effects of a stronger U.S. dollar of $0.3 billion. Excluding the effects of acquisitions, dispositions and foreign currency translation, industrial segment organic revenues* increased $0.3 billion.
Financial Services revenues increased $0.1 billion, or 3%, primarily due to higher gains and lower impairments, partially offset by volume declines.
|
|
COMMENTARY: 2017 - 2016NINE MONTHS ENDED SEPTEMBER 30 |
THREE MONTHS
Consolidated revenues increased $4.2$1.7 billion, or 14%.2%, primarily driven by increased industrial segment revenues of $1.9 billion, partially offset by decreased Financial Services revenues of $0.5 billion. The overall impact of foreign currency movements on consolidated revenues was an increase of $1.1 billion. Below are descriptions of the components:
ConsolidatedGE Industrial revenues decreased $0.2increased $1.7 billion, or 1%, excluding the $1.9 billion pre-tax gain recorded at Corporate from the sale of our Water business in the third quarter of 2017 and the impact of incremental Baker Hughes revenues of $2.5 billion*2%.
Industrial segment revenues increased approximately $0.2$1.9 billion, or 1%, excluding the items noted above*2%, as increases at Oil & Gas, Aviation and Healthcare were partially offset by decreases at Power, Renewable Energy, Transportation and Lighting. This increase was driven by the net effects of acquisitions of $0.3$5.5 billion, primarily attributable to Baker Hughes through the first half of 2018, and the effects of a weaker U.S. dollar of $0.2$1.1 billion, were partially offset by organic revenue* decreases of $0.4 billion.
Financial Services revenues decreased $0.2 billion, or 8%, primarily due to higher impairments and organic revenue declines, partially offset by higher gains.
NINE MONTHS
Consolidated revenues increased $0.1 billion.
Consolidated revenues decreased $1.2 billion, or 1%, excluding the pre-tax gains recorded at Corporate of $3.1 billion from the sale of Appliances in the second quarter of 2016 and $1.9 billion from the sale of our Water business in the third quarter of 2017 as well as the impact of incremental Baker Hughes revenues of $2.5 billion*.
Industrial segment revenues decreased approximately $0.3 billion, excluding the items noted above*, as the net effects of acquisitions of $0.7 billion and organic revenue* increases of $1.9 billion were partially offset by the net effects of dispositions of $2.8$2.5 billion, primarily attributable to the absence of Water following its sale in the third quarter of 2017 and Industrial Solutions following its sale in the second quarter of 2018. Excluding the effects of a stronger U.S. dollar of $0.1acquisitions, dispositions and foreign currency translation, industrial segment organic revenues* decreased $2.3 billion.
Financial Services revenues decreased $0.7$0.5 billion, or 9%6%, primarily due to higher impairments, organic revenuevolume declines and lower gains.gains, partially offset by lower impairments.
*Non-GAAP Financial Measure
1210 20172018 3Q FORM 10-Q
THREE AND NINE MONTHS ENDED SEPTEMBER 30(Dollars in billions; |
| | | | | | | | | | | | | |
| EARNINGS (LOSS) AND EARNINGS (LOSS) PER SHARE | | | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In billions; per-share amounts in dollars; attributable to GE common shareowners) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Continuing earnings(a) | $ | (22.8 | ) | $ | 1.4 |
| | $ | (21.7 | ) | $ | 2.6 |
|
| | | | | | |
| Continuing earnings per share | $ | (2.63 | ) | $ | 0.16 |
| | $ | (2.50 | ) | $ | 0.29 |
|
(a) Also referred to as "Earnings from continuing operations attributable to GE common
shareowners)shareowners" |
| | |
CONTINUING EARNINGS | | OPERATING EARNINGS* |
In the below discussion, GE Industrial refers to GE excluding the continuing operations of GE Capital. Industrial segment refers to the sum of our seven industrial reporting segments, without giving effect to corporate items or the elimination of transactions among such segments and between these segments and our financial services segment. |
|
COMMENTARY: 2017 - 2016THREE MONTHS ENDED SEPTEMBER 30 |
THREE MONTHS
Consolidated continuing earnings decreased $24.3 billion due to increased goodwill impairment charges of $21.0 billion, decreased GE Industrial continuing earnings of $2.6 billion, increased provision for GE Industrial income taxes of $0.5 billion and increased non-operating benefit costs of $0.2 billion, partially offset by decreased interest and other financial charges of $0.1 billion. The increase in income tax provision was driven by a $0.2 billion tax charge during the third quarter related to goodwill impairment, including a $0.4 billion charge related to an increase in the deferred tax valuation allowance of our non-U.S. operations as a result of lower forecasted operating earnings in our Power business. Below are descriptions of the components:
GE Industrial
Earnings earnings decreased $2.1$2.6 billion, or 98%77%.
Corporate items and eliminations decreased $2.0 billion primarily attributable to decreased net gains from disposed or held for sale businesses of $1.7 billion, increased restructuring and other costs of $0.4 billion, including non-cash intangible asset and property, plant and equipment impairment charges at our Power Conversion business of $0.6 billion, and unrealized losses on investments of $0.1 billion, partially offset by decreased adjusted Corporate operating costs* of $0.2 billion.
Industrial segment profit decreased $0.6 billion, or 21%, excludingwith decreases at Power and Renewable Energy, partially offset by higher profit at Aviation, Oil & Gas, Transportation, Healthcare and Lighting. This decrease in industrial segment profit was driven in part by the $1.9net effects of dispositions of $0.2 billion, after-tax gain recorded at Corporate fromprimarily associated with the saleabsence of our Water businessfollowing its sale in the third quarter of 2017*.2017 and Industrial Solutions following its sale in the second quarter of 2018, partially offset by lower restructuring and business development costs related to Baker Hughes of $0.2 billion. Excluding the effects of acquisitions, dispositions and foreign currency translation, industrial segment organic profit* decreased $0.6 billion, primarily driven by negative variable cost productivity, lower volume and pricing pressure at Power.
Financial Services earnings decreased slightly, primarily due to volume declines offset by higher gains associated with the sale of EFS' debt origination business and equity investments.
|
|
| COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30 |
Consolidated continuing earnings decreased $24.3 billion due to increased goodwill impairment charges of $21.0 billion, decreased GE Industrial continuing earnings of $1.7 billion and increased provision for GE Industrial income taxes of $0.9 billion driven by a $0.2 billion tax charge during the second quarter related to the planned separation of our Healthcare segment and a $0.2 billion tax charge during the third quarter related to goodwill impairment, including a $0.4 billion charge related to an increase in the deferred tax valuation allowance of our non-U.S. operations as a result of lower forecasted operating earnings in our Power business. Continuing earnings also declined due to increased non-operating benefit costs of $0.4 billion, increased Financial Services losses of $0.2 billion and increased interest and other financial charges of $0.1 billion. Below are descriptions of the components:
GE Industrial earnings decreased $1.7 billion, or 23%.
Corporate items and eliminations decreased $0.4 billion primarily attributable to decreased net gains from disposed or held for sale businesses of $1.4 billion, partially offset by decreased restructuring and other costs of $0.4 billion, decreased adjusted Corporate operating costs* of $0.4 billion as well as unrealized gains on investments of $0.2 billion.
Industrial segment profit decreased $0.7$1.3 billion, or 16%14%, due to organic operating decreases*with decreases at Power, Renewable Energy and Oil & Gas, partially offset by higher profit at Aviation, Healthcare, Transportation and Lighting. This decrease in industrial segment profit was driven in part by the net effects of $0.6dispositions of $0.3 billion, primarily associated with the absence of Water following its sale in the third quarter of 2017 and Industrial Solutions following its sale in the second quarter of 2018, and higher restructuring and business development costs related to Baker Hughes of $0.3 billion, partially offset by the net effects of acquisitions $0.3 billion, largely associated with Baker Hughes through the first half of $0.1 billion.the year. Excluding the effects of acquisitions, dispositions and foreign currency translation, industrial segment organic profit* decreased $1.0 billion, primarily driven by negative variable cost productivity, lower volume and pricing pressure at Power.
In addition, restructuring and other costs recordedFinancial Services losses increased $0.2 billion primarily due to higher impairments primarily at Corporate increased $1.3 billion, including non-cash impairment charges of $0.9 billionEFS related to goodwillits renewables and $0.3 billionoil and gas investments, and volume declines including costs associated with calling debt and lower base earnings including a loss related to a power plant asset. Gains recorded at Corporate decreased $0.2 billion, excludingupdates to the $1.9 billion pre-tax gainU.S. tax reform impact on energy investments, partially offset by higher gains associated with the sale of our Water business.
InterestEFS’ debt origination business and other financial charges increased $0.2 billion while the provision for income taxes decreased $0.3 billion, excluding the tax impact from the sale of our Water business*.
The net effect of acquisitions on our consolidated operating earnings was a decrease of $0.2 billion while the net effect of dispositions was an increase of $1.4 billion in the third quarter of 2017.
Foreign exchange favorably affected industrial operating earnings by $0.1 billion as a result of both translationalequity investments and transactional impacts related to remeasurementlower corporate and mark-to-market charges on open hedges.restructuring costs.
Financial Services
| |
▪ | Financial Services earnings decreased 8%, primarily due to lower tax benefits primarily associated with a 2016 IRS tax settlement, higher impairments and lower gains, partially offset by lower treasury and headquarters operation expenses associated with the GE Capital Exit Plan and core increases. |
*Non-GAAP Financial Measure
NINE MONTHS
Consolidated continuing earnings decreased $1.5 billion.
Industrial
Earnings decreased $1.6 billion, or 41%, excluding the after-tax gains recorded at Corporate of $1.8 billion from the sale of Appliances in the second quarter of 2016 and $1.9 billion from the sale of our Water business in the third quarter of 2017*.
Industrial segment profit decreased $0.6 billion, or 5%, driven by restructuring costs related to Baker Hughes of $0.3 billion, organic operating decreases* of $0.2 billion and the net effects of dispositions of $0.2 billion, partially offset by the net effects of acquisitions of $0.1 billion.
In addition, restructuring and other costs recorded at Corporate increased $1.2 billion, including non-cash impairment charges of $0.9 billion related to goodwill and $0.3 billion related to a power plant asset. Gains recorded at Corporate decreased $0.3 billion, excluding the $3.1 billion pre-tax gain on the sale of Appliances in 2016 and the $1.9 billion pre-tax gain on the sale of our Water business in 2017.
Interest and other financial charges increased $0.4 billion while the provision for income taxes increased $0.5 billion, excluding the tax impacts from the sale of Appliances and the sale of our Water business*.
The net effect of acquisitions on our consolidated operating earnings was a decrease of $0.2 billion while the net effect of dispositions was a decrease of $1.2 billion in 2017.
Foreign exchange adversely affected industrial operating earnings by an insignificant amount in 2017.
Financial Services
Financial Services losses decreased $1.3 billion, or 87% primarily due to lower treasury and headquarters operation expenses associated with the GE Capital Exit Plan, lower preferred dividend expenses associated with the January 2016 preferred equity exchange and core increases, partially offset by lower gains, higher impairments and lower tax benefits primarily associated with a 2016 IRS tax settlement.
20172018 3Q FORM 10-Q 1311
GE DIGITAL
GE Digital's activities are focused on assisting in the market development of our digital product offerings through software design, fulfillment and product management, while also interfacing with our customers. Digital revenues include internally developed software and associated hardware, including Predix and software solutions that improve our customers’ asset performance. These revenues and associated costs are largely generated from our operating businesses and are included in their segment results.
Revenues were $0.9 billion for the three months ended September 30, 2018, a decrease of $0.1 billion or 6% compared to revenues of $1.0 billion for the three months ended September 30, 2017. The decrease was primarily driven by Healthcare.
Revenues were $2.9 billion for the nine months ended September 30, 2018, an increase of $0.1 billion or 2% compared to revenues of $2.8 billion for the nine months ended September 30, 2017. The increase was primarily driven by Oil & Gas and Transportation, offset by decreases in Power and Healthcare.
Orders were $1.0 billion for three months ended September 30, 2018 a decrease of 29%, compared to orders of $1.4 billion for the three months ended September 30, 2017. The decrease was primarily driven by Oil & Gas, Transportation, Healthcare and non-GE Verticals.
Orders were $3.0 billion for the nine months ended September 30, 2018, a decrease of 19% compared to orders of $3.7 billion for the nine months ended September 30, 2017. Decreases in Transportation, Power, Oil & Gas and Healthcare were offset by increases in Transportation and Renewable Energy.
During the quarter, a goodwill impairment loss of $0.8 billion was recorded at Corporate associated with our Digital acquisitions that was previously allocated to our Power Generation and Grid Solutions reporting units. We recorded the estimated impairment losses in the caption "Goodwill impairment" in our consolidated Statement of Earnings (Loss).
SEGMENT OPERATIONS
|
| | | | | | | | | | | | | | | | | |
| SUMMARY OF OPERATING SEGMENTS |
| | | | | | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
| V% |
| | 2017 |
| 2016 |
| V% |
|
| | | | | | | | |
| Revenues | | | | | | | |
| Power(a) | $ | 8,679 |
| $ | 8,995 |
| (4) | % | | $ | 26,569 |
| $ | 25,664 |
| 4 | % |
| Renewable Energy | 2,905 |
| 2,770 |
| 5 | % | | 7,406 |
| 6,533 |
| 13 | % |
| Oil & Gas | 5,365 |
| 2,964 |
| 81 | % | | 11,475 |
| 9,497 |
| 21 | % |
| Aviation | 6,816 |
| 6,300 |
| 8 | % | | 20,153 |
| 19,074 |
| 6 | % |
| Healthcare | 4,724 |
| 4,482 |
| 5 | % | | 13,714 |
| 13,190 |
| 4 | % |
| Transportation | 1,074 |
| 1,249 |
| (14) | % | | 3,185 |
| 3,471 |
| (8 | )% |
| Lighting(a) | 483 |
| 576 |
| (16) | % | | 1,442 |
| 4,239 |
| (66 | )% |
| Total industrial segment revenues | 30,046 |
| 27,335 |
| 10 | % | | 83,943 |
| 81,667 |
| 3 | % |
| Capital | 2,397 |
| 2,600 |
| (8) | % | | 7,525 |
| 8,256 |
| (9 | )% |
| Total segment revenues | 32,444 |
| 29,936 |
| 8 | % | | 91,468 |
| 89,923 |
| 2 | % |
| Corporate items and eliminations | 1,028 |
| (670 | ) | | | (777 | ) | 681 |
| |
| Consolidated revenues | $ | 33,472 |
| $ | 29,266 |
| 14 | % | | $ | 90,691 |
| $ | 90,604 |
| — | % |
| | | | | | | | |
| Segment profit (loss) | | | | | | | |
| Power(a) | $ | 611 |
| $ | 1,259 |
| (51) | % | | $ | 2,526 |
| $ | 2,924 |
| (14 | )% |
| Renewable Energy | 257 |
| 202 |
| 27 | % | | 524 |
| 413 |
| 27 | % |
| Oil & Gas(b) | (36 | ) | 353 |
| U |
| | 325 |
| 981 |
| (67 | )% |
| Aviation | 1,680 |
| 1,494 |
| 12 | % | | 4,856 |
| 4,366 |
| 11 | % |
| Healthcare | 820 |
| 717 |
| 14 | % | | 2,289 |
| 2,130 |
| 7 | % |
| Transportation | 276 |
| 309 |
| (11) | % | | 634 |
| 747 |
| (15 | )% |
| Lighting(a) | 23 |
| (15 | ) | F |
| | 43 |
| 196 |
| (78 | )% |
| Total industrial segment profit | 3,630 |
| 4,320 |
| (16) | % | | 11,198 |
| 11,756 |
| (5 | )% |
| Capital | 24 |
| 26 |
| (8 | )% | | (195 | ) | (1,466 | ) | 87 | % |
| Total segment profit (loss) | 3,654 |
| 4,345 |
| (16 | )% | | 11,003 |
| 10,290 |
| 7 | % |
| Corporate items and eliminations | (1,095 | ) | (1,524 | ) | | | (4,687 | ) | (2,120 | ) | |
| GE interest and other financial charges | (718 | ) | (483 | ) | | | (1,918 | ) | (1,490 | ) | |
| GE benefit (provision) for income taxes | 64 |
| (241 | ) | | | (297 | ) | (1,034 | ) | |
Earnings (loss) from continuing operations attributable to GE common shareowners | 1,905 |
| 2,097 |
| (9) | % | | 4,101 |
| 5,645 |
| (27 | )% |
| Earnings (loss) from discontinued operations, net of taxes | (106 | ) | (105 | ) | (1 | )% | | (490 | ) | (954 | ) | 49 | % |
| Less net earnings attributable to | | | | | | | |
| noncontrolling interests, discontinued operations | (1 | ) | (2 | ) | | | 6 |
| 2 |
| |
| Earnings (loss) from discontinued operations, | | | | | | | |
| net of tax and noncontrolling interest | (105 | ) | (103 | ) | (2 | )% | | (497 | ) | (956 | ) | 48 | % |
Consolidated net earnings (loss) attributable to the GE common shareowners | $ | 1,800 |
| $ | 1,994 |
| (10) | % | | $ | 3,604 |
| $ | 4,689 |
| (23 | )% |
|
| | | | | | | | | |
| RECONCILIATION OF INDUSTRIAL BACKLOG TO REMAINING PERFORMANCE OBLIGATION |
| | September 30, 2018 |
| (In billions) | Equipment |
| Services |
| Total |
|
| | | | |
| Backlog | $ | 89.0 |
| $ | 289.9 |
| $ | 378.9 |
|
| Adjustments | (37.4 | ) | (92.3 | ) | (129.8 | ) |
| Remaining Performance Obligation | $ | 51.6 |
| $ | 197.6 |
| $ | 249.2 |
|
| |
(a) | Beginning in the third quarter of 2017, the Energy Connections business within the former Energy Connections & Lighting segment was combined with the Power segment and presented as one reporting segment called Power. As a result of this combination, our GE Lighting and Current, powered by GE (Current) businesses are now reported as a separate segment called Lighting. |
| |
(b) | Oil & Gas segment operating profit excluding restructuring and other charges was $231 million and $593 million for the three and nine months ended September 30, 2017, respectively. |
Backlog represents unfilled customer orders for products and product services (expected life of contract sales for product services). Remaining performance obligation is a defined term under GAAP and represents backlog excluding any purchase orders that provide the customer with the ability to cancel or terminate without incurring a substantive penalty, even if the likelihood of cancellation is remote based on historical experience. We plan to continue reporting backlog as we believe that it is a useful metric for investors, given its relevance to total orders.
Adjustments to reported backlog are largely driven by the Aviation business: (1) backlog includes engine contracts for which we have received purchase orders that are cancelable. We have included these in backlog as our historical experience has shown no net cancellations, as any canceled engines are typically moved by the airframer to other program customers; (2) our services backlog includes contracts that are cancelable without substantial penalty, primarily time and materials contracts; (3) backlog includes engines contracted under long-term service agreements, even if the engines have not yet been put into service. These adjustments to reported backlog are expected to be satisfied beyond one year. See Note 9 to the consolidated financial statements for further information.
REVENUES AND PROFIT
Segment revenues include revenuessales of products and other incomeservices related to the segment.
Segment profit is determined based on internal performance measures used by the Chief Executive Officer (CEO) to assess the performance of each business in a given period. In connection with that assessment, the CEO may exclude matters, such as charges for restructuring, rationalization and other similar expenses, acquisition costs and other related charges, technology and product development costs, certain gains and losses from acquisitions or dispositions, and litigation settlements or other charges, for which responsibility preceded the current management team. Subsequent to the Baker Hughes transaction, restructuring and other charges are included in the determination of segment operating profit for our Oil & Gas segment. See the Corporate Items and Eliminations section within this MD&A for additional information about costs excluded from segment profit.
Segment profit excludes results reported as discontinued operations and material accounting changes.changes other than those applied retrospectively. Segment profit also excludes the portion of earnings or loss attributable to noncontrolling interests of consolidated subsidiaries, and as such only includes the portion of earnings or loss attributable to our share of the consolidated earnings or loss of consolidated subsidiaries.
Segment profit excludes or includes interest and other financial charges, non-operating benefit costs, income taxes, and preferred stock dividends according to how a particular segment’s management is measured:
Interest and other financial charges, income taxes, non-operating benefit costs and GE preferred stock dividends are excluded in determining segment profit (which we sometimes refer to as “operating profit”) for the industrial segments.
Interest and other financial charges, income taxes, non-operating benefit costs and GE Capital preferred stock dividends are included in determining segment profit (which we sometimes refer to as “net earnings”) for the Capital segment.
Other income is included in segment profit for the industrial segments.
Certain corporate costs, such as shared services, employee benefits, and information technology, are allocated to our segments based on usage. A portion of the remaining corporate costs is allocated based on each segment’s relative net cost of operations.
With respect to the segment revenue and profit walks, the overall effect of foreign exchange is included within multiple captions as follows:
The translational foreign exchange impact is included within Foreign Exchange.
The transactional impact of foreign exchange hedging is included in operating cost within Productivity and in other income within Other.
SIGNIFICANT SEGMENT DEVELOPMENTS
SALE OF APPLIANCES
On January 15, 2016, we announced the signing of an agreement to sell our Appliances business to Haier. On June 6, 2016, we completed the sale for proceeds of $5.6 billion (including $0.8 billion from the sale of receivables originated in our Appliances business and sold from GE Capital to Haier) and recognized an after-tax gain of $1.8 billion in 2016. For the nine months ended September 30, 2016, Appliances contributed revenues of $2.6 billion and an operating profit of $0.3 billion.
CREATION OF BAKER HUGHES, A GE COMPANY
On July 3, 2017, we completed the transaction to create Baker Hughes, a GE company (BHGE). Under the terms of the deal, which we announced in October 2016, we combined our Oil & Gas business and Baker Hughes Incorporated (Baker Hughes) to create a new company in which GE holds an ownership interest of approximately 62.5% and former Baker Hughes shareholders hold an ownership interest of approximately 37.5%. Baker Hughes shareholders also received a cash dividend funded by a $7.5 billion cash contribution from GE. The completion of the transaction followed the approval of Baker Hughes shareholders, regulatory approvals and other customary closing conditions. Effective July 3, 2017, the operations of Baker Hughes are reported in our Oil & Gas segment.
INCLUSION OF ENERGY CONNECTIONS IN POWER REPORTING SEGMENT
Beginning in the third quarter of 2017, the Energy Connections business within the former Energy Connections & Lighting segment was combined with the Power segment and presented as one reporting segment called Power. As a result of the combination, our GE Lighting and Current, powered by GE (Current) businesses are now reported as a separate segment called Lighting.
20172018 3Q FORM 10-Q 1513
SEGMENT RESULTS – THREE AND NINE MONTHS ENDED SEPTEMBER 30
(Dollars in billions)
|
| | | | | | | | | | | | | | | | | |
| SUMMARY OF OPERATING SEGMENTS | | | | | | | |
| | | | | | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2018 |
| 2017 |
| V% |
| | 2018 |
| 2017 |
| V% |
|
| | | | | | | | |
| Revenues | | | | | | | |
| Power | $ | 5,739 |
| $ | 8,527 |
| (33) | % | | $ | 20,540 |
| $ | 25,868 |
| (21 | )% |
| Renewable Energy | 2,873 |
| 2,507 |
| 15 | % | | 6,172 |
| 6,587 |
| (6 | )% |
| Aviation | 7,480 |
| 6,696 |
| 12 | % | | 22,111 |
| 20,003 |
| 11 | % |
| Oil & Gas | 5,670 |
| 5,311 |
| 7 | % | | 16,609 |
| 11,394 |
| 46 | % |
| Healthcare | 4,707 |
| 4,710 |
| — | % | | 14,387 |
| 13,703 |
| 5 | % |
| Transportation | 932 |
| 949 |
| (2) | % | | 2,746 |
| 3,006 |
| (9 | )% |
| Lighting | 385 |
| 472 |
| (18) | % | | 1,272 |
| 1,407 |
| (10 | )% |
| Total industrial segment revenues | 27,785 |
| 29,171 |
| (5) | % | | 83,837 |
| 81,967 |
| 2 | % |
| Capital | 2,473 |
| 2,397 |
| 3 | % | | 7,075 |
| 7,525 |
| (6 | )% |
| Total segment revenues | 30,258 |
| 31,569 |
| (4) | % | | 90,912 |
| 89,491 |
| 2 | % |
| Corporate items and eliminations | (685 | ) | (907 | ) | 24 | % | | (2,575 | ) | (2,851 | ) | 10 | % |
| Consolidated revenues | $ | 29,573 |
| $ | 30,662 |
| (4) | % | | $ | 88,337 |
| $ | 86,640 |
| 2 | % |
| | | | | | | | |
| Segment profit (loss) | | | | | | | |
| Power | $ | (631 | ) | $ | 464 |
| U |
| | $ | 64 |
| $ | 1,896 |
| (97 | )% |
| Renewable Energy | 60 |
| 217 |
| (72) | % | | 220 |
| 445 |
| (51 | )% |
| Aviation | 1,665 |
| 1,335 |
| 25 | % | | 4,743 |
| 3,982 |
| 19 | % |
| Oil & Gas(a) | 180 |
| (57 | ) | F |
| | 110 |
| 322 |
| (66 | )% |
| Healthcare | 861 |
| 847 |
| 2 | % | | 2,522 |
| 2,335 |
| 8 | % |
| Transportation | 162 |
| 141 |
| 15 | % | | 448 |
| 420 |
| 7 | % |
| Lighting | 26 |
| 14 |
| 86 | % | | 52 |
| 41 |
| 27 | % |
| Total industrial segment profit | 2,325 |
| 2,961 |
| (21) | % | | 8,157 |
| 9,441 |
| (14 | )% |
| Capital | 19 |
| 24 |
| (21) | % | | (403 | ) | (195 | ) | U |
|
| Total segment profit (loss) | 2,344 |
| 2,985 |
| (21) | % | | 7,753 |
| 9,246 |
| (16 | )% |
| Corporate items and eliminations | (1,546 | ) | 439 |
| U |
| | (2,507 | ) | (2,083 | ) | (20 | )% |
| Goodwill impairment | (21,973 | ) | (947 | ) | U |
| | (21,973 | ) | (947 | ) | U |
|
| GE interest and other financial charges | (662 | ) | (718 | ) | 8 | % | | (1,995 | ) | (1,918 | ) | (4 | )% |
| GE non-operating benefit costs | (804 | ) | (610 | ) | (32) | % | | (2,178 | ) | (1,811 | ) | (20 | )% |
| GE benefit (provision) for income taxes | (205 | ) | 281 |
| U |
| | (842 | ) | 93 |
| U |
|
Earnings (loss) from continuing operations attributable to GE common shareowners | (22,847 | ) | 1,429 |
| U |
| | (21,742 | ) | 2,579 |
| U |
|
| Earnings (loss) from discontinued operations, net of taxes | 39 |
| (106 | ) | F |
| | (1,634 | ) | (490 | ) | U |
|
| Less net earnings attributable to | | | | | | | |
| noncontrolling interests, discontinued operations | — |
| (1 | ) | F |
| | — |
| 6 |
| U |
|
| Earnings (loss) from discontinued operations, | | | | | | | |
| net of tax and noncontrolling interest | 39 |
| (105 | ) | F |
| | (1,634 | ) | (497 | ) | U |
|
Consolidated net earnings (loss) attributable to the GE common shareowners | $ | (22,808 | ) | $ | 1,324 |
| U |
| | $ | (23,376 | ) | $ | 2,082 |
| U |
|
|
|
INDUSTRIAL SEGMENT EQUIPMENT
& SERVICES REVENUES
|
|
|
INDUSTRIAL SEGMENT PROFIT |
|
| |
■ ■Services (a)■■ Equipment (b)
| |
|
| |
(a) $13.6 billion,Oil & Gas segment profit excluding $1.5 billion related to Baker Hughes*,restructuring and $40.1 billion, excluding $1.5 billion related to Baker Hughes*,other charges* was $247 million and $210 million for the three months ended September 30, 2018 and 2017, respectively, and $650 million and $590 million for the nine months ended September 30, 2018 and 2017, respectively
(b) $13.9 billion, excluding $1.0 billion related to Baker Hughes*, and $41.3 billion, excluding $1.0 billion related to Baker Hughes*, for the three and nine months ended September 30, 2017, respectively
| (a) $3.8 billion, excluding $(0.1) billion related to Baker Hughes*
(b) $11.3 billion, excluding $(0.1) billion related to Baker Hughes*
respectively. |
|
|
2017 – 2016 COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30 |
Industrial segment revenues increased $2.7 billion, or 10%, driven by increases at Oil & Gas primarily due to Baker Hughes, Aviation, Healthcare and Renewable Energy, partially offset by decreases at Power, Transportation and Lighting.
Industrial segment profit decreased $0.7 billion, or 16%, driven primarily by lower earnings at Power, Oil & Gas primarily due to restructuring costs associated with Baker Hughes, and Transportation, partially offset by higher earnings at Aviation, Healthcare, Renewable Energy and Lighting.
Industrial segment margin decreased 280 bps to 13.0% in 2017 from 15.8% in 2016 driven by negative cost productivity and business mix. The decrease in Industrial segment margin reflects decreases at Oil & Gas and Power, offset by increases at Renewable Energy, Healthcare, Transportation, Aviation and Lighting.
|
|
2017 – 2016 COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30 |
Industrial segment revenues increased $2.3 billion, or 3%, driven by increases at Oil & Gas primarily due to Baker Hughes, Aviation, Power, Renewable Energy, and Healthcare, partially offset by decreases at Lighting primarily due to the sale of the Appliances business in the second quarter of 2016, and Transportation.
Industrial segment profit decreased $0.6 billion, or 5%, driven primarily by lower earnings at Oil & Gas, Power, Lighting due to the sale of Appliances in the second quarter of 2016, and Transportation, partially offset by higher earnings at Aviation, Healthcare, and Renewable Energy.
Industrial segment margin decreased 70 bps to 13.7% in 2017 from 14.4% in 2016 driven by price and business mix. The decrease in Industrial segment margin reflects decreases at Oil & Gas, Power and Transportation, partially offset by increases at Aviation, Renewable Energy, Healthcare and Lighting.
*Non-GAAP Financial Measure
1614 20172018 3Q FORM 10-Q
|
| | |
| MD&A | SEGMENT OPERATIONS | POWER |
POWER
OPERATIONAL OVERVIEW
(Dollars in billions)
|
| | | | | | | | | | | | | |
| SUB-SEGMENT REVENUES | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Gas Power Systems(a) | $ | 1.0 |
| $ | 2.0 |
| | $ | 3.9 |
| $ | 6.2 |
|
| Power Services | 2.7 |
| 2.9 |
| | 8.7 |
| 9.1 |
|
| Steam Power Systems | 0.4 |
| 0.6 |
| | 1.4 |
| 1.5 |
|
| Energy Connections(b) | 1.5 |
| 2.4 |
| | 6.0 |
| 7.1 |
|
| Other(c) | 0.1 |
| 0.7 |
| | 0.5 |
| 2.0 |
|
| Total segment revenues | $ | 5.7 |
| $ | 8.5 |
| | $ | 20.5 |
| $ | 25.9 |
|
|
|
2017 YTD SUB-SEGMENT REVENUES
|
|
|
EQUIPMENT/SERVICES REVENUES
|
|
|
(a) Includes Distributed Power
(b) Includes Grid Solutions, Power Conversion and Automation & Controls. Includes Industrial Solutions through its disposition.
(c) Includes Water & Process Technologies and GE Hitachi Nuclear
|
|
| | | | | | | | | | | | | |
| ORDERS | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Equipment | $ | 3.3 |
| $ | 3.9 |
| | $ | 9.0 |
| $ | 12.6 |
|
| Services | 3.4 |
| 4.2 |
| | 10.5 |
| 13.3 |
|
| Total | $ | 6.6 |
| $ | 8.1 |
| | $ | 19.5 |
| $ | 25.9 |
|
|
| | | | | | |
| BACKLOG | |
| (In billions) | September 30, 2018 |
| September 30, 2017 |
|
| | | |
| Equipment | $ | 25.0 |
| $ | 26.1 |
|
| Services | 68.7 |
| 73.3 |
|
| Total | $ | 93.7 |
| $ | 99.5 |
|
| | | UNIT SALES | | | |
| 3Q 2016 | 3Q 2017 | V | YTD 2016 | YTD 2017 | V | 3Q 2018 |
| 3Q 2017 |
| V |
| YTD 2018 |
| YTD 2017 |
| V |
|
| Gas Turbines | 30 | 22 | (8) | 69 | 63 | (6) | 9 |
| 22 |
| (13 | ) | 28 |
| 63 |
| (35 | ) |
20172018 3Q FORM 10-Q 1715
|
| | |
| MD&A | SEGMENT OPERATIONS | POWER |
FINANCIAL OVERVIEW
|
| | | | | | | | | | | | | |
| SEGMENT REVENUES | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Revenues | | | | | |
| Equipment | $ | 2.3 |
| $ | 4.5 |
| | $ | 9.3 |
| $ | 13.3 |
|
| Services | 3.4 |
| 4.1 |
| | 11.2 |
| 12.6 |
|
| Total | $ | 5.7 |
| $ | 8.5 |
| | $ | 20.5 |
| $ | 25.9 |
|
| | | | | | |
| SEGMENT PROFIT AND PROFIT MARGIN | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Segment profit | $ | (0.6 | ) | $ | 0.5 |
| | $ | 0.1 |
| $ | 1.9 |
|
| Segment profit margin | (11.0 | )% | 5.4 | % | | 0.3 | % | 7.3 | % |
2018 – 2017 COMMENTARY
As previously disclosed, the Power market as well as its operating environment continues to be challenging. Our outlook for Power has continued to deteriorate driven by the significant overcapacity in billions)the industry, lower market penetration as well as uncertain timing of deal closures due to financing and the complexities of working in emerging markets. In addition, our near-term earnings outlook has been negatively impacted by project execution and our own underlying operational challenges. Finally, market factors such as increasing energy efficiency and renewable energy penetration continue to impact our view of long-term demand. These conditions have resulted in downward revisions of our forecasts on current and future projected earnings and cash flows at these businesses.
|
| | | | |
SEGMENT REVENUES | | SEGMENT PROFIT | | SEGMENT PROFIT MARGIN |
|
|
■ ■Services ■■ EquipmentDuring the third quarter of 2018, Gas Power Systems recorded a $0.2 billion pre-tax charge related to an oxidation issue within the HA and 9FB Stage 1 turbine blades, resulting in increased warranty and maintenance reserves. In addition, Power recognized pre-tax charges of approximately $0.4 billion associated with an increase in issues on our existing projects driven by execution as well as partner and customer challenges.
THREE MONTHS ENDED SEPTEMBER 30:
|
|
| | | | | | |
| SEGMENT REVENUES & PROFIT WALK: |
| THREE MONTHS | |
| | Revenues |
| Profit |
|
| September 30, 2016 | $ | 9.0 |
| $ | 1.3 |
|
| Volume | (0.5 | ) | (0.1 | ) |
| Price | (0.1 | ) | (0.1 | ) |
| Foreign Exchange | 0.1 |
| — |
|
| (Inflation)/Deflation | N/A |
| — |
|
| Mix | N/A |
| (0.2 | ) |
| Productivity | N/A |
| (0.4 | ) |
| Other | 0.2 |
| 0.1 |
|
| September 30, 2017 | $ | 8.7 |
| $ | 0.6 |
|
| |
| NINE MONTHS | |
| | Revenues |
| Profit |
|
| September 30, 2016 | $ | 25.7 |
| $ | 2.9 |
|
| Volume | 0.9 |
| 0.1 |
|
| Price | (0.2 | ) | (0.2 | ) |
| Foreign Exchange | (0.1 | ) | — |
|
| (Inflation)/Deflation | N/A |
| 0.1 |
|
| Mix | N/A |
| (0.2 | ) |
| Productivity | N/A |
| (0.4 | ) |
| Other | 0.3 |
| 0.2 |
|
| September 30, 2017 | $ | 26.6 |
| $ | 2.5 |
|
Segment revenues down $0.3$2.8 billion (4%(33%);
Segment profit down $0.6 billion (51%):$1.1 billion:
The decrease inEquipment revenues was driven by lower services volume at Power Services due to 15 fewer AGP upgrades. Equipment volume also decreased primarily at Gas Power Systems as a result of eight fewer gas turbine and 32due to lower unit sales, including seven fewer aeroderivative units and 13 fewer gas turbines, as well as the absence of Water following the sale in September 2017 and Industrial Solutions following the sale in June 2018. Services revenues decreased primarily due to the absence of Water and Industrial Solutions, partially offset by seventhree more Heat Recovery Steam Generator shipments and extended scope including higher balance of plant revenues. Further decreases in revenue wereAGP upgrades. Revenues also decreased due to lower prices offset byprice pressure and the effects of a weakerstronger U.S. dollar versus the euro and increased other income including a reduction in foreign exchange transactional losses.certain currencies.
The decrease in profit was due to negative variable cost productivity unfavorable business mix due to higher revenues fromdriven by warranty and project cost updates as well as liquidated damages recognized by Gas Power Systems, lower margin balancevolume including the absence of plant volumeWater and fewer higher margin aeroderivative units,Industrial Solutions, lower prices and lower overall volume,negative mix in our long-term service contracts compared to the prior year. These decreases were partially offset by increased other income including afavorable business mix and cost reduction inefforts, excluding the effects of acquisition and disposition activity and foreign exchange transactional losses.exchange.
NINE MONTHS ENDED SEPTEMBER 30:
Segment revenues up $0.9down $5.3 billion (4%(21%);
Segment profit down $0.4$1.8 billion (14%(97%):
The increase inEquipment revenues was driven by higher equipment volume,decreased primarily at Gas Power Systems due to higher balance of plantlower unit sales, including 28 fewer aeroderivative units and 35 fewer gas turbines and 18 fewer Heat Recovery Steam Generators, as well as 36 more Heat Recovery Steam Generator shipments,the absence of Water following the sale in September 2017 and Industrial Solutions following the sale in June 2018. Services revenues decreased primarily due to the absence of Water and Industrial Solutions as well as 22 fewer AGP upgrades. Revenues also decreased due to price pressure, partially offset by six fewer gas turbine and 27 fewer aeroderivative units. Revenues also increased due to increased other income including a reduction in foreign exchange transactional losses offset by lower prices and the effects of a strongerweaker U.S. dollar versus the euro.certain currencies.
The decrease in profit was due to negative variable cost productivity unfavorable businessdriven by warranty and project cost updates as well as liquidated damages recognized by Gas Power Systems, lower volume including the absence of Water and Industrial Solutions, lower prices and negative mix duein our long-term service contracts compared to higher revenues from lower margin balance of plant volume and fewer higher margin aeroderivative units, and lower prices.the prior year. These decreases were partially offset by positive basefavorable business mix and cost productivity on higher volumereduction efforts, excluding the effects of acquisition and increased other income including a reduction indisposition activity and foreign exchange transactional losses.exchange.
*Non-GAAP Financial Measure
1816 20172018 3Q FORM 10-Q
|
| | |
| MD&A | SEGMENT OPERATIONS | RENEWABLE ENERGY |
RENEWABLE ENERGY
OPERATIONAL OVERVIEW
(Dollars in billions)
|
|
2017 YTD SUB-SEGMENT REVENUES
|
|
|
EQUIPMENT/SERVICES REVENUES
|
|
| | | | | | | | | | | | | |
| SUB-SEGMENT REVENUES | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Onshore Wind | $ | 2.6 |
| $ | 2.2 |
| | $ | 5.2 |
| $ | 5.8 |
|
| Offshore Wind | 0.1 |
| 0.1 |
| | 0.4 |
| 0.2 |
|
| Hydro | 0.2 |
| 0.3 |
| | 0.6 |
| 0.6 |
|
| Total segment revenues | $ | 2.9 |
| $ | 2.5 |
| | $ | 6.2 |
| $ | 6.6 |
|
|
| | | | | | | | | | | | | |
| ORDERS | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Equipment | $ | 1.7 |
| $ | 2.2 |
| | $ | 4.9 |
| $ | 5.7 |
|
| Services | 1.2 |
| 0.7 |
| | 2.1 |
| 1.4 |
|
| Total | $ | 2.9 |
| $ | 3.0 |
| | $ | 7.0 |
| $ | 7.1 |
|
|
| | | | | | |
| BACKLOG | |
| (In billions) | September 30, 2018 |
| September 30, 2017 |
|
| | | |
| Equipment | $ | 8.1 |
| $ | 7.2 |
|
| Services | 8.3 |
| 6.7 |
|
| Total | $ | 16.3 |
| $ | 14.0 |
|
|
| | | | | | | | | | | | |
| UNIT SALES | | | | | | |
| 3Q 2018 |
| 3Q 2017 |
| V |
| YTD 2018 |
| YTD 2017 |
| V |
|
| Wind Turbines | 952 |
| 637 |
| 315 |
| 1,655 |
| 1,895 |
| (240 | ) |
|
| | | | | | |
| UNIT SALES | | | | | | |
| 3Q 2016 | 3Q 2017 | V | YTD 2016 | YTD 2017 | V |
| Wind Turbines | 976 | 749 | (227) | 2,500 | 2,073 | (427) |
20172018 3Q FORM 10-Q 1917
|
| | |
| MD&A | SEGMENT OPERATIONS | RENEWABLE ENERGY |
FINANCIAL OVERVIEW
(Dollars in billions)
|
| | | | |
SEGMENT REVENUES | | SEGMENT PROFIT | | SEGMENT PROFIT MARGIN |
|
| | | | | | | | | | | | | |
| SEGMENT REVENUES | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Revenues | | | | | |
| Equipment | $ | 2.4 |
| $ | 2.0 |
| | $ | 4.8 |
| $ | 5.4 |
|
| Services | 0.4 |
| 0.6 |
| | 1.4 |
| 1.2 |
|
| Total | $ | 2.9 |
| $ | 2.5 |
| | $ | 6.2 |
| $ | 6.6 |
|
| | | | | | |
| SEGMENT PROFIT AND PROFIT MARGIN | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Segment profit | $ | 0.1 |
| $ | 0.2 |
| | $ | 0.2 |
| $ | 0.4 |
|
| Segment profit margin | 2.1 | % | 8.7 | % | | 3.6 | % | 6.8 | % |
|
| | | | | | |
| SEGMENT REVENUES & PROFIT WALK: |
| THREE MONTHS | |
| | Revenues |
| Profit |
|
| September 30, 2016 | $ | 2.8 |
| $ | 0.2 |
|
| Volume | 0.1 |
| — |
|
| Price | — |
| — |
|
| Foreign Exchange | — |
| — |
|
| (Inflation)/Deflation | N/A |
| — |
|
| Mix | N/A |
| — |
|
| Productivity | N/A |
| 0.1 |
|
| Other | — |
| — |
|
| September 30, 2017 | $ | 2.9 |
| $ | 0.3 |
|
| |
| NINE MONTHS | |
| | Revenues |
| Profit |
|
| September 30, 2016 | $ | 6.5 |
| $ | 0.4 |
|
| Volume | 0.6 |
| — |
|
| Price | (0.1 | ) | (0.1 | ) |
| Foreign Exchange | 0.1 |
| — |
|
| (Inflation)/Deflation | N/A |
| 0.1 |
|
| Mix | N/A |
| — |
|
| Productivity | N/A |
| (0.1 | ) |
| Other | 0.2 |
| 0.2 |
|
| September 30, 2017 | $ | 7.4 |
| $ | 0.5 |
|
The renewable energy market remains competitive, particularly in onshore wind. The onshore wind market continues to experience megawatt growth as customer preference has shifted from 1.X models to larger, more efficient units. However, overcapacity in the industry, the move to auctions in international markets and U.S. tax reform contributed to continued pricing pressure in the first nine months of 2018. In addition, uncertainty at the end of 2017 related to the impact of U.S. tax reform resulted in a temporary delay in project work during the year. From the third quarter of 2018 onward, we expect project build and shipments to increase in anticipation of the expiration of Production Tax Credits (PTCs) in the U.S. at 100% value in 2020.
THREE MONTHS ENDED SEPTEMBER 30:
Segment revenues up $0.1$0.4 billion (5%(15%);
Segment profit up $0.1down $0.2 billion (27%(72%):
The increase in revenues was primarily driven by higher servicesEquipment volume increased due to increased repowering projects at Onshore Wind, partially offset by lower equipment sales driven by 227 fewer315 more wind turbine shipments and 16% feweron a unit basis, or 70% more megawatts shipped, than in the prior year. Services volume decreased due to 177 fewer repower units at Onshore Wind driven by project delays as a result of uncertainty related to the impact of U.S. tax reform. Revenues also decreased due to pricing pressure and the effects of a stronger U.S. dollar versus certain currencies.
The increasedecrease in profit was primarily due to positivepricing pressure in Onshore Wind and negative variable cost productivity.productivity, partially offset by cost-out actions, materials deflation and increased equipment volume.
NINE MONTHS ENDED SEPTEMBER 30:
Segment revenues up $0.9down $0.4 billion (13%(6%);
Segment profit up $0.1down $0.2 billion (27%(51%):
The increase in revenues was primarily driven by higherEquipment volume decreased due to increased repowering projects at Onshore Wind and higher equipment sales at Hydro, partially offset by 427240 fewer wind turbine shipments and 4%on a unit basis, despite 1% more megawatts shipped, than in the prior year. Services volume increased due to larger installed base resulting in increased contractual revenues, partially offset by 18 fewer megawatts shippedrepower units at Onshore Wind than in the prior year. Revenues also increased due to increased other income including a reductionthe acquisition of LM Wind in foreign exchange transactional losses,April 2017, which contributed $0.1 billion of inorganic revenue growth in the first half of 2018, and the effects of a weaker U.S. dollar versus certain currencies, partially offset by pricing pressure.
The decrease in profit was due to pricing pressure, partially offset by materials deflation.
|
| | |
| MD&A | SEGMENT OPERATIONS | AVIATION |
AVIATION
OPERATIONAL OVERVIEW
|
| | | | | | | | | | | | | |
| SUB-SEGMENT REVENUES | Three months ended September 30 | | Nine months ended September 30 |
| (Dollars in billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Commercial Engines & Services | $ | 5.6 |
| $ | 4.8 |
| | $ | 16.4 |
| $ | 14.7 |
|
| Military | 0.9 |
| 1.0 |
| | 2.9 |
| 2.9 |
|
| Systems & Other | 0.9 |
| 0.8 |
| | 2.7 |
| 2.4 |
|
| Total segment revenues | $ | 7.5 |
| $ | 6.7 |
| | $ | 22.1 |
| $ | 20.0 |
|
|
| | | | | | | | | | | | | |
| ORDERS | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Equipment | $ | 4.1 |
| $ | 2.2 |
| | $ | 11.8 |
| $ | 7.7 |
|
| Services | 5.1 |
| 4.5 |
| | 15.0 |
| 13.6 |
|
| Total | $ | 9.1 |
| $ | 6.7 |
| | $ | 26.8 |
| $ | 21.3 |
|
|
| | | | | | |
| BACKLOG | |
| (In billions) | September 30, 2018 |
| September 30, 2017 |
|
| | | |
| Equipment | $ | 37.8 |
| $ | 34.7 |
|
| Services | 173.1 |
| 153.1 |
|
| Total | $ | 210.9 |
| $ | 187.8 |
|
|
| | | | | | | | | | | | | | | | | | |
| UNIT SALES | | | | | | |
| | 3Q 2018 |
| 3Q 2017 |
| V |
| YTD 2018 |
| YTD 2017 |
| V |
|
| Commercial Engines | 714 |
| 641 |
| 73 |
| 2,062 |
| 1,895 |
| 167 |
|
| LEAP Engines(a) | 303 |
| 111 |
| 192 |
| 739 |
| 257 |
| 482 |
|
| Military Engines | 160 |
| 145 |
| 15 |
| 502 |
| 402 |
| 100 |
|
| Spares Rate(b) | $ | 28.0 |
| $ | 23.2 |
| $ | 4.8 |
| $ | 26.6 |
| $ | 22.2 |
| $ | 4.4 |
|
(a) LEAP engines are a subset of commercial engines (b) Commercial externally shipped spares and spares used in time & material shop visits in millions of dollars per day |
|
| | |
| MD&A | SEGMENT OPERATIONS | AVIATION |
FINANCIAL OVERVIEW
|
| | | | | | | | | | | | | |
| SEGMENT REVENUES | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Revenues | | | | | |
| Equipment | $ | 2.8 |
| $ | 2.4 |
| | $ | 8.3 |
| $ | 7.4 |
|
| Services | 4.6 |
| 4.3 |
| | 13.8 |
| 12.6 |
|
| Total | $ | 7.5 |
| $ | 6.7 |
| | $ | 22.1 |
| $ | 20.0 |
|
| | | | | | |
| SEGMENT PROFIT AND PROFIT MARGIN | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Segment profit | $ | 1.7 |
| $ | 1.3 |
| | $ | 4.7 |
| $ | 4.0 |
|
| Segment profit margin | 22.3 | % | 19.9 | % | | 21.5 | % | 19.9 | % |
2018 – 2017 COMMENTARY
Global passenger air travel continued to grow with revenue passenger kilometers (RPK) growth outpacing the Brazilian real,five-year average and demand exceeding capacity. Industry-load factors remained above 80%(a). Air freight volume also increased, particularly in international markets. Freight capacity additions slightly exceeded freight volume growth during the year.
We shipped 739 LEAP engines in the first nine months of the year and remain on track to ship 1,100-1,200 engines in 2018.
THREE MONTHS ENDED SEPTEMBER 30:
Segment revenues up $0.8 billion (12%);
Segment profit up $0.3 billion (25%):
Equipment revenues increased primarily due to 73 more commercial units, including 192 more LEAP units partially offset by lower prices.
commercial legacy output including the CFM product line, versus the prior year. Services revenues increased primarily due to a higher commercial spares shipment rate, as well as increased price.The increase in profit was mainly due to material deflationproduct and structural cost productivity, increased other income including a reduction in foreign exchange transactional losses.price, and higher spare engine shipments. These increases were partially offset by an unfavorable business mix driven by negative cost productivityLEAP margin and lower prices.
NINE MONTHS ENDED SEPTEMBER 30:
Segment revenues up $2.1 billion (11%);
Segment profit up $0.8 billion (19%):
Equipment revenues increased primarily due to 100 more military engine shipments and 167 more commercial units, including 482 more LEAP units, versus the prior year, partially offset by lower legacy commercial output in the CFM and GE90 product lines. Services revenues increased primarily due to a higher commercial spares shipment rate, as well as increased price.
The increase in profit was mainly due to increased volume, increased price, higher spare engine shipments and product and structural cost productivity. These increases were partially offset by an unfavorable business mix driven by negative LEAP margin as well as higher overhaul shop costs due to increased volume and mix.
(a) Based on the latest available information from the International Air Transport Association
|
| | |
| MD&A | SEGMENT OPERATIONS | OIL & GAS |
OIL & GAS
OPERATIONAL OVERVIEW
(Dollars in billions)
|
|
2017 YTD SUB-SEGMENT REVENUES
|
|
|
(a) Previously referred to as Surface
(b) Previously referred to as Subsea Systems & Drilling
|
|
|
EQUIPMENT/SERVICES REVENUES
|
|
| | | | | | | | | | | | | |
| SUB-SEGMENT REVENUES | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Turbomachinery & Process Solutions (TPS) | $ | 1.4 |
| $ | 1.4 |
| | $ | 4.2 |
| $ | 4.7 |
|
| Oilfield Services (OFS) | 3.0 |
| 2.7 |
| | 8.6 |
| 3.1 |
|
| Oilfield Equipment (OFE) | 0.6 |
| 0.6 |
| | 1.9 |
| 2.0 |
|
| Digital Solutions | 0.7 |
| 0.6 |
| | 1.9 |
| 1.6 |
|
| Total segment revenues | $ | 5.7 |
| $ | 5.3 |
| | $ | 16.6 |
| $ | 11.4 |
|
|
| | | | | | | | | | | | | |
| ORDERS | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Equipment | $ | 2.2 |
| $ | 2.4 |
| | $ | 6.7 |
| $ | 4.6 |
|
| Services | 3.5 |
| 3.3 |
| | 10.3 |
| 6.8 |
|
| Total | $ | 5.8 |
| $ | 5.8 |
| | $ | 17.0 |
| $ | 11.4 |
|
|
| | | | | | |
| BACKLOG | |
| (In billions) | September 30, 2018 |
| September 30, 2017 |
|
| | | |
| Backlog | | |
| Equipment | $ | 5.3 |
| $ | 5.8 |
|
| Services | 16.0 |
| 16.0 |
|
| Total | $ | 21.3 |
| $ | 21.8 |
|
|
|
■ ■Services ■■ Equipment
|
(a) Included $2.5 billion related to Baker Hughes
(b) Included $2.5 billion related to Baker Hughes
|
|
| | |
| MD&A | SEGMENT OPERATIONS | OIL & GAS |
FINANCIAL OVERVIEW
(Dollars in billions)
|
| | | | |
SEGMENT REVENUES | | SEGMENT PROFIT | | SEGMENT PROFIT MARGIN |
|
| | | | | | | | | | | | | |
| SEGMENT REVENUES | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Revenues | | | | | |
| Equipment | $ | 2.2 |
| $ | 2.2 |
| | $ | 6.6 |
| $ | 4.7 |
|
| Services | 3.4 |
| 3.1 |
| | 10.0 |
| 6.7 |
|
| Total | $ | 5.7 |
| $ | 5.3 |
| | $ | 16.6 |
| $ | 11.4 |
|
| | | | | | |
| SEGMENT PROFIT AND PROFIT MARGIN | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Segment profit | $ | 0.2 |
| $ | (0.1 | ) | | $ | 0.1 |
| $ | 0.3 |
|
| Segment profit margin | 3.2 | % | (1.1 | )% | | 0.7 | % | 2.8 | % |
2018 – 2017 COMMENTARY
Stability in the oil and gas market since the second half of 2017 has led to continued improvements in activity. North American onshore rig count has continued to grow, and international rig count has also seen moderate increases. Offshore projects remain subject to increases in customer spending behavior, and final investment decisions on liquefied natural gas (LNG) projects are also expected to start in late 2018 as the market continues to be oversupplied.
THREE MONTHS ENDED SEPTEMBER 30:
Segment revenues up $0.4 billion (7%);
Segment profit up $0.2 billion:
|
|
■ Services and equipment revenues increased primarily at OFS as a result of higher activity in North America and international markets. These increases were partially offset by the effects of a stronger U.S. dollar versus certain currencies.■Services ■■ Equipment
|
|
| | | | |
(a) $2.8 billion, excluding $2.5 billion related to Baker Hughes*
(b) $8.9 billion, excluding $2.5 billion related to Baker Hughes*
| | (a) $0.1 billion, excluding $(0.1) billion related to Baker Hughes*
(b) $0.5 billion, excluding $(0.1) billion related to Baker Hughes*
| | (a) 3.9%, excluding (5.7)% related to Baker Hughes*
(b) 5.3%, excluding (5.7)% related to Baker Hughes*
|
The increase in profit was primarily driven by lower restructuring and other charges as well as synergies delivered from combining our Oil & Gas business with Baker Hughes Incorporated, partially offset by losses in equity of affiliates and the allocation to noncontrolling interests.
NINE MONTHS ENDED SEPTEMBER 30:
Segment revenues up $5.2 billion (46%);
Segment profit down $0.2 billion (66%):
The Baker Hughes acquisition in July 2017 contributed $5.4 billion of revenue growth in the first half of 2018 compared to the first half of 2017. Legacy Oil & Gas equipment revenues decreased due to lower volume primarily at TPS and OFE as a result of lower opening backlog, while services revenues increased due to higher OFS activity in North America and international markets. These decreases were partially offset by the effects of a weaker U.S. dollar versus certain currencies in the first half of 2018.
|
| | | | | | |
| SEGMENT REVENUES & PROFIT WALK: |
| THREE MONTHS | |
| | Revenues |
| Profit |
|
| September 30, 2016 | $ | 3.0 |
| $ | 0.4 |
|
| Volume | (0.2 | ) | — |
|
| Price | — |
| — |
|
| Foreign Exchange | 0.1 |
| — |
|
| (Inflation)/Deflation | N/A |
| — |
|
| Mix | N/A |
| — |
|
| Productivity | N/A |
| (0.3 | ) |
| Other | 0.1 |
| — |
|
| Baker Hughes | 2.5 |
| (0.1 | ) |
| September 30, 2017 | $ | 5.4 |
| $ | — |
|
| |
| NINE MONTHS | |
| | Revenues |
| Profit |
|
| September 30, 2016 | $ | 9.5 |
| $ | 1.0 |
|
| Volume | (0.5 | ) | (0.1 | ) |
| Price | (0.2 | ) | (0.2 | ) |
| Foreign Exchange | — |
| — |
|
| (Inflation)/Deflation | N/A |
| 0.1 |
|
| Mix | N/A |
| — |
|
| Productivity | N/A |
| (0.5 | ) |
| Other | 0.2 |
| 0.1 |
|
| Baker Hughes | 2.5 |
| (0.1 | ) |
| September 30, 2017 | $ | 11.5 |
| $ | 0.3 |
|
*Non-GAAP Financial Measure
Segment revenues up $2.4 billion (81%);
Segment profit down $0.4 billion (110%):
The increase in revenues was primarily driven by the effects of Baker Hughes, a weaker U.S. dollar versus the euro and increased other income including a reduction in foreign exchange transactional losses, partially offset by negative market conditions which resulted in lower organic equipment volume primarily in Oilfield Equipment.
The decrease in operating profit was driven by negative variable cost productivity as well as restructuring and other charges, partially offset by increased volume from Baker Hughes.
Segment revenues up $2.0 billion (21%);
Segment profit down $0.7 billion (67%):
The increase in revenues was primarily driven by the effects of Baker Hughes and increased other income including a reduction in foreign exchange transactional losses, partially offset by negative market conditions which resulted in lower prices and lower organic equipment volume primarily in Oilfield Equipment and Turbomachinery & Process Solutions.
The decrease in operating profit was primarily driven by negative variable cost productivity, restructuring and other charges, lower prices, and lower organic volume, partially offset by increased volume from Baker Hughes, deflation and increased other income including a reduction in foreign exchange transactional losses.
|
| | |
MD&A | SEGMENT OPERATIONS | AVIATION |
AVIATION
OPERATIONAL OVERVIEW
(Dollars in billions)
|
|
2017 YTD SUB-SEGMENT REVENUES
|
|
|
EQUIPMENT/SERVICES REVENUES
|
|
| | | | | | | | | | | | | | | | | | |
| UNIT SALES | | | | | | |
| | 3Q 2016 | 3Q 2017 | V | YTD 2016 | YTD 2017 | V |
| Commercial Engines | 654 |
| 641 |
| (13 | ) | 2,055 |
| 1,895 |
| (160 | ) |
| LEAP Engines(a) | 22 |
| 111 |
| 89 |
| 33 |
| 257 |
| 224 |
|
| Military Engines | 100 |
| 145 |
| 45 |
| 402 |
| 402 |
| — |
|
| Spares Rate(b) | $ | 19.1 |
| $ | 23.2 |
| $ | 4.1 |
| $ | 18.5 |
| $ | 22.2 |
| $ | 3.7 |
|
(a) LEAP engines are a subset of commercial engines (b) Commercial externally shipped spares and spares used in time & material shop visits in millions of dollars per day |
|
| | |
MD&A | SEGMENT OPERATIONS | AVIATION |
FINANCIAL OVERVIEW
(Dollars in billions)
|
| | | | |
SEGMENT REVENUES | | SEGMENT PROFIT | | SEGMENT PROFIT MARGIN |
|
| | | | | | |
| SEGMENT REVENUES & PROFIT WALK: |
| THREE MONTHS | |
| | Revenues |
| Profit |
|
| September 30, 2016 | $ | 6.3 |
| $ | 1.5 |
|
| Volume | 0.5 |
| 0.1 |
|
| Price | — |
| — |
|
| Foreign Exchange | — |
| — |
|
| (Inflation)/Deflation | N/A |
| 0.1 |
|
| Mix | N/A |
| — |
|
| Productivity | N/A |
| — |
|
| Other | — |
| — |
|
| September 30, 2017 | $ | 6.8 |
| $ | 1.7 |
|
| |
| NINE MONTHS | |
| | Revenues |
| Profit |
|
| September 30, 2016 | $ | 19.1 |
| $ | 4.4 |
|
| Volume | 1.0 |
| 0.2 |
|
| Price | 0.1 |
| 0.1 |
|
| Foreign Exchange | — |
| — |
|
| (Inflation)/Deflation | N/A |
| — |
|
| Mix | N/A |
| (0.1 | ) |
| Productivity | N/A |
| 0.2 |
|
| Other | — |
| — |
|
| September 30, 2017 | $ | 20.2 |
| $ | 4.9 |
|
Segment revenues up $0.5 billion (8%);Segment profit up $0.2 billion (12%):
The increase in revenues was primarily due to an increase in services volume including a higher commercial spares shipment rate, partially offset by a decrease in equipment volume. Equipment volume decreased primarily due to fewer GE90 and CF6 Commercial engine shipments, partially offset by 89 more LEAP engine shipments than in the prior year.
The increase in profit was mainly driven by higher volume and material deflation.
Segment revenues up $1.1 billion (6%);
Segment profit up $0.5 billion (11%):
The increase in revenues was primarily due to higher services volume including a higher commercial spares shipment rate and military spare parts demand, and higher prices. Equipment revenues decreased primarily due to 160 fewer Commercial engine shipments, partially offset by 224 more LEAP engine shipments than in the prior year.
The increase in profit was mainly driven by positive cost productivity, higher overall volume and higher prices at Services, partially offset by unfavorable business mix due to negative LEAP margin impact.
|
| | |
| MD&A | SEGMENT OPERATIONS | HEALTHCARE |
HEALTHCARE
OPERATIONAL OVERVIEW
(Dollars in billions)
|
|
2017 YTD SUB-SEGMENT REVENUES
|
|
|
EQUIPMENT/SERVICES REVENUES
|
|
| | | | | | | | | | | | | |
| SUB-SEGMENT REVENUES | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Healthcare Systems | $ | 3.4 |
| $ | 3.4 |
| | $ | 10.2 |
| $ | 9.7 |
|
| Life Sciences | 1.1 |
| 1.1 |
| | 3.5 |
| 3.3 |
|
| Healthcare Digital | 0.1 |
| 0.2 |
| | 0.6 |
| 0.8 |
|
| Total segment revenues | $ | 4.7 |
| $ | 4.7 |
| | $ | 14.4 |
| $ | 13.7 |
|
|
| | | | | | | | | | | | | |
| ORDERS | Three months ended September 30 | | Nine months ended September 30 |
(In billions)
| 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Equipment | $ | 3.1 |
| $ | 3.0 |
| | $ | 8.9 |
| $ | 8.5 |
|
| Services | 2.0 |
| 2.0 |
| | 6.2 |
| 6.0 |
|
| Total | $ | 5.1 |
| $ | 5.1 |
| | $ | 15.1 |
| $ | 14.6 |
|
|
| | | | | | |
| BACKLOG | |
| (In billions) | September 30, 2018 |
| September 30, 2017 |
|
| | | |
| Equipment | $ | 6.2 |
| $ | 6.1 |
|
| Services | 11.1 |
| 12.0 |
|
| Total | $ | 17.3 |
| $ | 18.1 |
|
20172018 3Q FORM 10-Q 2523
|
| | |
| MD&A | SEGMENT OPERATIONS | HEALTHCARE |
FINANCIAL OVERVIEW
(Dollars in billions)
|
| | | | |
SEGMENT REVENUES | | SEGMENT PROFIT | | SEGMENT PROFIT MARGIN |
|
| | | | | | |
| SEGMENT REVENUES & PROFIT WALK: |
| THREE MONTHS | |
| | Revenues |
| Profit |
|
| September 30, 2016 | $ | 4.5 |
| $ | 0.7 |
|
| Volume | 0.3 |
| — |
|
| Price | (0.1 | ) | (0.1 | ) |
| Foreign Exchange | — |
| — |
|
| (Inflation)/Deflation | N/A |
| — |
|
| Mix | N/A |
| — |
|
| Productivity | N/A |
| 0.1 |
|
| Other | — |
| — |
|
| September 30, 2017 | $ | 4.7 |
| $ | 0.8 |
|
| |
| NINE MONTHS | |
| | Revenues |
| Profit |
|
| September 30, 2016 | $ | 13.2 |
| $ | 2.1 |
|
| Volume | 0.8 |
| 0.1 |
|
| Price | (0.2 | ) | (0.2 | ) |
| Foreign Exchange | (0.1 | ) | — |
|
| (Inflation)/Deflation | N/A |
| (0.1 | ) |
| Mix | N/A |
| — |
|
| Productivity | N/A |
| 0.3 |
|
| Other | — |
| — |
|
| September 30, 2017 | $ | 13.7 |
| $ | 2.3 |
|
|
| | | | | | | | | | | | | |
| SEGMENT REVENUES | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Revenues | | | | | |
| Equipment | $ | 2.7 |
| $ | 2.6 |
| | $ | 8.1 |
| $ | 7.6 |
|
| Services | 2.0 |
| 2.1 |
| | 6.3 |
| 6.1 |
|
| Total | $ | 4.7 |
| $ | 4.7 |
| | $ | 14.4 |
| $ | 13.7 |
|
| | | | | | |
| SEGMENT PROFIT AND PROFIT MARGIN | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Segment profit | $ | 0.9 |
| $ | 0.8 |
| | $ | 2.5 |
| $ | 2.3 |
|
| Segment profit margin | 18.3 | % | 18.0 | % | | 17.5 | % | 17.0 | % |
2018 – 2017 COMMENTARY
The Healthcare Systems global market continues to expand at low single digit rates, driven by strength in emerging markets, as these economies continue to expand their population’s access to healthcare, and slower growth in developed markets. The Life Sciences market continues to be strong, with the Bioprocess market growing at a high single digit rate, driven by growth in biologic drugs, and the contrast agents market growing at low single digit rates.
THREE MONTHS ENDED SEPTEMBER 30:
Segment revenues up $0.2 billion (5%);flat;
Segment profit up $0.1 billion (14%)2%:
The increase inEquipment revenues wasincreased due to higher equipmentvolume in Healthcare Systems attributable to global growth in Imaging and services volumeUltrasound in both developed regions such as the U.S. and Europe as well as developing regions such as China and emerging markets. Volume also increased in Life Sciences, driven by Healthcare SystemsBioprocess and Life Sciences, partiallyContrast Imaging. These increases were offset by lower pricesa decrease in services revenues due to the disposition of the Value-Based Care Division at the beginning of the third quarter of 2018 as well as price pressure at Healthcare Systems.
The increase in profit was mainly due to positive cost productivityprimarily driven by cost savings resulting from previousproductivity due to cost reduction actions including increasing digital automation, sourcing and logistic initiatives, design engineering and prior year restructuring actions as well asand higher volume. These increases were partially offset by price pressure at Healthcare Systems, investments in programs including Digital and Healthcare Systems new product introductions, the nonrecurrence of a small gain on the disposition of a nonstrategicnon-strategic operation in Life Sciences partially offset by lower prices at Healthcare Systems.and the disposition of the Value-Based Care Division.
NINE MONTHS ENDED SEPTEMBER 30:
Segment revenues up $0.5$0.7 billion (4%(5%);
Segment profit up $0.2 billion (7%(8%):
The increase inServices and equipment revenues wasincreased due to higher equipmentvolume in Healthcare Systems attributable to global growth in Imaging and services volumeUltrasound in both developed regions such as the U.S. and Europe as well as developing regions such as China and emerging markets. Volume also increased in Life Sciences, driven by Healthcare SystemsBioprocess and Life Sciences,Contrast Imaging. In addition, revenues increased due to the effects of a weaker U.S. dollar versus certain currencies, partially offset by lower pricesprice pressure at Healthcare Systems and the effectsdisposition of a stronger U.S. dollar versus the pound sterling andValue-Based Care Division during the Chinese renminbi.quarter.
The increase in profit was mainlyprimarily driven by volume growth and cost productivity due to positive cost productivity driven by cost savings resulting from previousreduction actions including increasing digital automation, sourcing and logistic initiatives, design engineering and prior year restructuring actions, as well as higher volume,actions. These increases were partially offset by lower pricesprice pressure at Healthcare Systems, inflation, investments in programs including Digital and inflation.
Healthcare Systems new product introductions, the nonrecurrence of a small gain on the disposition of a non-strategic operation in Life Sciences and the disposition of the Value-Based Care Division.
2624 20172018 3Q FORM 10-Q
|
| | |
| MD&A | SEGMENT OPERATIONS | TRANSPORTATION |
TRANSPORTATION
OPERATIONAL OVERVIEW
(Dollars in billions)
|
|
2017 YTD SUB-SEGMENT REVENUES
|
|
|
EQUIPMENT/SERVICES REVENUES
|
|
| | | | | | | | | | | | | |
| SUB-SEGMENT REVENUES | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Locomotives | $ | 0.1 |
| $ | 0.3 |
| | $ | 0.5 |
| $ | 1.1 |
|
| Services | 0.6 |
| 0.5 |
| | 1.6 |
| 1.4 |
|
| Mining | 0.1 |
| 0.1 |
| | 0.4 |
| 0.2 |
|
| Other(a) | 0.1 |
| 0.1 |
| | 0.3 |
| 0.2 |
|
| Total segment revenues | $ | 0.9 |
| $ | 0.9 |
| | $ | 2.7 |
| $ | 3.0 |
|
|
|
| (a) Includes Marine, Stationary, Drilling and Digital |
|
| | | | | | | | | | | | | |
| ORDERS | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Equipment | $ | 1.4 |
| $ | 0.2 |
| | $ | 2.6 |
| $ | 1.0 |
|
| Services | 0.6 |
| 0.7 |
| | 2.0 |
| 1.7 |
|
| Total | $ | 2.0 |
| $ | 0.9 |
| | $ | 4.6 |
| $ | 2.7 |
|
|
| | | | | | |
| BACKLOG | |
| (In billions) | September 30, 2018 |
| September 30, 2017 |
|
| | | |
| Equipment | $ | 6.4 |
| $ | 4.0 |
|
| Services | 12.5 |
| 10.6 |
|
| Total | $ | 18.8 |
| $ | 14.6 |
|
| | | UNIT SALES | | | |
| | 3Q 2016 | 3Q 2017 | V | YTD 2016 | YTD 2017 | V | 3Q 2018 |
| 3Q 2017 |
| V |
| YTD 2018 |
| YTD 2017 |
| V |
|
| Locomotives | 200 | 77 | (123) | 578 | 354 | (224) | 40 |
| 77 |
| (37 | ) | 154 |
| 354 |
| (200 | ) |
20172018 3Q FORM 10-Q 2725
|
| | |
| MD&A | SEGMENT OPERATIONS | TRANSPORTATION |
FINANCIAL OVERVIEW
(Dollars in billions)
|
| | | | |
SEGMENT REVENUES | | SEGMENT PROFIT | | SEGMENT PROFIT MARGIN |
|
| | | | | | |
| SEGMENT REVENUES & PROFIT WALK: |
| THREE MONTHS | |
| | Revenues |
| Profit |
|
| September 30, 2016 | $ | 1.2 |
| $ | 0.3 |
|
| Volume | (0.2 | ) | — |
|
| Price | — |
| — |
|
| Foreign Exchange | — |
| — |
|
| (Inflation)/Deflation | N/A |
| — |
|
| Mix | N/A |
| 0.1 |
|
| Productivity | N/A |
| (0.1 | ) |
| Other | — |
| — |
|
| September 30, 2017 | $ | 1.1 |
| $ | 0.3 |
|
| |
| NINE MONTHS | |
| | Revenues |
| Profit |
|
| September 30, 2016 | $ | 3.5 |
| $ | 0.7 |
|
| Volume | (0.3 | ) | (0.1 | ) |
| Price | — |
| — |
|
| Foreign Exchange | — |
| — |
|
| (Inflation)/Deflation | N/A |
| — |
|
| Mix | N/A |
| 0.1 |
|
| Productivity | N/A |
| (0.1 | ) |
| Other | — |
| — |
|
| September 30, 2017 | $ | 3.2 |
| $ | 0.6 |
|
|
| | | | | | | | | | | | | |
| SEGMENT REVENUES | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Revenues | | | | | |
| Equipment | $ | 0.2 |
| $ | 0.4 |
| | $ | 0.8 |
| $ | 1.4 |
|
| Services | 0.7 |
| 0.6 |
| | 1.9 |
| 1.6 |
|
| Total | $ | 0.9 |
| $ | 0.9 |
| | $ | 2.7 |
| $ | 3.0 |
|
| | | | | | |
| SEGMENT PROFIT AND PROFIT MARGIN | Three months ended September 30 | | Six months ended June 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Segment profit | $ | 0.2 |
| $ | 0.1 |
| | $ | 0.4 |
| $ | 0.4 |
|
| Segment profit margin | 17.4 | % | 14.9 | % | | 16.3 | % | 14.0 | % |
2018 – 2017 COMMENTARY
While the North American market has experienced some fleet overcapacity and constrained spending by the railroads limiting fleet expansion, there continue to be signs of improvement. North American carload volume increased 5.0% during the third quarter of 2018, driven primarily by an increase in intermodal traffic(a). With improving carload volume, the number of parked locomotives has also improved, decreasing 27% from the prior year.
THREE MONTHS ENDED SEPTEMBER 30:
Segment revenues down $0.2 billion (14%)2%;
Segment profit down 11%up 15%:
TheEquipment volume decreased primarily driven by lower international locomotive shipments. This decrease in revenues was due to lower locomotive equipment volume as a result of decreased North America shipments, partially offset by increased international shipmentsgrowth in mining and increasedan increase in services revenues as railroads are running their locomotives longer, and recently unparked locomotives tend to be older units in higher need of servicing and replacement parts, driving an increase in services volume including locomotive parts.and parts shipped.
The decreaseincrease in profit was driven by negative cost productivity,favorable business mix from a higher proportion of services volume, partially offset by a favorable business mix.lower locomotive volume.
NINE MONTHS ENDED SEPTEMBER 30:
Segment revenues down $0.3 billion (8%(9%);
Segment profit down $0.1 billion (15%)up 7%:
The decrease in revenues was due toEquipment volume decreased primarily driven by lower locomotive equipment volume as a result of decreased North America shipments,shipments. This decrease was partially offset by increased international shipmentsgrowth in mining and increasedan increase in services revenues as railroads are running their locomotives longer, and recently unparked locomotives tend to be older units in higher need of servicing and replacement parts, driving an increase in services volume including locomotive parts.and parts shipped.
The decreaseincrease in profit was driven by negative cost productivityfavorable business mix from a higher proportion of services and mining volume as well as lower volume,spend driven by prior year restructuring, partially offset by a favorable business mix.
(a) Defined as when at least two modes of transportation are used to move freight.
2826 20172018 3Q FORM 10-Q
|
| | |
| MD&A | SEGMENT OPERATIONS | LIGHTING |
LIGHTING
OPERATIONAL OVERVIEW
(Dollars in billions)
|
|
2017 YTD SUB-SEGMENT REVENUES
|
|
|
EQUIPMENT/SERVICES REVENUES
|
|
| | | | | | | | | | | | | |
| SUB-SEGMENT REVENUES | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Current | $ | 0.2 |
| $ | 0.3 |
| | $ | 0.7 |
| $ | 0.7 |
|
| GE Lighting | 0.2 |
| 0.2 |
| | 0.6 |
| 0.7 |
|
| Total segment revenues | $ | 0.4 |
| $ | 0.5 |
| | $ | 1.3 |
| $ | 1.4 |
|
|
| | | | | | | | | | | | | |
| ORDERS | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Equipment | $ | 0.2 |
| $ | 0.2 |
| | $ | 0.7 |
| $ | 0.8 |
|
| Services | — |
| — |
| | — |
| 0.1 |
|
| Total | $ | 0.2 |
| $ | 0.2 |
| | $ | 0.7 |
| $ | 0.9 |
|
|
| | | | | | |
| BACKLOG | |
| (In billions) | September 30, 2018 |
| September 30, 2017 |
|
| | | |
| Equipment | $ | 0.2 |
| $ | 0.2 |
|
| Services | — |
| — |
|
| Total | $ | 0.2 |
| $ | 0.2 |
|
|
|
■ ■Services ■■ Equipment
|
(a) Lighting began reporting orders in 3Q'16. As a result, 3Q'16 QTD and YTD orders amounts are the same. |
20172018 3Q FORM 10-Q 2927
|
| | |
| MD&A | SEGMENT OPERATIONS | LIGHTING |
FINANCIAL OVERVIEW
(Dollars in billions)
|
| | | | |
SEGMENT REVENUES | | SEGMENT PROFIT | | SEGMENT PROFIT MARGIN |
|
| | | | | | | | | | | | | |
| SEGMENT REVENUES | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Revenues | | | | | |
| Equipment | $ | 0.4 |
| $ | 0.5 |
| | $ | 1.2 |
| $ | 1.4 |
|
| Services | — |
| — |
| | — |
| — |
|
| Total | $ | 0.4 |
| $ | 0.5 |
| | $ | 1.3 |
| $ | 1.4 |
|
| | | | | | |
| SEGMENT PROFIT AND PROFIT MARGIN | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Segment profit | $ | — |
| $ | — |
| | $ | 0.1 |
| $ | — |
|
| Segment profit margin | 6.8 | % | 3.0 | % | | 4.1 | % | 2.9 | % |
|
| | | | | | |
| SEGMENT REVENUES & PROFIT WALK: |
| THREE MONTHS | |
| | Revenues |
| Profit |
|
| September 30, 2016 | $ | 0.6 |
| $ | — |
|
| Volume | (0.1 | ) | — |
|
| Price | — |
| — |
|
| Foreign Exchange | — |
| — |
|
| (Inflation)/Deflation | N/A |
| — |
|
| Mix | N/A |
| — |
|
| Productivity | N/A |
| — |
|
| Other | — |
| — |
|
| September 30, 2017 | $ | 0.5 |
| $ | — |
|
| |
| NINE MONTHS | |
| | Revenues |
| Profit |
|
| September 30, 2016 | $ | 4.2 |
| $ | 0.2 |
|
| Volume | (2.7 | ) | (0.2 | ) |
| Price | (0.1 | ) | (0.1 | ) |
| Foreign Exchange | — |
| — |
|
| (Inflation)/Deflation | N/A |
| — |
|
| Mix | N/A |
| — |
|
| Productivity | N/A |
| 0.1 |
|
| Other | — |
| — |
|
| September 30, 2017 | $ | 1.4 |
| $ | — |
|
The traditional lighting market continued to decline in the nine months of 2018 with corresponding growth in LED lighting as the market shifts away from traditional lighting products in favor of more energy efficient, cost-saving options.
THREE MONTHS ENDED SEPTEMBER 30:
Segment revenues down $0.1 billion (16%(18%);
Segment profit up 253%86%:
The decreaseRevenues decreased due to the disposition of our GE Lighting business in Europe, the Middle East, Africa and Turkey and our Global Automotive Lighting business in the second quarter of 2018. Excluding the impact of these dispositions, equipment revenues was mainlydecreased due to lower equipment revenues primarily driven by the decline in sales of traditional lighting product and region exits outside of North America,solar sales and lower LED prices, partially offset by higher LED Solarvolume and Digital growth in Current.sales.
The increase in profit was driven by positive cost productivity due to the effects ofsavings from restructuring actions.and decreased investment and controllable spending, partially offset by regional exits and lower prices.
NINE MONTHS ENDED SEPTEMBER 30:
Segment revenues down $2.8$0.1 billion (66%(10%);
Segment profit down $0.2 billion (78%)up 27%:
The decrease in revenues was mainlyRevenues decreased due to the Appliances disposition of our GE Lighting business in June 2016, lowerEurope, the Middle East, Africa and Turkey and our Global Automotive Lighting business in the second quarter of 2018. Excluding the impact of these dispositions, equipment revenues primarily driven by the decline inincreased due to higher LED volume and Digital sales, of traditional lighting product, lower prices and region exits outside of North America, partially offset by lower traditional lighting and solar sales and lower LED growth in GE Lighting and Current as well as Solar and Digital growth in Current.prices.
The decreaseincrease in profit was due to lower volume driven by the Appliances disposition in June 2016, as well as lower prices,savings from restructuring and decreased investment and controllable spending, partially offset by positive cost productivity due to the effects of restructuring actions.
3028 20172018 3Q FORM 10-Q
|
| | |
| MD&A | SEGMENT OPERATIONS | CAPITAL |
CAPITAL
OPERATIONAL AND FINANCIAL OVERVIEW
(Dollars in billions)
|
|
2017 YTD SUB-SEGMENT REVENUES |
|
|
■■ Verticals ■■ Other Continuing
|
|
| | | | | | | | | | | | | |
| SUB-SEGMENT REVENUES | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| GECAS | $ | 1.2 |
| $ | 1.2 |
| | $ | 3.6 |
| $ | 3.9 |
|
| EFS | 0.3 |
| — |
| | 0.2 |
| 0.2 |
|
| Industrial Finance and WCS(a) | 0.3 |
| 0.4 |
| | 1.0 |
| 1.1 |
|
| Insurance | 0.7 |
| 0.7 |
| | 2.2 |
| 2.2 |
|
| Other continuing operations | (0.1 | ) | — |
| | — |
| — |
|
| Total segment revenues | $ | 2.5 |
| $ | 2.4 |
| | $ | 7.1 |
| $ | 7.5 |
|
| |
| (a) | In the second quarter of 2018, management of our Working Capital Solutions (WCS) business was transferred to our Treasury operations. |
|
| | | | | | | | | | | | | |
| SEGMENT PROFIT(a) | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Profit | $ | — |
| $ | — |
| | $ | (0.4 | ) | $ | (0.2 | ) |
■■ Verticals ■■ Other Continuing
| |
(a) Includes interest | Interest and other financial charges, and income taxes, non-operating benefit costs and GE Capital preferred stock dividends are included in |
determining segment profit for the Capital segment, which is included in continuing operations. See Note 2 to the consolidated financial
statements for further information on discontinued operations.
|
|
| SIGNIFICANT TRENDS & DEVELOPMENTS |
As of March 30, 2017, GE Capital’s non-US activities are no longer subject to consolidated supervision by the U.K.’s Prudential Regulation Authority (PRA). This completes GE Capital’s global exit from consolidated supervision, having had its designation as a Systemically Important Financial Institution (SIFI) removed in June 2016.
GE Capital paid no common dividends ofto GE in the three months ended September 30, 2017, and $4.0 billion to GE in the nine months ended September 30, 2017. GE Capital paid no common dividends in 2018 and does not expect to make a common dividend distribution to GE for the foreseeable future.
Our run-off insurance activities include future policy benefit reserves of $19.2 billionIn 2018, we announced plans to take actions to make GE Capital smaller and claim reserves of $4.9 billion at September 30, 2017 of which approximately $9.0 billion and $3.4 billion, respectively, relates to long-term care insurance contracts. We test future policy benefit reserves associated with our run-off insurance activities for premium deficiencies annually. We have recently experienced elevated claim experience formore focused, including a portion of our long-term care insurance contracts that requires the completion of a comprehensive review of premium deficiency assumptions across all insurance products. This review will be completedsubstantial reduction in the fourth quartersize of 2017. Based upon the work performed to dateGE Capital’s Energy Financial Services (EFS) and complexityIndustrial Finance businesses (GE Capital strategic shift). As a result, we classified financing receivables of the reviewEnergy Financial Services and Industrial Finance businesses as further described within our Critical Accounting Estimates andheld for sale as we no longer intend to hold these financing receivables for the foreseeable future. See Note 116 to the consolidated financial statements for further information.
In the first quarter of 2018, GE Capital contributed $3.5 billion of capital to its insurance subsidiaries and expects to contribute approximately an additional $11 billion through 2024 subject to ongoing monitoring by the Kansas Insurance Department (KID) and the total amount to be contributed could increase or decrease, or the timing could be accelerated, based upon the results of reserve adequacy testing or a charge relateddecision by KID to modify the schedule of contributions set forth in January 2018. GE maintains specified capital levels at these insurance subsidiaries under capital maintenance agreements. We perform premium deficiency testing at least annually. Any future adverse changes in our assumptions could result in an increase to future policy benefit reserves and additional contributions of capital over and above the $11 billion noted above. For example, a hypothetical five percent increase in future claim costs, holding all other assumptions constant, would result in a $1.5 billion increase to our future policy benefit reserves. Similarly, a hypothetical 25 basis point decline in expected investment yield, holding all other assumptions constant would result in a $1.0 billion increase in future policy benefit reserves. Any favorable changes to these assumptions could result in additional margin in our premium deficiency test and higher income over the remaining duration of the portfolio, including higher investment income. See Note 12 to the consolidated financial statements for further information.
We are actively exploring options to mitigate, reduce or eliminate our reinsurance exposures. These options include further premium increases, prudent enhancement of investment returns, transferring or terminating reinsurance arrangements, and risk-transfer transactions with third parties. Certain of these options could have a material financial impact, depending on the timing, extent of risk transfer to a probable deficiency is not reasonably estimable atthird party, and negotiated terms and conditions of any ultimate arrangements.
During the first quarter of 2018, we recorded a reserve of $1.5 billion in discontinued operations in connection with the DOJ ongoing investigation regarding potential violations of FIRREA by WMC and GE Capital. See Legal Proceedings and Note 19 to the consolidated financial statements for further information.
In August 2018, we announced an agreement to sell EFS' debt origination business within our Capital segment for proceeds of approximately $2.0 billion to Starwood Property Trust, Inc. an affiliate of a leading global private investment firm, Starwood Capital Group. In September 30, 2017. Until2018, we completed the above described review has beensale and recognized a pre-tax gain of approximately $0.3 billion in the third quarter of 2018. In addition, we completed we have deferred the decision whether GE Capital will pay additional dividends to GE.
sale of various EFS equity investments and recognized a pre-tax gain of approximately $0.2 billion in the third quarter of 2018.
20172018 3Q FORM 10-Q 3129
|
| | |
| MD&A | SEGMENT OPERATIONS | CAPITAL |
During the third quarter of 2018, in connection with the GE Capital strategic shift, we classified an additional $0.2 billion of Healthcare Equipment Finance financing receivables as held for sale at September 30, 2018. In October 2018, we announced an agreement to sell a portfolio of approximately $1.0 billion, including certain assumed obligations, of predominately equity investments in energy assets to Apollo Global Management, LLC. This EFS portfolio within our Capital segment comprises investments in renewable energy, contracted natural gas-fired generation and midstream energy infrastructure assets, primarily in the U.S. The deal is expected to close in the fourth quarter of 2018, subject to customary closing conditions and regulatory approvals.
2018 – 2017 COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30
Capital revenues decreased $0.2increased $0.1 billion, or 8%3%, primarily due to higher impairmentsgains and organic revenue declines,lower impairments, partially offset by higher gains.volume declines.
Capital earnings decreased 8%slightly due to lower volume, partially offset by higher gains associated with the sale of EFS’ debt origination business and equity investments.
2018 – 2017 COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30
Capital revenues decreased $0.5 billion, or 6%, primarily due to lower tax benefits primarily associated with a 2016 IRS tax settlement, higher impairmentsvolume declines and lower gains, partially offset by lower treasury and headquarters operation expenses associated with the GE impairments.
Capital Exit Plan and core increases.
Within Capital, Verticals net earnings decreasedlosses increased $0.2 billion, or 36%, primarily due to higher impairments ($0.2 billion)primarily at EFS related to its renewables and oil and gas investments and volume declines including costs associated with calling debt and lower gains,base earnings including a loss related to updates to the U.S. tax reform impact on energy investments, partially offset by core increases.
Other Capital losses decreased $0.2 billion, or 38%, primarilyhigher gains associated with the GE Capital Exit Plan as follows:
Lower headquarters operation expensessale of $0.3 billion.
Lower treasury operation expenses of $0.2 billion reflectingEFS’ debt origination business and equity investments and lower excess interest expensecorporate and derivative activities that reduce or eliminate interest rate, currency or market risk between financial assets and liabilities.
Lower tax benefits of $0.3 billion primarily associated with a 2016 IRS tax settlement.
NINE MONTHSrestructuring costs.
Capital revenues decreased $0.7 billion, or 9%, primarily due to higher impairments, organic revenue declines and lower gains.
Capital losses decreased $1.3 billion, or 87%, primarily due to lower treasury and headquarters operation expenses associated with the GE Capital Exit Plan, lower preferred dividend expenses associated with the January 2016 preferred equity exchange and core increases, partially offset by lower gains, higher impairments and lower tax benefits primarily associated with a 2016 IRS tax settlement.
Within Capital, Verticals net earnings decreased 3%, primarily due to lower gains ($0.1 billion) and higher impairments ($0.1 billion), partially offset by core increases ($0.2 billion).
Other Capital losses decreased $1.3 billion, or 45%, primarily associated with the GE Capital Exit Plan as follows:
Lower treasury operation expenses of $0.7 billion reflecting lower excess interest expense, including costs associated with the February and May 2016 debt tenders and derivative activities that reduce or eliminate interest rate, currency or market risk between financial assets and liabilities.
Lower headquarters operation expenses of $0.7 billion.
Lower preferred dividend expenses of $0.2 billion associated with the January 2016 preferred equity exchange.
Lower tax benefits of $0.3 billion primarily associated with a 2016 IRS tax settlement.
3230 20172018 3Q FORM 10-Q
|
| | |
| MD&A | CORPORATE ITEMS AND ELIMINATIONS |
| | | CORPORATE ITEMS AND ELIMINATIONS | CORPORATE ITEMS AND ELIMINATIONS | | | CORPORATE ITEMS AND ELIMINATIONS | | |
| | | | | | | | | |
| REVENUES AND OPERATING PROFIT (COST) | REVENUES AND OPERATING PROFIT (COST) | | | | REVENUES AND OPERATING PROFIT (COST) | | | |
| | | | | | | | | |
| | | Three months ended September 30 | | Nine months ended September 30 | | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | (In millions) | 2017 |
| 2016 |
| | 2017 |
| 2016 |
| (In millions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | | | | |
| Revenues | Revenues | | | | Revenues | | | |
| | Gains (losses) on disposals | 1,897 |
| 208 |
| | 1,899 |
| 3,395 |
| Eliminations and other | $ | (685 | ) | $ | (907 | ) | | $ | (2,575 | ) | $ | (2,851 | ) |
| | Eliminations and other | (869 | ) | (878 | ) | | (2,676 | ) | (2,714 | ) | |
| Total Corporate Items and Eliminations | Total Corporate Items and Eliminations | 1,028 |
| (670 | ) | | (777 | ) | 681 |
| Total Corporate Items and Eliminations | $ | (685 | ) | $ | (907 | ) | | $ | (2,575 | ) | $ | (2,851 | ) |
| | | | | | | | | |
| Operating profit (cost) | Operating profit (cost) | | | | Operating profit (cost) | | | |
| | Gains (losses) on disposals | 1,897 |
| 208 |
| | 1,899 |
| 3,395 |
| Gains (losses) on disposals(a) | $ | 207 |
| $ | 1,885 |
| | $ | 450 |
| $ | 1,887 |
|
| | Restructuring and other charges | (2,027 | ) | (683 | ) | | (3,755 | ) | (2,557 | ) | Restructuring and other charges(b) | (1,501 | ) | (1,079 | ) | | (2,328 | ) | (2,761 | ) |
| | Principal retirement plans(a) | (583 | ) | (542 | ) | | (1,668 | ) | (1,489 | ) | Unrealized gains (losses)(c) | (73 | ) | — |
| | 193 |
| — |
|
| | Eliminations and other | (383 | ) | (507 | ) | | (1,164 | ) | (1,469 | ) | Goodwill impairment | (21,973 | ) | (947 | ) | | (21,973 | ) | (947 | ) |
| Total Corporate Items and Eliminations | (1,095 | ) | (1,524 | ) | | (4,687 | ) | (2,120 | ) | |
| | | | | | |
| CORPORATE COSTS | | | | |
| | | | | | |
| | | Three months ended September 30 | | Nine months ended September 30 | |
| (In millions) | 2017 |
| 2016 |
| | 2017 |
| 2016 |
| |
| | | | | | Eliminations and other | (179 | ) | (367 | ) | | (822 | ) | (1,209 | ) |
| Total Corporate Items and Eliminations | Total Corporate Items and Eliminations | (1,095 | ) | (1,524 | ) | | (4,687 | ) | (2,120 | ) | Total Corporate Items and Eliminations | $ | (23,519 | ) | $ | (509 | ) | | $ | (24,481 | ) | $ | (3,031 | ) |
| Less: non-operating pension cost | (570 | ) | (511 | ) | | (1,708 | ) | (1,534 | ) | |
Total Corporate costs (operating)* | (525 | ) | (1,012 | ) | | (2,979 | ) | (586 | ) | |
| Less: restructuring and other charges | (2,027 | ) | (683 | ) | | (3,755 | ) | (2,557 | ) | |
Less: gains (losses) on disposals
| 1,897 |
| 208 |
| | 1,899 |
| 3,395 |
| |
| Adjusted total corporate costs (operating)* | (396 | ) | (538 | ) | | (1,124 | ) | (1,424 | ) | |
| |
| (a) | Included non-operating pension cost* of $0.6 billionIncludes gains (losses) on disposed or held for sale businesses. |
| |
| (b) | Subsequent to the Baker Hughes transaction, restructuring and $0.5 billionother charges are included in the determination of segment profit for our Oil & Gas segment. |
| |
| (c) | Amount is related to our Pivotal Software equity investment for the three months ended September 30, 2017 and 2016, respectively, and $1.7 billion and $1.5 billion in the nine months ended September 30, 2017 and 2016, respectively, which includes expected return on plan assets, interest costs and non-cash amortization of actuarial gains and losses.2018. |
We believe that adjusting operating corporate costs* to exclude the effects of items that are not closely associated with ongoing corporate operations (see reconciliation below), such as earnings of previously divested businesses, gains and losses on disposed and held for sale businesses, restructuring and other charges provides management and investors with a meaningful measure that increases the period-to-period comparability of our ongoing corporate costs.
|
| | | | | | | | | | | | | |
| CORPORATE COSTS (OPERATING) | | | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Total Corporate Items and Eliminations (GAAP) | $ | (23,519 | ) | $ | (509 | ) | | $ | (24,481 | ) | $ | (3,031 | ) |
| Less: restructuring and other charges | (1,501 | ) | (1,079 | ) | | (2,328 | ) | (2,761 | ) |
| Less: gains (losses) on disposals | 207 |
| 1,885 |
| | 450 |
| 1,887 |
|
| Less: unrealized gains (losses) | (73 | ) | — |
| | 193 |
| — |
|
| Less: goodwill impairment | (21,973 | ) | (947 | ) | | (21,973 | ) | (947 | ) |
| Adjusted total corporate costs (operating) (Non-GAAP) | $ | (179 | ) | $ | (367 | ) | | $ | (822 | ) | $ | (1,209 | ) |
20172018 - 20162017 COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30
Revenues and other income increased $1.7$0.2 billion, primarily as a result of:
$1.90.2 billion decrease in inter-segment eliminations.
Operating costs increased $23.0 billion, primarily as a result of:
$21.0 billion of higher goodwill impairment charges due to a $22.0 billion goodwill impairment related to our Power business in the third quarter of 2018 compared to a $0.9 billion charge for the impairment of Power Conversion goodwill in the third quarter of 2017.
$1.7 billion of lower net gains from disposed or held for sale businesses, which is primarily related to the $1.9 billion gain from the sale of our Water business to Suez
This increase in the third quarter of 2017 and $0.4 billion of held for sale losses related to revenuesour Lighting and other income wasAviation segments in the third quarter of 2018. These decreases were partially offset by the following:
$0.2 billion of lower other income for the nonrecurrence of a $0.4$0.7 billion gain from the sale of GE Asset Managementour Value-Based Care business to State
Street Corporation and a $0.2 billion charge related to the sale of a non-strategic platformVeritas Capital in the Aviation business in the
third quarter of 2016
Operating costs decreased $0.4 billion, primarily as a result of:2018.
$1.9 billion of higher gains from the sale of our Water business to Suez
$0.1 billion of lower corporate structural costs
These decreases to operating costs were partially offset by the following:
$1.30.4 billion of higher restructuring and other charges drivenrelated to $0.6 billion of impairments within our Power business in the third quarter of 2018 partially offset by a charge of $0.9 billion for the impairment of Power Conversion
goodwill and a charge of $0.3 billion for the impairment of a power plant asset
2017 - 2016 COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30
Revenues and other income decreased $1.5 billion, primarily as a result of:
$1.5$0.2 billion of lower net gains primarily driven by the nonrecurrenceimpairments on power plant assets in 2018.
$0.1 billion of the salehigher unrealized losses related to our equity investment in Pivotal Software.
$0.2 billion of our Appliances business to Haier for $3.1
billion in the second quarter of 2016, partially offset by the sale of our Water business to Suez for $1.9 billion in the third
quarter of 2017lower Corporate costs from restructuring and cost reduction actions.
*Non-GAAP Financial Measure
20172018 3Q FORM 10-Q 3331
|
| | |
| MD&A | CORPORATE ITEMS AND ELIMINATIONS |
Operating costs2018 - 2017 COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30
Revenues increased $2.6$0.3 billion, primarily as a result of:
$1.50.3 billion decrease in inter-segment eliminations.
Operating costs increased $21.5 billion, primarily as a result of:
$21.0 billion of higher goodwill impairment charges due to a $22.0 billion goodwill impairment related to our Power business in the third quarter of 2018 compared to a $0.9 billion charge for the impairment of Power Conversion goodwill in the third quarter of 2017.
$1.4 billion of lower net gains from disposed or held for sale businesses, which is primarily driven byrelated to the nonrecurrence of the sale of our Appliances business to Haier for $3.1
$1.9 billion in the second quarter of 2016, partially offset bygain from the sale of our Water business to Suez for $1.9 billion in the third quarter of 2017,
$1.2 $0.5 billion of higherheld for sale losses related to our Lighting and Aviation segments in 2018. These decreases were partially offset by a $0.7 billion gain from the sale of our Value-Based Care business to Veritas Capital in the third quarter of 2018 and a $0.3 billion gain from the sale of our Industrial Solutions business to ABB in the second quarter of 2018.
$0.4 billion of lower restructuring and other charges driven by a chargeprimarily due to $0.8 billion of $0.9lower restructuring charges as well as $0.2 billion for thelower impairment of Power Conversion
goodwill and a charge of $0.3 billion for the impairment of alosses on power plant assetassets in 2018. These decreases were partially offset by $0.6 billion of impairments related to our Power segment in 2018.
$0.2 billion of higher costs associated withunrealized gains related to our principal retirement plans, including the effects of lower discount rates
These increases to operating costs were partially offset by the following:equity investment in Pivotal Software.
$0.30.4 billion of lower corporate structuralCorporate costs from restructuring and cost reduction actions.
RESTRUCTURING
Restructuring actions are an essential component of our cost improvement efforts to both existing operations and those recently acquired. Restructuring and other charges relate primarily to workforce reductions, facility exit costs associated with the consolidation of sales, service and manufacturing facilities, the integration of recent acquisitions, including Alstom, the Baker Hughes transaction, and certain other asset write-downs.write-downs such as those associated with product line exits. We continue to closely monitor the economic environment and may undertake further restructuring actions to more closely align our cost structure with earnings and cost reduction goals.
| | | RESTRUCTURING & OTHER CHARGES | RESTRUCTURING & OTHER CHARGES | | | |
| | | Three months ended September 30 | Nine months ended September 30 | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | | 2017 | | 2016 | 2017 | | 2016 | 2018 |
| 2017 |
| | 2018 | 2017 |
| | | | | | | | | | |
| Workforce reductions | | $ | 0.3 |
| | $ | 0.3 |
| $ | 1.0 |
| | $ | 0.9 |
| $ | 0.3 |
| $ | 0.3 |
| | $ | 0.7 |
| $ | 1.0 |
|
| Plant closures & associated costs and other asset write-downs | | 0.8 |
| | 0.2 |
| 1.3 |
| | 0.9 |
| 1.1 |
| 0.8 |
| | 1.5 |
| 1.3 |
|
| Acquisition/disposition net charges | | 0.3 |
| | 0.1 |
| 0.7 |
| | 0.5 |
| 0.2 |
| 0.3 |
| | 0.6 |
| 0.7 |
|
| Goodwill impairment(a) | | 0.9 |
| | — |
| 0.9 |
| | — |
| |
| Other | | — |
| | 0.1 |
| 0.1 |
| | 0.3 |
| — |
| — |
| | 0.1 |
| 0.1 |
|
| Total(b)(c) | | $ | 2.4 |
| | $ | 0.7 |
| $ | 4.1 |
| | $ | 2.6 |
| |
| Total(a) | | $ | 1.6 |
| $ | 1.4 |
| | $ | 2.9 |
| $ | 3.1 |
|
| |
| (a) | This amount was recorded in Other costs and expenses in the Statement of Earnings. See Note 8 to the consolidated financial statements for further information. |
| |
(b) | Subsequent to the Baker Hughes transaction, restructuring and other charges are included in the determination of segment operating profit for our Oil & Gas segment. |
| |
(c) | Included $2.0 billion in GE and $0.4 billion in our Oil & Gas segment for the three months ended September 30, 2017, and $0.6 billion in GE and $0.1 billion in our Oil & Gas segment for the three months ended September 30, 2016. Included $3.5 billion in GE and $0.6 billion in our Oil & Gas segment for the nine months ended September 30, 2017, and $1.9 billion in GE and $0.6 billion in our Oil & Gas segment for the nine months ended September 30, 2016. |
20172018 - 20162017 COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30
For the three months ended September 30, 2017,2018, restructuring and other charges were $2.4$1.6 billion of which approximately $0.8$0.6 billion was reported in cost of products/services $0.7and $0.9 billion was reported in selling, general and administrative expenses (SG&A), and $0.9 billion was reported in other costs and expenses.. These activities were primarily at Power, Corporate and Oil & Gas. Cash expenditures for restructuring and other charges were approximately $0.5 billion for three months ended September 30, 2018. Of the total $1.6 billion restructuring and other charges, $0.1 billion was recorded in the Oil & Gas segment, which amounted to $0.1 billion net of noncontrolling interest.
For the three months ended September 30, 2017, restructuring and other charges were $1.4 billion of which approximately $0.8 billion was reported in cost of products/services, $0.7 billion was reported in SG&A. These activities were primarily at Corporate, Oil & Gas and Power. Cash expenditures for restructuring and other charges were approximately $0.6 billion for the three months ended September 30, 2017. Of the total $2.4$1.4 billion restructuring and other charges, $0.4 billion was recorded in the Oil & Gas segment which amounted to $0.3 billion net of noncontrolling interest.
For the three months ended September 30, 2016, restructuring and other charges were $0.7 billion of which approximately $0.5 billion was reported in cost of products/services and $0.2 billion was reported in SG&A. These activities were primarily at Power, Oil & Gas and Lighting. Cash expenditures for restructuring and other charges were approximately $0.5 billion for the three months ended September 30, 2016.
3432 20172018 3Q FORM 10-Q
|
| | |
| MD&A | CORPORATE ITEMS AND ELIMINATIONS |
20172018 - 20162017 COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30
For the nine months ended September 30, 2018, restructuring and other charges were $2.9 billion of which approximately $1.1 billion was reported in cost of products/services and $1.7 billion was reported in selling, general and administrative expenses (SG&A). These activities were primarily at Power, Corporate and Oil & Gas. Cash expenditures for restructuring and other charges were approximately $1.3 billion for nine months ended September 30, 2018. Of the total $2.9 billion restructuring and other charges, $0.6 billion was recorded in the Oil & Gas segment, which amounted to $0.4 billion net of noncontrolling interest.
For the nine months ended September 30, 2017, restructuring and other charges were $4.1$3.1 billion of which approximately $1.9 billion was reported in cost of products/services and $1.3 billion was reported in SG&A, and $0.9 billion was reported in other costs and expenses.&A. These activities were primarily at Corporate, Power Corporate and Oil & Gas. Cash expenditures for restructuring and other charges were approximately $1.6 billion for the nine months ended September 30, 2017. Of the total $4.1$3.1 billion restructuring and other charges, $0.4 billion was recorded in the Oil & Gas segment which amounted to $0.3 billion net of noncontrolling interest.
For the nine months ended September 30, 2016, restructuring and other charges were $2.6 billion of which approximately $1.6 billion was reported in cost of products/services, $0.8 billion was reported in SG&A. These activities were primarily at Power, Oil & Gas, and Healthcare. Cash expenditures for restructuring and other charges were approximately $1.2 billion for the nine months ended September 30, 2016.
COSTS AND GAINS NOT INCLUDED IN SEGMENT RESULTS
As discussed in the Segment Operations section within the MD&A, certain amounts are not included in industrial segment results because they are excluded from measurement of their operating performance for internal and external purposes. These costs relate primarily to goodwill impairment, restructuring and acquisition and disposition activities. The amount of costs and gains (losses) not included in segment results are as follows.
| | | COSTS | | | | | | | | | | | |
| | Three months ended September 30 | | Nine months ended September 30 | | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2017 |
| | 2016 |
| | 2017 |
| | 2016 |
| | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | | | | | | | |
Power(a) | $ | 1.1 |
| | $ | 0.4 |
| | $ | 1.7 |
| | $ | 1.0 |
| | $ | 23.0 |
| $ | 1.1 |
| | $ | 23.2 |
| $ | 1.7 |
|
| Renewable Energy | — |
| | — |
| | 0.2 |
| | 0.2 |
| | — |
| — |
| | 0.1 |
| 0.2 |
|
| Oil & Gas(b) | — |
| | 0.1 |
| | 0.2 |
| | 0.7 |
| | |
| Aviation | — |
| | — |
| | 0.1 |
| | 0.1 |
| | — |
| — |
| | — |
| 0.1 |
|
| Oil & Gas(a) | | — |
| — |
| | — |
| 0.2 |
|
| Healthcare | 0.1 |
| | 0.1 |
| | 0.2 |
| | 0.4 |
| | 0.1 |
| 0.1 |
| | 0.2 |
| 0.2 |
|
| Transportation | — |
| | — |
| | 0.1 |
| | 0.2 |
| | — |
| — |
| | — |
| 0.1 |
|
Lighting(a) | — |
| | 0.1 |
| | 0.2 |
| | 0.2 |
| | — |
| — |
| | — |
| 0.2 |
|
| Total | $ | 1.3 |
| | $ | 0.7 |
| | $ | 2.7 |
| | $ | 2.7 |
| | $ | 23.1 |
| $ | 1.3 |
| | $ | 23.6 |
| $ | 2.7 |
|
| | | GAINS (LOSSES) | | | | | | | | | | | |
| | Three months ended September 30 | | Nine months ended September 30 | | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2017 |
| | 2016 |
| | 2017 |
| | 2016 |
| | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | | | | | | | |
Power(a) | $ | 1.9 |
| | — |
| | $ | 1.9 |
| | — |
| | $ | — |
| $ | 1.9 |
| | $ | 0.3 |
| $ | 1.9 |
|
| Renewable Energy | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| — |
|
| Oil & Gas | — |
| | — |
| | — |
| | — |
| | |
| Aviation | — |
| | (0.2 | ) | | — |
| | (0.2 | ) | | (0.1 | ) | — |
| | (0.1 | ) | — |
|
| Oil & Gas(a) | | — |
| — |
| | — |
| — |
|
| Healthcare | — |
| | — |
| | — |
| | — |
| | 0.7 |
| — |
| | 0.7 |
| — |
|
| Transportation | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| — |
|
Lighting(a) | — |
| | — |
| | — |
| | 3.1 |
| (c) | (0.3 | ) | — |
| | (0.4 | ) | — |
|
| Total | $ | 1.9 |
| | $ | (0.2 | ) | | $ | 1.9 |
| | $ | 2.9 |
| | $ | 0.2 |
| $ | 1.9 |
| | $ | 0.4 |
| $ | 1.9 |
|
| |
| (a) | Beginning in the third quarter of 2017, the Energy Connections business within the former Energy Connections & Lighting segment has been combined with the Power segment and presented as one reporting segment called Power. As a result of this combination, our GE Lighting and Current, powered by GE (Current) businesses are now reported as a separate segment called Lighting. |
| |
(b) | Subsequent to the Baker Hughes transaction, restructuring and other charges are included in the determination of segment operating profit for our Oil & Gas segment. |
| |
(c) | Related to the sale of our Appliances business in the second quarter of 2016. |
20172018 3Q FORM 10-Q 3533
|
| | |
| MD&A | OTHER CONSOLIDATED INFORMATION |
OTHER CONSOLIDATED INFORMATION
INTEREST AND OTHER FINANCIAL CHARGES
Consolidated interest and other financial charges amounted to $1.2 billion and $1.2 billion for the three months ended September 30, 2018 and 2017, respectively, as incremental interest on BHGE debt issuances and higher benchmark interest rates were offset by debt maturities. Consolidated interest and other financial charges amounted to $3.8 billion and $3.5 billion for the nine months ended September 30, 2018 and 2017, respectively. The increase of $0.3 billion was driven by incremental interest on BHGE debt issuances and higher benchmark interest rates, partially offset by debt maturities.
GE interest and other financial charges (exclusive of interest on debt assumed by GE) amounted to $0.7 billion and $0.7 billion for the three months ended September 30, 2018 and 2017, respectively, as incremental interest on BHGE debt issuances and intercompany loans from GE Capital were offset by lower costs from monetization programs with GE Capital and debt maturities. GE interest and other financial charges (exclusive of interest on debt assumed by GE) amounted to $2.0 billion and $1.9 billion for the nine months ended September 30, 2018 and 2017, respectively. The increase of $0.1 billion was driven by incremental interest from BHGE debt issuances and intercompany loans from GE Capital as well as higher interest rates on commercial paper, partially offset by lower costs from monetization programs with GE Capital and debt maturities.
GE Capital interest and other financial charges (inclusive of interest on debt assumed by GE) amounted to $0.7 billion and $0.8 billion for the three months ended September 30, 2018 and 2017, respectively and $2.3 billion and $2.4 billion for the nine months ended September 30, 2018 and 2017, respectively. The decrease in both periods was driven by lower average debt balances due to maturities, partially offset by higher benchmark interest rates.
INCOME TAXES
GE pays the income taxes it owes in every country in which it does business. Many factors impact our income tax expense and cash tax payments. The most significant factor is that we conduct business in approximatelyover 180 countries and more than halfthe majority of our revenue is earned outside the U.S., oftenincluding in countries with lower tax rates than in the U.S. We reinvest most of our foreign earnings overseas to be able to fund our active non-U.S. business operations. Our tax liability is also affected by U.S. and foreign tax incentives designed to encourage certain investments, such aslike research and development,development; and by acquisitions, dispositions and tax law changes. On December 22, 2017, the U.S. enacted legislation commonly known as the Tax Cuts and Jobs Act (“U.S. tax reform”) that lowers the statutory tax rate on our U.S. earnings, taxes historic foreign earnings at a reduced rate of tax, creates a territorial tax system and enacts new taxes associated with global operations. Our provisional estimate of the transition tax on historic foreign earnings and the effect on our deferred taxes is described in Note 14 to the consolidated financial statements. Finally, our tax returns are routinely audited, and settlements of issues raised in these audits sometimes affect our tax rates.
GE and GE Capital file a consolidated U.S. federal income tax return. This enables GE and GE Capital to use tax deductions and credits of one member of the group to reduce the tax that otherwise would have been payable by another member of the group. The effective tax rate reflects the benefit of these tax reductions in the consolidated return. GE makes cash payments to GE Capital for tax reductions and GE Capital pays for tax increases at the time GE’s tax payments are due.
See Other Consolidated Information - Income Taxes section and Critical Accounting Estimates - Income Taxes section within MD&A in our Annual Report on Form 10-K for the year ended December 31, 20162017 for further information on income taxes.
CONSOLIDATED – THREE AND NINE MONTHS ENDED SEPTEMBER 30
(Dollars in billions)
|
|
PROVISION (BENEFIT) FOR INCOME TAXES |
|
| | | | | | | | | | | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In billions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Provision (benefit) for income taxes | $ | 0.2 |
| $ | (0.6 | ) | | $ | 0.7 |
| $ | (0.7 | ) |
20172018 – 20162017 COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30
The consolidated income tax rate was (23)(1)% and 1%(74)% for the quarters ended September 30, 2018 and 2017, and 2016, respectively.
The third quarter 2017 consolidated taxnegative rate for 2018 reflects a 128% tax expense on a pretax loss whereas the negative rate on $0.2 billion of pre-tax loss at GE Capital and a (4)% tax rate* on $1.7 billion of pre-tax income at GE.
The third quarter 2016 consolidated tax ratefor 2017 reflects a 137% tax ratebenefit on $0.2 billion of pre-tax loss at GE Capital and a 11% tax rate* on $2.2 billion of pre-tax income at GE.income.
The consolidated tax provision includes $0.1 billion benefit and(benefit) for income taxes was $0.2 billion expense for GE (excluding GE Capital) for the third quarters of 2017 and 2016, respectively.
Consolidated income tax benefit was $0.3 billion in the third quarter of 20172018 and insignificant for$(0.6) billion in the third quarter of 2016.2017. The decreaseincrease in tax expense isprovision was primarily due to the nonrecurrence of the benefit from a lower tax rate relative to the U.S. statutory rate on the disposition of the Water business a larger benefit from global activities and a decrease in pre-tax income taxed at above the average tax rate, partially offset by the adjustment to increase the 2017 year-to-date rate to be in line with the higher projected full year rate compared to the decrease in the 2016 year-to-date rate to be in-line with the lower projected full-year rate. The adjustment to bring the third quarter year-to-date tax rate in-line with the full year tax rate in 2017 decreasedand an increase in valuation allowances on the rate compared to prior quartersdeferred tax assets of 2017 due toour non-U.S. operations as a decreaseresult of lower forecasted operating earnings in projected full year pre-tax income.our Power business in 2018.
*Non-GAAP Financial Measure
3634 20172018 3Q FORM 10-Q
|
| | |
| MD&A | OTHER CONSOLIDATED INFORMATION |
2017 – 2016 COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30
The consolidated tax rate was (8)% in the first nine months of 2017 compared to 5% in the first nine months of 2016.
The first nine months of 2017 consolidated tax rate reflects a 110% tax rate on $0.5 billion of pre-tax loss at GE Capital and a 7% tax rate* on $4.4 billion of pre-tax income at GE.
The first nine months of 2016 consolidated tax rate reflects a 42% tax rate on $1.7 billion of pre-tax loss at GE Capital and a 13% tax rate* on $7.9 billion of pre-tax income at GE.
The consolidated tax provision (benefit) includes $0.3$0.2 billion and $1.0$(0.3) billion for GE (excluding GE Capital) for the firstthird quarters of 2018 and 2017, respectively.
2018 – 2017 COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30
The consolidated income tax rate was (3)% and (38)% for the nine months ended September 30, 2018 and 2017, respectively. The negative rate for 2018 reflects a tax expense on a pretax loss whereas the negative rate for 2017 reflects a tax benefit on pre-tax income.
The consolidated provision (benefit) for income taxes was $0.7 billion in the nine months of 20172018 and 2016, respectively.
Consolidated income tax benefit was $0.3$(0.7) billion forin the first nine months of 2017 compared to tax expense of $0.3 billion for the first nine months of 2016.2017. The decreaseincrease in tax expense isprovision was primarily due to the decrease in pre-tax income taxed at above the average tax rate, a larger benefitlower benefits from global activities relative to the U.S. statutory rate including an increase in valuation allowances on the deferred tax assets of our non-U.S. operations as a result of lower forecasted operating earnings in our Power business, the decision to execute an internal restructuring to separate the Healthcare business and the cost of the newly enacted base erosion and global intangible income provisions and the nonrecurrence of the benefit from a lower tax rate relative to the U.S. tax rate on the disposition of the Water business.business in 2017. This decrease was partially offset by an adjustment to the 2018 nine-month provision that decreased the rate to be in line with the lower projected full year rate while in 2017, there was an adjustment to increase the 2017 year-to-datenine-month rate to be in-linein line with the higher projected full-year rate compared to the decrease in the 2016 year-to-date rate to be in-line with the lower projected full-year rate and the non-repeat of a deductible stock loss. The adjustment to bring the third quarter year-to-date tax rate in-line with the full year rate decreasedrate.
The consolidated tax provision (benefit) includes $0.8 billion and $(0.1) billion for GE (excluding GE Capital) for the tax rate relative to prior quartersnine months of 2018 and 2017, due to a decrease in projected full year pre-tax income.respectively.
The effective tax rate in future periods is expected to increase as a result ofgiven changes in our income profile dueincluding changes to changes in GE Capital earnings as we continue to execute on the GE Capital Exit Plan. We expect the GE effective tax rate excluding GE Capital earnings to be in the low single digits for the full year of 2017.earnings.
See Note 1314 to the consolidated financial statements for additional information related to income taxes.
BENEFITS FROM GLOBAL OPERATIONS
OurAbsent the effects of U.S. tax reform, our consolidated income tax provision is reduced because of the benefits of lower-taxed global operations. ThereThe benefit from non-U.S. rates below the U.S. statutory rate was significant prior to the decrease in the U.S. statutory rate to 21% beginning in 2018. While reduced, there is still a benefit from global operations as certain non-U.S. income is subject to local country tax rates that are significantly below the 35%new U.S. statutory rate. These non-U.S. earnings have been indefinitely reinvested outside the U.S. and are not subject to current U.S. income tax. Most of these earnings have been reinvested in active non-U.S. business operations and we do not intend to repatriate these earnings to fund U.S. operations.
The rate of tax on our indefinitely reinvested non-U.S. earnings is below the historic 35% U.S. statutory tax rate because we have significant business operations subject to tax in countries where the tax on that income is lower than the U.S. statutory rate and because GE funds certain non-U.S. operations through foreign companies that are subject to low foreign taxes. Most of these earnings have been reinvested in active non-U.S. business operations and as of December 31, 2017, we had not decided to repatriate these earnings to the U.S. Given U.S. tax reform, substantially all of our prior unrepatriated earnings are subject to U.S. tax and accordingly we expect to have the ability to repatriate available non-U.S. cash from those earnings without additional U.S. federal tax cost and any foreign withholding taxes on a repatriation to the U.S. would potentially be partially offset by a U.S. foreign tax credit. We will update our analysis of investment in foreign earnings in 2018 as we consider the impact of U.S. tax reform.
A substantial portion of the benefit for lower-taxed non-U.S. earnings related to business operations subject to tax in countries where the tax on that income is lower than the U.S. statutory rate is derived from our GECAS aircraft leasing operations located in Ireland where the earnings are taxed at 12.5%, from our Power operations located in Switzerland and Hungary where the earnings are taxed at between 9% and 18.6%, and our Healthcare operations in Europe where tax deductions are allowed for certain intangible assets and earnings are taxed below the historic U.S. statutory rate.
We expect our abilityBecause the U.S. tax rate has been reduced to 21% beginning in 2018 and because the U.S. has adopted a territorial tax system and enacted new provisions of U.S. law related to taxation of global operations as part of U.S. tax reform, the overall tax benefit from non-U.S. operations compared to the U.S. statutory rate will be reduced or eliminated going forward as we also have non-U.S. operations taxed at close to the current U.S. statutory rate of 21% and non-U.S. operations with non-deductible losses and may incur additional taxes related to newly enacted U.S. tax provisions on global operations, as discussed below.
As part of U.S. tax reform, the U.S. has enacted a tax on “base eroding” payments from the U.S. We are evaluating the impact of this new provision on our operations and intend to undertake restructuring actions to avoid a significant impact from this provision. The U.S. has also enacted a minimum tax on foreign earnings (“global intangible low tax income”). Because we have tangible assets outside the U.S. and pay a rate of foreign tax above the minimum tax rate, we are not expecting a significant increase in tax liability from this new U.S. minimum tax. Because aspects of the new law and the effect on our operations is uncertain and because aspects of the accounting rules associated with the tax on global intangible low-taxed income have not been resolved, we have made an accrual for the current but not the deferred tax effects of this provision. Overall, we project a cost for the base erosion and global intangible low tax income provisions in 2018 that exceeds the net benefit of non-U.S. operations taxed at less than the 21% U.S. ratestatutory tax rate.
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| MD&A | OTHER CONSOLIDATED INFORMATION |
We have not significantly adjusted our provisional estimate of the enactment of U.S. tax reform during the third quarter of 2018 as we continue to continue, subjectanalyze information related to our operations as well as new guidance and other aspects of the enacted provisions. Based on our on-going analysis of the currently issued guidance on the transition tax on historic foreign earnings and related foreign tax credit impacts through the third quarter, including advice from outside advisors, we believe the provisional estimate of the impact of enactment, as recorded in the fourth quarter of 2017 and adjusted during 2018 remains a reasonable estimate of the effects of enactment including the impact of items in the 2018 tax filings. We will update the impact of enactment during the fourth quarter of 2018 based on available government guidance and additional analysis of our information. However, there were discrete changes in U.S. or foreign law. In addition, sincethe provisional estimate identified, primarily at Baker Hughes in connection with measurement period adjustments to purchase price allocation and the associated impact of the change in tax rate on deferred taxes that reduced the provisional amounts recorded by $0.1 billion in the first nine months of 2018. Primarily all of this benefit depends on management’s intentionrelates to indefinitely reinvest amounts outside the U.S., our tax provision will increasenon-consolidated operations and did not affect net earnings to the extent we no longer indefinitely reinvest foreign earnings.company as there is an offsetting adjustment to income from noncontrolling interests. The net remaining cost also relates primarily to the revaluation of deferred taxes corresponding to measurement period adjustments to the purchase price allocation for the Baker Hughes acquisition.
DISCONTINUED OPERATIONS
Discontinued operations primarily relatecomprise residual assets and liabilities related to our exited U.S. mortgage business (WMC), as discussed in Legal Proceedings and Notes 2 and 19 to the consolidated financial servicesstatements, as well as our mortgage portfolio in Poland and trailing liabilities associated with the sale of our GE Capital businesses as a result of the GE Capital Exit Plan and includes(our plan announced in 2015 to reduce the size of our U.S. mortgage business (WMC)financial services businesses). All of these operations were previously reported in the Capital segment.
During the first quarter of 2018, we recorded a reserve of $1.5 billion in discontinued operations in connection with the DOJ ongoing investigation regarding potential violations of FIRREA by WMC and GE Capital. See Notes 2Legal Proceedings and 18Note 19 to the consolidated financial statements for additional information related to discontinued operations.
*Non-GAAP Financial Measure
further information.
201736 2018 3Q FORM 10-Q37
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| MD&A | STATEMENT OF FINANCIAL POSITION |
STATEMENT OF FINANCIAL POSITION
Because GE and GE Capital share certain significant elements of their Statements of Financial Position, the following discussion addresses significant captions in the consolidated statement. Within the following discussions, however, we distinguish between GE and GE Capital activities in order to permit meaningful analysis of each individual consolidating statement.
MAJOR CHANGES IN OUR FINANCIAL POSITION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 20172018
The Baker Hughes transaction increased total assets (excludingCash, cash assumed as a resultequivalents and restricted cash decreased $17.0 billion.
As of the transaction) by $27.5September 30, 2018, GE Cash, cash equivalents and restricted cash excluding BHGE was $9.1 billion, primarily and BHGE Cash, cash equivalents and restricted cash was $4.8 billion.
GE Cash, cash equivalents and restricted cash decreased $5.0 billion due to goodwillcash used for operating activities of $14.2$4.1 billion other(including GE Pension Plan contributions of $6.0 billion), net repayments of borrowings of $3.4 billion (including $0.8 billion at BHGE), payments of common dividends to shareowners of $3.1 billion, gross additions to PP&E and internal-use software of $2.7 billion, BHGE net stock repurchases and dividends to noncontrolling interests of $0.6 billion, net investments in intangible assets of $4.4 billion, property, plant and equipment of $4.0 billion, current receivables of $2.4$0.5 billion and inventoriesnet settlements of $2.0 billion. See Note 8 to the consolidated financial statements for additional information.
Cash and equivalents decreased $8.3 billion. GE Cash and equivalents increased $2.3derivative hedges of $0.4 billion, due to the issuance of long-term debt, primarily to fund acquisitions, of $8.6 billion, debt effected through GE Capital of $7.3 billion, common dividendspartially offset by intercompany loans from GE Capital to GE of $4.0$6.5 billion and proceeds from business dispositions of $2.9$3.4 billion. The increase was partially offset by payments of dividends to shareowners of $6.3 billion, business acquisitions of $6.1 billion (net of $4.1 billion cash assumed as a result of the Baker Hughes transaction), treasury stock net purchases of $2.6 billion (cash basis), net PP&E additions of $2.2 billion, net settlements of derivative hedges of $1.4 billion, the settlement of the remaining portion of 2016 debt effected through GE Capital of $1.3 billion and additions to capitalized software of $0.4 billion.
GE Capital Cash, cash equivalents and equivalentsrestricted cash as of September 30, 2018 was $13.1 billion and decreased $10.6$12.1 billion primarily due to net repayments of debtborrowings of $17.6$16.8 billion, GE debt effected throughintercompany loans from GE Capital to GE of $7.3$6.5 billion and paymentsnet purchases of dividends to shareownersinvestment securities of $4.2$2.8 billion, partially offset by maturities of liquidity investments of $6.5 billion, net collections of financing receivables of $3.2$6.7 billion, cash collections from discontinued operationsmaturities of $2.9liquidity investments of $4.8 billion and proceeds from borrowings assumed by the buyer in asale of EFS' debt origination business dispositionand equity investments of $1.8 billion and the settlement of the remaining portion of 2016 GE debt effected through GE Capital of $1.3$3.7 billion.
See the Statement of Cash Flows section within this MD&A for additionalfurther information.
Investment securities decreased $5.6$3.9 billion, primarily due to maturities of liquidity portfolio investments and a decrease in net unrealized gains, partially offset by net purchases of investment securities at GE Capital. See Note 3 to the consolidated financial statements for additionalfurther information.
Inventories increased $1.5Current receivables decreased $3.8 billion, (excluding the impact of the Baker Hughes transaction), primarily due to lower-than-anticipated sales volume, mainlycustomer collections of receivables sold by GE to GE Capital in our Power segment and build for future demand in our Power, Aviation and Renewable Energy segments.prior periods outpacing new volume. See Note 54 to the consolidated financial statements for additionalfurther information.
Goodwill increasedFinancing receivables - net decreased $2.4 billion, (excluding the impact of the Baker Hughes transaction), primarily due to the effectsclassification of currency exchangeHealthcare Equipment Finance financing receivables at GE Capital as held for sale, in connection with the GE Capital strategic shift. See Note 6 to the consolidated financial statements for further information.
Property, plant and equipment - net decreased $3.2 billion, primarily due to depreciation and amortization of $2.3 billion, the acquisition of LM Wind Power in our Renewable Energy segment of $1.3$4.2 billion and the acquisition of ServiceMax in Digital of $0.7 billion, partially offset by the classification of the Industrial Solutionsour Distributed Power business in our Power segment as held for sale of $1.1$0.3 billion, partially offset by net additions to property, plant and an impairment in the Power Conversion business in our Power segmentequipment of $0.9$2.3 billion. See Note 87 to the consolidated financial statements for additionalfurther information.
Contract assets increased $4.6 billion. Revenues in excess of billings increased $2.6 billion and $1.3 billion for our long-term service and equipment agreements, respectively. The remaining increase in contract assets of $0.7 billion is primarily due an increase in deferred inventory costs and non-recurring engineering costs. See Note 9 to the consolidated financial statements for additional information.
Assets of discontinued operationsGoodwill decreased $8.0$23.6 billion, primarily due to impairments related to our Power segment of $22.0 billion, the dispositionclassification of businesses at GE Capital. See Note 2 to the consolidated financial statementsour Distributed Power business in our Power segment as held for additional information.
The Baker Hughes transaction increased total liabilities by $6.8 billion, primarily due to borrowingssale of $3.4 billion, accounts payable of $1.1 billion, other GE current liabilities of $1.1$1.8 billion and non-current compensation and benefitsthe effects of currency exchange of $0.6 billion, partially offset by purchase accounting adjustments of $0.8 billion. See Note 8 to the consolidated financial statements for additionalfurther information.
Borrowings decreased $3.2Contract and other deferred assets increased $0.5 billion. Revenues in excess of billings increased $0.3 billion (excluding the impact of the Baker Hughes transaction),on our long-term service agreements. In addition, other deferred assets increased $0.2 billion, primarily due to net repaymentan increase in nonrecurring engineering costs of debt at GE Capital of $17.6$0.3 billion partially offset by the issuancea decrease in deferred inventory costs of long-term debt at GE of $8.6 billion, primarily to fund acquisitions and the effects of currency exchange of $5.9$0.1 billion. See Note 10 to the consolidated financial statements for additionalfurther information.
LiabilitiesAll other assets decreased $4.5 billion, primarily due to sales of discontinued operations decreased $3.2associated companies at GE Capital and the adoption of ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. See Note 1 to the consolidated financial statements for further information.
Deferred income taxes increased $1.5 billion, primarily due to the dispositionadoption of businesses at GE Capital.ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. See Note 21 to the consolidated financial statements for additionalfurther information.
Common stock held in treasury increased $2.2Borrowings decreased $19.6 billion, primarily due to treasury stock purchasesnet repayments of $3.7borrowings at GE Capital of $16.8 billion, (book basis), partially offset by treasury stock issuancesnet repayments of $1.6borrowings at BHGE of $0.8 billion and the effects of currency exchange of $0.5 billion. See Note 11 to the consolidated financial statements for further information.
Investment contracts, insurance liabilities and insurance annuity benefits decreased $2.6 billion, primarily due to a decrease in future policy benefit reserves as a result of a decrease in unrealized gains on debt securities supporting insurance contracts. See Note 12 to the consolidated financial statements for further information.
Non-current compensation and benefits decreased $7.3 billion, primarily due to GE Pension Plan contributions of $6.0 billion.
NoncontrollingRedeemable noncontrolling interests increased $16.3decreased $3.0 billion, primarily due to the recognitionexercise by Alstom of an approximate 37.5% noncontrolling interest attributabletheir redemption rights with respect to BHGE's Class A shareholdersgrid technology and renewable energy joint ventures in conjunction with the Baker Hughes transaction.our Power and Renewable Energy segments. See Note 815 to the consolidated financial statements for additionalfurther information.
38 20172018 3Q FORM 10-Q37
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| MD&A | FINANCIAL RESOURCES AND LIQUIDITY |
FINANCIAL RESOURCES AND LIQUIDITY
LIQUIDITY AND BORROWINGS
We maintain a strong focus on liquidity. At both GE and GE Capital we manage our liquidity to help provide access to sufficient funding to meet our business needs and financial obligations throughout business cycles.
Our liquidity and borrowing plans for GE and GE Capital are established within the context of our annual financial and strategic planning processes. At GE, our liquidityprocesses and funding plans take into accountconsider the liquidity necessary to fund our operating commitments, which include primarily purchase obligations for inventory and equipment, payroll and general expenses (including pension funding). We also take into accountconsider our capital allocation and growth objectives, including paying dividends, repurchasing shares,funding debt maturities and insurance obligations, investing in research and development and acquiring industrial businesses.businesses, as well as dividend payments and share repurchases. We define our liquidity risk tolerance based on liquidity sources and uses, and our liquidity position is targeted to meet our obligations under both normal and stressed conditions.
GE cash, cash equivalents and restricted cash totaled $13.9 billion at September 30, 2018, including $4.8 billion at BHGE. At GE, we rely primarily on free cash generated throughflows from our operating activitiesbusinesses, proceeds from announced dispositions and any dividend payments from GE Capital.planned debt issuances. Cash generated from operating activities at GEgeneration can be subject to variability based on many factors, including seasonality, andreceipt of down payments on large equipment orders, timing of billings on long-term contracts. contracts, the effects of changes in end markets and our ability to execute dispositions. Our focus is on strengthening our cash position, with a balanced capital allocation plan including organic investments that generate strong returns. We intend to maintain a disciplined financial policy, targeting a sustainable credit rating in the Single A range, and targeting a net debt/EBITDA ratio of 2.5x or less. We expect to make significant progress toward this leverage goal over the next few years.
During the first nine months of 2018, GE entered into intercompany loans from GE Capital totaling $6.5 billion (utilizing a portion of GE Capital's excess unsecured term debt) which comprised $6.0 billion to fund its contributions to the GE Pension Plan and a short-term loan of $0.5 billion to refinance other existing intercompany loans from GE Capital to GE to a shorter duration. These loans bear the right of offset against amounts owed by GE Capital to GE under the assumed debt agreement and were priced at market terms with a weighted average interest rate and term of 3.6% and approximately six years, respectively. At September 30, 2018, the total balance of all such intercompany loans with right of offset was $13.7 billion, with a collective weighted average interest rate and term of 3.5% and approximately 10 years, respectively. These loans can be prepaid by GE at any time, in whole or in part, without premium or penalty.
Our 2018 capital allocation plan also considers the fourth quarter funding of €2.6 billion ($3.1 billion) for Alstom redemption rights related to certain consolidated joint ventures, which was completed on October 2, 2018. See Note 15 to the consolidated financial statements for further information.
GE has available a variety of liquidity management tools to fund its operations, including a commercial paper program, as well as bank operating linesrevolving credit facilities and short-term intercompany loans from GE Capital, which are typically repaid within the same quarter. At GE Capital, we mainly rely on cash and short-term investments, cash generated from dispositions and cash flows from our businesses to fund our insurance obligations and debt maturities, including the current portion of long-term debt of $7.6 billion at September 30, 2018, as well as our operating and interest costs. On October 2, 2018, S&P lowered the credit ratings of GE and GE Capital short- and long-term debt from A-1 to A-2 and from A to BBB+, respectively, with a Stable outlook. The reduction in our short-term ratings will result in GE transitioning to a split tier-1/tier-2 commercial paper issuer, which will reduce our borrowing capacity in the commercial paper markets. To accommodate GE’s short-term liquidity needs, we plan to increase utilization of our revolving credit facilities, which will result in an overall increase to our cost of funds.
We maintain a detailed liquidity policy for GE Capital that defines GE Capital's liquidity risk tolerance under stress based on its liquidity sources, and a comprehensive framework for managing liquidity risk including metrics to identify and monitor liquidity risk and procedures to escalate and address potential issues.
Based on asset and liability management actions we have taken, GE Capital does not plan to issue any incremental GE Capital senior unsecured term debt until 2019.2020. GE Capital mainly relies on excess cash positions, cash generated through dispositions, and the cash flow from our Verticals to fund our debt maturities, including the current portion of long-term debt ($15.6 billion at September 30, 2017), and our operating and interest costs. GE Capital's liquidity position is targeted to meet its obligations under both normal and stressed conditions. We expectexpects to maintain an elevatedadequate liquidity position, primarily as we generatea result of cash and short-term investments, cash generated from asset sales, returning to more normalized levels in 2019.dispositions and cash flows from our businesses. During this period, we expect to continue to have excess interest costs as asset sales have outpaced our debt maturities. WhileAdditionally, as previously communicated, GE Capital expects to fund approximately $11.0 billion to our insurance subsidiaries over the next seven years, in addition to $3.5 billion which was funded in the first quarter of 2018. These contributions are subject to ongoing monitoring by the Kansas Insurance Department, and the total amount to be contributed could increase or decrease based upon the results of reserve adequacy testing. GE maintains specified capital levels at these insurance subsidiaries under capital maintenance agreements.
As of September 30, 2018, GE Capital maintained liquidity sources of $13.8 billion that consisted of cash, cash equivalents and restricted cash of $13.1 billion, high-quality investments of $0.2 billion and cash, cash equivalents and restricted cash of $0.4 billion classified within discontinued operations. We expect to generate incremental cash from planned asset reduction actions, of which approximately $7.0 billion has been completed. We also anticipate that GE will contribute at least $3 billion of capital to GE Capital in 2019. Additionally, while we maintain elevatedadequate liquidity levels, we may engage in liability management actions, such as buying back debt, based on market and economic conditions in order to reduce our excess interest costs.
As part of GE’s previously formulated and communicated plan to incur new long-term debt primarily to fund acquisitions and to refinance existing debt, we issued $15.9 billion of long-term debt in 2017. $8.6 billion equivalent of euro debt was issued in the external debt markets, and $7.3 billion was done through two transactions with GE Capital. The $8.6 billion equivalent consists of €1,750 million of 0.375% Notes due 2022, €2,000 million of 0.875% Notes due 2025, €2,250 million of 1.50% Notes due 2029 and €2,000 million of 2.125% Notes due 2037. In lieu of issuing the $7.3 billion of debt externally in the capital markets, GE effected the transactions through GE Capital because GE Capital is holding excess debt as a result of the GE Capital Exit Plan. The debt transactions with GE Capital were priced at markets terms with a weighted average interest rate of 3.5% and a weighted average term of 15 years. To effectuate these transactions, GE and GE Capital entered into intercompany transactions that had the effect of reducing the intercompany payables and receivables given the right of offset between GE and GE Capital by $7.3 billion, as shown in the table below. *Non-GAAP Financial Measure
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| MD&A | FINANCIAL RESOURCES AND LIQUIDITY |
In 2015, senior unsecured notes and commercial paper were assumed by GE upon its merger with GE Capital resulting in an intercompany receivable and payable between GE and GE Capital. On the GE Statement of Financial Position, assumed debt is presented within borrowings with an offsetting receivable from GE Capital and on the GE Capital Statement of Financial Position, this is reflected as an intercompany payable to GE within borrowings. As ofAt September 30, 2017,2018, the amount ofoutstanding assumed outstanding debt was $49.9$37.0 billion (see Note 1011 to the consolidated financial statements for additional information). The following table illustratesprovides a reconciliation of total short- and long-term borrowings as reported on the respective GE and GE Capital external debt and debt assumedStatements of Financial Position to borrowings originally issued by GE as of September 30, 2017.
and GE Capital.
| | | September 30, 2017 (in billions) | GE |
| GE Capital |
| Consolidated(a) |
| |
| September 30, 2018 (in billions) | | GE |
| GE Capital |
| Consolidated(a) |
|
| | | |
| External debt | $ | 83.8 |
| $ | 54.9 |
| $ | 136.4 |
| |
| Total short- and long-term borrowings | | $ | 69.6 |
| $ | 47.0 |
| $ | 115.0 |
|
| | | |
| Debt assumed by GE from GE Capital | (49.9 | ) | 49.9 |
| — |
| (37.0 | ) | 37.0 |
| — |
|
| Intercompany loans with right of offset | 7.3 |
| (7.3 | ) | — |
| 13.7 |
| (13.7 | ) | — |
|
| Total intercompany payable (receivable) between GE and GE Capital | (42.6 | ) | 42.6 |
| — |
| (23.3 | ) | 23.3 |
| — |
|
| | | |
| Debt adjusted for assumed debt and intercompany loans | $ | 41.3 |
| $ | 97.5 |
| $ | 136.4 |
| |
| Total borrowings issued and outstanding | | $ | 46.3 |
| $ | 70.3 |
| $ | 115.0 |
|
| |
| (a) | Includes $2.41.6 billion elimination of other intercompany borrowings between GE and GE Capital. |
The following table illustrates the primary components of borrowings originally issued and outstanding in GE and GE Capital.
|
| | | | | | | | |
| (In billions) | | | | |
| GE | September 30, 2018 |
| | GE Capital | September 30, 2018 |
|
| Commercial paper | $ | 3.0 |
| | Commercial paper | $ | 3.0 |
|
| Senior notes | 20.9 |
| | Senior and subordinated notes | 39.5 |
|
| Intercompany loans from GE Capital(a) | 13.7 |
| | Senior and subordinated notes assumed by GE | 37.0 |
|
| Other GE borrowings | 2.3 |
| | Intercompany loans to GE(a) | (13.7 | ) |
| Total GE excluding BHGE | $ | 39.9 |
| | Other GE Capital borrowings | 4.4 |
|
| BHGE borrowings | 6.4 |
| | | |
| Total borrowings issued by GE | $ | 46.3 |
| | Total borrowings issued by GE Capital | $ | 70.3 |
|
| |
| (a) | The intercompany loans from GE Capital to GE bear the right of offset against amounts owed by GE Capital to GE under the assumed debt agreement. |
In conjunction with the 2016 exchange of the GE Capital preferred stock into GE preferred stock and the exchange of Series A, B and C preferred stock into Series D preferred stock, GE Capital issued preferred stock to GE for which the amount and terms mirrored the GE preferred stock held by external investors ($5,496 million carrying value at September 30, 2018). On July 1, 2018, GE Capital and GE exchanged the existing Series D preferred stock issued to GE for new GE Capital Series D preferred stock that is mandatorily convertible into GE Capital common stock on January 21, 2021. The cash dividend on the new GE Capital preferred stock will equal the cash dividend and accretion on the GE Series D preferred stock through January 21, 2021, at which time the GE Capital preferred stock will convert to GE Capital common stock. After this conversion, GE Capital will no longer pay preferred stock dividends to GE and GE will have to rely on its own cash flows to pay dividends on the GE Series D preferred stock. The exchange of GE Capital Series D preferred stock has no impact on the GE Series D preferred stock, which remains callable for $5,694 million on January 21, 2021 or thereafter on dividend payment dates.
LIQUIDITY SOURCES
GE cash, cash equivalents and restricted cash totaled $13.9 billion at September 30, 2018, including $4.8 billion in BHGE that can only be accessed by GE through the declaration of a dividend by BHGE's Board of Directors, our pro-rata share of BHGE stock buy-backs, and settlements of any intercompany positions. As a result of these restrictions, GE does not consider BHGE cash a freely available source of liquidity for its purposes. GE Capital maintained liquidity sources of $13.8 billion that consisted of cash, cash equivalents and restricted cash of $13.1 billion, high-quality investments of $0.2 billion and cash, cash equivalents and restricted cash of $0.4 billion classified as discontinued operations. Additionally, GE had in place $47.5 billion of committed credit lines ($40.8 billion net of offset provisions), which had no outstanding balance at September 30, 2018.
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| MD&A | FINANCIAL RESOURCES AND LIQUIDITY |
LIQUIDITY SOURCES
GE cash and equivalents of $12.8 billion at September 30, 2017, comprising $8.0 billion at GE and $4.8 billion at BHGE. GE Capital maintained liquidity sources of $32.5 billion that consisted of cash and equivalents of $27.0 billion, high-quality investments of $5.0 billion and cash and equivalents of $0.5 billion classified as discontinued operations. Additionally, at September 30, 2017, GE has $20.0 billion of committed unused credit lines extended by 36 banks in a syndicated credit facility agreement, as well as $5.3 billion of committed operating lines extended by nine banks. GE Capital has the right to compel GE to borrow under these credit lines and transfer the proceeds as loans to GE Capital.
| | | CASH AND EQUIVALENTS | |
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
| (In billions) | September 30, 2017 |
| | | September 30, 2017 |
| September 30, 2018 |
| | September 30, 2018 |
|
| | | | | | | | |
| GE(a) | $ | 12.8 |
| | U.S. | $ | 7.9 |
| $ | 13.9 |
| | U.S. | $ | 9.8 |
|
| GE Capital(b) | 27.0 |
| | Non-U.S.(c) | 31.9 |
| 13.1 |
| | Non-U.S. | 17.2 |
|
| |
| (a) | At September 30, 2017, $4.52018, $3.7 billion of GE cash, cash equivalents and equivalentsrestricted cash was held in countries with currency controls that may restrict the transfer of funds to the U.S. or limit our ability to transfer funds to the U.S. without incurring substantial costs. These funds are available to fund operations and growth in these countries and we do not currently anticipate a need to transfer these funds to the U.S. Included in this amount was $1.2$1.1 billion of BHGE cash and equivalents, which is subject to similar restrictions. |
| |
| (b) | At September 30, 2017, GE Capital cash and equivalents of about $0.6Included $0.8 billion were primarilyheld in insurance and banking entities and werewhich are subject to regulatory restrictions. |
Excluding cash held in countries with currency controls and cash at BHGE, total GE cash, cash equivalents and restricted cash was $6.5 billion at September 30, 2018.
|
| | | |
| COMMITTED AND AVAILABLE CREDIT FACILITIES | |
| September 30 (In billions) | 2018 |
| | |
| Unused back-up revolving credit facility(a) | $ | 20.0 |
|
| Revolving credit facilities (exceeding one year)(b) | 24.0 |
|
| Bilateral revolving credit facilities (364-day)(c) | 3.6 |
|
| Total committed credit facilities | $ | 47.5 |
|
| Less offset provisions(d) | (6.7 | ) |
| Total net available credit facilities | $ | 40.8 |
|
| |
| (a) | Consisted of a $20 billion syndicated credit facility extended by 36 banks, expiring in 2021. |
| |
| (b) | Included a $19.8 billion syndicated credit facility extended by six banks, expiring in 2020. |
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| (c) | Of this amount at September 30, 2017, $4.6Consisted of credit facilities extended by seven banks, with expiration dates ranging from February 2019 to May 2019. |
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| (d) | Commitments under certain credit facilities in (a) and (b) may be reduced by up to $6.7 billion is held outside of the U.S. and is availabledue to fund operations and other growth of non-U.S. subsidiaries; it is also availableoffset provisions for any bank that holds a commitment to fund our needs in the U.S. on a short-term basis through short-term loans, without being subject to U.S. tax. Under the Internal Revenue Code, these loans are permitted to be outstanding for 30 days or less and the total of all such loans is required to be outstanding for less than 60 days during the year. If we were to repatriate this cash, we would be subject to additional U.S. income taxes and foreign withholding taxes.lend under both syndicated credit facilities. |
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| COMMERCIAL PAPER |
| (In billions) | GE |
| | GE Capital |
|
| | | | |
| Average commercial paper borrowings during the third quarter of 2017 | $ | 14.8 |
| | $ | 5.0 |
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| Maximum commercial paper borrowings outstanding during the third quarter of 2017 | $ | 19.5 |
| | $ | 5.1 |
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| Ending commercial paper balance at September 30, 2017 | $ | 2.0 |
| | $ | 5.0 |
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Under the terms of an agreement between GE Capital and GE, GE Capital has the right to compel GE to borrow under certain of these credit lines and transfer the proceeds to GE Capital as intercompany loans, which would be subject to the same terms and conditions as those between GE and the lending banks.
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| COMMERCIAL PAPER |
| (In billions) | GE | | GE Capital |
| | | | |
| 2018 | | | |
| Average borrowings during the third quarter | $ | 9.8 |
| | $ | 3.0 |
|
| Maximum borrowings outstanding during the third quarter | $ | 11.7 |
| | $ | 3.1 |
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| Ending balance at September 30 | $ | 3.0 |
| | $ | 3.0 |
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| | | | |
| 2017 | | | |
| Average borrowings during the third quarter | $ | 14.8 |
| | $ | 5.0 |
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| Maximum borrowings outstanding during the third quarter | $ | 19.5 |
| | $ | 5.1 |
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| Ending balance at September 30 | $ | 2.0 |
| | $ | 5.0 |
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GE Capital commercial paper maturities have historically been funded principally through new commercial paper issuances, and atthe majority of GE are substantially commercial paper is repaid before quarter-end using indefinitely reinvested overseas cash, which as discussed above, is available for use inwithin the U.S. on a short-term basis without being subject to U.S. tax.respective quarter.
We securitize financial assets as an alternative source of funding. During 2018, we completed $2.2 billion of non-recourse issuances and $1.4 billion of non-recourse borrowings matured. At September 30, 2017,2018, consolidated non-recourse securitization borrowings were $0.7$2.7 billion.
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| MD&A | FINANCIAL RESOURCES AND LIQUIDITY |
FOREIGN CURRENCY
As a result of our global operations, we generate and incur a significant portion of our revenues and expenses in currencies other than the U.S. dollar. Such principal currencies are euro, the pound sterling, the Brazilian real and the Chinese renminbi. The results of operating entities reported in currencies other than U.S. dollar are translated to the U.S. dollar at the applicable exchange rate for inclusion in the financial statements. We use a number of techniques to manage the effects of currency exchange, including selective borrowings in local currencies and selective hedging of significant cross-currency transactions. The foreign currency effect arising from operating activities outside of the U.S., including the remeasurement of derivatives, can result in significant transactional foreign currency fluctuations at points in time, but will generally be offset as the underlying hedged item is recognized in earnings. The effects of foreign currency fluctuations, excluding the earnings impact of the underlying hedged item, decreased net earnings by $0.1 billion for the ninethree months ended September 30, 2017.2018 by less than $0.3 billion.
Effective July 1, 2018, we designated the Argentine peso as highly inflationary, which had an immaterial impact on our financial statements.
As of September 30, 2018, we held the U.S. dollar equivalent of $0.4 billion of cash in Angolan kwanza. As Angola is subject to currency controls that restrict the transfer of funds to the U.S. and there is no liquid derivatives market for this currency, we have used Angolan kwanza to purchase $0.4 billion equivalent bonds issued by the central bank in Angola (Banco Nacional de Angola) with various maturities through 2020 to mitigate the related currency devaluation exposure risk. The bonds are denominated in Angolan kwanza as U.S. dollar equivalents, so that, upon payment of periodic interest and principal upon maturity, payment is made in Angolan kwanza, equivalent to the respective U.S. dollars at the then-current exchange rate.
See Notes 16 and 21Note 17 to the consolidated financial statements for further information about our risk exposures, our use of derivatives, and the effects of this activity on our financial statements.
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MD&A | FINANCIAL RESOURCES AND LIQUIDITY |
DEBT AND DERIVATIVE INSTRUMENTS, GUARANTEES AND COVENANTS
CREDIT RATINGS
We have relied, and may continue to rely, on the short-termshort- and long-term debt capital markets to fund, among other things, a significant portion of our operations and significant acquisitions. The cost and availability of debt financing is influenced by our credit ratings.
On October 20, 2017, Moody’s Investors Service (Moody’s), Standard and Poor’s Global Ratings (S&P) placed all of its, and Fitch Ratings (Fitch) currently issue ratings on GE and GE Capital short- and their affiliates on CreditWatch, with negative implications.long-term debt.
On October 2, 2018, S&P stated it will be conducting a reviewlowered the credit ratings of these ratingsGE and expects to complete this review at approximately the same time GE announces its financial results for the fourth quarter 2017, if not earlier. On October 30, 2017, Fitch Ratings (Fitch) changed its rating outlook to Negative from Stable for GE, GE Capital short- and long-term debt from A-1 to A-2 and from A to BBB+, respectively, with a Stable outlook. In addition, Moody’s and Fitch changed their affiliates.respective outlooks to ‘review for a potential downgrade’ and ‘Rating Watch Negative’ for both GE and GE Capital.
We are disclosing these updates and the ratings below to enhance understanding of our sources of liquidity and the effects of our ratings on our costs of funds. Our ratings may be subject to a revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating. For a description of some of the potential consequences of a reduction in our credit ratings, see our Annual Report on Form 10-K for the year ended December 31, 2016 under “Risk Factors - Financial Risks - Funding access/costs& liquidity - Failure to maintain our credit ratings, or conditions in the financial and credit markets, could adversely affect our access to capital markets, funding costs and related margins, liquidity, capital allocation plans and competitive position.”
GE’sThe credit ratings of GE and GE Capital’s ratingsCapital as of the date of this filing are set forth in the table below.
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| | Moody's | S&P | Fitch |
| | | | |
| GE | | | |
| Outlook | Review for Downgrade | Stable | CreditWatchRating Watch Negative | Negative
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| Short term | P-1 | A-1+A-2 | F1+F1 |
| Long term | A1A2 | AA-BBB+ | AA-A |
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| GE Capital | | | |
| Outlook | Review for Downgrade | Stable | CreditWatchRating Watch Negative
| Negative
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Commercial paperShort term | P-1 | A-1+A-2 | F1+F1 |
Senior notesLong term | A1A2 | AA-BBB+ | AA-A |
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| MD&A | FINANCIAL RESOURCES AND LIQUIDITY |
PRINCIPAL DEBT AND DERIVATIVE CONDITIONS
Certain of our derivative instruments can be terminated if specified credit ratings are not maintained and certain debt and derivatives agreements of other consolidated entities have provisions that are affected by these credit ratings. Substantially all of our debt agreements do not contain material credit rating covenants.
Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our standard master agreements) on an individual counterparty basis. Where we have agreed to netting of derivative exposures with a counterparty, we offset our exposures with that counterparty and apply the value of collateral posted to us to determine the net exposure. We actively monitor these net exposures against defined limits and take appropriate actions in response, including requiring additional collateral.
Swap, forward and option contracts are executed under standard master agreements that typically contain mutual downgrade provisions that provide the ability of the counterparty to require termination if the credit ratings of the applicable GE entity were to fall below specified ratings levels agreed upon with the counterparty, primarily BBB/Baa2. Our master agreements also typically contain provisions that provide termination rights upon the occurrence of certain other events, such as a bankruptcy or events of default by one of the parties. If an agreement was terminated under any of these circumstances, the termination amount payable would be determined on a net basis and could also take into account any collateral posted. The net amount of our derivative liability subject to such termination provisions, after consideration of collateral posted by us and outstanding interest payments was $510 million at September 30, 2018. This excludes exposure related to embedded derivatives.
See Note 17 to the consolidated financial statements for further information about our risk exposures, our use of derivatives, and the effects of this activity on our financial statements.
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| MD&A | FINANCIAL RESOURCES AND LIQUIDITY |
STATEMENT OF CASH FLOWS -– NINE MONTHS ENDED SEPTEMBER 30, 20172018 VERSUS 2016
CONSOLIDATED CASH FLOWS2017
We evaluate our cash flowflows performance by reviewing our industrial (non-GE Capital) businesses and GE Capital businesses separately. Cash from operating activities (CFOA) is the principal source of cash generation for our industrial businesses.
All other operating activities reflect cash sources and uses as well as non-cash adjustments to net earnings (loss) including those related to taxes, pensions, restructuring and gains (losses) on principal business dispositions. See Note 20 to the consolidated financial statements for further information regarding All other operating activities and All other investing activities.
GE CASH FLOWS – NINE MONTHS ENDED SEPTEMBER 30
(in billions)
With respect to GE CFOA, we believe that it is useful to supplement our GE Statement of Cash Flows and to examine in a broader context the business activities that provide and require cash.
The most significant source of cash in GE CFOA is customer-related activities, the largest of which is collecting cash resulting from product or services sales. The most significant operating use of cash is to pay our suppliers, employees, tax authorities and others for a wide range of material and services. DividendsCommon dividends from GE Capital represent the distribution of a portion of GE Capital retained earnings, and are distinct from cash from continuing operations within the GE Capital businesses.
All other operating activities reflectIn the following discussion, Net earnings for cash sourcesflows represents the adding together of Net earnings (loss), (Earnings) loss from discontinued operations and uses as well as non-cash adjustments(Earnings) loss from continuing operations retained by GE Capital, excluding GE Capital common dividends paid to net income including those related to taxes, interest, pension, contract assets and gains (losses) on principal business dispositions. See Note 21 to the consolidated financial statements for further information.GE, if any.
See the Intercompany Transactions between GE and GE Capital section within thethis MD&A and Notes 4 and 1921 to the consolidated financial statements for further information regarding certain transactions affecting our consolidated Statement of Cash Flows.
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| OPERATING CASH FLOWS | | INVESTING CASH FLOWS | | FINANCING CASH FLOWS |
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| 2016 | 2017 | | 2016 | 2017 | | 2016 | 2017 |
GE cash used for operating activities increased $8.2 billion primarily due to the following:
No common dividends were paid by GE Capital to GE in 2018 compared with $4.0 billion in 2017.
Cash used for GE CFOA (excluding common dividends received from GE Capital in 2017) amounted to $4.1 billion in 2018 and an insignificant amount in 2017, primarily due to the following:
Net earnings for cash flows plus depreciation and amortization of property, plant and equipment, amortization of intangible assets, goodwill impairments and deferred income taxes of $5.5 billion in 2018 compared with $6.0 billion in 2017. Net earnings for cash flows included pre-tax gains on business dispositions and other investments and non-cash pre-tax gains (losses) of $0.9 billion compared with $2.0 billion in 2017. Net earnings for cash flows also included pre-tax restructuring and other charges of $2.2 billion in 2018 compared with $3.0 billion in 2017.
Lower growth in contract and other deferred assets of $1.0 billion in 2018 compared with $2.9 billion in 2017, primarily due to the timing of revenue recognized relative to the timing of billings and collections on our long-term equipment agreements, primarily in our Power segment, our long-term service agreements, primarily in our Aviation segment, and lower cash used for deferred inventory, primarily in our Power segment, partially offset by our Renewable Energy and Aviation segments.
An increase in cash used for working capital of $2.3 billion in 2018 compared with $0.9 billion in 2017. This was primarily due to an increase in cash used from progress collections of $1.9 billion, mainly in our Power and Aviation segments, partially offset by our Renewable Energy segment, an increase in cash used for current receivables of $1.4 billion across all segments excluding Oil & Gas, and an increase in cash used for inventories of $0.3 billion, mainly in our Oil & Gas, Transportation, Healthcare and Aviation segments, partially offset by our Power segment. These increases in cash used for working capital were partially offset by an increase in cash generated from accounts payable of $2.2 billion, mainly in our Aviation, Oil & Gas, Renewable Energy and Healthcare segments.
GE Pension Plan contributions of $6.0 billion in 2018 compared with $1.4 billion in 2017.
Lower cash paid for restructuring charges of $1.3 billion in 2018 compared with $1.6 billion in 2017.
42 20172018 3Q FORM 10-Q43
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| MD&A | FINANCIAL RESOURCES AND LIQUIDITY |
2017 – 2016 COMMENTARY
GE cash from operating activities decreased $14.3 billion primarily due to the following:
GE Capital paid common dividends to GE totaling $4.0 billion in 2017 compared with $16.1 billion in 2016.
Cash generated from Industrial CFOA* amounted to an insignificant amount and $2.3 billion in 2017 and 2016, respectively, primarily due to the following:
Net income plus depreciation and deferred income taxes of $5.9 billion in 2017 compared with $9.1 billion in 2016. Net income included pre-tax gains of $1.9 billion from the sale of Water in 2017 and $3.1 billion from the sale of Appliances and $0.4 billion from the sale of GE Asset Management in 2016 which are not included in Industrial CFOA and are instead reflected as a component of total proceeds from principal business dispositions within cash flows from investing activities. Net income also included non-cash pre-tax impairments of $1.3 billion related to Power Conversion goodwill and a power plant asset in 2017 and current tax expense of $0.7 billion and $1.0 billion in 2017 and 2016, respectively.
A decrease in cash used for working capital of $0.1 billion in 2017 compared with 2016. This was primarily due to a reduction in inventory build of $1.1 billion, partially offset by an increase in cash used for accounts payable of $0.9 billion across all businesses.
An increase in contract assets of $4.0 billion in 2017 compared with $3.0 billion in 2016, primarily due to cumulative catch up adjustments driven by lower forecasted cost to complete the contracts as well as increased forecasted revenue on our long-term service agreements and the timing of revenue recognized relative to the timing of billings and collections on both our long-term service agreements and long-term equipment contracts.
GE Pension Plan contributions of $1.4 billion in 2017 compared with zero in 2016.
Lower taxes paid of $1.8 billion in 2017 compared with $2.3 billion in 2016.
See Note 21 to the consolidated financial statements for further information regarding cash sources and uses as well as non-cash adjustments to net income reported as All other operating activities.
GE cash used for investing activities increased $8.1 billion primarily due to the following:
Business acquisition activitiesAn insignificant amount of business acquisitions in 2018, compared with business acquisitions of $6.1 billion primarilyin 2017, mainly driven by the Baker Hughes transaction for $3.4 billion ($7.5 billion cash consideration, less $4.1 billion of cash assumed), LM Wind Power for $1.6 billion (net of cash acquired) and ServiceMax for $0.9 billion (net of cash acquired).
Net cash paid for settlements of derivative hedges of $0.4 billion in 2018, compared with $1.4 billion in 2017.
Lower additions to property, plant and equipment of $2.4 billion in 2018, compared with $3.1 billion in 2017.
Proceeds from business dispositions of $3.4 billion in 2018, primarily from the sale of our Industrial Solutions business for $2.2 billion (net of cash transferred) and our Value-Based Care business in our Healthcare segment for $1.0 billion (net of cash transferred), compared with $2.9 billion in 2017, compared with business acquisitions of $0.9 billion in 2016.
Business disposition proceeds of $2.9 billion, primarilymainly driven by the sale of our Water business for $2.7 billion (net of cash transferred) in 2017, compared with proceeds of $5.3 billion, primarily driven by the sale of our Appliances business for $4.8 billion and the sale of GE Asset Management for $0.4 billion in 2016..
Net settlements of derivative hedges of $1.4 billion in 2017 compared with minimal net settlements in 2016.
GE cash fromused for financing activities increased $23.9$6.2 billion primarily due to the following:
Net repurchases of GE treasury shares of $2.6 billion and $18.0 billion in 2017 and 2016, respectively.
A net increase in borrowings of $14.9$3.1 billion in 2018, mainly driven by intercompany loans from GE Capital to GE of $6.5 billion (including $6.0 billion to fund contributions to the GE Pension Plan), partially offset by net repayments of debt of $3.4 billion (including $0.8 billion at BHGE), compared with a net increase in borrowings of $14.7 billion in 2017, mainly driven by the issuance of long-term debt of $8.6 billion, primarily to fund acquisitions, and 2017 debt effected throughlong-term loans from GE Capital to GE of $7.3 billion, partially offset by the settlement of the remaining portion of a 2016 debt effected throughshort-term loan from GE Capital to GE of $1.3 billion.
BHGE net stock repurchases and dividends to noncontrolling interests of $0.6 billion in 2018, compared with a net increase in borrowings of $6.2$0.1 billion in 2016, primarily driven by debt effected through GE Capital of $5.0 billion.2017.
*Non-GAAP FInancial Measure
2017 3Q FORM 10-Q 43These increases in cash used were partially offset by the following decreases:
Common dividends paid to shareowners of $3.1 billion in 2018, compared with $6.3 billion in 2017.
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MD&A | FINANCIAL RESOURCES AND LIQUIDITY |
GE CAPITAL CASH FLOWS
2018 – NINE MONTHS ENDED SEPTEMBER 30
(Dollars in billions)
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| OPERATING CASH FLOWS | | INVESTING CASH FLOWS | | FINANCING CASH FLOWS |
| | | | | | | | |
| 2016 | 2017 | | 2016 | 2017 | | 2016 | 2017 |
2017 – 2016 COMMENTARY-CONTINUING OPERATIONS:
GE Capital cash from operating activities-continuing operations increased $0.2decreased $1.6 billion primarily due to the following:
Lower income tax payments of $0.2 billion and a generalA net increase in cash generated from earnings of continuing operations.
These increases were partially offset by a net decrease in cash collateral received frompaid to counterparties on derivative contracts of $0.8$1.8 billion.
GE Capital cash from investing activities-continuing operations decreased $38.7$2.1 billion primarily due to the following:
A decrease in net maturities related to investment securities of $4.6 billion: $2.1 billion in 2018 compared with $6.7 billion in 2017.
An increase in net additions to property, plant & equipment of $1.2 billion.
Net proceeds from the sales of our discontinued operations of an insignificant amount in 2018 compared with $1.0 billion in 2017 compared2017.
An increase in intercompany loans from GE Capital to $53.2GE of $6.5 billion in 2016.
Maturities2018 compared with $5.9 billion in 2017 ($7.3 billion of $10.4 billion related to interest bearing deposits in 2016.
GE debt effected through GE Capital of $7.3 billion,long-term loans, partially offset by the settlement of the remaining portion of a 2016 GE debt effected through GE Capitalshort-term loan of $1.3 billion in 2017, compared to GE debt effected through GE Capital of $5.0 billion in 2016.
Net cash paid for derivative settlements of an insignificant amount in 2017 compared to net cash received from derivative settlements of $0.6 billion in 2016.
These decreases were partially offset by the following increases:
Investment securities of $18.7 billion related to maturities of $6.5 billion in 2017 compared to investments of $12.2 billion in 2016.
•Higher net collections of financing receivables of $3.1 billion in 2017.billion).
A general reduction in funding related to discontinued operations.
These decreases in cash were partially offset by the following increases:
Proceeds from the sale of EFS' debt origination business and equity investments of $3.7 billion in 2018.
Higher collections of financing receivables of $3.4 billion: $6.7 billion in 2018 compared with $3.2 billion in 2017.
GE Capital cash used for financing activities-continuing operations decreased $45.3$2.9 billion primarily due to the following:
GE Capital paid no common dividends to GE in 2018 compared with $4.0 billion in 2017.
Lower net repayments of borrowings of $16.8 billion in 2018 compared with $17.6 billion in 2017 compared to $50.7 billion2017.
These increases in 2016.cash were partially offset by a net increase in derivative cash settlements paid of $1.8 billion.
GE Capital paid common dividends to GE totaling $4.0 billion in 2017 compared to $16.1 billion in 2016.
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MD&A | FINANCIAL RESOURCES AND LIQUIDITY |
GE CAPITAL DISCONTINUED OPERATIONS CASH FLOWS – NINE MONTHS ENDED SEPTEMBER 30
(Dollars in billions)
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| OPERATING CASH FLOWS | | INVESTING CASH FLOWS | | FINANCING CASH FLOWS |
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| 2016 | 2017 | | 2016 | 2017 | | 2016 | 2017 |
2017 – 2016 COMMENTARY-DISCONTINUED OPERATIONS:
GE Capital cash used for operating activities-discontinued operations decreased $5.2 billion primarily due to the following:
Lower cash paid for income taxes in 2017.
GE Capital cash used for investing activities-discontinued operations decreased $9.7 billion primarily due to the following:
The sale of bank deposits of $16.5 billion resulting in net cash paid in conjunction with the sale of GE Capital Bank's U.S. online deposit platform during 2016.
This decrease was partially offset by the following increases:
Reduction in funding from continuing operations (primarily our treasury operations).
Sale of bank deposits for $0.5 billion resulting in net cash paid related to our Consumer platform during 2017.
GE Capital cash from financing activities-discontinued operations increased $1.6 billion primarily due to the following:
Debt issued of $1.8 billion in 2017 and $0.9 billion in 2016 by a discontinued business sold during the first quarter of 2017.
Lower repayment of borrowings and bank deposit activity of $0.6 billion in 2017.
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| MD&A | FINANCIAL RESOURCES AND LIQUIDITY |
INTERCOMPANY TRANSACTIONS BETWEEN GE AND GE CAPITAL
We are repositioning GE to be the world’s best infrastructure and technology company, with a smaller financial services division. Our focus is on driving infrastructure leadership, investing in innovation and achieving a culture of simplification to better serve our customers around the world. Over the last decade, we have made significant strides in transforming our portfolio and focusing on our industrial leadership. We have grown our infrastructure platforms with major portfolio moves, investing in adjacencies and pursuing opportunities that are closely related to our core.
In parallel, we have made a concentrated effort to reduce the size of our GE Capital, business and align its growth with Industrial earnings. As a result,the financial arm of GE, Capital Verticals are now focused on investingprovides financial human and intellectual capital to promote growth for ourGE’s industrial businesses and theirits customers. GE Capital accomplishes thisenables GE orders by either providing direct financing for a GE transaction or by bringing market participants together that result in part through related partyindustrial sales. On January 16, 2018, we announced plans to take actions to make GE Capital smaller and more focused, including a substantial reduction in the size of GE Capital's Energy Financial Services and Industrial Finance businesses. We will retain origination capabilities to support our industrial businesses; however, we will transition to more funding by the capital markets, including export credit agencies and financial institutions. The transactions withwhere GE thatand GE Capital are directly involved are made on an arms-length basisarm's length terms and are reported in the respective GE and GE Capital columns of our financial statements, but are eliminated in deriving our consolidated financial statements. These transactions include, but are not limited to, the following:
GE Capital dividends to GE,
GE Capital working capital solutions to optimize GE cash management,
GE Capital enabled GE industrial orders, including related GE guarantees to GE Capital,
GE Capital financing of GE long-term receivables, and
Aircraft engines, power equipment, renewable energy equipment and healthcare equipment manufactured by GE that are installed on GE Capital investments, including leased equipment.
In addition to the above transactions that primarily enable growth for the GE businesses, there are routine related party transactions, which include, but are not limited to, the following:
Expenses related to parent-subsidiary pension plans,
Buildings and equipment leased between GE and GE Capital, including sale-leaseback transactions,
Information technology (IT) and other services sold to GE Capital by GE,
Settlements of tax liabilities, and
Various investments, loans and allocations of GE corporate overhead costs.
CASH FLOWS
GE did not receive a common dividend distribution from GE Capital in the nine months ended September 30, 2018 and it does not expect to for the foreseeable future. GE Capital paid $4.0 billion and $16.1 billion of common dividends to GE in the nine months ended September 30, 2017 and 2016, respectively.2017.
In order to manage short-term liquidity and credit exposure, GE sells current receivables to GE Capital and other third parties in part to fund the growth of our industrial businesses. These transactions can result in cash generation or cash use. During any given period, GE receives cash from the sale of receivables to GE Capital and other third parties.parties, and it therefore forgoes the future collections of cash on receivables sold, as GE Capital collects the cash from the customer. GE also leverages GE Capital for its expertise in receivables collection services and sales of receivables to GE Capital are made on an arm’s length basis.terms. These transactions can result in cash generation or cash use in the Statement of Cash Flows. The incremental amount of cash received from sales of receivables in excess of the cash GE would have otherwise collected had these receivables not been sold represents the cash generated or used in the period relating to this activity. The effect of cash generated in GE CFOAimpact from current receivables sold to GE Capital, including current receivables subsequently sold to third parties, decreased GE’s CFOA by $2.3$2.9 billion and $0.2$2.3 billion in the nine months ended September 30, 20172018 and 2016,2017, respectively.
As of September 30, 2017,2018, GE Capital had approximately $11.26.4 billion recorded on its balance sheet related to current receivables purchased from GE. Of these amounts, approximately half26% had been sold by GE to GE Capital with full or limited recourse (i.e., the GE business retains theall or some risk of default). The evaluation of whether recourse transactions qualify for accounting derecognition is based, in part, upon the legal jurisdiction of the sale; as such, the majority of recourse transactions outside the U.S. qualify for sale treatment. ClaimsThe effect on GE CFOA of claims by GE Capital on receivables sold with full or limited recourse to GE havehas not been significant for the nine months ended September 30, 20172018 and 2016.2017.
In December 2016, GE Capital entered into a Receivables Facility with members of a bank group, designed to provide extra liquidity to GE. The Receivables Facility allows us to sell eligible current receivables on a non-recourse basis for cash and a deferred purchase price to members of the bank group. The purchase commitment of the bank group increased from $3.0remains at $3.8 billion to $3.2 billion during the third quarter of 2017.at September 30, 2018. See Note 4 to the consolidated financial statements for further information.
46 20172018 3Q FORM 10-Q45
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| MD&A | FINANCIAL RESOURCES AND LIQUIDITY |
In certain circumstances, GE provides customers primarily within our Power, Renewable Energy and Aviation businesses with extended payment terms for the purchase of new equipment, purchases of significant upgrades and for fixed billings within our long-term service contracts. Similar to current receivables, GE may sell these long-term receivables to GE Capital to manage short-term liquidity and fund growth. These transactions are made on arm's length terms and any fair value adjustments, primarily related to time value of money, are recognized within the Industrial business in the period these receivables are sold to GE Capital. GE Capital accretes interest and factoring fee income over the life of the receivables. Factoring fee income is eliminated in our consolidated results. In addition, the long-term portion of any remaining outstanding receivables as of the end of the period are reflected in All other assets within our consolidated Statement of Financial Position. Related to GE long-term customer receivables outstanding, assets at GE Capital decreased to $1.2 billion from $2.1 billion, net of deferred income of approximately $0.1 and $0.3 billion recorded in its balance sheet at September 30, 2018 and December 31, 2017, respectively. The effect of cash generated from the sale of these long-term receivables to GE Capital decreased GE's CFOA by $0.6 billion and increased GE's CFOA by $0.4 billion in the nine months ended September 30, 2018 and 2017, respectively.
ENABLED ORDERS
Enabled orders represent the act of introducing, elevating and influencing customers and prospects that result in an industrial sale, potentially coupled with programmatic captive financing or driving incremental products or services across the GE Store.services. During the nine months ended September 30, 20172018 and 2016,2017, GE Capital enabled $8.8$5.9 billion and $8.2$8.8 billion of GE industrial orders, respectively. 2017In 2018, orders arewere primarily with our Power ($3.3 billion), Renewable Energy ($3.32.2 billion), Healthcare ($1.01.5 billion) and Oil & GasPower ($0.71.1 billion) businesses.
AVIATION
During the nine months ended September 30, 20172018 and 2016,2017, GE Capital acquired 28 aircraft (list price totaling $3.4 billion) and 34 aircraft (list price totaling $4.6 billion) and 32 aircraft (list price totaling $4.7 billion), respectively, from third parties that will be leased to others, which are powered by engines that were manufactured by GE Aviation and affiliates.affiliates and made payments related to spare engines and engine parts to GE Aviation and affiliates of $0.3 billion and $0.1 billion, respectively. Additionally, GE Capital had $1.5$1.2 billion of net book value of engines, originally manufactured by GE Aviation and affiliates and subsequently leased back to GE Aviation and affiliates at both September 30, 20172018 and December 31, 2016, respectively.
POWER, RENEWABLE ENERGY AND AVIATION
GE leverages GE Capital for its expertise in structuring long-term financing arrangements with certain Power, Renewable Energy and Aviation customers for the purchase of equipment, upgrades and long-term service contracts. These arrangements are made on an arm’s length basis and any fair value adjustments are recognized within the results of our Power, Renewable Energy and Aviation segments. Any associated deferred income recorded by GE Capital is eliminated in our consolidated results. In relation to these arrangements, GE Capital had approximately $2.3 billion and $1.9 billion of long-term financing receivables outstanding, net of deferred income of approximately $0.3 billion and $0.3 billion reported on its balance sheet at September 30, 2017 and December 31, 2016, respectively. The effect of cash generated in GE CFOA from long-term financing arrangements with GE Capital increased GE's CFOA by $0.4 billion and $1.0 billion in the nine months ended September 30, 2017 and 2016, respectively.2017.
PENSIONS
GE Capital is a member of certain GE Pension Plans. As a result of the GE Capital Exit Plan, GE Capital will have additional funding obligations for these pension plans. These obligations do not relate to the Verticals and are recognized as an expense in GE Capital’s other continuing operations when they become probable and estimable. There was no additional funding obligations recognized by GE Capital for the nine months ended September 30, 2018. The additional funding obligationsobligation recognized by GE Capital were an insignificant amount and $0.3 billion for the three and nine months ended September 30, 2017, respectively, and $0.1 billion and $0.4 billion for the three and nine months ended September 30, 2016, respectively.
Certain of this additional funding is recorded as a contra pension expense for GE because GE’s related future pension obligations will be paid by GE Capital. For certain other pension plan funding obligations triggered by the GE Capital Exit Plan, GE agreed to assume the funding obligation that would have been triggered by GE Capital at the date of exit from the plan in exchange for an assumption fee that GE recorded as Other income. There was no cash transferred to GE for the assumption of these GE Capital funding obligations for the three and nine months ended September 30, 2017. The total cash transferred for similar funding obligations assumed by GE from GE Capital for the three and nine months ended September 30, 2016 were zero and $0.1 billion, respectively.
On a consolidated basis, the additional required pension funding and any related assumption fees do not affect current period earnings. Any additional required pension funding will be reflected as a reduction of the pension liability when paid.
GE GUARANTEE OF GE CAPITAL THIRD-PARTY TRANSACTIONS
In certain instances, GE provides guarantees to GE Capital transactions with third parties primarily in connection with enabled orders. In order to meet its underwriting criteria, GE Capital may obtain a direct guarantee from GE related to the performance of the third party. GE guarantees can take many forms and may include, but not be limited to, direct performance or payment guarantees, return on investment guarantees, asset value guarantees and loss pool arrangements. As of September 30, 20172018, GE had outstanding guarantees to GE Capital on $1.5$2.0 billion of funded exposure and $1.2$1.0 billion of unfunded commitments.commitments, which included guarantees issued by industrial businesses. The recorded amount of these contingent liabilities was $0.1$0.2 billion as of September 30, 20172018 and is dependent upon individual transaction level defaults, losses and/or returns.
GE GUARANTEE OF CERTAIN GE CAPITAL DEBT
GE provides implicit and explicit support to GE Capital through commitments, capital contributions and operating support. As previously discussed, debt assumed by GE from GE Capital in connection with the merger of GE Capital into GE was $49.937.0 billion, and GE guaranteed $44.537.9 billion of GE Capital debt at September 30, 20172018.
See Notes 10 and 20Note 21 to the consolidated financial statements for additional information.information about the eliminations of intercompany transactions between GE and GE Capital.
201746 2018 3Q FORM 10-Q47
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| MD&A | CRITICAL ACCOUNTING ESTIMATES |
CRITICAL ACCOUNTING ESTIMATES
We utilized significant estimates in the preparation of the third quarter financial statements.
Please refer to the Critical Accounting Estimates section within MD&A and Note 1 Basis of Presentation and Summary of Significant Accounting Policies, to the consolidated financial statements of our Annual Report on Form 10-K Report filed on February 24, 2017,23, 2018, for a discussion of our accounting policies and the critical accounting estimates we use to: recognize revenue on long-term product services agreements; assess the recoverability of assets such as financing receivables and goodwill; determine the fair value of financial assets; and determine our provision for income taxes and recoverability of deferred tax assets.
INSURANCE AND INVESTMENT CONTRACT LIABILITIES
Insuranceassets and investment contract liabilities amounted to $26.6 billion and $26.1 billion at September 30, 2017 and December 31, 2016, respectively and primarily comprise adetermine the liability for future policy benefits for those claims not yet incurred and claim reserves for claims that have been incurred or are estimated to have been incurred but not yet reported. Reserves ceded to reinsurers were $2.2 billion and $2.0 billion at September 30, 2017 and December 31, 2016, respectively and are included in the caption “Other receivables” on our Consolidated Statement of Financial Position.benefits.
REVENUE RECOGNITION ON LONG-TERM PRODUCT SERVICES AGREEMENTS
Claim reserves amounted toOn January 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09, $4.9 billionRevenue from Contracts with Customers and $4.6 billion of which $3.4 billion and $3.1 billion relates to long-term care insurance contracts as of September 30, 2017 and December 31, 2016, respectively. Claim reserves are established when a claim is incurred or is estimated to have been incurred and represents our best estimate of the ultimate obligations for future claim payments and claim adjustment expenses. Key inputs include actual known facts about the claims, such as the benefits available and cause of disability of the claimant, as well as assumptions derived from our actual historical experience and expected future changes in experience factors. Claim reserves are evaluated periodically for potential changes in loss estimates with the support of qualified actuaries and any changes are recorded in the period in which they are determined.
Future policy benefit reserves amounted to $19.2 billion and $18.7 billion of which $9.0 billion and $8.7 billion relates to long-term care insurance contracts at September 30, 2017 and December 31, 2016, respectively. These reserves represent the present value of such benefits less the present value of future net premiums and are based on actuarial assumptions established at the time the policies were issued or acquired. These assumptions include, but are not limited to interest rates, health care experience (including type and cost of care), mortality, and the lengthrelated amendments (ASC 606), which supersedes most previous U.S. GAAP revenue guidance. The standard requires us to make certain estimates that affect the amount and timing of timerevenue recognized in a policy will remain in force. Our annual premium deficiency testing assesses the adequacy of future policy benefit reserves, net of capitalized acquisition costs using current assumptions. As we no longer originate new policies, we perform premium deficiency testing in the aggregate across our run-off insurance products.
We have recently experienced elevated claim experience for a portion of our long-term care insurance contracts, which is most pronounced for policyholders with higher attained ages. As a result,given period, primarily related to equipment and as described below, we are conducting a comprehensive review of premium deficiency assumptions across all insurance products, including a reassessment of future claim projections for long-term careservice contracts that will be incorporated within our annual test of future policy benefit reserves for premium deficiencies, which is expectedare recognized on an overtime basis (refer to be completed in the fourth quarter of 2017.
A comprehensive review of premium deficiency assumptions is a complex processNote 1 and depends on a number of factors, many of which are interdependent and require evaluation individually and in the aggregate across all insurance products. The vast majority of our run-off insurance activities comprises reinsurance from multiple ceding insurance entities with underlying treaties having unique terms and conditions. Premium deficiency testing relies on claim and policy information provided by these ceding entities and considers each of the unique treaties. In order to utilize that information for purposes of completing experience studies covering all key assumptions, we perform detailed procedures to conform and validate the data received, including periodic evaluation of the operating environment at ceding entities. Our long-term care business includes coverage where credible claim experience for higher attained ages is still emerging and to the extent that recent experience deviates from previous expectations, new projections of claim costs extending over the expected life of the policies require development. Significant uncertainties exist in making these best estimate projections for these long-duration insurance contracts that includes consideration of a wide range of possible outcomes as well as actuarial peer reviews before a final determination can be made.
Should the net liability for future policy benefits plus the present value of expected future gross premiums be insufficient to provide for the present value of expected future policy benefits and expenses, we would be required to reduce any remaining capitalized acquisition costs and, to the extent a shortfall still exists, increase our existing future policy benefit reserves. We would record a charge to earnings for any premium deficiencies in the fourth quarter of 2017 upon completion of this review. Based upon the work performed to date and complexity of the review described above, a charge related to a probable deficiency is not reasonably estimable at September 30, 2017. Until the above described review has been completed we have deferred the decision whether GE Capital will pay additional dividends to GE.
See Note 119 to the consolidated financial statements for further discussion of our accounting policy for these contracts). The most critical estimates relevant to our revenue accounting are related to our long-term product service agreements as discussed below.
We enter into long-term product service agreements with our customers primarily within our Aviation, Power, Oil & Gas and Transportation segments. These agreements require us to provide preventative maintenance, asset overhaul / updates, and standby "warranty-type" services that include certain levels of assurance regarding asset performance and uptime throughout the contract periods, which generally range from 5 to 25 years. Contract modifications that extend or revise contract terms are not uncommon and generally result in our recognizing the impact of the revised terms prospectively over the remaining life of the modified contract (i.e., effectively like a new contract).
Our revenue recognition on long-term product services agreements requires estimates of both customer payments expected to be received over the contract term as well as the costs expected to be incurred to perform required maintenance services. We routinely review estimates under product services agreements and regularly revise them to adjust for changes in outlook as described below.
We recognize revenue as we perform under these arrangements using an over time accounting model based on costs incurred relative to total expected costs. Throughout the life of a contract, this reportmeasure of progress captures the nature of the timing and Noteextent of our underlying performance activities as our stand-ready services often fluctuate between routine inspections and maintenance, unscheduled service events and major overhauls at pre-determined usage intervals.
Customers generally pay us based on the utilization of the asset (per hour of usage for example) or upon the occurrence of a major event within the contract such as an overhaul. As a result, a significant estimate in determining expected revenues of a contract is estimating how customers will utilize their assets over the term of the agreement. Changes in customer utilization can influence the timing and extent of overhauls and other service events over the life of the contract. As a result, the revenue recognized each period is dependent on our estimate of how a customer will utilize their assets over the term of the agreement. We generally use a combination of both historical utilization trends as well as forward-looking information such as market conditions and potential asset retirements in developing our revenue estimates. This estimate of customer utilization will impact both the total contract billings and costs to satisfy our obligation to maintain the equipment. To the extent required, we limit the amount of variable consideration used to estimate our transaction price such that it is improbable that a significant revenue reversal will occur in future periods.
To develop our cost estimates, we consider the timing and extent of future maintenance and overhaul events, including the amount and cost of labor, spare parts and other resources required to perform the services. In developing our cost estimates, we utilize a combination of our historical cost experience and expected cost improvements. Cost improvements are only included in future cost estimates after savings have been observed in actual results or proven effective through an extensive regulatory or engineering approval process.
We regularly assess customer credit risk inherent in the carrying amounts of receivables and contract assets and estimated earnings, including the risk that contractual penalties may not be sufficient to offset our accumulated investment in the event of customer termination. We gain insight into future utilization and cost trends, as well as credit risk, through our knowledge of the installed base of equipment and the close interaction with our customers that comes with supplying critical services and parts over extended periods.
See Notes 1, 9 and 10 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016 for further information.
48 20172018 3Q FORM 10-Q47
OTHER ITEMS
NEW ACCOUNTING STANDARDS
ASU NO. 2016-16,2018-12, FINANCIAL SERVICES - INSURANCE (TOPIC 944): TARGETED IMPROVEMENTS TO THE ACCOUNTING FOR INCOME TAXES: INTRA-ENTITY TRANSFERS OF ASSETS OTHER THAN INVENTORYLONG-DURATION CONTRACTS
In October 2016,August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-16,2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. We are evaluating the effect of the standard on our consolidated financial statements and anticipate that its adoption will significantly change the accounting for measurements of our long-duration insurance liabilities. The ASU requires cash flow assumptions used in the measurement of various insurance liabilities to be reviewed at least annually and updated if actual experience or other evidence indicates previous assumptions need to be revised with any required changes recorded in earnings. The discount rate, equivalent to the upper-medium grade (i.e., single A) fixed-income instrument yield reflecting the duration characteristics of the liability, is required to be updated in each reporting period with changes recorded in accumulated other comprehensive income. In measuring the insurance liabilities, contracts shall not be grouped together from different issue years. While we continue to evaluate the effect of the standard on our ongoing financial reporting, we anticipate that the adoption of the ASU may materially affect our financial statements.
ASU NO. 2018-02, INCOME STATEMENT - REPORTING COMPREHENSIVE INCOME (TOPIC 220): RECLASSIFICATION OF CERTAIN TAX EFFECTS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME
In February 2018, the FASB issued ASU No. 2018-02, Income Taxes: Intra-Entity Asset TransfersStatement - Reporting Comprehensive Income (Topic 220): Reclassification of AssetsCertain Tax Effects from Accumulated Other than InventoryComprehensive Income. The ASU eliminatesprovides that the deferral of thestranded tax effects of intra-entity asset transfers other than inventory. As a result, the tax expense from the intercompany saleTax Cuts and Jobs Act on the balance of assets, other than inventory, and associated changescomprehensive income (OCI) may be reclassified to deferred taxes will be recognized when the sale occurs even though the pre-tax effects of the transaction have not been recognized.retained earnings. The new standardASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The2018, with an election to adopt early. We are evaluating the effect of the adoption of the standard on our consolidated financial statements which we estimate on a preliminary basis, will depend on the nature and amount of future transactions but is currently expected as an increase to retained earnings ofby approximately $0.4$2 billion. Future earnings will be reduced in total by this amount. The effect of the change on future transactions will depend on the nature of those transactions as it will affect the timing of recognition of both tax expense and tax benefits, with no change in associated cash flows.
ASU NO. 2016-15,2017-12, STATEMENT OF CASH FLOWSDERIVATIVES AND HEDGING (TOPIC 815): TARGETED IMPROVEMENTS TO ACCOUNTING FOR HEDING ACTIVITIES
In August 2016,2017, the FASB issued ASU No. 2016-15,2017-12, Statement of Cash Flows: Classification of Certain Cash ReceiptsDerivatives and Cash PaymentsHedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The new standard requires that cash receipts from payments on a transferor’s beneficial interests in securitized trade receivables should be classified as cash inflows from investing activities. The new standardASU is effective for fiscal yearsperiods beginning after December 15, 2017. A retrospective transition approach is required. Note 42018, with an election to adopt early. The ASU requires certain changes to the Financial Statements describes the DPP created by the Receivables Facility. We currently report cash receipts from the purchasing entities to reduce their DPP obligation to the Company as cash inflows from operating activitiespresentation of hedge accounting in the Consolidated Statementfinancial statements and some new or modified disclosures. The ASU also simplifies the application of Cash Flows.hedge accounting and expands the strategies that qualify for hedge accounting. The ASU is not expected to have a material effect to our financial statements.
ASU NO. 2016-02, LEASES
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standardASU establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. Similarly, lessors will be required to classify leases as sales-type, finance or operating, with classification affecting the pattern of income recognition. Classification for both lessees and lessors will be based on an assessment of whether risks and rewards as well as substantive control have been transferred through a lease contract. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. A modified retrospectiveWe are planning to elect the new transition approach is required for leases existing at, or entered into after,method approved by the beginningFASB on July 30, 2018, which allows companies to apply the provisions of the earliestnew leasing standard as of January 1, 2019, without adjusting the comparative periodperiods presented by recognizing a cumulative-effect adjustment to the opening balance of retained earnings. We are currently in the financial statements,process of accumulating and evaluating all the necessary information required to properly account for our lease portfolio under the new standard. Additionally, we are implementing an enterprise-wide lease management system to support the ongoing accounting requirements. Development and testing of our selected systems solution is ongoing. We are working closely with certain practical expedients available.the software system developer as the timely readiness of the lease software system is critical to ensure an efficient and effective adoption of the standard. We are evaluating additional changes to our processes and internal controls to ensure we meet the standard’s reporting and disclosure requirements. While we continue to evaluate the effect of the standard on our ongoingconsolidated financial reporting, we anticipate thatstatements, the adoption of the ASU may materially affectwill result in the recognition of a right of use asset and related liability in the range of approximately $5 billion to $6 billion with an estimated immaterial effect to our Statement of Financial Position.retained earnings and cash flows.
ASU NO. 2014-09, REVENUE FROM CONTRACTS WITH CUSTOMERS
BACKGROUND
In May 2014, the FASB issued a new comprehensive set of revenue recognition principles (ASU No. 2014-09, Revenue from Contracts with Customers) that supersedes most existing U.S. GAAP revenue recognition guidance (including ASC 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts). The new standard will become effective for annual reporting periods beginning after December 15, 2017. We will adopt the standard on January 1, 2018, will apply it retrospectively to all periods presented and will elect the practical expedient for contract modifications. Since the issuance of the new standard by the FASB, we have engaged in a collaborative process with our industry peers and worked with standard setters on important interpretive matters with the objective of ensuring consistency in the application of the standard.
TRANSITION METHOD FOR APPLYING THE NEW STANDARD
Companies can use either a full retrospective or modified retrospective method to adopt the standard. Under the full retrospective method, all periods presented will be updated upon adoption to conform to the new standard and a cumulative adjustment for effects on periods prior to 2016 will be recorded to retained earnings as of January 1, 2016. Under the modified retrospective approach, prior periods are not updated to be presented on an accounting basis that is consistent with 2018. Rather, a cumulative adjustment for effects of applying the new standard to periods prior to 2018 is recorded to retained earnings as of January 1, 2018. Because only 2018 revenues reflect application of the new standard, incremental disclosures are required to present the 2018 revenues under the prior standard.
As noted above, we have elected to apply the full retrospective approach. We chose that approach because we believe that it is the most helpful to our investors. First and foremost, when we adopt the standard in 2018 we will provide investors with a consistent view of historical trends, as 2016 and 2017 will be on a basis consistent with 2018.
CHANGE IN TIMING AND PRESENTATION, NO IMPACT TO CASH OR ECONOMICS
The new standard requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time based on when control of goods and services transfer to a customer. As a result, we expect significant changes in the presentation of our financial statements, including: (1) timing of revenue recognition, and (2) changes in classification between revenue and costs. The new standard will have no cash impact and, as such, does not affect the economics of our underlying customer contracts. The effect of applying the new guidance to our existing book of contracts will result in lower reported earnings in 2018 (and comparative periods previously reported) and in the early years after adoption. However, we expect to experience an increase in reported earnings, on that existing book of contracts, as they mature. The new standard will provide for a better alignment of cash and earnings for the affected long-term customer contracts and we expect that it will enhance comparability across industry peers.
SPECIFIC EFFECT ON GE BUSINESSES
Power and Aviation Service Agreements -48 For our long-term product service agreements, primarily in our Power and Aviation businesses, we expect to continue to recognize revenue based on costs incurred plus an estimated margin rate (over time model). However, the new standard provides prescriptive guidance tied to several factors for determining what constitutes the proper scope of a customer contract for accounting purposes. These factors include optional purchases, contract modifications, and termination clauses. For example, under the new standard contract modifications will be accounted for prospectively by recognizing the financial effect of the modification over the remaining life of the contract. Under existing accounting guidance revisions to estimated margin rates resulting from modifications were reflected as cumulative effect adjustments to earnings in the current period.
Aviation Commercial Engines - Consistent with industry peers, the financial presentation of our Aviation Commercial engines business will be significantly affected as they will be accounted for as of a point in time, which is a change from our current long-term contract accounting process. Our current process applies contract-specific estimated margin rates, which include the effect of estimated cost improvements, to costs incurred. This change is required because our commercial engine contracts do not transfer control to the customer during the manufacturing process. Each install and spare engine will be accounted for as a separate performance obligation, reflecting the actual price and manufacturing costs of such engines. We expect that the most significant effect of this change will be reflected when we have new engine launches, where the cost of earlier production units is higher than the cost of later production units because of cost improvements.
All Other Large Equipment - For the remainder of our equipment businesses, the new revenue standard requires emphasis on transfer of control rather than risks and rewards, which may accelerate timing of revenue recognition versus our current practices. For example, in our Renewable Energy business we wait for risk of loss to be assumed by the customer before recognizing revenue, which generally occurs later than when control is transferred.
CURRENT RANGE OF FINANCIAL STATEMENT EFFECT
We will adopt the new standard as of January 1, 2018. When we report our 2018 results, the comparative results for 2017 and 2016 will be updated to reflect the application of the requirements of the new standard to these periods. Based on our assessment and best estimates to date, we expect a non-cash charge to our January 1, 2016 retained earnings balance of approximately $4.3 billion. We estimate that the charge will comprise approximately $1.0 billion related to commercial aircraft engines and $3.3 billion related primarily to our services businesses (predominately in Power and Aviation). Beyond those effects, we expect application of the new guidance will result in increases and decreases in revenue within our segments, which will largely offset overall and will be immaterial at a total company level. We estimate that our 2016 restated earnings per share will be lower by approximately $0.13, driven primarily by the required changes in accounting for long-term product service arrangements as described above. The expected effect to 2016 earnings per share reflects an increase from the previously reported estimate of approximately $0.10 due to further refinements in the application of our technical interpretations and our detailed assessments at a contract level, which is a complex process for our long-term contracts. In addition, the impact on 2017 will also be a decrease to earnings; however, we are unable to complete that calculation until we finalize our 2017 results. Upon adoption in 2018, our books and records will only reflect the results as required under the new standard limiting our ability to estimate the effect of the standard on our earnings. Given the inherent difficulty in this ongoing estimation of the effect of the standard on any future periods, we do not plan to continue to assess the effect on 2018.
To summarize, we will adopt the new standard in 2018, at which time we will update prior periods to be presented on a consistent basis. As discussed above, we anticipate a dilutive effect of the new standard in the year of adoption consistent with the effect to the restated 2016 and 2017 results and the effect will be less dilutive for years after initial adoption. However, this expectation is based on many variables, including underlying business performance, which are subject to change, making the effect of the standard on future periods difficult to estimate. Importantly, application of the new guidance has no effect on the cash we expect to receive nor the economics of these contracts. Rather, it will simply more closely align revenue with cash, which we believe will be helpful to our investors.
GE DIGITALASU NO. 2016-13, FINANCIAL INSTRUMENTS - CREDIT LOSSES
GE Digital's activities are focused on assisting inIn June 2016, the market developmentFASB issued ASU No. 2016-13, Financial Instruments - Credit Losses. The ASU introduces a new accounting model, the Current Expected Credit Losses model (CECL), which requires earlier recognition of our digital product offerings through software design, fulfillmentcredit losses and product management, while also interfacing with our customers. Digital revenues include internally developed software and associated hardware, including Predix and software solutions that improve our customers’ asset performance. These revenues and associated costs are largely generated from our operating businesses and are included in their segment results.
Revenues were $1.0 billionadditional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the three months ended September 30, 2017, an increaserecognition of $0.1 billioncredit losses for loans and other receivables at the time the financial asset is originated or 6% comparedacquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current GAAP, which generally require that a loss be incurred before it is recognized. The new standard will also apply to revenues of $0.9 billionreceivables arising from revenue transactions such as contract assets and accounts receivables, as well as reinsurance recoverables at GE Capital's run-off insurance operations and is effective for the three months ended September 30, 2016. Revenues were $2.8 billion for the nine months ended September 30, 2017, an increase of $0.3 billion or 11% compared to revenues of $2.6 billion for the nine months ended September 30, 2016. These increases were principally driven by Power and Non-GE Verticals.
Orders were $1.4 billion for the three months ended September 30, 2017, an increase of $0.4 billion or 50% compared to orders of $0.9 billion for the three months ended September 30, 2016. Orders were $3.7 billion for the nine months ended September 30, 2017, an increase of $0.9 billion or 32% compared to orders of $2.8 billion for the nine months ended September 30, 2016. These increases were principally driven by Oil & Gas, Non-GE Verticals, Power and Renewable Energy.
VENEZUELA
Although we continue to experience delays in collecting payments on our receivables from our primary customer in Venezuela, our outstanding receivables are not disputed, and we continue to believe that our carrying value of these receivables are recoverable. In assessing the recoverability of these receivables, we considered our collection experience with this customer. To date we have had no material write-offs related to this customer and have collected approximately $67 million in 2017 and $103 million in 2016. In addition, we consider: the continued importance to the Venezuelan economy of oil production; our strategic relationship with this customer; our current activity levels and our current intention to continue to provide services to this customer; the impact of cross-default provisions within the loan agreements with the customer; and an evaluation of this customer’s financial solvency.fiscal years beginning after December 15, 2019. We continue to actively manageevaluate the effect of the standard on our relationship with this customer, with ongoing dialogue between key executives of both companies.consolidated financial statements.
As of September 30, 2017, our net exposure to this customer is approximately $260 million. The primary component of this exposure is in GE Capital, which has outstanding financing receivables with a gross value of $210 million and a carrying value of $162 million at September 30, 2017. GE has guaranteed the collectability of these receivables to GE Capital. This exposure also includes approximately $60 million of on-hand inventory that we may not be able to redeploy to other customers should the contracts with this customer be terminated unexpectedly, and net trade receivables of approximately $40 million ($266 million gross value). In 2015 and 2016, we exchanged $257 million and $194 million, respectively, of customer accounts receivable for interest bearing promissory notes with a par value of the same amount. As part of these exchanges, GE recognized a pre-tax loss of $135 million to recognize the notes at fair value. Through the second quarter of 2017, GE recorded approximately $40 million of interest and discount accretion on these loans as no payments were past due and these financing receivables are cross-defaulted with other outstanding customer debt. At September 30, 2017 payments of $52 million were past due and while the majority of these payments were received subsequent to the end of the quarter, due to the difficulties in receiving payment GE placed these loans on nonaccrual status and performed an impairment review of these loans, which supported the carrying value at September 30, 2017.
During the three months ended September 30, 2017, GE recorded a bad debt reserve and receivables write offs on other customer receivables of $62 million and an impairment of two buildings of $26 million.
We believe our collectability assumptions to be reasonable according to the current facts and circumstances and they are reviewed on a quarterly basis. However, differences in actual experience or changes in facts and circumstances may materially affect our financial position or results of operations. Our assumptions and related judgments are sensitive to the political and economic conditions in Venezuela. If conditions in Venezuela worsen or if low commodity prices persist for an extended period, we may be required to record adjustments to our receivables balance. Our financial results can be affected, positively or negatively, by changes in our assessment of the collectability of these trade receivables.
MD&A
MINE SAFETY DISCLOSURES
Our barite mining operations, in support of our drilling fluids products and services business, are subject to regulation by the federal Mine Safety and Health Administration under the Federal Mine Safety and Health Act of 1977. There areWe have no mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K to report for the current quarter.
IRAN THREAT REDUCTION AND SYRIA HUMAN RIGHTS ACT OF 2012
The Company is making the following disclosure pursuant to Section 13(r) of the Securities Exchange Act of 1934. Under Section 13(r) of the Securities Exchange Act of 1934, enacted in 2012, GE is required to disclose in its periodic reports if it or any of its affiliates knowingly engaged in business activities relating to Iran, even if those activities are conducted in accordance with authorizations subsequently issued by the U.S. Government. Reportable activities include investments that significantly enhance Iran’s ability to develop petroleum resources valued at $20 million or more in the aggregate during a twelve-month period. Reporting is also required for transactions related to Iran’s domestic production of refined petroleum products or Iran’s ability to import refined petroleum products valued at $5 million or more in the aggregate during a twelve-month period.
In January 2016, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) issued General License H authorizing U.S.-owned or controlled foreign entities to engage in transactions with Iran if these entities meet the requirements of the general license. PursuantOn May 8, 2018, President Trump announced that the United States will cease participation in the Joint Comprehensive Plan of Action (JCPOA) and begin re-imposing the U.S. nuclear-related sanctions. On June 27, 2018, OFAC revoked General License H and added Section 560.537 to this authorization, athe Iranian Transactions and Sanctions Regulations (ITSR), which authorizes all transactions and activities that are ordinarily incident and necessary to the winding down of activities previously approved under General License H through November 4, 2018. Prior to May 8, 2018, certain non-U.S. affiliates of GE conducted limited activities as described below in accordance with General License H. Non-U.S. affiliates of GE expect to wind down activities in Iran by November 4, which may include the collection of payments for previously completed work. These activities are conducted in accordance with all applicable laws and regulations.
A non-U.S. affiliate of GE’s Oil & Gas business received five purchase ordersattributed €3.8 million ($4.4 million) in gross revenues and €0.7 million ($0.8 million) in net profits during the third quarter of 2017 for the sale of goods pursuantending September 30, 2018 against previously reported transactions related to General License H that could potentially enhance Iran’s ability to develop petroleum resources. The purchase orders cover the sale of valves and parts for industrial machinery and equipment used in gas plants, petrochemical plants and gas production projects in Iran. These purchase orders are valued at €0.1million ($0.1 million), €0.5 million ($0.5 million), €0.2 million ($0.2 million), €0.1 million ($0.1 million), €1.3 million ($1.5 million). This non-US affiliate also booked a modification of a previously reported contract for the sale of spare parts for gas turbines to add additional scope valued at €0.1 million ($0.1 million) and a further modification to another previously reported contract for the sale of spare parts to reduce the value of the contract by €1.6 million ($1.8 million). This non-US affiliate attributed €1.5 million ($1.8 million) in gross revenues and €0.8 million ($0.9 million) in net profits against previously reported transactions during the quarter ending September 30, 2017.
A second non-U.S. affiliate of GE’s Oil & Gas business revised four previously received two purchase orders during the third quarter of 2017 for2018 in order to reflect a reduction in scope to only spare parts that can be delivered prior to November 4, 2018. Each of the sale of consumable parts, instruments and a digital recording system to be applied to industrial machinery and equipment on gas plants. Thefour previously reported purchase orders are now valued at €0.1 million ($0.1 million) andless than €0.1 million ($0.1 million). This non-USnon-U.S. affiliate attributed €0.3less than €0.1 million ($0.30.1 million) in gross revenues and less than €0.1 million ($0.1 million) in net profits to these transactions during the quarter ending September 30, 2017.
A non-U.S. affiliate of GE’s Power business received a cancellation to a purchase order previously reported for the sale of spare parts to an Iranian entity to provide electricity and steam to an area of Iran that includes certain oil refineries during the quarter ending September 30, 2017. This purchase order cancellation reduces the value by €16.2 million ($18.1 million). This non-US affiliate also received a modification to a previously reported purchase order for the sale of spare parts to reduce the value of the purchase order by €1.3 million ($1.5 million). This non-US affiliate also attributed €4.8 million ($5.7 million) in gross revenues and €3.1 million ($3.7 million) in net profits during the quarter ending September 30, 2017.2018 against previously reported transactions.
A second non-USnon-U.S. affiliate of GE’s Power business received three purchase orders pursuant to General License H valued atattributed €2.2 million ($2.6 million) in gross revenues and less than €0.1 million ($0.1 million), €0.1 million ($0.1 million) and €0.2 million ($0.2 million) during the third quarter of 2017. The purchase orders cover the sale of protection relays for oil refinery related projects in Iran. This non-US affiliate did not recognize any revenue or profitnet profits during the quarter ending September 30, 2017.2018 against a previously reported received purchase order for the sale of a generator to a petrochemical company in Iran.
A third non-USsecond non-U.S. affiliate of GE’sGE's Power business received two purchase orders pursuant to General License H valued atattributed €0.1 million ($0.1 million) in gross revenues and less than €0.1 million ($0.1 million) during the third quarter of 2017. The purchase orders cover the sale of spare parts for motors for ultimate end use by a petro-chemical company in Iran. This non-US affiliate did not recognize any revenue or profitnet profits during the quarter ending September 30, 2017.2018 against a previously reported sale of protection relays for an Iranian oil refinery project.
All of these These non-U.S. affiliates do not intend to continue the activities described above as permittedbeyond November 4, 2018. The Company will wind down all of these activities by all applicable laws and regulations.
that date in full compliance with U.S. sanctions; revenues associated with previously reported projects can only be collected after November 4 if specific U.S. Government authorization is obtained.
For additional information on business activities related to Iran, please refer to the Other Items section within MD&A in our quarterly report on Form 10-Q for the quarter ended June 30, 2017.
2018.
52 20172018 3Q FORM 10-Q49
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| MD&A | SUPPLEMENTALNON-GAAP FINANCIAL INFORMATION |
SUPPLEMENTAL INFORMATIONNON-GAAP FINANCIAL MEASURES
FINANCIAL MEASURES THAT SUPPLEMENT U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES MEASURES (NON-GAAP FINANCIAL MEASURES)
In the accompanying analysis of financial information, we sometimes use information derived from consolidated financial data but not presented in our financial statements prepared in accordance with GAAP. Certain of these data are considered “non-GAAP financial measures” under SEC rules. Specifically, we have referred, in various sections of this report, to:
GE Industrial segment organic revenues and Industrial segment organic – revenues excluding Powerthe effects of acquisitions, dispositions and translational foreign currency exchange.
GE Industrial structural costs – Industrial structural costs include segment structural costs excluding the impact of restructuring and other charges, business acquisitions and dispositions, foreign exchange, plus total Corporate operating profit excluding restructuring and other charges and gains. The Baker Hughes acquisition is represented on a pro-forma basis, which means we calculated our structural costs by including legacy Baker Hughes results for the three and six months ended June 30, 2017.
Adjusted earnings (loss) – continuing earnings excluding the impact of non-operating benefit costs, gains (losses), restructuring and other items and goodwill impairment, after tax, and the impact of U.S. tax reform.
Adjusted earnings (loss) per share (EPS) – when we refer to adjusted earnings per share, it is the diluted per-share amount of “adjusted earnings.”
Adjusted GE Industrial profit and profit margin (excluding certain items) – GE Industrial profit margin excluding interest and other financial charges, non-operating benefit costs, gains (losses), restructuring and other charges and goodwill impairment plus noncontrolling interests.
GE Industrial organic profit – profit excluding the effects of acquisitions, business dispositions and translational foreign currency exchange.
Adjusted Oil & Gas segment profit – Reported Oil & Gas segment profit less GE's share of restructuring & other charges.
Operating and non-operating pension cost
Adjusted corporate costs (operating)
GE effective tax rates, excluding GE Capital earnings –GE provision for income taxes divided by GE pre-tax earnings from continuing operations, excluding GE Capital earnings (loss) from continuing operationsoperations.
GE Industrial Free Cash Flows (FCF) and the corresponding effective tax rates
Adjusted GE Industrial operating earningsFCF – GE Industrial free cash flows (Non-GAAP) is GE CFOA adjusted for gross GE additions to property, plant and GE Capital earnings (loss) from continuing operationsequipment and EPS
Industrial operating + Verticals earnings and EPS
Industrial operating profit and operating profit margin (excluding certain items)
Industrial operating profit excluding Power and Oil & Gas
Industrialinternal-use software, which are included in cash flows from operatinginvesting activities, (Industrial CFOA) and Industrial CFOA excluding deal taxes anddividends from GE Capital, GE Pension Plan funding, and taxes related to business sales. Adjusted GE Industrial free cash flows (Non-GAAP) is GE Industrial free cash flows adjusted for Oil & Gas CFOA, gross Oil & Gas additions to property, plant and equipment and internal-use software, and including the BHGE Class B shareholder dividend.
GE Industrial net debt – GE Industrial net debt reflects the total of gross debt, after-tax net pension liabilities, adjustments for operating lease obligations, and adjustments for 50% of preferred stock, less 75% of GE’s cash balance.
The reasons we use these non-GAAP financial measures and the reconciliations to their most directly comparable GAAP financial measures follow.
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| | |
| MD&A | NON-GAAP FINANCIAL INFORMATION |
|
| | | | | | | | | | | | | | | | | |
| GE INDUSTRIAL SEGMENT ORGANIC REVENUES (NON-GAAP) |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2018 |
| 2017 |
| V% | | 2018 |
| 2017 |
| V% |
| | | | | | | | |
| GE Industrial segment revenues (GAAP) | $ | 27,785 |
| $ | 29,171 |
| (5 | )% | | $ | 83,837 |
| $ | 81,967 |
| 2 | % |
| Adjustments: | | | | | | | |
| Less: acquisitions | 4 |
| 1 |
| | | 5,588 |
| 92 |
| |
| Less: business dispositions (other than dispositions acquired for investment) | 10 |
| 1,408 |
| | | 13 |
| 2,479 |
| |
| Less: Currency exchange rate(a) | (285 | ) | — |
| | | 1,121 |
| — |
| |
| GE Industrial segment organic revenues (Non-GAAP) | $ | 28,057 |
| $ | 27,762 |
| 1 | % | | $ | 77,116 |
| $ | 79,396 |
| (3 | )% |
| (a) Translational foreign exchange | | | | | | | |
| | | | | | | | |
| Organic revenues* measure revenues excluding the effects of acquisitions, business dispositions and currency exchange rates. We believe that this measure provides management and investors with a more complete understanding of underlying operating results and trends of established, ongoing operations by excluding the effect of acquisitions, dispositions and currency exchange, which activities are subject to volatility and can obscure underlying trends. We also believe that presenting organic revenues* separately for our industrial businesses provides management and investors with useful information about the trends of our industrial businesses and enables a more direct comparison to other non-financial businesses and companies. Management recognizes that the term "organic revenues" may be interpreted differently by other companies and under different circumstances. Although this may have an effect on comparability of absolute percentage growth from company to company, we believe that these measures are useful in assessing trends of the respective businesses or companies and may therefore be a useful tool in assessing period-to-period performance trends. |
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| | | | | | | | | | | | | | | | | | | |
| GE INDUSTRIAL STRUCTURAL COSTS (NON-GAAP) | | | | | |
| | | | | | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2018 |
| 2017 |
| V$ | | 2018 |
| 2017 |
| V$ |
|
| | | | | | | | |
| GE total costs and expenses (GAAP) | $ | 50,449 |
| $ | 29,978 |
| $ | 20,471 |
| | $ | 104,390 |
| $ | 80,977 |
| $ | 23,412 |
|
| Less: GE interest and other financial charges (GAAP) | 662 |
| 718 |
| | | 1,995 |
| 1,918 |
| |
| Less: goodwill impairment (GAAP) | 21,973 |
| 947 |
| | | 21,973 |
| 947 |
| |
| Less: non-operating benefit costs (GAAP) | 804 |
| 610 |
| | | 2,178 |
| 1,811 |
| |
| GE Industrial costs excluding interest and other financial charges, goodwill impairment and non-operating benefit costs (Non-GAAP) | $ | 27,009 |
| $ | 27,703 |
| $ | (693 | ) | | $ | 78,243 |
| $ | 76,300 |
| $ | 1,943 |
|
| Less: Segment variable costs | 19,895 |
| 20,196 |
| | | 58,291 |
| 55,694 |
| |
| Less: Segment restructuring & other | 188 |
| 363 |
| | | 709 |
| 388 |
| |
| Less: Segment acquisitions/dispositions structural costs and impact from foreign exchange | (13 | ) | 334 |
| | | 539 |
| (369 | ) | |
| Less: Corporate restructuring & other charges | 1,501 |
| 1,079 |
| | | 2,328 |
| 2,761 |
| |
| Add: Corporate revenue (ex. GE-GE Capital eliminations), other income and noncontrolling interests | 176 |
| (1,529 | ) | | | 486 |
| (744 | ) | |
| Less: Corporate (gains) losses(a) | (207 | ) | (1,885 | ) | | | (450 | ) | (1,887 | ) | |
| Less: Corporate unrealized (gains) losses | 73 |
| — |
| | | (193 | ) | — |
| |
| GE Industrial structural costs (Non-GAAP) | $ | 5,748 |
| $ | 6,087 |
| $ | (339 | ) | | $ | 17,504 |
| $ | 18,969 |
| $ | (1,465 | ) |
| | | | | | | | |
| (a) Includes gains (losses) on disposed or held for sale businesses. | | | | | | | |
| | | | | | | | |
| Industrial structural costs* includes segment structural costs excluding the impact of restructuring and other charges, business acquisitions and dispositions, foreign exchange, plus total Corporate operating profit excluding restructuring and other charges and gains. The Baker Hughes acquisition is represented on a pro-forma basis, which means we calculated our structural costs by including legacy Baker Hughes results for the three and six months ended June 30, 2017. |
| Segment variable costs are those costs within our industrial segments that vary with volume. The most significant variable costs would be material and direct labor costs incurred to produce our products and deliver our services that are recorded in the Statement of Earnings line items of cost of goods and cost of services sold. |
| We believe that Industrial structural costs* is a meaningful measure as it is broader than selling, general and administrative costs and represents the total costs in the Industrial segments and Corporate that generally do not vary with volume and excludes the effect of segment acquisitions, dispositions, and foreign exchange movements. |
| This measure was first introduced in March 2017 as disclosed in our Form 8-K filed on March 22, 2017. |
*Non-GAAP Financial Measure
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| MD&A | NON-GAAP FINANCIAL INFORMATION |
|
| | | | | | | | | | | | | | | | | |
| ADJUSTED EARNINGS (LOSS) (NON-GAAP) | | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2018 |
| 2017 |
| V% |
| | 2018 |
| 2017 |
| V% |
|
| | | | | | | | |
| Consolidated earnings (loss) from continuing operations attributable to GE common shareowners (GAAP) | $ | (22,847 | ) | $ | 1,429 |
| U |
| | $ | (21,742 | ) | $ | 2,579 |
| U |
|
| Less: GE Capital earnings (loss) from continuing operations attributable to GE common shareowners (GAAP) | 19 |
| 24 |
| | | (403 | ) | (195 | ) | |
| GE Industrial earnings (loss) (Non-GAAP) | (22,866 | ) | 1,405 |
| U |
| | (21,339 | ) | 2,774 |
| U |
|
| | | | | | | | |
| Non-operating benefits costs (pre-tax) (GAAP) | (804 | ) | (610 | ) | | | (2,178 | ) | (1,811 | ) | |
| Tax effect on non-operating benefit costs(a) | 169 |
| 214 |
| | | 457 |
| 634 |
| |
| Less: non-operating benefit costs (net of tax) | (636 | ) | (397 | ) | | | (1,721 | ) | (1,177 | ) | |
| Gains (losses) and impairments for disposed or held for sale businesses (pre-tax) | 207 |
| 1,885 |
| | | 450 |
| 1,887 |
| |
| Tax effect on gains (losses) and impairments for disposed or held for sale businesses(b) | (89 | ) | (45 | ) | | | (190 | ) | (46 | ) | |
| Less: gains (losses) and impairments for disposed or held for sale businesses (net of tax) | 118 |
| 1,840 |
| | | 260 |
| 1,841 |
| |
| Restructuring & other (pre-tax) | (1,568 | ) | (1,347 | ) | | | (2,734 | ) | (3,029 | ) | |
| Tax effect on restructuring & other(b) | 337 |
| 448 |
| | | 398 |
| 953 |
| |
| Less: restructuring & other (net of tax) | (1,231 | ) | (898 | ) | | | (2,337 | ) | (2,076 | ) | |
| Goodwill impairment (pre-tax) | (21,973 | ) | (947 | ) | | | (21,973 | ) | (947 | ) | |
| Tax effect on goodwill impairment(b) | (246 | ) | 7 |
| | | (246 | ) | 7 |
| |
| Less: goodwill impairment (net of tax) | (22,220 | ) | (940 | ) | | | (22,220 | ) | (940 | ) | |
| Unrealized gains (losses) (pre-tax) | (73 | ) | — |
| | | 193 |
| — |
| |
| Tax effect on unrealized gains (losses)(a) | 15 |
| — |
| | | (41 | ) | — |
| |
| Less: unrealized gains (losses) (net of tax) | (58 | ) | — |
| | | 153 |
| — |
| |
| Less: GE Industrial U.S. tax reform enactment adjustment | — |
| — |
| | | (55 | ) | — |
| |
| Adjusted GE Industrial earnings (loss) (Non-GAAP) | $ | 1,160 |
| $ | 1,801 |
| (36 | )% | | $ | 4,581 |
| $ | 5,127 |
| (11 | )% |
| | | | | | | | |
| GE Capital earnings (loss) from continuing operations attributable to GE common shareowners (GAAP) | 19 |
| 24 |
| (21 | )% | | (403 | ) | (195 | ) | U |
|
| Less: GE Capital U.S. tax reform enactment adjustment | — |
| — |
| | | (45 | ) | — |
| |
| Adjusted GE Capital earnings (loss) (Non-GAAP) | $ | 19 |
| $ | 24 |
| (21 | )% | | $ | (358 | ) | $ | (195 | ) | (84 | )% |
| | | | | | | | |
| Adjusted GE Industrial earnings (loss) (Non-GAAP) | $ | 1,160 |
| $ | 1,801 |
| (36 | )% | | $ | 4,581 |
| $ | 5,127 |
| (11 | )% |
| Add: Adjusted GE Capital earnings (loss) (Non-GAAP) | 19 |
| 24 |
| | | (358 | ) | (195 | ) | |
| Adjusted earnings (loss) (Non-GAAP) | $ | 1,179 |
| $ | 1,825 |
| (35 | )% | | $ | 4,223 |
| $ | 4,932 |
| (14 | )% |
| | | | | | | | |
| (a) The tax effect was calculated using a 21% and 35% U.S. federal statutory tax rate in 2018 and 2017, respectively, based on its applicability to such cost. |
| (b) The tax effect presented includes both the rate for the relevant item as well as other direct and incremental tax charges. |
| Adjusted earnings (loss)* excludes non-operating benefit costs, gains (losses) and impairments for disposed or held for sale businesses, restructuring and other, goodwill impairment, and unrealized gains (losses), after tax, excluding the effects of U.S. tax reform enactment adjustment. The service cost of our pension and other benefit plans are included in adjusted earnings, which represents the ongoing cost of providing pension benefits to our employees. The components of non-operating benefit costs are mainly driven by capital allocation decisions and market performance, and we manage these separately from the operational performance of our businesses. Gains and restructuring and other items are impacted by the timing and magnitude of gains associated with dispositions, and the timing and magnitude of costs associated with restructuring activities. Prior to the third quarter of 2018, goodwill impairment was included as a component of restructuring and other charges; for the third quarter of 2018, on a comparable basis, we reported it separately in the Statement of Earnings (Loss) because of the significance of the charge that quarter, and Adjusted earnings (loss)* continues to exclude amounts related to goodwill impairment as separate from the ongoing operations of our businesses. We believe that the retained costs in Adjusted earnings (loss)* provides management and investors a useful measure to evaluate the performance of the total company, and increases period-to-period comparability. We believe that presenting Adjusted Industrial earnings (loss) separately for our financial services businesses also provides management and investors with useful information about the relative size of our industrial and financial services businesses in relation to the total company. |
*Non-GAAP Financial Measure
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| | |
| MD&A | NON-GAAP FINANCIAL INFORMATION |
|
| | | | | | | | | | | | | | | | | |
| ADJUSTED EARNINGS (LOSS) PER SHARE (EPS) (NON-GAAP) | | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| | 2018 |
| 2017 |
| V% |
| | 2018 |
| 2017 |
| V% |
|
| | | | | | | | |
| Consolidated EPS from continuing operations attributable to GE common shareowners (GAAP) | $ | (2.63 | ) | $ | 0.16 |
| U |
| | (2.50 | ) | 0.29 |
| U |
|
| Less: GE Capital EPS from continuing operations attributable to GE common shareowners (GAAP) | — |
| — |
| | | (0.05 | ) | (0.02 | ) | |
| GE Industrial EPS (Non-GAAP) | $ | (2.63 | ) | $ | 0.16 |
| U |
| | $ | (2.46 | ) | $ | 0.32 |
| U |
|
| | | | | | | | |
| Non-operating benefits costs (pre-tax) (GAAP) | (0.09 | ) | (0.07 | ) | | | (0.25 | ) | (0.21 | ) | |
| Tax effect on non-operating benefit costs(a) | 0.02 |
| 0.02 |
| | | 0.05 |
| 0.07 |
| |
| Less: non-operating benefit costs (net of tax) | (0.07 | ) | (0.05 | ) | | | (0.20 | ) | (0.13 | ) | |
| Gains (losses) and impairments for disposed or held for sale businesses (pre-tax) | 0.02 |
| 0.22 |
| | | 0.05 |
| 0.21 |
| |
| Tax effect on gains (losses) and impairments for disposed or held for sale businesses(b) | (0.01 | ) | (0.01 | ) | | | (0.02 | ) | (0.01 | ) | |
| Less: gains (losses) and impairments for disposed or held for sale businesses (net of tax) | 0.01 |
| 0.21 |
| | | 0.03 |
| 0.21 |
| |
| Restructuring & other (pre-tax) | (0.18 | ) | (0.15 | ) | | | (0.31 | ) | (0.34 | ) | |
| Tax effect on restructuring & other(b) | 0.04 |
| 0.05 |
| | | 0.05 |
| 0.11 |
| |
| Less: restructuring & other (net of tax) | (0.14 | ) | (0.10 | ) | | | (0.27 | ) | (0.24 | ) | |
| Goodwill impairment (pre-tax) | (2.53 | ) | (0.11 | ) | | | (2.53 | ) | (0.11 | ) | |
| Tax effect on goodwill impairment(b) | (0.03 | ) | — |
| | | (0.03 | ) | — |
| |
| Less: goodwill impairment (net of tax) | (2.56 | ) | (0.11 | ) | | | (2.56 | ) | (0.11 | ) | |
| Unrealized gains (losses) (pre-tax) | (0.01 | ) | — |
| | | 0.02 |
| — |
| |
| Tax effect on unrealized gains (losses)(a) | — |
| — |
| | | — |
| — |
| |
| Less: unrealized gains (losses) (net of tax) | (0.01 | ) | — |
| | | 0.02 |
| — |
| |
| Less: GE Industrial U.S. tax reform enactment adjustment | — |
| — |
| | | (0.01 | ) | — |
| |
| Adjusted GE Industrial EPS (Non-GAAP) | $ | 0.13 |
| $ | 0.21 |
| (38 | )% | | $ | 0.53 |
| $ | 0.58 |
| (9 | )% |
| | | | | | | | |
| GE Capital EPS from continuing operations attributable to GE common shareowners (GAAP) | — |
| — |
| — | % | | (0.05 | ) | (0.02 | ) | U |
|
| Less: GE Capital U.S. tax reform enactment adjustment | — |
| — |
| | | (0.01 | ) | — |
| |
| Adjusted GE Capital EPS (Non-GAAP) | $ | — |
| $ | — |
| — | % | | $ | (0.04 | ) | $ | (0.02 | ) | (100 | )% |
| | | | | | | | |
| Adjusted GE Industrial EPS (Non-GAAP) | $ | 0.13 |
| $ | 0.21 |
| (38 | )% | | $ | 0.53 |
| $ | 0.58 |
| (9 | )% |
| Add: Adjusted GE Capital EPS (Non-GAAP) | — |
| — |
| | | (0.04 | ) | (0.02 | ) | |
| Adjusted EPS (Non-GAAP)(c) | $ | 0.14 |
| $ | 0.21 |
| (33 | )% | | $ | 0.49 |
| $ | 0.56 |
| (13 | )% |
| | | | | | | | |
| (a) The tax effect was calculated using a 21% and 35% U.S. federal statutory tax rate in 2018 and 2017, respectively, based on its applicability to such cost. |
| (b) The tax effect presented includes both the rate for the relevant item as well as other direct and incremental tax charges. |
| (c) Earnings-per-share amounts are computed independently. As a result, the sum of per-share amounts may not equal the total. |
| Adjusted EPS* excludes non-operating benefit costs, gains (losses) and impairments for disposed or held for sale businesses, restructuring and other, goodwill impairment, and unrealized gains (losses), after tax, excluding the effects of U.S. tax reform enactment adjustment. The service cost of our pension and other benefit plans are included in adjusted earnings, which represents the ongoing cost of providing pension benefits to our employees. The components of non-operating benefit costs are mainly driven by capital allocation decisions and market performance, and we manage these separately from the operational performance of our businesses. Gains and restructuring and other items are impacted by the timing and magnitude of gains associated with dispositions, and the timing and magnitude of costs associated with restructuring activities. Prior to the third quarter of 2018, goodwill impairment was included as a component of restructuring and other charges; for the third quarter of 2018, on a comparable basis, we reported it separately in the statement of earnings (loss) because of the significance of the charge that quarter, and Adjusted EPS* continues to exclude amounts related to goodwill impairment as separate from the ongoing operations of our businesses. We believe that the retained costs in Adjusted EPS* provides management and investors a useful measure to evaluate the performance of the total company, and increases period-to-period comparability. We also use Adjusted EPS* as a performance metric at the company level for our annual executive incentive plan for 2018. We believe that presenting Adjusted EPS separately for our financial services businesses also provides management and investors with useful information about the relative size of our industrial and financial services businesses in relation to the total company. |
*Non-GAAP Financial Measure
|
| | |
| MD&A | SUPPLEMENTALNON-GAAP FINANCIAL INFORMATION |
|
| | | | | | | | | | | | | |
| ADJUSTED GE INDUSTRIAL PROFIT AND PROFIT MARGIN (EXCLUDING CERTAIN ITEMS) (NON-GAAP) |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| GE total revenues (GAAP) | $ | 27,456 |
| $ | 28,774 |
| | $ | 82,429 |
| $ | 80,683 |
|
| | | | | | |
| Costs | | | | | |
| GE total costs and expenses (GAAP) | $ | 50,449 |
| $ | 29,978 |
| | $ | 104,390 |
| $ | 80,977 |
|
| Less: GE interest and other financial charges | 662 |
| 718 |
| | 1,995 |
| 1,918 |
|
| Less: non-operating benefit costs | 804 |
| 610 |
| | 2,178 |
| 1,811 |
|
| Less: restructuring & other | 1,488 |
| 1,347 |
| | 2,789 |
| 3,029 |
|
| Less: goodwill impairment | 21,973 |
| 947 |
| | 21,973 |
| 947 |
|
| Add: noncontrolling interests | (132 | ) | (168 | ) | | (228 | ) | (316 | ) |
| Adjusted GE Industrial costs (Non-GAAP) | $ | 25,389 |
| $ | 26,188 |
| | $ | 75,227 |
| $ | 72,955 |
|
| | | | | | |
| Other Income | | | | | |
| GE other income (GAAP) | $ | 201 |
| $ | 2,160 |
| | $ | 1,237 |
| $ | 2,659 |
|
| Less: unrealized gains (losses) | (73 | ) | — |
| | 193 |
| — |
|
| Less: restructuring & other | (80 | ) | — |
| | (80 | ) | — |
|
| Less: gains (losses) and impairments for disposed or held for sale businesses | 207 |
| 1,885 |
| | 450 |
| 1,887 |
|
| Adjusted GE other income (Non-GAAP) | $ | 147 |
| $ | 275 |
| | $ | 674 |
| $ | 772 |
|
| | | | | | |
| GE Industrial profit (GAAP) | $ | (22,793 | ) | $ | 957 |
| | $ | (20,725 | ) | $ | 2,365 |
|
| GE Industrial profit margin (GAAP) | (83.0 | )% | 3.3 | % | | (25.1 | )% | 2.9 | % |
| | | | | | |
| Adjusted GE Industrial profit (Non-GAAP) | $ | 2,213 |
| $ | 2,861 |
| | $ | 7,875 |
| $ | 8,500 |
|
| Adjusted GE Industrial profit margin (Non-GAAP) | 8.1 | % | 9.9 | % | | 9.6 | % | 10.5 | % |
| | | | | | |
| We have presented our Adjusted GE Industrial profit* and profit margin* excluding interest and other financial charges, non-operating benefit costs, restructuring and other, goodwill impairment, non-controlling interests, unrealized gains (loss) on Pivotal equity investment and gains (losses) and impairment for disposed or held for sale businesses. We believe that GE Industrial profit and profit margins adjusted for these items are meaningful measures because they increase the comparability of period-to-period results. |
|
| | | | | | | | | | | | | | | | | |
| GE INDUSTRIAL ORGANIC PROFIT (NON-GAAP) |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2018 |
| 2017 |
| V% | | 2018 |
| 2017 |
| V% |
| | | | | | | | |
| Adjusted GE Industrial profit (Non-GAAP) | $ | 2,213 |
| $ | 2,861 |
| (23 | )% | | $ | 7,875 |
| $ | 8,500 |
| (7 | )% |
| Adjustments: | | | | | | | |
| Less: acquisitions | (1 | ) | (1 | ) | | | 293 |
| (19 | ) | |
| Less: business dispositions (other than dispositions acquired for investment) | (11 | ) | 176 |
| | | (26 | ) | 257 |
| |
| Less: Currency exchange rate(a) | (2 | ) | — |
| | | (60 | ) | — |
| |
| Adjusted GE Industrial organic profit (Non-GAAP) | $ | 2,226 |
| $ | 2,687 |
| (17) | % | | $ | 7,669 |
| $ | 8,262 |
| (7 | )% |
| (a) Translational foreign exchange | | | | | | | |
| | | | | | | | |
| Organic profit* measures profit excluding the effects of acquisitions, business dispositions and currency exchange rates. We believe that this measure provides management and investors with a more complete understanding of underlying operating results and trends of established, ongoing operations by excluding the effect of acquisitions, dispositions and currency exchange, which activities are subject to volatility and can obscure underlying trends. Management recognizes that the term "organic profit" may be interpreted differently by other companies and under different circumstances. Although this may have an effect on comparability of absolute percentage growth from company to company, we believe that these measures are useful in assessing trends of our Industrial businesses and may therefore be a useful tool in assessing period-to-period performance trends. |
|
| | | | | | | | | | | | | | | | | |
| INDUSTRIAL SEGMENT ORGANIC REVENUES |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
| V% | | 2017 |
| 2016 |
| V% |
| | | | | | | | |
| Industrial segment revenues (GAAP) | $ | 30,046 |
| $ | 27,335 |
| 10 | % | | $ | 83,943 |
| $ | 81,667 |
| 3 | % |
| Less adjustments: | | | | | | | |
| Acquisitions | 2,865 |
| 6 |
| | | 3,214 |
| 22 |
| |
| Business dispositions | 51 |
| 57 |
| | | 61 |
| 2,852 |
| |
| Currency exchange rates | 219 |
| — |
| | | (51 | ) | — |
| |
| Industrial segment organic revenues (Non-GAAP) | $ | 26,911 |
| $ | 27,272 |
| (1) | % | | $ | 80,718 |
| $ | 78,793 |
| 2 | % |
| | | | | | | | |
| Power revenues (GAAP) | $ | 8,679 |
| $ | 8,995 |
| (4) | % | | $ | 26,569 |
| $ | 25,664 |
| 4 | % |
| Less adjustments: | | | | | | | |
| Acquisitions | 94 |
| — |
|
| | 230 |
| 5 |
| |
| Business dispositions | — |
| 19 |
| | | — |
| 154 |
| |
| Currency exchange rates | 123 |
| — |
| | | (73 | ) | — |
| |
| Power organic revenues (Non-GAAP) | $ | 8,462 |
| $ | 8,976 |
| (6) | % | | $ | 26,412 |
| $ | 25,505 |
| 4 | % |
| | | | | | | | |
| Oil & Gas revenues (GAAP) | 5,365 |
| 2,964 |
| 81 | % | | 11,475 |
| 9,497 |
| 21 | % |
| Less adjustments: | | | | | | | |
| Acquisitions | 2,541 |
| — |
| | | 2,542 |
| 1 |
| |
| Business dispositions | — |
| — |
| | | — |
| — |
| |
| Currency exchange rates | 58 |
| — |
| | | (13 | ) | — |
| |
| Oil & Gas organic revenues (Non-GAAP) | $ | 2,766 |
| $ | 2,964 |
| (7) | % | | $ | 8,946 |
| $ | 9,496 |
| (6 | )% |
| | | | | | | | |
| Industrial segment organic revenues excluding Power and Oil & Gas (Non-GAAP) | $ | 15,683 |
| $ | 15,332 |
| 2 | % | | $ | 45,360 |
| $ | 43,792 |
| 4 | % |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| ADJUSTED OIL & GAS SEGMENT PROFIT (NON-GAAP) |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2018 |
| 2017 |
| V% | | 2018 |
| 2017 |
| V% |
| | | | | | | | |
| Reported segment profit (GAAP) | $ | 180 |
| $ | (57 | ) | F |
| | $ | 110 |
| $ | 322 |
| (66 | )% |
| Less: restructuring & other (GE share) | (67 | ) | (267 | ) | | | (540 | ) | (267 | ) | |
| Adjusted Oil & Gas segment profit (Non-GAAP) | $ | 247 |
| $ | 210 |
| 18 | % | | $ | 650 |
| $ | 590 |
| 10 | % |
| | | | | | | | |
| Adjusted GE Oil & Gas segment profit* measures Oil & Gas reported segment profit excluding the effects of restructuring and other charges. We believe that this measure provides management and investors with a more complete understanding of underlying operating results and trends of established, ongoing operations of our Oil & Gas segment. |
Organic revenue growth measures revenue growth excluding the effects of acquisitions, business dispositions and currency exchange rates. We believe that this measure provides management and investors with a more complete understanding of underlying operating results and trends of established, ongoing operations by excluding the effect of acquisitions, dispositions and currency exchange, which activities are subject to volatility and can obscure underlying trends. We also believe that presenting organic revenue growth separately for our industrial businesses provides management and investors with useful information about the trends of our industrial businesses and enables a more direct comparison to other non-financial businesses and companies. Management recognizes that the term "organic revenue growth" may be interpreted differently by other companies and under different circumstances. Although this may have an effect on comparability of absolute percentage growth from company to company, we believe that these measures are useful in assessing trends of the respective businesses or companies and may therefore be a useful tool in assessing period-to-period performance trends.
We also believe that the variability in the revenue of our Power and Oil & Gas businesses may obscure underlying trends of our other industrial businesses. As a result, we have also presented our organic revenue growth measure excluding the revenues of our Power and Oil & Gas businesses.
*Non-GAAP Financial Measure
|
| | |
| MD&A | SUPPLEMENTALNON-GAAP FINANCIAL INFORMATION |
|
| | | | | | | | | | | | | |
| OPERATING AND NON-OPERATING PENSION COST |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
| | | | | | |
| Service cost for benefits earned | $ | 267 |
| $ | 307 |
| | $ | 810 |
| $ | 913 |
|
| Prior service cost amortization | 73 |
| 76 |
| | 218 |
| 228 |
|
| Curtailment loss (gain) | — |
| — |
| | 43 |
| (1 | ) |
| Operating pension cost (Non-GAAP) | 340 |
| 383 |
| | 1,071 |
| 1,140 |
|
| | | | | | |
| Expected return on plan assets | (847 | ) | (837 | ) | | (2,545 | ) | (2,507 | ) |
| Interest cost on benefit obligations | 715 |
| 736 |
| | 2,144 |
| 2,205 |
|
| Net actuarial loss amortization | 702 |
| 612 |
| | 2,109 |
| 1,836 |
|
| Non-operating pension cost (Non-GAAP) | 570 |
| 511 |
| | 1,708 |
| 1,534 |
|
| Total principal pension plans cost (GAAP) | $ | 910 |
| $ | 894 |
| | $ | 2,779 |
| $ | 2,674 |
|
We have provided the operating and non-operating components of cost for our principal pension plans. Operating pension cost comprise the service cost of benefits earned, prior service cost amortization and curtailment loss (gain) for our principal pension plans. Non-operating pension cost comprise the expected return on plan assets, interest cost on benefit obligations and net actuarial loss amortization for our principal pension plans. We believe that the operating components of pension cost better reflects the ongoing service-related cost of providing pension benefits to our employees. We believe that the operating and non-operating components of cost for our principal pension plans, considered along with the corresponding GAAP measure, provide management and investors with additional information for comparison of our pension plan cost and operating results with the pension plan cost and operating results of other companies. |
| | | | | | | | | | | | | |
| GE EFFECTIVE TAX RATES, EXCLUDING GE CAPITAL EARNINGS (NON-GAAP) |
| | Three months ended September 30 | Nine months ended September 30 |
| (In millions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| GE earnings (loss) from continuing operations before income taxes (GAAP) | $ | (22,774 | ) | $ | 981 |
| | $ | (21,128 | ) | $ | 2,170 |
|
| Less: GE Capital earnings (loss) from continuing operations | 19 |
| 24 |
| | $ | (403 | ) | $ | (195 | ) |
| GE Industrial earnings (loss) from continuing operations before income taxes (Non-GAAP) | (22,793 | ) | 957 |
| | $ | (20,725 | ) | $ | 2,365 |
|
| | | | | | |
| GE provision (benefit) for income taxes (GAAP) | $ | 205 |
| $ | (281 | ) | | $ | 842 |
| $ | (93 | ) |
| GE effective tax rate, excluding GE Capital earnings (Non-GAAP) | (1 | )% | (29 | )% | | (4 | )% | (4 | )% |
| | | | | | |
| We believe that the GE effective tax rate is best analyzed in relation to GE earnings before income taxes excluding the GE Capital net earnings* from continuing operations, as GE tax expense does not include taxes on GE Capital earnings. Management believes that in addition to the Consolidated and GE Capital tax rates shown in Note 13 to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2017, this supplemental measure provides investors with useful information as it presents the GE effective tax rate that can be used in comparing the GE results to other non-financial services businesses. |
|
| | | | | | | | | | | | | |
| ADJUSTED CORPORATE COSTS (OPERATING) |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
| | | | | | |
| Total Corporate Items and Eliminations (GAAP) | $ | (1,095 | ) | $ | (1,524 | ) | | $ | (4,687 | ) | $ | (2,120 | ) |
| Less: non-operating pension cost (Non-GAAP) | (570 | ) | (511 | ) | | (1,708 | ) | (1,534 | ) |
| Total Corporate costs (operating) (Non-GAAP) | $ | (525 | ) | $ | (1,012 | ) | | $ | (2,979 | ) | $ | (586 | ) |
| Less: restructuring and other charges | (2,027 | ) | (683 | ) | | (3,755 | ) | (2,557 | ) |
| Less: gains (losses) on disposals | 1,897 |
| 208 |
| | 1,899 |
| 3,395 |
|
| Adjusted total corporate costs (operating) (Non-GAAP) | $ | (396 | ) | $ | (538 | ) | | $ | (1,124 | ) | $ | (1,424 | ) |
|
| | | | | | |
| GE INDUSTRIAL FREE CASH FLOWS (FCF) AND ADJUSTED GE INDUSTRIAL FCF (NON-GAAP) |
| | Nine months ended September 30 |
| (Dollars in millions) | 2018 |
| 2017 |
|
| GE CFOA (GAAP) | $ | (4,128 | ) | $ | 4,051 |
|
| Add: gross additions to PP&E | (2,419 | ) | (3,051 | ) |
| Add: gross additions to internal-use software | (262 | ) | (396 | ) |
| Less: common dividends from GE Capital | — |
| 4,016 |
|
| Less: GE Pension Plan funding | (6,000 | ) | (1,431 | ) |
| Less: taxes related to business sales | (91 | ) | (112 | ) |
| GE Industrial Free Cash Flows (Non-GAAP) | $ | (718 | ) | $ | (1,869 | ) |
| | | |
| Less: Oil & Gas CFOA | 669 |
| (242 | ) |
| Less: Oil & Gas gross additions to PP&E | (630 | ) | (250 | ) |
| Less: Oil & Gas gross additions to internal-use software | (23 | ) | (24 | ) |
| Add: BHGE Class B shareholder dividend | 399 |
| 122 |
|
| Adjusted GE Industrial Free Cash Flows (Non-GAAP) | $ | (335 | ) | $ | (1,230 | ) |
| | | |
| In 2018, GE transitioned from reporting an Adjusted GE Industrial CFOA metric to measuring itself on a GE Industrial Free Cash Flows basis*. This metric includes GE CFOA plus investments in property, plant and equipment and additions to internal-use software; this metric excludes any dividends received from GE Capital and any cash received from dispositions of property, plant and equipment. |
| | | |
| We believe that investors may also find it useful to compare GE’s Industrial free cash flows* performance without the effects of cash used for taxes related to business sales and contributions to the GE Pension Plan. We believe that this measure will better allow management and investors to evaluate the capacity of our industrial operations to generate free cash flows. In addition, we report Adjusted GE Industrial Free Cash Flows* in order to provide a more fair representation of the cash that we are entitled to utilize in a given period. We also use Adjusted GE Industrial Free Cash Flows* as a performance metric at the company-wide level for our annual executive incentive plan for 2018. |
| | | |
| Management recognizes that the term free cash flows may be interpreted differently by other companies and under different circumstances. Although this may have an effect on comparability of absolute percentage growth from company to company, we believe that these measures are useful in assessing trends of the respective businesses or companies and may therefore be a useful tool in assessing period-to-period performance trends. |
Operating corporate costs exclude non-service-related |
|
| GE INDUSTRIAL NET DEBT (NON-GAAP) |
In this document we use GE Industrial net debt*. We cannot provide an equivalent GAAP guidance range for our Industrial net debt target, which is calculated based on rating agency methodologies, without unreasonable effort. GE Industrial net debt reflects the total of gross debt, after-tax net pension costsliabilities, adjustments for operating lease obligations, and adjustments for 50% of preferred stock, less 75% of GE’s cash balance. There is significant uncertainty on the timing and amount of events that could give rise to items included in the determination of this metric, including the timing of pension funding, proceeds from dispositions, and the impact of interest rates on our principal pension plans, which comprise interest costs, expected return on plan assets and amortization of actuarial gains/losses. Service cost, prior service cost and curtailment loss components of our principal pension plans are included in operating corporate costs. We believe that these components of pension cost better reflect the ongoing service-related costs of providing pension benefits to our employees. Accordingly, we believe that our measure of operating corporate costs provides management and investors with a useful measure of the operational costs incurred outside of our businesses. We believe that this measure, considered along with the corresponding GAAP measure, provides management and investors with additional information for comparison of our operating corporate costs to the operating corporate costs of other companies.liabilities.
We also believe that adjusting operating corporate costs to exclude the effects of items that are not closely associated with ongoing corporate operations, such as earnings of previously divested businesses, gains and losses on disposed and held for sale businesses, and restructuring and other charges, provides management and investors with a meaningful measure that increases the period-to-period comparability of our ongoing corporate costs.
*Non-GAAP Financial Measure
|
| | |
MD&A | SUPPLEMENTAL INFORMATION |
|
| | | | | | | | | | | | | |
| GE PRE-TAX EARNINGS FROM CONTINUING OPERATIONS, EXCLUDING GE CAPITAL EARNINGS (LOSS) FROM CONTINUING OPERATIONS AND THE CORRESPONDING EFFECTIVE TAX RATES |
| | Three months ended September 30 | Nine months ended September 30 |
| (Dollars in millions) | 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
| | | | | | |
| GE earnings from continuing operations before income taxes (GAAP) | $ | 1,701 |
| $ | 2,263 |
| | $ | 4,162 |
| $ | 6,405 |
|
| Less: GE Capital earnings (loss) from continuing operations | $ | 24 |
| $ | 26 |
| | $ | (195 | ) | $ | (1,466 | ) |
| Adjusted earnings from continuing operations before income taxes (Non-GAAP) | $ | 1,677 |
| $ | 2,237 |
| | $ | 4,357 |
| $ | 7,871 |
|
| | | | | | |
| GE (excluding GE Capital) provision for income taxes - continuing operations (GAAP) | $ | (64 | ) | $ | 241 |
| | $ | 297 |
| $ | 1,034 |
|
| GE effective tax rate, excluding GE Capital earnings (Non-GAAP) | (4 | )% | 11 | % | | 7 | % | 13 | % |
We believe that the GE effective tax rate is best analyzed in relation to GE earnings before income taxes excluding the GE Capital net earnings from continuing operations, as GE tax expense does not include taxes on GE Capital earnings. Management believes that in addition to the Consolidated and GE Capital tax rates shown in Note 14 to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2016, this supplemental measure provides investors with useful information as it presents the GE effective tax rate that can be used in comparing the GE results to other non-financial services businesses.
|
| | | | | | | | | | | | | | | | | |
| INDUSTRIAL OPERATING EARNINGS AND GE CAPITAL EARNINGS (LOSS) FROM CONTINUING OPERATIONS AND EPS |
| | Three months ended September 30 | | Nine months ended September 30 |
| (Dollars in millions; except per-share amounts) | 2017 |
| 2016 |
| V% |
| | 2017 |
| 2016 |
| V% |
|
| | | | | | | | |
| Consolidated earnings (loss) from continuing operations attributable to GE common shareowners (GAAP) | $ | 1,905 |
| $ | 2,097 |
| (9 | )% | | $ | 4,101 |
| $ | 5,645 |
| (27 | )% |
| Non-operating pension cost | 570 |
| 511 |
| | | 1,708 |
| 1,534 |
| |
| Tax effect on non-operating pension cost(a) | (199 | ) | (179 | ) | | | (597 | ) | (537 | ) | |
| Adjustment: non-operating pension cost (net of tax) | 371 |
| 332 |
| | | 1,111 |
| 997 |
| |
| Operating earnings (loss) (Non-GAAP) | 2,276 |
| 2,429 |
| (6 | )% | | 5,212 |
| 6,642 |
| (22 | )% |
| | | | | | | | |
| Less: GE Capital earnings (loss) from continuing operations attributable to GE common shareowners | 24 |
| 26 |
| | | (195 | ) | (1,466 | ) | |
| Industrial operating earnings (loss) (Non-GAAP) | $ | 2,252 |
| $ | 2,404 |
| (6 | )% | | $ | 5,407 |
| $ | 8,109 |
| (33 | )% |
| | | | | | | | |
| Earnings (loss) per share (EPS) – diluted(b) | | | | | | | |
| Consolidated EPS from continuing operations attributable to GE common shareowners (GAAP) | $ | 0.22 |
| $ | 0.23 |
| (4 | )% | | $ | 0.47 |
| $ | 0.61 |
| (23 | )% |
| Adjustment: non-operating pension cost (net of tax) | 0.04 |
| 0.04 |
| | | 0.13 |
| 0.11 |
| |
| Operating EPS (Non-GAAP) | 0.26 |
| 0.27 |
| (4 | )% | | 0.59 |
| 0.72 |
| (18 | )% |
| Less: GE Capital EPS from continuing operations attributable to GE common shareowners (GAAP) | — |
| — |
| 0 | % | | (0.02 | ) | (0.16 | ) | 88 | % |
| Industrial operating EPS (Non-GAAP) | $ | 0.26 |
| $ | 0.27 |
| (4 | )% | | $ | 0.61 |
| $ | 0.88 |
| (31 | )% |
| |
(a) | The tax effect on non-operating pension cost was calculated using a 35% U.S. federal statutory tax rate, based on its applicability to such cost. |
| |
(b) | Earnings-per-share amounts are computed independently. As a result, the sum of per-share amounts may not equal the total. |
Operating earnings (loss) excludes non-service related pension cost of our principal pension plans, comprising interest cost, expected return on plan assets and amortization of actuarial gains/losses. The service cost, prior service cost and curtailment loss components of our principal pension plans are included in operating earnings. We believe that these components of pension cost better reflect the ongoing service-related cost of providing pension benefits to our employees. As such, we believe that our measure of operating earnings (loss) provides management and investors with a useful measure of the operational results of our business. Other components of GAAP pension cost are mainly driven by capital allocation decisions and market performance, and we manage these separately from the operational performance of our businesses. Neither GAAP nor operating pension cost are necessarily indicative of the current or future cash flow requirements related to our pension plans. We believe that this measure, considered along with the corresponding GAAP measure, provides management and investors with additional information for comparison of our operating results to the operating results of other companies. We also believe that presenting operating earnings separately for our industrial businesses provides management and investors with useful information about the relative size of our industrial and financial services businesses in relation to the total company.
|
| | |
MD&A | SUPPLEMENTAL INFORMATION |
|
| | | | | | | | | | | | | | | | | |
| INDUSTRIAL OPERATING + VERTICALS EARNINGS AND EPS |
| | Three months ended September 30 | | Nine months ended September 30 |
| (Dollars in millions; except per-share amounts) | 2017 |
| 2016 |
| V% |
| | 2017 |
| 2016 |
| V% |
|
| | | | | | | | |
| GE Capital earnings (loss) from continuing operations attributable to GE common shareowners (GAAP) | $ | 24 |
| $ | 26 |
| (8 | )% | | $ | (195 | ) | $ | (1,466 | ) | 87 | % |
| Less: GE Capital other continuing earnings (loss) (Other Capital)(a) | (275 | ) | (441 | ) | | | (1,573 | ) | (2,881 | ) | |
| Verticals earnings(b) | 299 |
| 466 |
| (36 | )% | | 1,377 |
| 1,414 |
| (3 | )% |
| Industrial operating earnings (Non-GAAP) | 2,252 |
| 2,404 |
| (6 | )% | | 5,407 |
| 8,109 |
| (33 | )% |
| Industrial operating earnings + Verticals earnings (Non-GAAP) | $ | 2,550 |
| $ | 2,870 |
| (11 | )% | | $ | 6,784 |
| $ | 9,523 |
| (29 | )% |
| | | | | | | | |
| Earnings (loss) per share (EPS) - diluted(c) | | | | | | | |
| GE Capital EPS from continuing operations attributable to GE common shareowners | $ | — |
| $ | — |
| — | % | | $ | (0.02 | ) | $ | (0.16 | ) | 88 | % |
| Less: GE Capital other continuing EPS (Other Capital) | (0.03 | ) | (0.05 | ) | | | (0.18 | ) | (0.31 | ) | |
| Verticals EPS | $ | 0.03 |
| $ | 0.05 |
| (40 | )% | | $ | 0.16 |
| $ | 0.15 |
| 7 | % |
| Industrial operating EPS (Non-GAAP) | 0.26 |
| 0.27 |
| (4 | )% | | 0.61 |
| 0.88 |
| (31 | )% |
| Industrial operating + Verticals EPS (Non-GAAP) | $ | 0.29 |
| $ | 0.32 |
| (9 | )% | | $ | 0.77 |
| $ | 1.03 |
| (25 | )% |
| | | | | | | | |
Consolidated EPS from continuing operations attributable to GE common shareowners (GAAP)
| $ | 0.22 |
| $ | 0.23 |
| (4 | )% | | $ | 0.47 |
| $ | 0.61 |
| (23 | )% |
| Less: non-operating pension cost (net of tax) | (0.04 | ) | (0.04 | ) | | | (0.13 | ) | (0.11 | ) | |
| Less: Other Capital | (0.03 | ) | (0.05 | ) | | | (0.18 | ) | (0.31 | ) | |
| Industrial operating + Verticals EPS (Non-GAAP) | $ | 0.29 |
| $ | 0.32 |
| (9 | )% | | $ | 0.77 |
| $ | 1.03 |
| (25 | )% |
| |
(a) | Includes interest on non-Verticals borrowings, restructuring costs and allocations of GE and GE Capital headquarters costs in excess of those allocated to the Verticals. |
| |
(b) | Verticals include businesses expected to be retained (GECAS, Energy Financial Services, Industrial Finance, and run-off insurance activities), including allocated corporate after-tax costs of $25 million in both the three months ended September 30, 2017 and 2016, and $75 million in both the nine months ended September 30, 2017 and 2016. |
| |
(c) | Earnings-per-share amounts are computed independently. As a result, the sum of per-share amounts may not equal the total. |
As described above, Verticals represents the GE Capital businesses that we expect to retain. We believe that presenting Industrial operating + Verticals earnings-per-share amounts provides management and investors with a useful measure to evaluate the performance of the businesses we expect to retain after the disposition of most of our financial services business.
|
| | |
MD&A | SUPPLEMENTAL INFORMATION |
|
| | | | | | | | | | | | | |
| INDUSTRIAL OPERATING PROFIT AND OPERATING PROFIT MARGIN (EXCLUDING CERTAIN ITEMS) |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
| | | | | | |
| Revenues | | | | | |
| GE total revenues and other income | $ | 31,603 |
| $ | 27,172 |
| | $ | 84,506 |
| $ | 82,382 |
|
| Less: GE Capital earnings (loss) from continuing operations | 24 |
| 26 |
| | (195 | ) | (1,466 | ) |
| GE revenues and other income excluding GE Capital earnings (loss) (Industrial revenues) (GAAP) | 31,580 |
| 27,146 |
| | 84,701 |
| 83,848 |
|
| | | | | | |
| Less: gains on disposals | 1,897 |
| 208 |
| | 1,899 |
| 3,395 |
|
| Adjusted Industrial revenues (Non-GAAP) | $ | 29,682 |
| $ | 26,938 |
| | $ | 82,801 |
| $ | 80,453 |
|
| | | | | | |
| Costs | | | | | |
| GE total costs and expenses | $ | 29,903 |
| $ | 24,909 |
| | $ | 80,344 |
| $ | 75,977 |
|
| Less: GE interest and other financial charges | 718 |
| 483 |
| | 1,918 |
| 1,490 |
|
| Industrial costs excluding interest and other financial charges (GAAP) | 29,185 |
| 24,426 |
| | 78,426 |
| 74,487 |
|
| | | | | | |
| Less: non-operating pension cost | 570 |
| 511 |
| | 1,708 |
| 1,534 |
|
| Less: restructuring and other charges | 2,294 |
| 683 |
| | 4,022 |
| 2,557 |
|
| Less: noncontrolling interests | 140 |
| 76 |
| | 236 |
| 275 |
|
| Adjusted Industrial costs (Non-GAAP) | $ | 26,181 |
| $ | 23,156 |
| | $ | 72,459 |
| $ | 70,121 |
|
| | | | | | |
| Industrial profit (GAAP) | 2,394 |
| 2,720 |
| | 6,275 |
| 9,361 |
|
| Industrial margins (GAAP) | 7.6 | % | 10.0 | % | | 7.4 | % | 11.2 | % |
| | | | | | |
| Industrial operating profit (Non-GAAP) | $ | 3,501 |
| 3,782 |
| | $ | 10,342 |
| $ | 10,332 |
|
| Industrial operating profit margins (Non-GAAP) | 11.8 | % | 14.0 | % | | 12.5 | % | 12.8 | % |
|
| | | | | | | |
| INDUSTRIAL OPERATING PROFIT EXCLUDING POWER AND OIL & GAS (NON-GAAP) |
| | | Three months ended September 30 |
| (In millions) | | 2017 |
| 2016 |
| V% |
|
| | | | | |
| | | | | |
| Industrial operating profit (Non-GAAP from above) | | 3,501 |
| 3,782 |
| |
| Less: Power segment profit | | 611 |
| 1,259 |
| |
| Less: Oil & Gas segment profit, excluding restructuring and other charges | | 231 |
| 353 |
| |
| Industrial operating profit excluding Power and Oil & Gas (Non-GAAP) | | 2,659 |
| 2,169 |
| 23 | % |
| |
(a) | Oil & Gas segment profit of $(36) million, excluding restructuring and other charges of $267 million, was $231 million for the three months ended September 30, 2017. |
We have presented our Industrial operating profit and operating profit margin excluding gains, non-operating pension cost, restructuring and other charges and noncontrolling interests. We believe that Industrial operating profit and operating profit margin adjusted for these items are meaningful measures because they increase the comparability of period-to-period results. In addition, we have presented our industrial operating profit measure excluding the segment profit of the Power business and the segment profit of the Oil & Gas business, excluding restructuring and other charges as we believe that the variability in the operating profit of our Power and Oil & Gas businesses may obscure underlying trends of our other industrial businesses.
|
| | |
MD&A | SUPPLEMENTAL INFORMATION |
|
| | | | | | | | |
| INDUSTRIAL CASH FLOWS FROM OPERATING ACTIVITIES (INDUSTRIAL CFOA) AND INDUSTRIAL CFOA EXCLUDING DEAL TAXES AND GE PENSION PLAN FUNDING |
| | Nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
| V% |
|
| | | | |
| Cash from GE's operating activities (continuing operations), as reported (GAAP) | $ | 4,050 |
| $ | 18,342 |
| (78 | )% |
| Adjustments: dividends from GE Capital | 4,016 |
| 16,050 |
| |
| Industrial CFOA (Non-GAAP) | $ | 34 |
| $ | 2,292 |
| 99 | % |
| Adjustments: | | | |
| Deal taxes | 112 |
| 1,076 |
| |
| GE Pension Plan funding | 1,431 |
| — |
| |
| Industrial CFOA excluding deal taxes and GE Pension Plan funding (Non-GAAP) | $ | 1,577 |
| $ | 3,368 |
| U |
|
We define “Industrial CFOA” as GE’s cash from operating activities (continuing operations) less the amount of dividends received by GE from GE Capital. This reflects the effects of intercompany transactions, which include, but are not limited to, the following: GE Capital working capital solutions to optimize GE cash management; GE Capital enabled GE industrial orders; aircraft engines, power equipment, renewable energy equipment and healthcare equipment manufactured by GE that are installed on GE Capital investments, including leased equipment; expenses related to parent-subsidiary pension plans; buildings and equipment leased between GE and GE Capital, including sale-leaseback transactions; information technology (IT) and other services sold to GE Capital by GE; and various investments, loans and allocations of GE corporate overhead costs.
We believe that investors may find it useful to compare GE's operating cash flows without the effect of GE Capital dividends, since these dividends are not representative of the operating cash flows of our industrial businesses and can vary from period-to-period based upon the results of the financial services businesses. We also believe that investors may find it useful to compare Industrial CFOA excluding the effects of deal taxes paid related to the 2016 Appliances sale, the 2017 Baker Hughes transaction and contributions to our GE Pension Plan. Management recognizes that these measures may not be comparable to cash flow results of companies which contain both industrial and financial services businesses, but believes that this comparison is aided by the provision of additional information about the amounts of dividends paid by our financial services business and the separate presentation in our financial statements of the GE Capital cash flows. We believe that our measure of Industrial CFOA and Industrial CFOA excluding deal-related taxes and GE Pension Plan contributions provides management and investors with useful measures to compare the capacity of our industrial operations to generate operating cash flow with the operating cash flow of other non-financial businesses and companies and as such provides useful measures to supplement the reported GAAP CFOA measure.
CONTROLS AND PROCEDURES
Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that (i) our disclosure controls and procedures were effective as of September 30, 2017,2018, and (ii) no change in internal control over financial reporting occurred during the quarter ended September 30, 2017,2018, that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.
Effective January 1, 2018, we adopted the new revenue guidance under ASC Topic 606, Revenue from Contracts with Customers, using the full retrospective method of adoption. The adoption of this guidance required the implementation of new accounting policies and processes, including enhancements to our information systems, which changed the Company’s internal controls over financial reporting for revenue recognition and related disclosures for both our recast historical financial statements and current period reporting.
6056 20172018 3Q FORM 10-Q
OTHER FINANCIAL DATA
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
| | | Period | Total number of shares purchased |
| Average price paid per share |
| Total number of shares purchased as part of our share repurchase program(a) |
| Approximate dollar value of shares that may yet be purchased under our share repurchase program(a) |
| Total number of shares purchased |
| Average price paid per share |
| Total number of shares purchased as part of our share repurchase program(a) |
| Approximate dollar value of shares that may yet be purchased under our share repurchase program(a) |
|
| (Shares in thousands) | | | | | | | | |
| | | | | | | | | |
| 2017 | | | | | |
| 2018 | | | | | |
| July | 696 |
| $ | 26.23 |
| 696 |
| | 1,125 |
| $ | 13.49 |
| 1,125 |
| |
| August | 1,132 |
| 24.99 |
| 1,132 |
| | 1,356 |
| 12.69 |
| 1,356 |
| |
| September | 899 |
| 24.39 |
| 899 |
| | 1,104 |
| 12.18 |
| 1,104 |
| |
| Total | 2,727 |
| $ | 25.11 |
| 2,727 |
| $ | 21 | billion | 3,585 |
| $ | 12.78 |
| 3,585 |
| $ | 20.7 | billion |
| |
| (a) | Shares were repurchased through the 2015 GE Share Repurchase Program that we announced on April 10, 2015 (the Program). As of September 30, 2017,Under the Program, we wereare authorized to repurchase up to $50 billion of our common stock through 2018 and, as of September 30, 2018, we had repurchased a total of approximately $29$29.3 billion under the Program. The Program is flexible and shares will be acquired with a combination of borrowings and free cash flow from the public markets and other sources, including GE Stock Direct, a stock purchase plan that is available to the public. |
20172018 3Q FORM 10-Q 6157
RISK FACTORS
The risk factor set forth below updates the corresponding risk factor in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018. In addition to the risk factor below, you should carefully consider the risk factors discussed in our most recent Form 10-K and Form 10-Q reports, which could materially affect our business, financial position and results of operations.
Funding & liquidity - Failure to maintain our credit ratings, or conditions in the financial and credit markets, could adversely affect our access to capital markets, funding costs and related margins, liquidity, capital allocation plans and competitive position.
We rely on cash from operations and proceeds from planned dispositions and business separations, as well as access to the short- and long-term debt markets, to fund our operations, maintain liquidity and meet our financial obligations and capital allocation priorities, such as funding GE dividend payments. In particular, we have relied on significant short-term borrowings in the commercial paper market to fund our operations on an intra-quarter basis. If we do not meet our cash flow objectives, whether through improved cash performance in our businesses or successful execution of planned dispositions and other portfolio actions, our financial condition could be adversely affected. Our access to the debt markets, and to the commercial paper markets in particular, depends on our credit ratings. On October 2, 2018, S&P lowered the credit ratings of GE and GE Capital short- and long-term debt from A-1 to A-2 and from A to BBB+, respectively, with a Stable outlook. In addition, Moody’s and Fitch changed their respective outlooks to “review for a potential downgrade” and “Rating Watch Negative” for both GE and GE Capital. The reduction in our short-term ratings has resulted in GE transitioning to a split tier-1/tier-2 commercial paper issuer, which will reduce our borrowing capacity in the commercial paper markets. To accommodate GE’s short-term liquidity needs, we are increasing utilization of our revolving credit facilities, which will result in an overall increase to our cost of funds. There can also be no assurance that we will not face additional credit downgrades, and future downgrades could further adversely affect our cost of funds and related margins, liquidity, competitive position and, potentially, access to capital markets. A significant increase in our cost of capital could require us to consider changes to our capital allocation plans, such as our planned dividend levels. Also, in certain securitization transactions where we provide servicing for third-party investors, we are contractually permitted to commingle cash collected from customers on financing receivables sold or pledged to third-party investors with our own cash prior to making required payments to third-party investors, provided our short-term credit rating does not fall below A-2/P-2. In the event our ratings were to fall below such levels, we would be required to segregate certain of these cash collections owed to third-party investors into restricted bank accounts and would lose the short-term liquidity benefit of commingling with respect to such collections. In addition, under various debt and derivative instruments, guarantees and covenants, we could be required to post additional capital or collateral in the event of a ratings downgrade, which would increase the impact of a ratings downgrade on our liquidity and capital position. Swap, forward and option contracts are executed under standard master agreements that typically contain mutual downgrade provisions that provide the ability of the counterparty to require termination if the credit ratings of the applicable GE entity were to fall below specified ratings levels agreed upon with the counterparty, primarily BBB/Baa2. For additional discussion about our current credit ratings and related considerations, refer to the Financial Resources and Liquidity - Debt and Derivative Instruments, Guarantees and Covenants section of this report.
External conditions in the financial and credit markets may also limit the availability of funding at particular times or increase the cost of funding, which could adversely affect our business, financial position and results of operations. Factors that may affect the availability of funding or cause an increase in our funding costs include disruptions in the commercial paper market, and potential market impacts arising in the United States, Europe or China from developments in sovereign debt situations, currency movements or other potential market disruptions. If our cost of funding were to increase, it may adversely affect our competitive position and result in lower net interest margins, earnings and cash flows as well as lower returns on shareowners' equity and invested capital.
LEGAL PROCEEDINGS
The following information supplements and amends our discussion set forth under “Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended December 31, 20162017 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 20172018 and June 30, 2017.2018. We also incorporate the information reported under "Legal Proceedings" in Baker Hughes, a GE company's most recent Form 10-K report and updates in its Form 10-Q reports.
WMC. There are 5At September 30, 2018, there were two pending lawsuits in which our discontinued U.S. mortgage business, WMC, is a party. The adverse parties in these cases are securitization trustees or parties claiming to act on their behalf. While the alleged claims for relief vary from case to case, theThe complaints and counterclaims in these actions generally assert claims for breach of contract, indemnification, and/or declaratory judgment, and seek specific performance (repurchase) and/or monetary damages. Beginning in the fourth quarter 2013, WMC entered into settlements that reduced its exposure on claims asserted in certain securitizations, and the claim amounts reported herein reflect the effect of these settlements.
At September 30, 2017, five WMC cases wereOne lawsuit is pending in the United States District Court for the District of Connecticut. Four of these cases were initiated in 2012, and one was initiated in the third quarter 2013. Deutsche Bank National Trust Company (Deutsche Bank) is the adverse party in four cases, and TMI Trust Company (TMI), as successor to Law Debenture Trust Company of New York, is the adverse party in one case. The Deutsche Bank complaints assert claims on approximately $4,300 million of mortgage loans and seek to recover damages in excess of approximately $1,800 million. The TMI complaint assertsasserting claims on approximately $800 million of mortgage loans, and alleges losses on these loans in excess of approximately $425 million. In September 2016, WMC and Deutsche Bank agreed to settle all claims arising out of the four securitizations at issueTrial in the Connecticut lawsuits, subject to judicial approvals. In October 2016, Deutsche Bank filed petitions for instruction in California state court seeking judicial instructions that Deutsche Bank’s entry into the settlement agreements was a reasonable exercise of its discretion and approving the distribution of settlement proceeds pursuant to the terms of each trust’s governing documents. No bondholder in any of these securitizations has objected to the proposed settlements. On July 17, 2017, the court entered a judgment and order granting Deutsche Bank’s petitions. The period to file an appeal expired October 9, 2017, and the underlying lawsuits were dismissed by stipulationthis case commenced on October 13, 2017. On August 25, 2017, the presiding judge in the TMI case entered an order setting a trial date of January 16, 2018. The parties have concluded their presentation of evidence and delivered closing arguments on June 12, 2018.
Four cases areAt September 30, 2018, one case was pending against WMC in New York State Supreme Court, all of which were initiated by securitization trustees or securities administrators. These cases involve, in the aggregate, claims involving approximately $4,559 million of mortgage loans. One of these lawsuitsCourt. This lawsuit was initiated by Deutsche Bank in the second quarter 2013 and names as defendants WMC and Barclays Bank PLC. It involves claims against WMC on approximately $1,000 million of mortgage loans and does not specify the amount of damages sought. In September 2016, WMC and Deutsche Bank agreed to settle all claims arising out of the two securitizations at issue in this lawsuit, subject to judicial approvals. In October 2016, Deutsche Bank filed petitions for instruction in California state court seeking judicial instructions that Deutsche Bank’s entry into the settlement agreements was a reasonable exercise of its discretion and approving the distribution of settlement proceeds pursuant to the terms of each trust’s governing documents. Bondholders in these two securitizations have filed objections to the proposed settlements, and are seeking discovery in connection with their objections.the court approved both settlements over the bondholder objections on April 3, 2018. The court has scheduled the next hearing on these objections for December 8, 2017. The second case, in which the plaintiff is The Bank of New York Mellon (BNY), was initiated in the fourth quarter 2012 and names as defendants WMC, J.P. Morgan Mortgage Acquisition Corporation and JPMorgan Chase Bank, N.A. BNY asserts claims on approximately $1,300 million of mortgage loans, and seeks to recover damages in excess of $650 million. In the second quarter, WMC and J.P. Morgan reached an agreement with the securitization trustee to settle this case, subject to court approval, and the trustee filed an action in Minnesota state court seeking such approval on July 11, 2017. The court held an initial hearing in this matter on September 11, 2017, at which no bondholder objected to the settlement, and enteredissued an order approving the settlementsettlements on October 4, 2017. With this settlement now final, we expect the underlying lawsuit will be dismissed in the fourth quarter. The third case was initiated by BNY in November 2013 and names as defendants WMC, J.P. Morgan Mortgage Acquisition Corporation and JPMorgan Chase Bank, N.A. In this case, BNY asserts claims on approximately $1,300 million of mortgage loans, and seeks to recover damages in excess of $600 million. On September 18, 2015, the court granted defendants’ motion to dismiss this case on statute of limitations grounds,May 14, 2018, and the plaintiffobjecting bondholders filed a noticenotices of appeal on July 10, 2018. On October 21, 2015. On May 11, 2017, the intermediate appellate court affirmed the dismissal of WMC, and the plaintiff is seeking leave to appeal this decision to the New York Court of Appeals. The fourth case was filed in October 2014 and names as defendants WMC, J.P. Morgan Mortgage Acquisition Corporation and JPMorgan Chase Bank, N.A. The plaintiff, BNY, asserts claims on approximately $959 million of mortgage loans and seeks to recover damages in excess of $475 million. On September 7, 2016, the court granted WMC’s motion to dismiss this case on statute of limitations grounds, and an appeal from this decision is pending in the intermediate appellate court. The latter two cases have been stayed pending the outcome of ongoing settlement negotiations.
At September 30, 2017, one case was pending against WMC in the United States District Court for the Southern District of New York. The case was initiated by the Federal Housing Finance Agency (FHFA) in the fourth quarter 2012. In the second quarter 2013,1, 2018, Deutsche Bank in its role as securitization trustee, intervenedwaived final court approval as a plaintiffcondition to its acceptance of the settlement, rendering the settlement final. WMC made the settlement payment on October 10, 2018, and filed a complaint relating to approximately $1,300 million of loans and alleging losses in excess of approximately $100 million. In December 2013, the District Court issued an order denying WMC’s motion to dismiss but, on its own motion, ordered re-briefing on several issues raised by WMC’s motion to dismiss in February 2015. On July 10, 2015, the District Court entered an order dismissing the lawsuit as time-barred under the applicable statute of limitations. Deutsche Bank filed a notice of appeal from this order of dismissal on August 13, 2015, and the United States Court of Appeals for the Second Circuit heard oral argument on June 10, 2016. In September 2016, WMC and Deutsche Bank agreed to settle all claims arising out of the securitizationunderlying lawsuit on October 15, 2018.
The amount of the claim at issue in this lawsuit, subject to judicial approval. In October 2016, Deutsche Bank filed a petition for instruction in California state court seeking judicial instructions that Deutsche Bank’s entry into the settlement agreement was a reasonable exercise of its discretion and approving the distribution of settlement proceeds pursuant to the terms of the trust’s governing documents. No bondholder in this securitization has objected to the proposed settlement. On July 17, 2017, the court entered a judgment and order granting Deutsche Bank’s petition. The period to file an appeal expired October 9, 2017, and the underlying lawsuit was dismissed on October 16, 2017.
The amounts of the claims at issue in these casesTMI case (discussed above) reflectreflects the purchase price or unpaid principal balances of the mortgage loans at issue at the time of purchase and dodoes not give effect to pay downs, accrued interest or fees, or potential recoveries based upon the underlying collateral. All of the mortgage loans involved in these lawsuitsthis lawsuit are included in WMC’s reported claims at September 30, 2017.2018. See Note 1819 to the consolidated financial statements for additionalfurther information.
On January 23, 2017, the ResCap Liquidating Trust, as successor to Residential Funding Company, LLC (RFC), filed a lawsuit seeking unspecified damages against WMC in the United States District Court for the District of Minnesota arising from alleged breaches in representations and warranties made by WMC in connection with the sale of approximately $840 million in loans to RFC over a period of time preceding RFC’s filing for bankruptcy protection in May 2012. On September 27, 2017, the parties entered into a settlement agreement, and the lawsuit was dismissed October 8, 2017.
In December 2015, we learned that, as part of continuing industry-wide investigation of subprime mortgages, the Civil Division of the U.S. Department of Justice (DOJ) is investigating potential violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) by WMC and its affiliates arising out of the origination, purchase or sale of residential mortgage loans between January 1, 2005 and December 31, 2007. The Justice DepartmentDOJ subsequently issued subpoenas to WMC and GE Capital, and we are cooperating with the Justice Department’sDOJ’s investigation, including providing documents and witnesses for interviews. Following DOJ's assertion that WMC and GE Capital violated FIRREA in connection with WMC’s origination and sale of subprime mortgage loans in 2006 and 2007, WMC and GE Capital are exploring whether an acceptable settlement of this matter can be reached. In the event that an acceptable settlement cannot be reached, we believe the DOJ would initiate legal proceedings against WMC and GE Capital. WMC and GE Capital believe they would have defenses to any such lawsuit.
Alstom legacy matters. In connection with our acquisition of Alstom’s Thermal, Renewables and Grid businesses in November 2015, we are subject to legacy legal proceedings and legal compliance risks that relate to claimed anti-competitive conduct or improper payments by Alstom in the pre-acquisition period. See Note 1819 to the consolidated financial statements for further information.
Shareholder lawsuits. Since November 2017, several putative class actions under the federal securities laws have been filed against GE and certain affiliated individuals. All of those actions filed to date have been consolidated into a single action currently pending in the U.S. District Court for the Southern District of New York (Hachem v. GE et al.). In May 2018, the court appointed Sjunde AP-Fonden (AP7) as Lead Plaintiff and Kessler Topaz Meltzer & Check, LLP as Lead Counsel for the consolidated shareholder actions. In October 2018, AP7 filed a Fourth Amended Consolidated Class Action Complaint naming as defendants GE, Jeffrey R. Immelt, Jeffrey S. Bornstein, Jamie S. Miller, Keith S. Sherin, Jan R. Hauser and Richard A. Laxer. It alleges violations of Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 related to insurance reserves and accounting for long-term service agreements and seeks damages on behalf of shareowners who acquired GE stock between February 27, 2013 and January 23, 2018. GE has filed a motion to dismiss on behalf of all defendants, and briefing on that motion concluded in October 2018.
Since February 2018, six shareholder derivative lawsuits have also been filed against current and former GE executive officers and members of GE’s Board of Directors and GE (as nominal defendant). Two of the lawsuits (consolidated as the Gammel case) were filed in New York state court, one lawsuit (the Bennett case) was filed in Massachusetts state court and three lawsuits (consolidated as the Raul case) were filed in the U.S. District Court for the Southern District of New York. The lawsuits allege violations of securities laws, breaches of fiduciary duties, unjust enrichment, waste of corporate assets, abuse of control and gross mismanagement. The allegations relate to substantially the same facts as those underlying the securities class actions described above, as well as the oversight of past GE practices regarding the use of its corporate aircraft. The Bennett complaint also includes a claim for professional negligence and accounting malpractice against GE’s auditor, KPMG. The plaintiffs seek unspecified damages and improvements in GE’s corporate governance and internal procedures. In June and October 2018, respectively, GE filed a motion to dismiss the Gammel case on behalf of all defendants, and the plaintiffs in the Raul case agreed to the dismissal of that case. The Bennett case has been stayed pending resolution of the motion to dismiss in the Gammel case.
In June 2018, an additional information.lawsuit (the Bezio case) was filed in New York state court derivatively on behalf of participants in the GE Retirement Savings Plan (the GE RSP), and alternatively as a class action on behalf of shareowners who acquired GE stock between February 26, 2013 and January 24, 2018, alleging violations of Section 11 of the Securities Act of 1933 based on alleged misstatements and omissions related to insurance reserves and performance of GE’s business segments in a GE RSP registration statement and documents incorporated therein by reference. In October 2018, GE filed a motion to dismiss.
In July 2018, an additional putative class action (the Mahar case) was filed in New York state court naming as defendants GE, Jeffrey R. Immelt, Jeffrey S. Bornstein, Jan R. Hauser, John L. Flannery, Douglas A. Warner III and KPMG. It alleges violations of Sections 11, 12 and 15 of the Securities Act of 1933 based on alleged misstatements related to insurance reserves and performance of GE’s business segments in GE Stock Direct Plan registration statements and documents incorporated therein by reference and seeks damages on behalf of shareowners who acquired GE stock between July 20, 2015 and July 19, 2018 through the GE Stock Direct Plan. In October 2018, GE filed a motion to dismiss on behalf of all defendants.
These cases are at an early stage; we believe we have defenses to the claims and are responding accordingly.
SEC investigation. In late November 2017, staff of the Boston office of the U.S. Securities & Exchange Commission (SEC) notified us that they are conducting an investigation of GE’s revenue recognition practices and internal controls over financial reporting related to long-term service agreements. Following our investor update on January 16, 2018 about the increase in future policy benefit reserves for GE Capital’s run-off insurance operations, as discussed in the Critical Accounting Estimates section of our Annual Report on Form 10-K, the SEC staff expanded the scope of its investigation to encompass the reserve increase and the process leading to the reserve increase. Following our announcement on October 1, 2018 about the expected non-cash goodwill impairment charge related to GE’s Power business, as discussed further in Note 8 to the consolidated financial statements, the SEC expanded the scope of its investigation to include that charge as well. We are providing documents and other information requested by the SEC staff, and we are cooperating with the ongoing investigation. Staff from the DOJ are also investigating these matters, and we are providing them with requested documents and information as well.
GE Retirement Savings Plan class action.actions. On September 27, 2017, three individual plaintiffs filed a putative class action lawsuit in the U.S. District Court for the Southern District of California against GE, trusteeswith claims regarding the oversight of GE’s 401(k) plan (the GE RSP). From October 30 to November 15, 2017, three similar class action suits were filed in the U.S. District Court for the District of Massachusetts. All four actions have been consolidated into a single action in the District of Massachusetts. The consolidated complaint names as defendants GE, GE Asset Management, current and other individual defendants yet to be named.former GE and GE Asset Management employees who served on fiduciary bodies responsible for overseeing the GE RSP during the class period and current and former members of GE's Board of Directors. Like a growing number of similar lawsuits that have been brought against other companies in recent years, the suitthis action alleges that the defendants breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA) in their oversight of the GE RSP, includingprincipally by selectingretaining five proprietary funds that plaintiffs allege were underperforming proprietary mutual funds as investment options for plan participants.participants and charging higher management fees than some alternative funds. The plaintiffs purporting to actseek unspecified damages on behalf of a class of GE RSP participants and beneficiaries from October 30, 2011 through June 30, 2016, seek damagesthe date of $700 million, but weany judgment. In August 2018, the court issued an order denying GE's motion to dismiss as to a majority of the counts and taking GE's motion under further advisement regarding two counts. We believe we have defenses to the claims and will respondare responding accordingly.
201760 2018 3Q FORM 10-Q63
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FINANCIAL STATEMENTS AND NOTES
| | | | | | |
| | | | |
| | |
| | | | |
| | | | |
| | | | |
| | 1 | | | 1 | | |
| | 2 | | | 2 | | |
| | 3 | | | 3 | | |
| | 4 | Current Receivables | | 4 | Current Receivables | |
| | 5 | | | 5 | | |
| | 6 | | | 6 | | |
| | 7 | | | 7 | | |
| | 8 | | | 8 | Goodwill and Other Intangible Assets | |
| | 9 | | | 9 | Revenues | |
| | 10 | | | 10 | Contract and Other Deferred Assets and Progress Collections and Deferred Income | |
| | 11 | Investment contracts, insurance liabilities and insurance annuity benefits | | 11 | | |
| | 12 | | | 12 | Investment contracts, insurance liabilities and insurance annuity benefits | |
| | 13 | | | 13 | | |
| | 14 | | | 14 | | |
| | 15 | | | 15 | | |
| | 16 | | | 16 | | |
| | 17 | | | 17 | | |
| | 18 | Commitments, Guarantees, Product Warranties and Other Loss Contingencies | | 18 | | |
| | 19 | | | 19 | Commitments, Guarantees, Product Warranties and Other Loss Contingencies | |
| | 20 | | | 20 | Cash Flows Information | |
| | 21 | | | 21 | | |
| | | 22 | | |
20172018 3Q FORM 10-Q 6561
FINANCIAL STATEMENTS
| | | STATEMENT OF EARNINGS (LOSS) | | |
| (UNAUDITED) | | |
| | Three months ended September 30 | Three months ended September 30 |
| | General Electric Company and consolidated affiliates | General Electric Company and consolidated affiliates |
| (In millions; per-share amounts in dollars) | 2017 |
| 2016 |
| 2018 |
| 2017 |
|
| | | |
| Revenues and other income | | |
| Revenues | | |
| Sales of goods | $ | 19,386 |
| $ | 18,553 |
| $ | 18,095 |
| $ | 19,244 |
|
| Sales of services | 10,043 |
| 8,261 |
| 9,370 |
| 9,521 |
|
| Other income | 2,146 |
| 227 |
| |
| GE Capital earnings (loss) from continuing operations | — |
| — |
| |
| GE Capital revenues from services | 1,898 |
| 2,224 |
| 2,109 |
| 1,898 |
|
| Total revenues and other income | 33,472 |
| 29,266 |
| |
| Total revenues (Note 9) | | 29,573 |
| 30,662 |
|
| | | |
| Costs and expenses | | |
| Cost of goods sold | 16,815 |
| 15,255 |
| 15,991 |
| 16,361 |
|
| Cost of services sold | 7,279 |
| 5,711 |
| 6,855 |
| 7,310 |
|
| Selling, general and administrative expenses | 4,855 |
| 4,343 |
| 4,855 |
| 4,741 |
|
| Interest and other financial charges | 1,232 |
| 961 |
| 1,227 |
| 1,232 |
|
| Investment contracts, insurance losses and insurance annuity benefits | 617 |
| 684 |
| 710 |
| 617 |
|
| Goodwill impairment | | 21,973 |
| 947 |
|
| Non-operating benefit costs | | 807 |
| 611 |
|
| Other costs and expenses | 1,208 |
| 238 |
| 98 |
| 261 |
|
| Total costs and expenses | 32,006 |
| 27,191 |
| 52,515 |
| 32,082 |
|
| | | |
| Other income | | 205 |
| 2,165 |
|
| GE Capital earnings (loss) from continuing operations | | — |
| — |
|
| | | |
| Earnings (loss) from continuing operations before income taxes | 1,466 |
| 2,074 |
| (22,736 | ) | 746 |
|
| Benefit (provision) for income taxes | 334 |
| (18 | ) | (162 | ) | 551 |
|
| Earnings (loss) from continuing operations | 1,800 |
| 2,056 |
| (22,899 | ) | 1,297 |
|
| Earnings (loss) from discontinued operations, net of taxes (Note 2) | (106 | ) | (105 | ) | 39 |
| (106 | ) |
| Net earnings (loss) | 1,694 |
| 1,951 |
| (22,859 | ) | 1,191 |
|
| Less net earnings (loss) attributable to noncontrolling interests | (142 | ) | (76 | ) | (90 | ) | (169 | ) |
| Net earnings (loss) attributable to the Company | 1,836 |
| 2,027 |
| (22,769 | ) | 1,360 |
|
| Preferred stock dividends | (36 | ) | (33 | ) | (39 | ) | (36 | ) |
| Net earnings (loss) attributable to GE common shareowners | $ | 1,800 |
| $ | 1,994 |
| $ | (22,808 | ) | $ | 1,324 |
|
| | | |
| Amounts attributable to GE common shareowners | | |
| Earnings (loss) from continuing operations | $ | 1,800 |
| $ | 2,056 |
| $ | (22,899 | ) | $ | 1,297 |
|
| Less net earnings (loss) attributable to noncontrolling interests, | | |
| continuing operations | (141 | ) | (74 | ) | (90 | ) | (169 | ) |
| Earnings (loss) from continuing operations attributable to the Company | 1,941 |
| 2,131 |
| (22,808 | ) | 1,465 |
|
| Preferred stock dividends | (36 | ) | (33 | ) | (39 | ) | (36 | ) |
| Earnings (loss) from continuing operations attributable | | |
| to GE common shareowners | 1,905 |
| 2,097 |
| (22,847 | ) | 1,429 |
|
| Earnings (loss) from discontinued operations, net of taxes | (106 | ) | (105 | ) | 39 |
| (106 | ) |
| Less net earnings (loss) attributable to | | |
| noncontrolling interests, discontinued operations | (1 | ) | (2 | ) | — |
| (1 | ) |
| Net earnings (loss) attributable to GE common shareowners | $ | 1,800 |
| $ | 1,994 |
| $ | (22,808 | ) | $ | 1,324 |
|
| | | |
| Per-share amounts (Note 15) | | |
| Per-share amounts (Note 16) | | |
| Earnings (loss) from continuing operations | | |
| Diluted earnings (loss) per share | $ | 0.22 |
| $ | 0.23 |
| $ | (2.63 | ) | $ | 0.16 |
|
| Basic earnings (loss) per share | $ | 0.22 |
| $ | 0.24 |
| $ | (2.63 | ) | $ | 0.16 |
|
| | | |
| Net earnings (loss) | | |
| Diluted earnings (loss) per share | $ | 0.21 |
| $ | 0.22 |
| $ | (2.62 | ) | $ | 0.15 |
|
| Basic earnings (loss) per share | $ | 0.21 |
| $ | 0.22 |
| $ | (2.62 | ) | $ | 0.15 |
|
| | | |
| Dividends declared per common share | $ | 0.24 |
| $ | 0.23 |
| $ | 0.12 |
| $ | 0.24 |
|
Amounts may not add due to rounding.
See accompanying notes.
6662 20172018 3Q FORM 10-Q
| | STATEMENT OF EARNINGS (LOSS) (CONTINUED) | | (UNAUDITED) | | | | | | |
| | | | | | | |
| | Three months ended September 30 | Three months ended September 30 |
| | GE(a) | | Financial Services (GE Capital) | GE(a) | | Financial Services (GE Capital) |
| (In millions; per-share amounts in dollars) | 2017 |
| 2016 |
| | 2017 |
| 2016 |
| 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | | |
| Revenues and other income | | | | |
| Revenues | | | | |
| Sales of goods | $ | 19,358 |
| $ | 18,621 |
| | $ | 39 |
| $ | 34 |
| $ | 18,072 |
| $ | 19,216 |
| | $ | 37 |
| $ | 39 |
|
| Sales of services | 10,080 |
| 8,313 |
| | — |
| — |
| 9,383 |
| 9,558 |
| | — |
| — |
|
| Other income | 2,141 |
| 213 |
| | — |
| — |
| |
| GE Capital earnings (loss) from continuing operations | 24 |
| 26 |
| | — |
| — |
| |
| GE Capital revenues from services | — |
| — |
| | 2,359 |
| 2,566 |
| — |
| — |
| | 2,436 |
| 2,359 |
|
| Total revenues and other income | 31,603 |
| 27,172 |
| | 2,397 |
| 2,600 |
| |
| Total revenues | | 27,456 |
| 28,774 |
| | 2,473 |
| 2,397 |
|
| | | | | | | |
| Costs and expenses | | | | | | |
| Cost of goods sold | 16,796 |
| 15,329 |
| | 30 |
| 27 |
| 15,976 |
| 16,343 |
| | 28 |
| 30 |
|
| Cost of services sold | 6,725 |
| 5,216 |
| | 592 |
| 547 |
| 6,373 |
| 6,756 |
| | 502 |
| 592 |
|
| Selling, general and administrative expenses | 4,717 |
| 3,880 |
| | 285 |
| 631 |
| 4,660 |
| 4,604 |
| | 332 |
| 284 |
|
| Interest and other financial charges | 718 |
| 483 |
| | 790 |
| 617 |
| 662 |
| 718 |
| | 704 |
| 790 |
|
| Investment contracts, insurance losses and insurance annuity benefits | — |
| — |
| | 640 |
| 700 |
| — |
| — |
| | 732 |
| 640 |
|
| Goodwill impairment | | 21,973 |
| 947 |
| | — |
| — |
|
| Non-operating benefit costs | | 804 |
| 610 |
| | 2 |
| 1 |
|
Other costs and expenses(b) | 947 |
| — |
| | 271 |
| 241 |
| — |
| — |
| | 115 |
| 271 |
|
| Total costs and expenses | 29,903 |
| 24,909 |
| | 2,608 |
| 2,763 |
| 50,449 |
| 29,978 |
| | 2,416 |
| 2,608 |
|
| | | | | |
| Other income | | 201 |
| 2,160 |
| | — |
| — |
|
| GE Capital earnings (loss) from continuing operations | | 19 |
| 24 |
| | — |
| — |
|
| | | | | | | |
| Earnings (loss) from continuing operations before income taxes | 1,701 |
| 2,263 |
| | (211 | ) | (163 | ) | (22,774 | ) | 981 |
| | 57 |
| (211 | ) |
| Benefit (provision) for income taxes | 64 |
| (241 | ) | | 270 |
| 223 |
| (205 | ) | 281 |
| | 43 |
| 270 |
|
| Earnings (loss) from continuing operations | 1,765 |
| 2,022 |
| | 59 |
| 60 |
| (22,979 | ) | 1,261 |
| | 99 |
| 59 |
|
| Earnings (loss) from discontinued operations, net of taxes (Note 2) | (105 | ) | (103 | ) | | (106 | ) | (105 | ) | 39 |
| (105 | ) | | 40 |
| (106 | ) |
| Net earnings (loss) | 1,660 |
| 1,918 |
| | (47 | ) | (45 | ) | (22,940 | ) | 1,156 |
| | 139 |
| (47 | ) |
| Less net earnings (loss) attributable to noncontrolling interests | (140 | ) | (76 | ) | | (2 | ) | 0 |
| (132 | ) | (168 | ) | | 42 |
| (2 | ) |
| Net earnings (loss) attributable to the Company | 1,800 |
| 1,994 |
| | (46 | ) | (45 | ) | (22,808 | ) | 1,324 |
| | 98 |
| (46 | ) |
| Preferred stock dividends | — |
| — |
| | (36 | ) | (33 | ) | — |
| — |
| | (39 | ) | (36 | ) |
| Net earnings (loss) attributable to GE common shareowners | $ | 1,800 |
| $ | 1,994 |
| | $ | (81 | ) | $ | (78 | ) | $ | (22,808 | ) | $ | 1,324 |
| | $ | 59 |
| $ | (81 | ) |
| | | | | | | |
| Amounts attributable to GE common shareowners: | | | | | | |
| Earnings (loss) from continuing operations | $ | 1,765 |
| $ | 2,022 |
| | $ | 59 |
| $ | 60 |
| $ | (22,979 | ) | $ | 1,261 |
| | $ | 99 |
| $ | 59 |
|
| Less net earnings (loss) attributable to noncontrolling interests, | | | | | | |
| continuing operations | (140 | ) | (76 | ) | | (1 | ) | 1 |
| (132 | ) | (168 | ) | | 42 |
| (1 | ) |
| Earnings (loss) from continuing operations attributable to the Company | 1,905 |
| 2,097 |
| | 60 |
| 59 |
| (22,847 | ) | 1,429 |
| | 58 |
| 60 |
|
| Preferred stock dividends | — |
| — |
| | (36 | ) | (33 | ) | — |
| — |
| | (39 | ) | (36 | ) |
| Earnings (loss) from continuing operations attributable | | | | | | |
| to GE common shareowners | 1,905 |
| 2,097 |
| | 24 |
| 26 |
| (22,847 | ) | 1,429 |
| | 19 |
| 24 |
|
| Earnings (loss) from discontinued operations, net of taxes | (105 | ) | (103 | ) | | (106 | ) | (105 | ) | 39 |
| (105 | ) | | 40 |
| (106 | ) |
| Less net earnings (loss) attributable to | | | | | | |
| noncontrolling interests, discontinued operations | — |
| — |
| | (1 | ) | (2 | ) | — |
| — |
| | — |
| (1 | ) |
| Net earnings (loss) attributable to GE common shareowners | $ | 1,800 |
| $ | 1,994 |
| | $ | (81 | ) | $ | (78 | ) | $ | (22,808 | ) | $ | 1,324 |
| | $ | 59 |
| $ | (81 | ) |
| |
| (a) | Represents the adding together of all affiliated companies except GE Capital, which is presented on a one-line basis. See Note 1. |
Amounts may not add due to rounding.
In the consolidating data on this page, “GE” means the basis of consolidation as described in Note 1 to the consolidated financial statements; “GE Capital” means GE Capital Global Holdings, LLC (GECGH) and all of their affiliates and associated companies. Separate information is shown for “GE” and “Financial Services (GE Capital).” Transactions between GE and GE Capital have been eliminated from the “General Electric Company and consolidated affiliates” columns on the prior page.
|
| | | | | | |
| STATEMENT OF EARNINGS (LOSS) |
| (UNAUDITED) |
| | Nine months ended September 30 |
| | General Electric Company
and consolidated affiliates |
| (In millions; per-share amounts in dollars) | 2018 |
| 2017 |
|
| | | |
| Revenues | | |
| Sales of goods | $ | 53,377 |
| $ | 54,348 |
|
| Sales of services | 29,055 |
| 26,108 |
|
| GE Capital revenues from services | 5,905 |
| 6,184 |
|
| Total revenues | 88,337 |
| 86,640 |
|
| | | |
| Costs and expenses | | |
| Cost of goods sold | 45,103 |
| 45,911 |
|
| Cost of services sold | 21,692 |
| 19,614 |
|
| Selling, general and administrative expenses | 13,547 |
| 13,180 |
|
| Interest and other financial charges | 3,807 |
| 3,545 |
|
| Investment contracts, insurance losses and insurance annuity benefits | 2,009 |
| 1,908 |
|
| Goodwill impairment | 21,973 |
| 947 |
|
| Non-operating benefit costs | 2,188 |
| 1,824 |
|
| Other costs and expenses | 286 |
| 584 |
|
| Total costs and expenses | 110,604 |
| 87,512 |
|
| | | |
| Other income | 1,275 |
| 2,692 |
|
| GE Capital earnings (loss) from continuing operations | — |
| — |
|
| | | |
| Earnings (loss) from continuing operations before income taxes | (20,992 | ) | 1,820 |
|
| Benefit (provision) for income taxes | (677 | ) | 693 |
|
| Earnings (loss) from continuing operations | (21,670 | ) | 2,513 |
|
| Earnings (loss) from discontinued operations, net of taxes (Note 2) | (1,634 | ) | (490 | ) |
| Net earnings (loss) | (23,304 | ) | 2,023 |
|
| Less net earnings (loss) attributable to noncontrolling interests | (188 | ) | (312 | ) |
| Net earnings (loss) attributable to the Company | (23,116 | ) | 2,334 |
|
| Preferred stock dividends | (260 | ) | (252 | ) |
| Net earnings (loss) attributable to GE common shareowners | $ | (23,376 | ) | $ | 2,082 |
|
| | | |
| Amounts attributable to GE common shareowners | | |
| Earnings (loss) from continuing operations | $ | (21,670 | ) | $ | 2,513 |
|
| Less net earnings (loss) attributable to noncontrolling interests, | | |
| continuing operations | (188 | ) | (318 | ) |
| Earnings (loss) from continuing operations attributable to the Company | (21,482 | ) | 2,831 |
|
| Preferred stock dividends | (260 | ) | (252 | ) |
| Earnings (loss) from continuing operations attributable | | |
| to GE common shareowners | (21,742 | ) | 2,579 |
|
| Earnings (loss) from discontinued operations, net of taxes | (1,634 | ) | (490 | ) |
| Less net earnings (loss) attributable to noncontrolling interests, | | |
| discontinued operations | — |
| 6 |
|
| Net earnings (loss) attributable to GE common shareowners | $ | (23,376 | ) | $ | 2,082 |
|
| | | |
| Per-share amounts (Note 15) | | |
| Earnings (loss) from continuing operations | | |
| Diluted earnings (loss) per share | $ | (2.50 | ) | $ | 0.29 |
|
| Basic earnings (loss) per share | $ | (2.50 | ) | $ | 0.30 |
|
| | | |
| Net earnings (loss) | | |
| Diluted earnings (loss) per share | $ | (2.69 | ) | $ | 0.24 |
|
| Basic earnings (loss) per share | $ | (2.69 | ) | $ | 0.24 |
|
| | | |
| Dividends declared per common share | $ | 0.36 |
| $ | 0.72 |
|
Amounts may not add due to rounding.
See accompanying notes.
|
| | | | | | | | | | | | | |
| STATEMENT OF EARNINGS (LOSS) |
| (UNAUDITED) |
| | | | | | |
| | Nine months ended September 30 |
| | GE(a) | | Financial Services (GE Capital) |
| (In millions; per-share amounts in dollars) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Revenues | | | | | |
| Sales of goods | $ | 53,305 |
| $ | 54,408 |
| | $ | 100 |
| $ | 101 |
|
| Sales of services | 29,123 |
| 26,275 |
| | — |
| — |
|
| GE Capital revenues from services | — |
| — |
| | 6,975 |
| 7,424 |
|
| Total revenues | 82,429 |
| 80,683 |
| | 7,075 |
| 7,525 |
|
| | | | | | |
| Costs and expenses | | | | | |
| Cost of goods sold | 45,046 |
| 45,993 |
| | 78 |
| 79 |
|
| Cost of services sold | 20,207 |
| 18,108 |
| | 1,573 |
| 1,673 |
|
| Selling, general and administrative expenses | 12,990 |
| 12,199 |
| | 987 |
| 1,346 |
|
| Interest and other financial charges | 1,995 |
| 1,918 |
| | 2,296 |
| 2,373 |
|
| Investment contracts, insurance losses and insurance annuity benefits | — |
| — |
| | 2,071 |
| 1,958 |
|
| Goodwill impairment | 21,973 |
| 947 |
| | — |
| — |
|
| Non-operating benefit costs | 2,178 |
| 1,811 |
| | 9 |
| 12 |
|
| Other costs and expenses | — |
| — |
| | 328 |
| 629 |
|
| Total costs and expenses | 104,390 |
| 80,977 |
| | 7,342 |
| 8,070 |
|
| | | | | | |
| Other income | 1,237 |
| 2,659 |
| | — |
| — |
|
| GE Capital earnings (loss) from continuing operations | (403 | ) | (195 | ) | | — |
| — |
|
| | | | | | |
| Earnings (loss) from continuing operations before income taxes | (21,128 | ) | 2,170 |
| | (268 | ) | (545 | ) |
| Benefit (provision) for income taxes | (842 | ) | 93 |
| | 165 |
| 600 |
|
| Earnings (loss) from continuing operations | (21,970 | ) | 2,263 |
| | (103 | ) | 55 |
|
| Earnings (loss) from discontinued operations, net of taxes (Note 2) | (1,634 | ) | (497 | ) | | (1,579 | ) | (494 | ) |
| Net earnings (loss) | (23,604 | ) | 1,766 |
| | (1,682 | ) | (439 | ) |
| Less net earnings (loss) attributable to noncontrolling interests | (228 | ) | (316 | ) | | 40 |
| 5 |
|
| Net earnings (loss) attributable to the Company | (23,376 | ) | 2,082 |
| | (1,722 | ) | (443 | ) |
| Preferred stock dividends | — |
| — |
| | (260 | ) | (252 | ) |
| Net earnings (loss) attributable to GE common shareowners | $ | (23,376 | ) | $ | 2,082 |
| | $ | (1,982 | ) | $ | (695 | ) |
| | | | | | |
| Amounts attributable to GE common shareowners: | | | | | |
| Earnings (loss) from continuing operations | $ | (21,970 | ) | $ | 2,263 |
| | $ | (103 | ) | $ | 55 |
|
| Less net earnings (loss) attributable to noncontrolling interests, | | | | | |
| continuing operations | (228 | ) | (316 | ) | | 40 |
| (2 | ) |
| Earnings (loss) from continuing operations attributable to the Company | (21,742 | ) | 2,579 |
| | (143 | ) | 57 |
|
| Preferred stock dividends | — |
| — |
| | (260 | ) | (252 | ) |
| Earnings (loss) from continuing operations attributable | | | | | |
| to GE common shareowners | (21,742 | ) | 2,579 |
| | (403 | ) | (195 | ) |
| Earnings (loss) from discontinued operations, net of taxes | (1,634 | ) | (497 | ) | | (1,579 | ) | (494 | ) |
| Less net earnings (loss) attributable to noncontrolling interests, | | | | | |
| discontinued operations | — |
| — |
| | — |
| 6 |
|
| Net earnings (loss) attributable to GE common shareowners | $ | (23,376 | ) | $ | 2,082 |
| | $ | (1,982 | ) | $ | (695 | ) |
| |
(b)(a) | Represents the adding together of all affiliated companies except GE amount representsCapital, which is presented on a goodwill impairment charge recognized in the third quarter of 2017.one-line basis. See Note 8 for further information.1. |
Amounts may not add due to rounding.
In the consolidating data on this page, “GE” means the basis of consolidation as described in Note 1 to the consolidated financial statements; “GE Capital” means GE Capital Global Holdings, LLC (GECGH) or its predecessor General Electric Capital Corporation (GECC) and all of their affiliates and associated companies. Separate information is shown for “GE” and “Financial Services (GE Capital).” Transactions between GE and GE Capital have been eliminated from the “General Electric Company and consolidated affiliates” columns on the prior page.
|
| | | | | | | | | | | | | |
| GENERAL ELECTRIC COMPANY AND CONSOLIDATED AFFILIATES | | | | |
| CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) | | | | |
| (UNAUDITED) | | | | | |
| | | | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Net earnings (loss) | $ | (22,859 | ) | $ | 1,191 |
| | $ | (23,304 | ) | $ | 2,023 |
|
| Less net earnings (loss) attributable to noncontrolling interests | (90 | ) | (169 | ) | | (188 | ) | (312 | ) |
| Net earnings (loss) attributable to the Company | $ | (22,769 | ) | $ | 1,360 |
| | $ | (23,116 | ) | $ | 2,334 |
|
| | | | | | |
| Other comprehensive income (loss) | | | | | |
| Investment securities | $ | (57 | ) | $ | 21 |
| | $ | 68 |
| $ | 213 |
|
| Currency translation adjustments | (633 | ) | 501 |
| | (1,471 | ) | 1,829 |
|
| Cash flow hedges | (9 | ) | 100 |
| | (35 | ) | 109 |
|
| Benefit plans | 863 |
| 423 |
| | 2,521 |
| 2,032 |
|
| Other comprehensive income (loss) | 164 |
| 1,046 |
| | 1,082 |
| 4,184 |
|
| Less other comprehensive income (loss) attributable to noncontrolling interests | (39 | ) | 124 |
| | (92 | ) | 131 |
|
| Other comprehensive income (loss) attributable to the Company | $ | 203 |
| $ | 922 |
| | $ | 1,174 |
| $ | 4,053 |
|
| | | | | | |
| Comprehensive income (loss) | $ | (22,695 | ) | $ | 2,236 |
| | $ | (22,222 | ) | $ | 6,207 |
|
| Less comprehensive income (loss) attributable to noncontrolling interests | (129 | ) | (46 | ) | | (280 | ) | (181 | ) |
| Comprehensive income (loss) attributable to the Company | $ | (22,566 | ) | $ | 2,282 |
| | $ | (21,941 | ) | $ | 6,387 |
|
Amounts presented net of taxes.
Amounts may not add due to rounding.
See accompanying notes.
[PAGE INTENTIONALLY LEFT BLANK]
|
| | | | | | |
| STATEMENT OF EARNINGS (LOSS) |
| (UNAUDITED) |
| | Nine months ended September 30 |
| | General Electric Company |
| | and consolidated affiliates |
| (In millions; per-share amounts in dollars) | 2017 |
| 2016 |
|
| | | |
| Revenues and other income | | |
| Sales of goods | $ | 54,562 |
| $ | 54,626 |
|
| Sales of services | 27,333 |
| 25,530 |
|
| Other income | 2,611 |
| 3,385 |
|
| GE Capital earnings (loss) from continuing operations | — |
| — |
|
| GE Capital revenues from services | 6,184 |
| 7,063 |
|
| Total revenues and other income | 90,691 |
| 90,604 |
|
| | | |
| Costs and expenses | | |
| Cost of goods sold | 46,805 |
| 45,533 |
|
| Cost of services sold | 19,441 |
| 18,177 |
|
| Selling, general and administrative expenses | 13,649 |
| 13,833 |
|
| Interest and other financial charges | 3,545 |
| 4,023 |
|
| Investment contracts, insurance losses and insurance annuity benefits | 1,908 |
| 2,101 |
|
| Other costs and expenses | 1,531 |
| 801 |
|
| Total costs and expenses | 86,879 |
| 84,467 |
|
| | | |
| Earnings (loss) from continuing operations before income taxes | 3,812 |
| 6,137 |
|
| Benefit (provision) for income taxes | 303 |
| (302 | ) |
| Earnings (loss) from continuing operations | 4,115 |
| 5,835 |
|
| Earnings (loss) from discontinued operations, net of taxes (Note 2) | (490 | ) | (954 | ) |
| Net earnings (loss) | 3,624 |
| 4,881 |
|
| Less net earnings (loss) attributable to noncontrolling interests | (231 | ) | (283 | ) |
| Net earnings (loss) attributable to the Company | 3,856 |
| 5,164 |
|
| Preferred stock dividends | (252 | ) | (474 | ) |
| Net earnings (loss) attributable to GE common shareowners | $ | 3,604 |
| $ | 4,689 |
|
| | | |
| Amounts attributable to GE common shareowners | | |
| Earnings (loss) from continuing operations | $ | 4,115 |
| $ | 5,835 |
|
| Less net earnings (loss) attributable to noncontrolling interests, | | |
| continuing operations | (238 | ) | (285 | ) |
| Earnings (loss) from continuing operations attributable to the Company | 4,352 |
| 6,120 |
|
| Preferred stock dividends | (252 | ) | (474 | ) |
| Earnings (loss) from continuing operations attributable | | |
| to GE common shareowners | 4,101 |
| 5,645 |
|
| Earnings (loss) from discontinued operations, net of taxes | (490 | ) | (954 | ) |
| Less net earnings (loss) attributable to noncontrolling interests, | | |
| discontinued operations | 6 |
| 2 |
|
| Net earnings (loss) attributable to GE common shareowners | $ | 3,604 |
| $ | 4,689 |
|
| | | |
| Per-share amounts (Note 15) | | |
| Earnings (loss) from continuing operations | | |
| Diluted earnings (loss) per share | $ | 0.47 |
| $ | 0.61 |
|
| Basic earnings (loss) per share | $ | 0.47 |
| $ | 0.62 |
|
| | | |
| Net earnings (loss) | | |
| Diluted earnings (loss) per share | $ | 0.41 |
| $ | 0.51 |
|
| Basic earnings (loss) per share | $ | 0.41 |
| $ | 0.51 |
|
| | | |
| Dividends declared per common share | $ | 0.72 |
| $ | 0.69 |
|
|
| | | | | | |
| STATEMENT OF FINANCIAL POSITION |
| | General Electric Company
and consolidated affiliates |
| (In millions, except share amounts) | September 30, 2018 |
| December 31, 2017 |
|
| | (Unaudited) |
| |
| Assets | | |
| Cash, cash equivalents and restricted cash(a) | $ | 26,932 |
| $ | 43,967 |
|
| Investment securities (Note 3) | 34,761 |
| 38,696 |
|
| Current receivables (Note 4) | 20,414 |
| 24,209 |
|
| Inventories (Note 5) | 20,642 |
| 19,419 |
|
| Financing receivables – net (Note 6) | 7,918 |
| 10,336 |
|
| Other GE Capital receivables | 6,115 |
| 6,301 |
|
| Property, plant and equipment – net (Note 7) | 50,638 |
| 53,874 |
|
| Receivable from GE Capital | — |
| — |
|
| Investment in GE Capital | — |
| — |
|
| Goodwill (Note 8) | 60,377 |
| 83,968 |
|
| Other intangible assets – net (Note 8) | 18,838 |
| 20,273 |
|
| Contract and other deferred assets (Note 10) | 20,905 |
| 20,356 |
|
| All other assets | 24,491 |
| 28,949 |
|
| Deferred income taxes (Note 14) | 10,354 |
| 8,819 |
|
| Assets of businesses held for sale (Note 2) | 4,588 |
| 4,164 |
|
| Assets of discontinued operations (Note 2) | 4,716 |
| 5,912 |
|
| Total assets(b) | $ | 311,691 |
| $ | 369,245 |
|
| | | |
| Liabilities and equity | | |
| Short-term borrowings (Note 11) | $ | 15,206 |
| $ | 24,036 |
|
| Accounts payable, principally trade accounts | 15,748 |
| 15,172 |
|
| Progress collections and deferred income | 20,579 |
| 22,117 |
|
| Dividends payable | 1,054 |
| 1,052 |
|
| Other GE current liabilities | 17,930 |
| 16,919 |
|
| Non-recourse borrowings of consolidated securitization entities (Note 11) | 2,699 |
| 1,980 |
|
| Long-term borrowings (Note 11) | 97,060 |
| 108,575 |
|
| Investment contracts, insurance liabilities and insurance annuity benefits (Note 12) | 35,575 |
| 38,136 |
|
| Non-current compensation and benefits | 34,342 |
| 41,630 |
|
| All other liabilities | 19,913 |
| 20,784 |
|
| Liabilities of businesses held for sale (Note 2) | 1,360 |
| 1,248 |
|
| Liabilities of discontinued operations (Note 2) | 2,002 |
| 706 |
|
| Total liabilities(b) | 263,468 |
| 292,355 |
|
| | | |
| Redeemable noncontrolling interests (Note 15) | 386 |
| 3,391 |
|
| | | |
Preferred stock (5,939,874 shares outstanding at both September 30, 2018
and December 31, 2017) | 6 |
| 6 |
|
Common stock (8,698,115,000 and 8,680,571,000 shares outstanding
at September 30, 2018 and December 31, 2017, respectively) | 702 |
| 702 |
|
| Accumulated other comprehensive income (loss) – net attributable to GE(c) | | |
| Investment securities | (36 | ) | (102 | ) |
| Currency translation adjustments | (6,040 | ) | (4,661 | ) |
| Cash flow hedges | 27 |
| 62 |
|
| Benefit plans | (7,181 | ) | (9,702 | ) |
| Other capital | 37,311 |
| 37,384 |
|
| Retained earnings | 90,867 |
| 117,245 |
|
| Less common stock held in treasury | (84,202 | ) | (84,902 | ) |
| Total GE shareowners’ equity | 31,454 |
| 56,030 |
|
| Noncontrolling interests(d) (Note 15) | 16,383 |
| 17,468 |
|
| Total equity (Note 15) | 47,837 |
| 73,498 |
|
| Total liabilities, redeemable noncontrolling interests and equity | $ | 311,691 |
| $ | 369,245 |
|
| |
| (a) | Includes restricted cash of $454 million and $668 million at September 30, 2018 and December 31, 2017, respectively. |
| |
| (b) | Our consolidated assets at September 30, 2018 included total assets of $5,248 million of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs. These assets included current receivables and net financing receivables of $2,986 million within continuing operations and assets of discontinued operations of $109 million. Our consolidated liabilities at September 30, 2018 included liabilities of certain VIEs for which the VIE creditors do not have recourse to GE. These liabilities included non-recourse borrowings of consolidated securitization entities (CSEs) of $(1,622) million within continuing operations. See Note 18. |
| |
| (c) | The sum of accumulated other comprehensive income (loss) (AOCI) attributable to the Company was $(13,229) million and $(14,404) million at September 30, 2018 and December 31, 2017, respectively. |
| |
| (d) | Included AOCI attributable to noncontrolling interests of $(318) million and $(226) million at September 30, 2018 and December 31, 2017, respectively. |
Amounts may not add due to rounding.
See accompanying notes.
|
| | | | | | | | | | | | | |
| STATEMENT OF EARNINGS (LOSS) |
| (UNAUDITED) |
| | | | | | |
| | Nine months ended September 30 |
| | GE(a) | | Financial Services (GE Capital) |
| (In millions; per-share amounts in dollars) | 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
| | | | | | |
| Revenues and other income | | | | | |
| Sales of goods | $ | 54,622 |
| $ | 54,745 |
| | $ | 101 |
| $ | 88 |
|
| Sales of services | 27,501 |
| 25,745 |
| | — |
| — |
|
| Other income | 2,578 |
| 3,359 |
| | — |
| — |
|
| GE Capital earnings (loss) from continuing operations | (195 | ) | (1,466 | ) | | — |
| — |
|
| GE Capital revenues from services | — |
| — |
| | 7,424 |
| 8,168 |
|
| Total revenues and other income | 84,506 |
| 82,382 |
| | 7,525 |
| 8,256 |
|
| | | | | | |
| Costs and expenses | | | | | |
| Cost of goods sold | 46,888 |
| 45,669 |
| | 79 |
| 71 |
|
| Cost of services sold | 17,934 |
| 16,725 |
| | 1,673 |
| 1,667 |
|
| Selling, general and administrative expenses | 12,656 |
| 12,094 |
| | 1,358 |
| 2,238 |
|
| Interest and other financial charges | 1,918 |
| 1,490 |
| | 2,373 |
| 3,006 |
|
| Investment contracts, insurance losses and insurance annuity benefits | — |
| — |
| | 1,958 |
| 2,186 |
|
| Other costs and expenses(b) | 947 |
| — |
| | 629 |
| 822 |
|
| Total costs and expenses | 80,344 |
| 75,977 |
| | 8,070 |
| 9,990 |
|
| | | | | | |
| Earnings (loss) from continuing operations before income taxes | 4,162 |
| 6,405 |
| | (545 | ) | (1,734 | ) |
| Benefit (provision) for income taxes | (297 | ) | (1,034 | ) | | 600 |
| 732 |
|
| Earnings (loss) from continuing operations | 3,865 |
| 5,370 |
| | 55 |
| (1,002 | ) |
| Earnings (loss) from discontinued operations, net of taxes (Note 2) | (497 | ) | (956 | ) | | (494 | ) | (954 | ) |
| Net earnings (loss) | 3,368 |
| 4,414 |
| | (439 | ) | (1,956 | ) |
| Less net earnings (loss) attributable to noncontrolling interests | (236 | ) | (275 | ) | | 5 |
| (8 | ) |
| Net earnings (loss) attributable to the Company | 3,604 |
| 4,689 |
| | (443 | ) | (1,948 | ) |
| Preferred stock dividends | — |
| — |
| | (252 | ) | (474 | ) |
| Net earnings (loss) attributable to GE common shareowners | $ | 3,604 |
| $ | 4,689 |
| | $ | (695 | ) | $ | (2,422 | ) |
| | | | | | |
| Amounts attributable to GE common shareowners: | | | | | |
| Earnings (loss) from continuing operations | $ | 3,865 |
| $ | 5,370 |
| | $ | 55 |
| $ | (1,002 | ) |
| Less net earnings (loss) attributable to noncontrolling interests, | | | | | |
| continuing operations | (236 | ) | (275 | ) | | (2 | ) | (10 | ) |
| Earnings (loss) from continuing operations attributable to the Company | 4,101 |
| 5,645 |
| | 57 |
| (992 | ) |
| Preferred stock dividends | — |
| — |
| | (252 | ) | (474 | ) |
| Earnings (loss) from continuing operations attributable | | | | | |
| to GE common shareowners | 4,101 |
| 5,645 |
| | (195 | ) | (1,466 | ) |
| Earnings (loss) from discontinued operations, net of taxes | (497 | ) | (956 | ) | | (494 | ) | (954 | ) |
| Less net earnings (loss) attributable to noncontrolling interests, | | | | | |
| discontinued operations | — |
| — |
| | 6 |
| 2 |
|
| Net earnings (loss) attributable to GE common shareowners | $ | 3,604 |
| $ | 4,689 |
| | $ | (695 | ) | $ | (2,422 | ) |
|
| | | | | | | | | | | | | |
| STATEMENT OF FINANCIAL POSITION (CONTINUED) |
| | GE(a) | | Financial Services (GE Capital) |
| (In millions, except share amounts) | September 30,
2018 |
| December 31, 2017 |
| | September 30,
2018 |
| December 31, 2017 |
|
| | (Unaudited) | | | (Unaudited) | |
| Assets | | | | | |
| Cash, cash equivalents and restricted cash(b) | $ | 13,862 |
| $ | 18,822 |
| | $ | 13,071 |
| $ | 25,145 |
|
| Investment securities (Note 3) | 874 |
| 569 |
| | 33,961 |
| 38,231 |
|
| Current receivables (Note 4) | 14,877 |
| 14,638 |
| | — |
| — |
|
| Inventories (Note 5) | 20,586 |
| 19,344 |
| | 56 |
| 75 |
|
| Financing receivables - net (Note 6) | — |
| — |
| | 15,663 |
| 21,967 |
|
| Other GE Capital receivables | — |
| — |
| | 14,834 |
| 16,945 |
|
| Property, plant and equipment – net (Note 7) | 22,041 |
| 23,963 |
| | 29,352 |
| 30,595 |
|
| Receivable from GE Capital(c) | 23,250 |
| 39,844 |
| | — |
| — |
|
| Investment in GE Capital | 11,673 |
| 13,493 |
| | — |
| — |
|
| Goodwill (Note 8) | 59,393 |
| 82,985 |
| | 984 |
| 984 |
|
| Other intangible assets – net (Note 8) | 18,597 |
| 20,014 |
| | 242 |
| 259 |
|
| Contract and other deferred assets (Note 10) | 20,905 |
| 20,356 |
| | — |
| — |
|
| All other assets | 10,307 |
| 13,627 |
| | 14,175 |
| 15,606 |
|
| Deferred income taxes (Note 14) | 8,901 |
| 7,815 |
| | 1,449 |
| 999 |
|
| Assets of businesses held for sale (Note 2) | 4,259 |
| 3,799 |
| | — |
| — |
|
| Assets of discontinued operations (Note 2) | — |
| — |
| | 4,716 |
| 5,912 |
|
| Total assets | $ | 229,525 |
| $ | 279,267 |
| | $ | 128,503 |
| $ | 156,716 |
|
| | | | | | |
| Liabilities and equity | | | | | |
| Short-term borrowings (Note 11)(c) | $ | 8,694 |
| $ | 14,548 |
| | $ | 11,223 |
| $ | 19,602 |
|
| Accounts payable, principally trade accounts | 21,026 |
| 21,851 |
| | 2,046 |
| 1,853 |
|
| Progress collections and deferred income | 20,847 |
| 22,221 |
| | — |
| — |
|
| Dividends payable | 1,054 |
| 1,052 |
| | — |
| — |
|
| Other GE current liabilities | 17,930 |
| 16,919 |
| | — |
| — |
|
| Non-recourse borrowings of consolidated securitization entities (Note 11) | — |
| — |
| | 2,699 |
| 1,980 |
|
| Long-term borrowings (Note 11)(c) | 60,863 |
| 67,040 |
| | 56,329 |
| 73,614 |
|
| Investment contracts, insurance liabilities and insurance annuity benefits (Note 12) | — |
| — |
| | 36,070 |
| 38,587 |
|
| Non-current compensation and benefits | 33,530 |
| 40,820 |
| | 804 |
| 801 |
|
| All other liabilities | 15,881 |
| 16,873 |
| | 5,735 |
| 5,886 |
|
| Liabilities of businesses held for sale (Note 2) | 1,399 |
| 1,248 |
| | — |
| — |
|
| Liabilities of discontinued operations (Note 2) | 77 |
| 23 |
| | 1,925 |
| 683 |
|
| Total liabilities | 181,302 |
| 202,595 |
| | 116,831 |
| 143,007 |
|
| | | | | | |
| Redeemable noncontrolling interests (Note 15) | 386 |
| 3,391 |
| | — |
| — |
|
| | | | | | |
Preferred stock (5,939,874 shares outstanding at both September 30, 2018
and December 31, 2017) | 6 |
| 6 |
| | 6 |
| 6 |
|
Common stock (8,698,115,000 and 8,680,571,000 shares outstanding
at September 30, 2018 and December 31, 2017, respectively) | 702 |
| 702 |
| | — |
| — |
|
| Accumulated other comprehensive income (loss) - net attributable to GE | | | | | |
| Investment securities | (36 | ) | (102 | ) | | (28 | ) | (99 | ) |
| Currency translation adjustments | (6,040 | ) | (4,661 | ) | | (234 | ) | (225 | ) |
| Cash flow hedges | 27 |
| 62 |
| | 74 |
| 54 |
|
| Benefit plans | (7,181 | ) | (9,702 | ) | | (504 | ) | (524 | ) |
| Other capital | 37,311 |
| 37,384 |
| | 12,881 |
| 12,806 |
|
| Retained earnings | 90,867 |
| 117,245 |
| | (522 | ) | 1,476 |
|
| Less common stock held in treasury | (84,202 | ) | (84,902 | ) | | — |
| — |
|
| Total GE shareowners’ equity | 31,454 |
| 56,030 |
| | 11,673 |
| 13,493 |
|
| Noncontrolling interests (Note 15) | 16,383 |
| 17,252 |
| | (1 | ) | 217 |
|
| Total equity (Note 15) | 47,837 |
| 73,282 |
| | 11,672 |
| 13,709 |
|
| Total liabilities, redeemable noncontrolling interests and equity | $ | 229,525 |
| $ | 279,267 |
| | $ | 128,503 |
| $ | 156,716 |
|
| |
| (a) | Represents the adding together of all affiliated companies except GE Capital, which is presented on a one-line basis. See Note 1. |
| |
| (b) | GE amount represents a goodwill impairment charge recognized in the third quarter of 2017. See Note 8 for further information. |
Amounts may not add due to rounding.
In the consolidating data on this page, “GE” means the basis of consolidation as described in Note 1 to the consolidated financial statements; “GE Capital” means GE Capital Global Holdings, LLC (GECGH) or its predecessor General Electric Capital Corporation (GECC) and all of their affiliates and associated companies. Separate information is shown for “GE” and “Financial Services (GE Capital).” Transactions between GE and GE Capital have been eliminated from the “General Electric Company and consolidated affiliates” columns on the prior page.
|
| | | | | | | | | | | | | |
| GENERAL ELECTRIC COMPANY AND CONSOLIDATED AFFILIATES |
| CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) |
| (UNAUDITED) |
| | | | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
| | | | | | |
| Net earnings (loss) | $ | 1,694 |
| $ | 1,951 |
| | $ | 3,624 |
| $ | 4,881 |
|
| Less net earnings (loss) attributable to noncontrolling interests | (142 | ) | (76 | ) | | (231 | ) | (283 | ) |
| Net earnings (loss) attributable to the Company | $ | 1,836 |
| $ | 2,027 |
| | $ | 3,856 |
| $ | 5,164 |
|
| | | | | | |
| Other comprehensive income (loss) | | | | | |
| Investment securities | $ | 21 |
| $ | 97 |
| | $ | 213 |
| $ | 715 |
|
| Currency translation adjustments | 513 |
| (194 | ) | | 1,854 |
| (138 | ) |
| Cash flow hedges | 100 |
| 30 |
| | 109 |
| 60 |
|
| Benefit plans | 423 |
| 548 |
| | 2,032 |
| 1,481 |
|
| Other comprehensive income (loss) | 1,058 |
| 481 |
| | 4,209 |
| 2,117 |
|
| Less other comprehensive income (loss) attributable to noncontrolling interests | 127 |
| 5 |
| | 134 |
| 10 |
|
| Other comprehensive income (loss) attributable to the Company | $ | 931 |
| $ | 477 |
| | $ | 4,075 |
| $ | 2,107 |
|
| | | | | | |
| Comprehensive income (loss) | $ | 2,752 |
| $ | 2,432 |
| | $ | 7,833 |
| $ | 6,998 |
|
| Less comprehensive income (loss) attributable to noncontrolling interests | (15 | ) | (71 | ) | | (98 | ) | (273 | ) |
| Comprehensive income (loss) attributable to the Company | $ | 2,766 |
| $ | 2,504 |
| | $ | 7,931 |
| $ | 7,271 |
|
Amounts presented net of taxes.
Amounts may not add due to rounding.
See accompanying notes.
|
| | | | | | | |
| GENERAL ELECTRIC COMPANY AND CONSOLIDATED AFFILIATES | | | |
| CONSOLIDATED STATEMENT OF CHANGES IN SHAREOWNERS' EQUITY |
| (UNAUDITED) |
| | | | |
| | Nine months ended September 30 |
| (In millions) | 2017 |
| | 2016 |
|
| | | | |
| Shareowners' equity balance at January 1 | $ | 75,828 |
| | $ | 98,274 |
|
| Net earnings (loss) attributable to the Company | 3,856 |
| | 5,164 |
|
| Dividends and other transactions with shareowners | (6,514 | ) | | (6,770 | ) |
| Redemption value adjustment for redeemable noncontrolling interests | (177 | ) | | (178 | ) |
| Other comprehensive income (loss) attributable to the Company | 4,075 |
| | 2,107 |
|
| Net sales (purchases) of shares for treasury | (2,161 | ) | | (16,310 | ) |
| Changes in other capital(a) | 1,199 |
| | (404 | ) |
| Ending balance at September 30 | 76,105 |
| | 81,882 |
|
| Noncontrolling interests | 17,947 |
| | 1,663 |
|
| Total equity balance at September 30 | $ | 94,052 |
| | $ | 83,544 |
|
(a) The Baker Hughes transaction resulted in an increase to additional paid in capital of $1,131 million. See Note 8 for further information.
Amounts may not add due to rounding.
See accompanying notes.
|
| | | | | | |
| STATEMENT OF FINANCIAL POSITION |
| | General Electric Company and consolidated affiliates |
| (In millions, except share amounts) | September 30, 2017 |
| December 31, 2016 |
|
| | (Unaudited) |
| |
| Assets | | |
| Cash and equivalents | $ | 39,854 |
| $ | 48,129 |
|
| Investment securities (Note 3) | 38,696 |
| 44,313 |
|
| Current receivables (Note 4) | 25,026 |
| 24,076 |
|
| Inventories (Note 5) | 25,848 |
| 22,354 |
|
| Financing receivables – net (Note 6) | 12,228 |
| 12,242 |
|
| Other GE Capital receivables | 6,107 |
| 5,944 |
|
| Property, plant and equipment – net (Note 7) | 54,101 |
| 50,518 |
|
| Receivable from GE Capital | — |
| — |
|
| Investment in GE Capital | — |
| — |
|
| Goodwill (Note 8) | 87,068 |
| 70,438 |
|
| Other intangible assets – net (Note 8) | 21,435 |
| 16,436 |
|
| Contract assets (Note 9) | 29,809 |
| 25,162 |
|
| All other assets | 27,576 |
| 27,176 |
|
| Deferred income taxes (Note 13) | 1,129 |
| 1,833 |
|
| Assets of businesses held for sale (Note 2) | 2,369 |
| 1,745 |
|
| Assets of discontinued operations (Note 2) | 6,791 |
| 14,815 |
|
| Total assets(a) | $ | 378,038 |
| $ | 365,183 |
|
| | | |
| Liabilities and equity | | |
| Short-term borrowings (Note 10) | $ | 28,127 |
| $ | 30,714 |
|
| Accounts payable, principally trade accounts | 14,907 |
| 14,435 |
|
| Progress collections and price adjustments accrued | 16,970 |
| 16,760 |
|
| Dividends payable | 2,093 |
| 2,107 |
|
| Other GE current liabilities | 17,420 |
| 17,564 |
|
| Non-recourse borrowings of consolidated securitization entities (Note 10) | 708 |
| 417 |
|
| Long-term borrowings (Note 10) | 107,557 |
| 105,080 |
|
| Investment contracts, insurance liabilities and insurance annuity benefits (Note 11) | 26,597 |
| 26,086 |
|
| Non-current compensation and benefits | 42,423 |
| 43,780 |
|
| All other liabilities | 22,191 |
| 22,912 |
|
| Liabilities of businesses held for sale (Note 2) | 561 |
| 656 |
|
| Liabilities of discontinued operations (Note 2) | 990 |
| 4,158 |
|
| Total liabilities(a) | 280,544 |
| 284,668 |
|
| | | |
| Redeemable noncontrolling interests (Note 14) | 3,441 |
| 3,025 |
|
| | | |
Preferred stock (5,944,250 shares outstanding at both September 30, 2017
and December 31, 2016) | 6 |
| 6 |
|
Common stock (8,672,085,000 and 8,742,614,000 shares outstanding
at September 30, 2017 and December 31, 2016, respectively) | 702 |
| 702 |
|
| Accumulated other comprehensive income (loss) – net attributable to GE(b) | | |
| Investment securities | 887 |
| 674 |
|
| Currency translation adjustments | (5,092 | ) | (6,816 | ) |
| Cash flow hedges | 119 |
| 12 |
|
| Benefit plans | (10,436 | ) | (12,469 | ) |
| Other capital | 38,423 |
| 37,224 |
|
| Retained earnings | 136,696 |
| 139,532 |
|
| Less common stock held in treasury | (85,199 | ) | (83,038 | ) |
| Total GE shareowners’ equity | 76,105 |
| 75,828 |
|
| Noncontrolling interests(c) (Note 14) | 17,947 |
| 1,663 |
|
| Total equity (Note 14) | 94,052 |
| 77,491 |
|
| Total liabilities, redeemable noncontrolling interests and equity | $ | 378,038 |
| $ | 365,183 |
|
| |
(a) | Our consolidated assets at September 30, 2017 included total assets of $6,018 million of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs. These assets included current receivables and net financing receivables of $1,486restricted cash was $380 million and investment securities of $965 million within continuing operations and assets of discontinued operations of $285 million. Our consolidated liabilities at September 30, 2017 included liabilities of certain VIEs for which the VIE creditors do not have recourse to GE. These liabilities included non-recourse borrowings of consolidated securitization entities (CSEs) of $(708) million within continuing operations. See Note 17. |
| |
(b) | The sum of accumulated other comprehensive income (loss) (AOCI) attributable to the Company was $(14,523) million and $(18,598)$611 million at September 30, 20172018 and December 31, 2016,2017, respectively, and GE Capital restricted cash was $74 million and $57 million at September 30, 2018 and December 31, 2017, respectively. |
| |
| (c) | Included AOCI attributable to noncontrolling interests of $(144) million and $(278) million at September 30, 2017 and December 31, 2016, respectively. |
Amounts may not add due to rounding.
See accompanying notes.
|
| | | | | | | | | | | | | |
| STATEMENT OF FINANCIAL POSITION (CONTINUED) |
| | GE(a) | | Financial Services (GE Capital) |
| (In millions, except share amounts) | September 30,
2017 |
| December 31, 2016 |
| | September 30,
2017 |
| December 31, 2016 |
|
| | (Unaudited) | | | (Unaudited) | |
| Assets | | | | | |
| Cash and equivalents | $ | 12,836 |
| $ | 10,525 |
| | $ | 27,019 |
| $ | 37,604 |
|
| Investment securities (Note 3) | 384 |
| 137 |
| | 38,415 |
| 44,180 |
|
| Current receivables (Note 4) | 14,725 |
| 12,715 |
| | — |
| — |
|
| Inventories (Note 5) | 25,767 |
| 22,263 |
| | 81 |
| 91 |
|
| Financing receivables - net (Note 6) | — |
| — |
| | 24,900 |
| 26,041 |
|
| Other GE Capital receivables | — |
| — |
| | 15,654 |
| 15,576 |
|
| Property, plant and equipment – net (Note 7) | 23,740 |
| 19,103 |
| | 31,260 |
| 32,225 |
|
| Receivable from GE Capital(b) | 42,593 |
| 58,780 |
| | — |
| — |
|
| Investment in GE Capital | 20,856 |
| 24,677 |
| | — |
| — |
|
| Goodwill (Note 8) | 84,698 |
| 68,070 |
| | 2,370 |
| 2,368 |
|
| Other intangible assets – net (Note 8) | 21,170 |
| 16,131 |
| | 266 |
| 305 |
|
| Contract assets (Note 9) | 29,809 |
| 25,162 |
| | — |
| — |
|
| All other assets | 14,083 |
| 12,007 |
| | 13,227 |
| 14,608 |
|
| Deferred income taxes (Note 13) | 6,179 |
| 6,666 |
| | (5,055 | ) | (4,833 | ) |
| Assets of businesses held for sale (Note 2) | 2,220 |
| 1,629 |
| | — |
| — |
|
| Assets of discontinued operations (Note 2) | — |
| 9 |
| | 6,791 |
| 14,806 |
|
| Total assets | $ | 299,061 |
| $ | 277,874 |
| | $ | 154,928 |
| $ | 182,970 |
|
| | | | | | |
| Liabilities and equity | | | | | |
| Short-term borrowings (Note 10)(b) | $ | 18,748 |
| $ | 20,482 |
| | $ | 21,179 |
| $ | 23,443 |
|
| Accounts payable, principally trade accounts | 20,574 |
| 20,876 |
| | 1,883 |
| 1,605 |
|
| Progress collections and price adjustments accrued | 17,139 |
| 16,838 |
| | — |
| — |
|
| Dividends payable | 2,093 |
| 2,107 |
| | — |
| — |
|
| Other GE current liabilities | 17,420 |
| 17,564 |
| | — |
| — |
|
| Non-recourse borrowings of consolidated securitization entities (Note 10) | — |
| — |
| | 708 |
| 417 |
|
| Long-term borrowings (Note 10)(b) | 65,097 |
| 58,810 |
| | 75,651 |
| 93,443 |
|
| Investment contracts, insurance liabilities and insurance annuity benefits (Note 11) | — |
| — |
| | 27,105 |
| 26,546 |
|
| Non-current compensation and benefits | 41,447 |
| 42,770 |
| | 967 |
| 1,001 |
|
| All other liabilities | 18,688 |
| 17,506 |
| | 5,388 |
| 7,430 |
|
| Liabilities of businesses held for sale (Note 2) | 561 |
| 656 |
| | — |
| — |
|
| Liabilities of discontinued operations (Note 2) | 24 |
| 35 |
| | 966 |
| 4,123 |
|
| Total liabilities | 201,791 |
| 197,644 |
| | 133,847 |
| 158,008 |
|
| | | | | | |
| Redeemable noncontrolling interests (Note 14) | 3,441 |
| 3,025 |
| | — |
| — |
|
| | | | | | |
Preferred stock (5,944,250 shares outstanding at both September 30, 2017 and December 31, 2016) | 6 |
| 6 |
| | 6 |
| 6 |
|
Common stock (8,672,085,000 and 8,742,614,000 shares outstanding at September 30, 2017 and December 31, 2016, respectively) | 702 |
| 702 |
| | — |
| — |
|
| Accumulated other comprehensive income (loss) - net attributable to GE | | | | | |
| Investment securities | 887 |
| 674 |
| | 895 |
| 656 |
|
| Currency translation adjustments | (5,092 | ) | (6,816 | ) | | (169 | ) | (740 | ) |
| Cash flow hedges | 119 |
| 12 |
| | 43 |
| 43 |
|
| Benefit plans | (10,436 | ) | (12,469 | ) | | (555 | ) | (622 | ) |
| Other capital | 38,423 |
| 37,224 |
| | 12,773 |
| 12,669 |
|
| Retained earnings | 136,696 |
| 139,532 |
| | 7,863 |
| 12,664 |
|
| Less common stock held in treasury | (85,199 | ) | (83,038 | ) | | — |
| — |
|
| Total GE shareowners’ equity | 76,105 |
| 75,828 |
| | 20,856 |
| 24,677 |
|
| Noncontrolling interests (Note 14) | 17,723 |
| 1,378 |
| | 224 |
| 285 |
|
| Total equity (Note 14) | 93,829 |
| 77,205 |
| | 21,080 |
| 24,962 |
|
| Total liabilities, redeemable noncontrolling interests and equity | $ | 299,061 |
| $ | 277,874 |
| | $ | 154,928 |
| $ | 182,970 |
|
| |
(a) | Represents the adding together of all affiliated companies except GE Capital, which is presented on a one-line basis. See Note 1. |
| |
(b) | In 2015, senior unsecured notes and commercial paper were assumed by GE upon its merger with GE Capital, resulting in an intercompany receivable and payable between GE and GE Capital. See Note 10.11. |
Amounts may not add due to rounding.
In the consolidating data on this page, “GE” means the basis of consolidation as described in Note 1 to the consolidated financial statements; “GE Capital” means GE Capital Global Holdings, LLC (GECGH) or its predecessor General Electric Capital Corporation (GECC) and all of their affiliates and associated companies. Separate information is shown for “GE” and “Financial Services (GE Capital).” Transactions between GE and GE Capital have been eliminated from the “General Electric Company and consolidated affiliates” columns on the prior page.
20172018 3Q FORM 10-Q 7369
| | STATEMENT OF CASH FLOWS | | (UNAUDITED) | | |
| | Nine months ended September 30 | Nine months ended September 30 |
| | General Electric Company and consolidated affiliates | General Electric Company and consolidated affiliates |
| (In millions) | 2017 |
| 2016 |
| 2018 |
| 2017 |
|
| | | |
| Cash flows – operating activities | | |
| Net earnings (loss) | $ | 3,624 |
| $ | 4,881 |
| $ | (23,304 | ) | $ | 2,023 |
|
| Less net earnings (loss) attributable to noncontrolling interests | (231 | ) | (283 | ) | |
| Net earnings (loss) attributable to the Company | 3,856 |
| 5,164 |
| |
| (Earnings) loss from discontinued operations | 490 |
| 954 |
| 1,634 |
| 490 |
|
| Adjustments to reconcile net earnings (loss) attributable to the | | |
| Company to cash provided from operating activities | | |
| Adjustments to reconcile net earnings (loss) | | |
| to cash provided from operating activities | | |
| Depreciation and amortization of property, plant and equipment | 3,715 |
| 3,641 |
| 4,222 |
| 3,715 |
|
| Amortization of intangible assets | | 2,126 |
| 1,713 |
|
| Goodwill impairment | | 21,973 |
| 947 |
|
| (Earnings) loss from continuing operations retained by GE Capital | — |
| — |
| — |
| — |
|
| Deferred income taxes | (669 | ) | 1,244 |
| (171 | ) | (1,270 | ) |
| Decrease (increase) in contract and other deferred assets | | (960 | ) | (2,931 | ) |
| Decrease (increase) in GE current receivables | 1,737 |
| 763 |
| 2,873 |
| 1,348 |
|
| Decrease (increase) in inventories | (1,454 | ) | (2,594 | ) | (2,016 | ) | (1,726 | ) |
| Increase (decrease) in accounts payable | (518 | ) | (49 | ) | 1,051 |
| (533 | ) |
| Increase (decrease) in GE progress collections | (269 | ) | 78 |
| (1,024 | ) | 924 |
|
| All other operating activities(a) | (2,881 | ) | (5,356 | ) | |
| All other operating activities | | (6,739 | ) | (1,320 | ) |
| Cash from (used for) operating activities – continuing operations | 4,008 |
| 3,846 |
| (333 | ) | 3,381 |
|
| Cash from (used for) operating activities – discontinued operations | (490 | ) | (5,719 | ) | (102 | ) | (490 | ) |
| Cash from (used for) operating activities | 3,518 |
| (1,873 | ) | (435 | ) | 2,892 |
|
| | | |
| Cash flows – investing activities | | |
| Additions to property, plant and equipment | (5,071 | ) | (5,109 | ) | (4,983 | ) | (5,071 | ) |
| Dispositions of property, plant and equipment | 3,768 |
| 3,403 |
| 2,707 |
| 3,768 |
|
| Additions to internal-use software | | (278 | ) | (418 | ) |
| Net decrease (increase) in GE Capital financing receivables | 1,184 |
| 293 |
| 1,281 |
| 1,184 |
|
| Proceeds from sale of discontinued operations | 1,018 |
| 53,250 |
| 29 |
| 1,018 |
|
| Proceeds from principal business dispositions | 3,030 |
| 5,273 |
| 5,564 |
| 3,030 |
|
| Net cash from (payments for) principal businesses purchased | (6,053 | ) | (930 | ) | (21 | ) | (6,053 | ) |
| All other investing activities(a) | 6,815 |
| (2,621 | ) | |
| All other investing activities | | 3,764 |
| 7,800 |
|
| Cash from (used for) investing activities – continuing operations | 4,692 |
| 53,559 |
| 8,064 |
| 5,259 |
|
| Cash from (used for) investing activities – discontinued operations | (2,349 | ) | (12,056 | ) | (224 | ) | (2,515 | ) |
| Cash from (used for) investing activities | 2,343 |
| 41,503 |
| 7,840 |
| 2,744 |
|
| | | |
| Cash flows – financing activities | | |
| Net increase (decrease) in borrowings (maturities of 90 days or less) | 531 |
| (1,021 | ) | (1,975 | ) | 531 |
|
| Newly issued debt (maturities longer than 90 days) | 9,337 |
| 1,178 |
| 2,431 |
| 9,337 |
|
| Repayments and other debt reductions (maturities longer than 90 days) | (18,418 | ) | (50,500 | ) | (18,563 | ) | (18,418 | ) |
| Net dispositions (purchases) of GE shares for treasury | (2,620 | ) | (17,969 | ) | (6 | ) | (2,620 | ) |
| Dividends paid to shareowners | (6,417 | ) | (6,611 | ) | (3,282 | ) | (6,417 | ) |
| All other financing activities | (640 | ) | (266 | ) | (2,932 | ) | (640 | ) |
| Cash from (used for) financing activities – continuing operations | (18,228 | ) | (75,188 | ) | (24,326 | ) | (18,228 | ) |
| Cash from (used for) financing activities – discontinued operations | 1,905 |
| 295 |
| — |
| 1,905 |
|
| Cash from (used for) financing activities | (16,323 | ) | (74,893 | ) | (24,326 | ) | (16,323 | ) |
| Effect of currency exchange rate changes on cash and equivalents | 1,253 |
| (169 | ) | |
| Increase (decrease) in cash and equivalents | (9,208 | ) | (35,432 | ) | |
| Cash and equivalents at beginning of year | 49,558 |
| 90,878 |
| |
| Cash and equivalents at September 30 | 40,350 |
| 55,445 |
| |
| Less cash and equivalents of discontinued operations at September 30 | 496 |
| 2,915 |
| |
| Cash and equivalents of continuing operations at September 30 | $ | 39,854 |
| $ | 52,530 |
| |
Effect of currency exchange rate changes on cash, cash equivalents and restricted cash | | (440 | ) | 1,253 |
|
| Increase (decrease) in cash, cash equivalents and restricted cash | | (17,361 | ) | (9,434 | ) |
| Cash, cash equivalents and restricted cash at beginning of year | | 44,724 |
| 50,384 |
|
| Cash, cash equivalents and restricted cash at September 30 | | 27,364 |
| 40,950 |
|
| Less cash, cash equivalents and restricted cash of discontinued operations at September 30 | | 432 |
| 501 |
|
| Cash, cash equivalents and restricted cash of continuing operations at September 30 | | $ | 26,932 |
| $ | 40,449 |
|
| |
(a) | Included a $512 million correction of investing cash flows used for the settlement of derivative instruments classified as operating during the the six months ended June 30, 2017. Therefore, operating cash flows were understated and investing cash flows were overstated during the the six months ended June 30, 2017. |
Amounts may not add due to rounding.
See accompanying notes.
7470 20172018 3Q FORM 10-Q
| | | STATEMENT OF CASH FLOWS (CONTINUED) | STATEMENT OF CASH FLOWS (CONTINUED) | | | STATEMENT OF CASH FLOWS (CONTINUED) | | |
(UNAUDITED) | | | Nine months ended September 30 | Nine months ended September 30 |
| | GE(a) | | Financial Services (GE Capital) | GE(a) | | Financial Services (GE Capital) |
| (In millions) | 2017 |
| 2016 |
| | 2017 |
| 2016 |
| 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | | |
| Cash flows – operating activities | | | | | | |
| Net earnings (loss) | $ | 3,368 |
| $ | 4,414 |
| | $ | (439 | ) | $ | (1,956 | ) | $ | (23,604 | ) | $ | 1,766 |
| | $ | (1,682 | ) | $ | (439 | ) |
| Less net earnings (loss) attributable to noncontrolling interests | (236 | ) | (275 | ) | | 5 |
| (8 | ) | |
| Net earnings (loss) attributable to the Company | 3,604 |
| 4,689 |
| | (443 | ) | (1,948 | ) | |
| (Earnings) loss from discontinued operations | 497 |
| 956 |
| | 494 |
| 954 |
| 1,634 |
| 497 |
| | 1,579 |
| 494 |
|
| Adjustments to reconcile net earnings (loss) attributable to the | | | | |
| Company to cash provided from operating activities | | | | |
| Adjustments to reconcile net earnings (loss) | | | | |
| to cash provided from operating activities | | | | |
| Depreciation and amortization of property, plant and equipment | 1,977 |
| 1,857 |
| | 1,736 |
| 1,771 |
| 2,621 |
| 1,977 |
| | 1,593 |
| 1,736 |
|
| Amortization of intangible assets | | 2,085 |
| 1,662 |
| | 42 |
| 50 |
|
| Goodwill impairment | | 21,973 |
| 947 |
| | — |
| — |
|
| (Earnings) loss from continuing operations retained by GE Capital(b) | 4,211 |
| 17,518 |
| | — |
| — |
| 403 |
| 4,211 |
| | — |
| — |
|
| Deferred income taxes | (401 | ) | 81 |
| | (267 | ) | 1,164 |
| 363 |
| (1,002 | ) | | (533 | ) | (267 | ) |
| Decrease (increase) in contract and other deferred assets | | (960 | ) | (2,931 | ) | | — |
| — |
|
| Decrease (increase) in GE current receivables | 701 |
| 455 |
| | — |
| — |
| (668 | ) | 772 |
| | — |
| — |
|
| Decrease (increase) in inventories | (1,437 | ) | (2,543 | ) | | — |
| (15 | ) | (2,032 | ) | (1,709 | ) | | 20 |
| — |
|
| Increase (decrease) in accounts payable | (980 | ) | (38 | ) | | (97 | ) | 12 |
| 1,243 |
| (995 | ) | | (12 | ) | (97 | ) |
| Increase (decrease) in GE progress collections | (179 | ) | 179 |
| | — |
| — |
| (873 | ) | 1,015 |
| | — |
| — |
|
| All other operating activities(c) | (3,942 | ) | (4,812 | ) | | 632 |
| (35 | ) | |
| All other operating activities | | (6,315 | ) | (2,160 | ) | | (509 | ) | 577 |
|
| Cash from (used for) operating activities – continuing operations | 4,050 |
| 18,342 |
| | 2,053 |
| 1,903 |
| (4,128 | ) | 4,051 |
| | 497 |
| 2,053 |
|
| Cash from (used for) operating activities – discontinued operations | — |
| — |
| | (490 | ) | (5,719 | ) | — |
| — |
| | (101 | ) | (490 | ) |
| Cash from (used for) operating activities | 4,050 |
| 18,342 |
| | 1,563 |
| (3,815 | ) | (4,128 | ) | 4,051 |
| | 395 |
| 1,563 |
|
| | | | | | | |
| Cash flows – investing activities | | | | | | |
| Additions to property, plant and equipment | (3,051 | ) | (2,804 | ) | | (2,422 | ) | (2,719 | ) | (2,419 | ) | (3,051 | ) | | (2,630 | ) | (2,422 | ) |
| Dispositions of property, plant and equipment | 825 |
| 727 |
| | 3,186 |
| 2,974 |
| 522 |
| 825 |
| | 2,196 |
| 3,186 |
|
| Additions to internal-use software | | (262 | ) | (396 | ) | | (16 | ) | (22 | ) |
| Net decrease (increase) in GE Capital financing receivables | — |
| — |
| | 3,242 |
| 128 |
| — |
| — |
| | 6,656 |
| 3,242 |
|
| Proceeds from sale of discontinued operations | — |
| — |
| | 1,018 |
| 53,250 |
| — |
| — |
| | 29 |
| 1,018 |
|
| Proceeds from principal business dispositions | 2,908 |
| 5,273 |
| | — |
| — |
| 3,357 |
| 2,908 |
| | 2,011 |
| — |
|
| Net cash from (payments for) principal businesses purchased | (6,053 | ) | (930 | ) | | — |
| — |
| (21 | ) | (6,053 | ) | | — |
| — |
|
| All other investing activities(c) | (2,375 | ) | (1,915 | ) | | 3,472 |
| (6,435 | ) | |
| All other investing activities | | (754 | ) | (1,955 | ) | | (1,739 | ) | 3,576 |
|
| Cash from (used for) investing activities – continuing operations | (7,745 | ) | 350 |
| | 8,497 |
| 47,198 |
| 423 |
| (7,720 | ) | | 6,507 |
| 8,578 |
|
| Cash from (used for) investing activities – discontinued operations | — |
| — |
| | (2,349 | ) | (12,056 | ) | — |
| — |
| | (224 | ) | (2,515 | ) |
| Cash from (used for) investing activities | (7,744 | ) | 351 |
| | 6,147 |
| 35,142 |
| 424 |
| (7,720 | ) | | 6,283 |
| 6,063 |
|
| | | | | | | |
| Cash flows – financing activities | | | | | | |
| Net increase (decrease) in borrowings (maturities of 90 days or less) | 170 |
| 1,732 |
| | 243 |
| (1,945 | ) | (1,678 | ) | 4 |
| | (1,765 | ) | 243 |
|
| Newly issued debt (maturities longer than 90 days) | 16,214 |
| 5,180 |
| | 420 |
| 987 |
| 6,638 |
| 16,214 |
| | 2,288 |
| 420 |
|
| Repayments and other debt reductions (maturities longer than 90 days) | (1,532 | ) | (755 | ) | | (18,215 | ) | (49,745 | ) | (1,846 | ) | (1,532 | ) | | (17,274 | ) | (18,215 | ) |
| Net dispositions (purchases) of GE shares for treasury | (2,620 | ) | (17,969 | ) | | — |
| — |
| (6 | ) | (2,620 | ) | | — |
| — |
|
| Dividends paid to shareowners | (6,269 | ) | (6,427 | ) | | (4,164 | ) | (16,234 | ) | (3,135 | ) | (6,269 | ) | | (185 | ) | (4,164 | ) |
| All other financing activities | (461 | ) | (143 | ) | | (168 | ) | (259 | ) | (841 | ) | (461 | ) | | (2,091 | ) | (168 | ) |
| Cash from (used for) financing activities – continuing operations | 5,501 |
| (18,382 | ) | | (21,884 | ) | (67,196 | ) | (868 | ) | 5,335 |
| | (19,027 | ) | (21,884 | ) |
| Cash from (used for) financing activities – discontinued operations | — |
| — |
| | 1,905 |
| 295 |
| — |
| — |
| | — |
| 1,905 |
|
| Cash from (used for) financing activities | 5,501 |
| (18,382 | ) | | (19,979 | ) | (66,900 | ) | (868 | ) | 5,335 |
| | (19,027 | ) | (19,979 | ) |
| Effect of currency exchange rate changes on cash and equivalents | 504 |
| (91 | ) | | 749 |
| (78 | ) | |
| Increase (decrease) in cash and equivalents | 2,311 |
| 219 |
| | (11,519 | ) | (35,652 | ) | |
| Cash and equivalents at beginning of year | 10,525 |
| 10,372 |
| | 39,033 |
| 80,506 |
| |
| Cash and equivalents at September 30 | 12,836 |
| 10,591 |
| | 27,514 |
| 44,854 |
| |
| Less cash and equivalents of discontinued operations at September 30 | — |
| — |
| | 496 |
| 2,915 |
| |
| Cash and equivalents of continuing operations at September 30 | $ | 12,836 |
| $ | 10,591 |
| | $ | 27,019 |
| $ | 41,939 |
| |
| Effect of currency exchange rate changes on cash, cash equivalents and restricted cash | | (388 | ) | 504 |
| | (51 | ) | 749 |
|
| Increase (decrease) in cash, cash equivalents and restricted cash | | (4,961 | ) | 2,170 |
| | (12,400 | ) | (11,603 | ) |
| Cash, cash equivalents and restricted cash at beginning of year | | 18,822 |
| 11,083 |
| | 25,902 |
| 39,301 |
|
| Cash, cash equivalents and restricted cash at September 30 | | 13,862 |
| 13,253 |
| | 13,502 |
| 27,697 |
|
| Less cash, cash equivalents and restricted cash of discontinued operations at September 30 | | — |
| — |
| | 432 |
| 501 |
|
| Cash, cash equivalents and restricted cash of continuing operations at September 30 | | $ | 13,862 |
| $ | 13,253 |
| | $ | 13,071 |
| $ | 27,196 |
|
| |
| (a) | Represents the adding together of all affiliated companies except GE Capital, which is presented on a one-line basis. |
| |
| (b) | Represents GE Capital earnings/lossearnings (loss) from continuing operations attributable to the Company, net of GE Capital common dividends paid to GE. |
| |
(c) | GE included a $512 million correction of investing cash flows used for the settlement of derivative instruments classified as operating during the the six months ended June 30, 2017. Therefore, operating cash flows were understated and investing cash flows were overstated during the the six months ended June 30, 2017.
|
Amounts may not add due to rounding.
In the consolidating data on this page, “GE” means the basis of consolidation as described in Note 1 to the consolidated financial statements; “GE Capital”"GE Capital" means GE Capital Global Holdings, LLC (GECGH) or its predecessor General Electric Capital Corporation (GECC) and all of their affiliates and associated companies. Separate information is shown for “GE” and “Financial Services (GE Capital).” Transactions between GE and GE Capital have been eliminated from the “Consolidated” columns and are discussed in Note 19.21.
20172018 3Q FORM 10-Q 7571
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements represent the consolidation of General Electric Company (the Company) and all companies that we directly or indirectly control, either through majority ownership or otherwise. See Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 20162017 that discusses our consolidation and financial statement presentation. As used in this report on Form 10-Q (Report), “GE” represents the adding together of all affiliated companies except GE Capital (GE Capital or Financial Services), whose continuing operations are presented on a one-line basis; GE Capital consists of GeneralGE Capital Global Holdings, LLC (GECGH) and all of its affiliates; and “Consolidated” represents the adding together of GE and GE Capital with the effects of transactions between the two eliminated. Unless otherwise indicated, we refer to the caption revenues and other income simply as “revenues” throughout this Form 10-Q.
We have reclassified certain prior-period amounts to conform to the current-period presentation. Certain columns and rows may not add due to the use of rounded numbers. Percentages presented are calculated from the underlying numbers in millions. Unless otherwise indicated, information in these notes to the consolidated financial statements relates to continuing operations.
INTERIM PERIOD PRESENTATION
The consolidated financial statements and notes thereto are unaudited. These statements include all adjustments (consisting of normal recurring accruals) that we considered necessary to present a fair statement of our results of operations, financial position and cash flows. The results reported in these consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in our consolidated financial statements of our Annual Report on Form 10-K for the year ended December 31, 2016.2017.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Please refer to Note 1, Basis of Presentation and Summary of Significant Accounting Policies, to the consolidated financial statements of our 2016Annual Report on Form 10-K Reportfor the year ended December 31, 2017 for the discussion of our significant accounting policies.policies as well as the additional revenue accounting policy information provided in Note 9, reflective of our adoption of ASC 606.
ACCOUNTING CHANGES
On January 1, 2017,2018, we adopted ASU 2015-11,Accounting Standards Update (ASU) 2014-09, Simplifying the Measurement of InventoryRevenue from Contracts with Customers, which was intended to simplify the subsequent measurement of inventory held by an entity not measured using last-in, first-out (LIFO) or retail inventory method. The amendments eliminated the requirement that entities consider the replacement cost of inventory and the net realizable value lessrelated amendments (ASC 606), which supersedes most previous U.S. GAAP revenue guidance. We elected to adopt the new standard on a normal profit margin,retrospective basis to ensure a consistent basis of presentation within our consolidated financial statements for all periods reported. In addition, we elected the practical expedient for contract modifications, which was historically usedessentially means that the terms of the contract that existed at the beginning of the earliest period presented can be assumed to establishhave been in place since the inception of the contract (i.e., not practical to separately evaluate the effects of all prior contract modifications).
ASC 606 requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a floorpoint in time or over time based on when control of goods and ceiling for an assessmentservices transfers to a customer. As a result of market value. Thethe adoption of thisthe standard, we recorded significant changes in the timing of revenue recognition and in the classification between revenues and costs. The financial statement effect of the adoption was immateriala decrease to our previously reported retained earnings as of January 1, 2016 of $4,240 million and a decrease to our previously reported revenues and earnings (loss) from continuing operations of $2,224 million and $2,668 million, respectively, for the year ended December 31, 2017 and $220 million and $1,182 million, respectively, for the year ended December 31, 2016. The effect on our statement of financial statements.
position was principally comprised of changes to our contract assets, inventories, deferred taxes, deferred income and progress collections balances resulting in an $8,317 million decrease to previously reported total assets as of December 31, 2017.
7672 20172018 3Q FORM 10-Q
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| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
As discussed in prior filings, some of the impacts of adopting the ASC 606 are:
Long-Term Service Agreements - For our long-term service agreements, we will continue to recognize revenue over time using percentage of completion based on costs incurred relative to total expected costs. We will also continue to record cumulative effect adjustments resulting from changes to our estimated contract billings or costs (excluding those resulting from contract modifications as discussed below). Our accounting will be impacted by various changes in the new revenue standard including (1) accounting for contract modifications and their related impacts and (2) changes in the accounting scope and term of our contracts.
Modifications - Under the new revenue standard, contract modifications will generally be accounted for as if we entered into a new contract, resulting in prospective recognition of changes to our estimates of contract billings and costs. That is, cumulative effect adjustments will generally no longer be recognized in the period that modifications occur.
There was limited guidance for accounting for contract modifications under prior U.S. GAAP. As a result, our previous method of accounting for contract modifications was developed with the objective of accounting for the nature of the contract modifications. Generally, contract modifications were accounted for as cumulative effect adjustments, which reflected an update to the contract margin for the impact of the modification (i.e., changes to estimates of future contract billings and costs); however, modifications that substantially changed the economics of the arrangement were effectively accounted for as a new contract.
Scope and term - The new revenue standard provides more prescriptive guidance on identifying the elements of long-term service type contracts that should be accounted for as separate performance obligations. Application of this guidance, which focuses on understanding the nature of the arrangement, including our customers' discretion in purchasing decisions, has resulted in changes to the scope of elements included in our accounting model for long-term service agreements. For example, significant equipment upgrades offered as part of our long-term service agreements will generally be accounted for as separate performance obligations under the new revenue standard.
Also, the term of our contracts is now defined as the shorter of the stated term or the term not subject to customer termination without substantive penalty. Over this contract term, we estimate our revenues and related costs, including estimates of fixed and variable payments related to asset utilization and related costs to fulfill our performance obligations. Historically, our accounting for long-term contracts did not reflect an expectation that a contract would be terminated prior to the stated term, particularly when the probability of termination was considered remote. Under prior U.S. GAAP, while termination rights were considered, more emphasis was placed on expected outcomes (i.e., use of best estimates). For example, we used historical experience with similar types of contracts as well as other evidence (e.g., customer intent, economic compulsion and future plans for operating the asset) to determine the contract term for application of our accounting model.
These changes to our long-term service agreement accounting have significantly impacted all of our industrial businesses except for Renewable Energy, Healthcare, and Lighting and were some of the drivers in the reduction of the related contract asset balance of $8,255 million as of December 31, 2017. While these contract asset balances have been reduced due to the accounting changes, the economics and cash impact of these contracts remain unchanged.
Aviation Commercial Engines - For Aviation Commercial engines our previous method applied contract-specific estimated margin rates, which included the effect of estimated cost improvements over time, to costs incurred to determine the amount of revenue that should be recognized. The new revenue standard will result in a significant change from our previous long-term contract accounting model. While we will continue to recognize revenue at delivery, each engine is now accounted for as a separate performance obligation, reflecting the contractually stated price and manufacturing cost of each engine. The most significant effect of this change is on our new engine launches, where the cost of earlier production units is higher than the cost of later production units driven by expected cost improvements over the life of the engine program, which will generally result in lower earnings or increased losses on our early program engine deliveries to our customers. The effect of this change reduced the related contract asset balance by $1,755 million as of December 31, 2017.
All Other Large Equipment - For the remainder of our equipment businesses, the new revenue standard’s emphasis on transfer of control rather than risks and rewards has resulted in an accelerated timing of revenue recognition versus our previous accounting for certain products. While this change impacts all our businesses, our Renewable Energy business was most significantly impacted on a year over year basis with certain of their products recognized at an earlier point in time compared to historical standards. Our policy under ASC 605 was to defer recognition until all risk had transferred to the customer, which was generally upon product installation or customer acceptance. For these equipment contracts, the customer has control of the equipment in advance of the related installation or acceptance event based on our evaluation of the indicators provided in ASC 606. Consistent with our industry peers, certain of our businesses’ products have transitioned either to a point in time or over time recognition based on the nature of the arrangement. This change in timing of revenue had an effect on inventory, contract assets and progress collections to reflect the transfer of control at an earlier point in time.
Refer to our Form 8-K filed on April 13, 2018 for supplemental information on the effect of the adoption of ASC 606 to our financial statements.
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| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
On January 1, 2018, we adopted ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU requires the service cost component of the net periodic costs for pension and postretirement plans to be presented in the same line item in the statement of earnings as other employee-related compensation costs. The non-service related costs are now required to be presented separately from the service cost component. This change to the income statement has been reflected on a retrospective basis and had no effect on continuing or net income. The new standard also added guidance requiring entities to exclude these non-service related costs from capitalization in inventory or other internally-developed assets on a prospective basis, which is not expected to have a significant effect.
On January 1, 2018 we adopted ASU No. 2016-18, Statement of Cash Flows: Restricted Cash. The ASU requires the changes in the total of cash and restricted cash to be presented in the statement of cash flows. In addition, when cash and restricted cash are presented on separate lines on the balance sheet, an entity is required to reconcile the totals in the statement of cash flows to the related line items in the balance sheet. While not a direct effect of the adoption of the standard, to simplify the reconciliation of the statement of cash flows to the cash balances presented in our statement of financial position, we have elected to present cash and restricted cash as a single line on the balance sheet, which resulted in an increase of $668 million and $654 million to our previously reported December 31, 2017 and December 31, 2016 cash balances, respectively. The change to our cash balances and cash flows has been reflected on a retrospective basis for all periods presented.
On January 1, 2018, we adopted ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. The ASU eliminates the deferral of the tax effects of intra-entity asset transfers other than inventory and was required to be adopted on a modified retrospective basis. As a result, the tax expense from the intercompany sale of assets, other than inventory, and associated changes to deferred taxes will be recognized when the sale occurs even though the pre-tax effects of the transaction have not been recognized as they are eliminated in consolidation. This change to our income tax provision has been reflected as a $464 million cumulative catch up adjustment to increase retained earnings as of January 1, 2018 and is not reflected in periods prior to this date.
On January 1, 2018, we adopted ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The ASU is required to be reflected on a retrospective basis and provides guidance on the classification of certain cash receipts and cash payments, including requiring cash payments for debt prepayment or debt extinguishment costs be classified as financing activities and payments from a beneficial interest in securitization transactions be classified as investing activities. As part of the adoption, we reclassified $553 million of cash receipts from our beneficial interest in securitized trade receivables within our consolidated statement of cash flows from cash inflows from operating activities to cash inflows from investing activities for the year ended December 31, 2017 (no effect to periods prior to 2017).
Our only beneficial interest in securitized trade receivables is the deferred purchase price ("DPP") created by transactions between the Company and the third parties that purchase trade receivables from GE Capital under the Receivables Facility. In our accounting under the new guidance, we determined the non-cash activities and cash flows associated with the DPP in accordance with the contractual terms of the Receivables Facility when computing the amount of DPP that we receive, in part, as consideration for the sale of receivables. In the third quarter of 2018 we learned of an interpretation of the ASU under which there may be a requirement to develop a computation of both non-cash activities and cash flows associated with the DPP that is different from the contractual computation of the DPP we have used in our accounting to date. We are currently evaluating whether a change in our accounting is required that would result in a reclassification between previously reported consolidated cash flows from operating and investing activities and, if so, whether the change would be material. We expect to complete this evaluation in the fourth quarter of 2018, and any revision of our presentation to reflect the reclassification between operating and investing cash flows and our disclosures in Note 4 in subsequent filings would be made on a retrospective basis consistent with the requirements of the adoption of a new accounting policy. The adoption of the ASU did not have an effect on our GE Industrial cash flows, nor do we expect the fourth quarter evaluation to have an effect on our GE Industrial cash flows.
On January 1, 2018 we adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU provides guidance related to the recognition and measurement of financial assets and financial liabilities with changes primarily affecting equity investments and disclosure of financial instruments. Under the new guidance, equity investments with readily determinable fair value, except those accounted for under the equity method of accounting, will be measured at fair value with changes in fair value recognized in earnings. The adoption had an insignificant impact to retained earnings and other comprehensive income.
Effective January 1, 2018, we voluntarily changed the cost method of the GE U.S. inventories that were previously measured on a last-in, first-out (LIFO) basis to first-in, first-out (FIFO) basis. We believe the FIFO method is a preferable measure for our inventories as it is expected to better reflect the current value of inventory reported in the consolidated statement of financial position, improve the matching of costs of goods sold with related revenue, and provide for greater consistency and uniformity across our operations with respect to the method of inventory valuation. While this change will also require us to make a conforming change for U.S. income tax purposes, all existing GE businesses previously using LIFO are expected to be in a deflationary cost environment due to the manufacturing life cycle of the products and continuous reduction in the manufacturing costs due to better efficiencies, which would significantly decrease the tax benefit that LIFO would otherwise provide. Prior to the change and as reported in our 2017 10-K, LIFO was used for approximately 32% of GE inventories as of December 31, 2017.
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| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
As required by U.S. GAAP, we have reflected this change in accounting principle on a retrospective basis resulting in changes to the
historical periods presented. The retrospective application of the change resulted in a decrease to our January 1, 2016 retained
earnings of $105 million and a decrease to our net loss from continuing operations by $28 million, $56 million and $124 million for the three months ended September 30, 2017, nine months ended September 30, 2017 and the year ended December 31, 2017, respectively, and a decrease to our net earnings from continuing operations by $147 million for the year ended December 31, 2016. This change did not affect our previously reported cash flows from operating, investing or financing activities.
NOTE 2. BUSINESSES HELD FOR SALE AND DISCONTINUED OPERATIONS
ASSETS AND LIABILITIES OF BUSINESSES HELD FOR SALE
On September 25, 2017,In the third quarter of 2018, we signed an agreement to sell our Industrial SolutionsEnergy Financial Service’s (EFS) debt origination business within our PowerCapital segment, with assetsto Starwood Property Trust, Inc. The sale was completed on September 19, 2018 for proceeds of $2,220approximately $2,000 million and liabilitieswe recognized a pre-tax gain of $561 million, to ABB for approximately $2,600$285 million. The transaction is targeted to close in mid-2018.
On March 8,November 13, 2017, we signed an agreementthe Company announced its intention to sell our Water business withinexit approximately $20 billion of assets over the next one to two years. Since this announcement, GE has classified various businesses across our Power, segment to Suez Environnement S.A. (Suez). On September 30, 2017,Lighting, Aviation and Healthcare segments as held for sale. As these businesses met the criteria for held for sale, we completed the sale for consideration of $3,041 million, net of obligations assumedpresented these businesses as a single asset and cash transferred, (including $122 million from sale of receivables originatedliability in our Water business and sold from GE Capital to Suez)financial statements and recognized an after-tax gaina valuation allowance, if necessary, to recognize the net carrying amount at the lower of $1,872cost or fair value, less cost to sell. To date, we have recorded a cumulative pre-tax loss on the planned disposals of $1,598 million ($1,489 million after-tax), of which $565 million was recorded in 2018. Through the third quarter of 20172018, we closed certain of these transactions within our Power, Healthcare, and Lighting segments for total net proceeds of $3,439 million, recognized a pre-tax gain of $458 million in the caption “Other income” in our consolidated Statement of Earnings.Earnings (Loss) and liquidated $546 million of our previously recorded valuation allowance. These transactions are subject to customary working capital and other post-close adjustments.
While we announced the strategic portfolio actions for Transportation, GE Healthcare and BHGE, these businesses have not met the accounting criteria for held for sale classification. That classification will depend on the nature and timing of the respective transactions.
| | FINANCIAL INFORMATION FOR ASSETS AND LIABILITIES OF BUSINESSES HELD FOR SALE | | (In millions) | September 30, 2017 |
| December 31, 2016 |
| September 30, 2018 |
| December 31, 2017 |
|
| | Assets |
|
|
|
|
|
|
| Current receivables(a) | $ | 339 |
| $ | 366 |
| $ | 534 |
| $ | 612 |
|
| Inventories | 361 |
| 211 |
| 823 |
| 931 |
|
| Property, plant, and equipment – net | 390 |
| 632 |
| 779 |
| 931 |
|
| Goodwill | 1,050 |
| 212 |
| 2,238 |
| 1,619 |
|
| Other intangible assets – net | 130 |
| 123 |
| 356 |
| 403 |
|
| Contract assets | 52 |
| 125 |
| 736 |
| 619 |
|
| Other | 46 |
| 76 |
| |
| Valuation allowance on disposal group classified as held for sale (b) | | (962 | ) | (1,000 | ) |
| Other assets | | 83 |
| 49 |
|
| Assets of businesses held for sale | $ | 2,369 |
| $ | 1,745 |
| $ | 4,588 |
| $ | 4,164 |
|
| | Liabilities |
|
|
| Accounts payable | $ | 219 |
| $ | 190 |
| |
| Progress collections and price adjustments accrued | 21 |
| 141 |
| |
| Other current liabilities | 131 |
| 133 |
| |
| Accounts payable(a) | | $ | 543 |
| $ | 602 |
|
| Progress collections and deferred income | | 294 |
| 179 |
|
| Non-current compensation and benefits | 152 |
| 82 |
| 229 |
| 162 |
|
| Other | 38 |
| 110 |
| |
| Other liabilities | | 294 |
| 305 |
|
| Liabilities of businesses held for sale | $ | 561 |
| $ | 656 |
| $ | 1,360 |
| $ | 1,248 |
|
| |
| (a) | Included transactions in our industrial businesses that were made on an arms-length basis with GE Capital, including GE current receivables sold to GE Capital of $148$329 million and $117$366 million at September 30, 20172018 and December 31, 2016, respectively.2017 respectively, and GE Capital services for material procurement of $39 million at September 30, 2018. These intercompany balances, included within our held for sale businesses, are reported in the GE and GE Capital columns of our financial statements, butand are eliminated in deriving our consolidated financial statements. |
| |
| (b) | We adjusted the carrying value to fair value less cost to sell for certain held for sale businesses. |
DISCONTINUED OPERATIONS
Discontinued operations primarily relate to our financial services businesses as a result of the GE Capital Exit Plan, and also includes the remaining assets of our U.S. mortgage business (WMC). All of these operations were previously reported in the Capital segment. Results of operations, financial position and cash flows for these businesses are separately reported as discontinued operations for all periods presented.
We have entered into Transitional Service Agreements (TSA) with and provided certain indemnifications to buyers of GE Capital’s assets. Under the TSAs, GE Capital provides various services for terms generally between 12 and 24 months and receives a level of cost reimbursement from the buyers. See Note 18 for further information about indemnifications.
20172018 3Q FORM 10-Q 7775
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| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
DISCONTINUED OPERATIONS
Discontinued operations primarily relate to our financial services businesses. Discontinued operations primarily comprise residual assets and liabilities related to our exited U.S. mortgage business (WMC), our mortgage portfolio in Poland, and trailing liabilities associated with the sale of our GE Capital businesses as a result of the GE Capital Exit Plan (our plan announced in 2015 to reduce the size of our financial services businesses). Results of operations, financial position and cash flows for these businesses are separately reported as discontinued operations for all periods presented. See Note 19 for further information about indemnifications and further discussion on WMC.
| | | FINANCIAL INFORMATION FOR DISCONTINUED OPERATIONS | FINANCIAL INFORMATION FOR DISCONTINUED OPERATIONS | | | |
| | Three months ended September 30 | Nine months ended September 30 | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
|
|
|
|
|
| |
|
|
|
| Operations |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
| Total revenues and other income (loss) | $ | 35 |
| $ | 633 |
| $ | 123 |
| $ | 2,494 |
| $ | 152 |
| $ | 35 |
| | $ | (1,316 | ) | $ | 123 |
|
|
|
| |
|
| Earnings (loss) from discontinued operations before income taxes | $ | (191 | ) | $ | 6 |
| $ | (603 | ) | $ | (154 | ) | $ | 61 |
| $ | (191 | ) | | $ | (1,669 | ) | $ | (603 | ) |
| Benefit (provision) for income taxes(a) | 71 |
| 278 |
| 198 |
| 460 |
| (22 | ) | 71 |
| | 32 |
| 198 |
|
| Earnings (loss) from discontinued operations, net of taxes | $ | (120 | ) | $ | 284 |
| $ | (404 | ) | $ | 306 |
| $ | 39 |
| $ | (120 | ) | | $ | (1,637 | ) | $ | (404 | ) |
|
|
| |
|
| Disposal |
|
| |
|
| Gain (loss) on disposal before income taxes | $ | 22 |
| $ | (50 | ) | $ | 3 |
| $ | (591 | ) | $ | — |
| $ | 22 |
| | $ | 4 |
| $ | 3 |
|
| Benefit (provision) for income taxes(a) | (8 | ) | (339 | ) | (89 | ) | (670 | ) | — |
| (8 | ) | | (1 | ) | (89 | ) |
| Gain (loss) on disposal, net of taxes | $ | 14 |
| $ | (389 | ) | $ | (86 | ) | $ | (1,261 | ) | $ | — |
| $ | 14 |
| | $ | 3 |
| $ | (86 | ) |
|
|
| |
|
| Earnings (loss) from discontinued operations, net of taxes(b)(c) | $ | (106 | ) | $ | (105 | ) | $ | (490 | ) | $ | (954 | ) | $ | 39 |
| $ | (106 | ) | | $ | (1,634 | ) | $ | (490 | ) |
| |
| (a) | GE Capital's total tax benefit (provision) for discontinued operations and disposals included current tax benefit (provision) of $(63)$(63) million and $726 million for both the three months ended September 30, 20172018 and 2016, respectively,2017, and $(386)$60 million and $(154)$(386) million for the nine months ended September 30, 20172018 and 2016,2017, respectively, including current U.S. Federal tax benefit (provision) of $1$(18) million and $678$1 million for the three months ended September 30, 20172018 and 2016,2017, respectively and $(518)$43 million and $207$(518) million for the nine months ended September 30, 20172018 and 2016,2017, respectively. The deferred tax benefit (provision) was $126$41 million and $(787)$126 million for the three months ended September 30, 20172018 and 2016,2017, respectively and $495$(29) million and $(56)$495 million for the nine months ended September 30, 20172018 and 2016,2017, respectively. |
| |
| (b) | The sum of GE Industrial earnings (loss) from discontinued operations, net of taxes, and GE Capital earnings (loss) from discontinued operations, net of taxes, after adjusting for earnings (loss) attributable to noncontrolling interests related to discontinued operations, is reported within earnings (loss) from discontinued operations, net of taxes, in the GE Industrial column of the Consolidatedconsolidated Statement of Earnings (Loss). |
| |
| (c) | Earnings (loss) from discontinued operations attributable to the Company, before income taxes, was $(168)61 million and $(43)(168) million for the three months ended September 30, 20172018 and 2016,2017, respectively, and $(606)$(1,665) million and $(746)$(606) million for the nine months ended September 30, 2018 and 2017, and 2016, respectively. |
| | | (In millions) | September 30, 2017 |
| December 31, 2016 |
| September 30, 2018 |
| December 31, 2017 |
|
| | Assets |
|
|
| Cash and equivalents | $ | 496 |
| $ | 1,429 |
| |
| Cash, cash equivalents and restricted cash | | $ | 432 |
| $ | 757 |
|
| Investment securities | 1,131 |
| 2,626 |
| 240 |
| 647 |
|
| Deferred income taxes | 969 |
| 487 |
| 934 |
| 951 |
|
| Financing receivables held for sale | 3,631 |
| 8,547 |
| 2,916 |
| 3,215 |
|
| Other assets | 564 |
| 1,727 |
| 194 |
| 342 |
|
| Assets of discontinued operations | $ | 6,791 |
| $ | 14,815 |
| $ | 4,716 |
| $ | 5,912 |
|
| | Liabilities |
|
|
| Accounts payable | 51 |
| 164 |
| 46 |
| 51 |
|
| Borrowings | — |
| 2,076 |
| 1 |
| 1 |
|
| Other liabilities | 939 |
| 1,918 |
| 1,955 |
| 654 |
|
| Liabilities of discontinued operations | $ | 990 |
| $ | 4,158 |
| $ | 2,002 |
| $ | 706 |
|
7876 20172018 3Q FORM 10-Q
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 3. INVESTMENT SECURITIES
Substantially all of our investment securities are classified as available-for-sale and comprise mainly investment-grade debt securities supporting obligations to annuitants and policyholders in our run-off insurance operations. We do not have any securities classified as held-to-maturity.
| |
| September 30, 2017 |
| December 31, 2016 | September 30, 2018 |
| December 31, 2017 |
| (In millions) | Amortized
cost |
| Gross
unrealized
gains |
| Gross
unrealized
losses |
| Estimated
fair value (a) |
|
| Amortized
cost |
| Gross
unrealized
gains |
| Gross
unrealized
losses |
| Estimated
fair value (a) |
| Amortized
cost |
| Gross
unrealized
gains |
| Gross
unrealized
losses |
| Estimated
fair value(a) |
|
| Amortized
cost |
| Gross
unrealized
gains |
| Gross
unrealized
losses |
| Estimated
fair value(a) |
|
| | Debt |
|
|
|
|
|
|
| U.S. corporate | $ | 20,255 |
| $ | 3,594 |
| $ | (45 | ) | $ | 23,804 |
|
| $ | 20,049 |
| $ | 3,081 |
| $ | (85 | ) | $ | 23,046 |
| $ | 21,467 |
| $ | 2,363 |
| $ | (255 | ) | $ | 23,575 |
|
| $ | 20,104 |
| $ | 3,775 |
| $ | (35 | ) | $ | 23,843 |
|
| Non-U.S. corporate | 5,615 |
| 84 |
| (13 | ) | 5,686 |
|
| 11,917 |
| 98 |
| (27 | ) | 11,987 |
| 2,100 |
| 60 |
| (41 | ) | 2,120 |
|
| 5,455 |
| 86 |
| (13 | ) | 5,528 |
|
| State and municipal | 3,827 |
| 506 |
| (49 | ) | 4,284 |
|
| 3,916 |
| 412 |
| (92 | ) | 4,236 |
| 3,411 |
| 329 |
| (68 | ) | 3,672 |
|
| 3,775 |
| 534 |
| (40 | ) | 4,269 |
|
| Mortgage and asset-backed | 2,808 |
| 97 |
| (19 | ) | 2,886 |
|
| 2,787 |
| 111 |
| (37 | ) | 2,861 |
| 3,298 |
| 45 |
| (63 | ) | 3,280 |
|
| 2,820 |
| 81 |
| (23 | ) | 2,878 |
|
| Government and agencies | 1,769 |
| 74 |
| (10 | ) | 1,833 |
|
| 1,842 |
| 160 |
| (26 | ) | 1,976 |
| 1,602 |
| 56 |
| (43 | ) | 1,615 |
|
| 1,927 |
| 75 |
| (2 | ) | 2,000 |
|
| Equity (b) | 191 |
| 13 |
| — |
| 204 |
|
| 154 |
| 55 |
| (1 | ) | 208 |
| 499 |
| — |
| — |
| 499 |
|
| 166 |
| 12 |
| — |
| 178 |
|
| Total | $ | 34,464 |
| $ | 4,368 |
| $ | (136 | ) | $ | 38,696 |
|
| $ | 40,665 |
| $ | 3,917 |
| $ | (269 | ) | $ | 44,313 |
| $ | 32,378 |
| $ | 2,853 |
| $ | (469 | ) | $ | 34,761 |
|
| $ | 34,246 |
| $ | 4,564 |
| $ | (114 | ) | $ | 38,696 |
|
| |
| (a) | IncludedIncludes $384874 million and $137569 million of investment securities held by GE at September 30, 20172018 and December 31, 2016,2017, respectively, of which$149 $464 million and $86141 million are equity securities.securities with readily determinable fair value.
|
| |
| (b) | EstimatedThese securities have readily determinable fair values included $107 millionand $17 millionsubsequent to the adoption of trading securities at September 30, 2017 and December 31, 2016, respectively.ASU 2016-01 on January 1, 2018, changes in fair value are recorded to earnings. Net unrealized gains (losses) recorded to earnings related to these securities were were$12(60) million and $1$12 million for the three months ended and $41$204 million and $(2)$41 million for the nine months ended September 30, 20172018 and 2016,2017, respectively.
|
Investments with a fair value of $4,452$4,176 million and $4,406$4,413 million were classified within Level 3 (significant inputs to the valuation model are unobservable) at September 30, 20172018 and December 31, 2016,2017, respectively. The remaining investments are substantially all classified within Level 2 (determined based on significant observable inputs). During the nine months ended September 30, 20172018 and 2016,2017, there were no significant transfers into or out of Level 3.
|
| | | | | | | | | | | | | |
| ESTIMATED FAIR VALUE AND GROSS UNREALIZED LOSSES OF AVAILABLE-FOR-SALE INVESTMENT SECURITIES |
| | In loss position for |
| | Less than 12 months | | 12 months or more |
| (In millions) | Estimated fair value |
| Gross unrealized losses |
| | Estimated
fair value |
| Gross
unrealized
losses |
|
| | | | | | |
| September 30, 2017 | | | | | |
| Debt | | | | | |
| U.S. corporate | $ | 681 |
| $ | (17 | ) | | $ | 530 |
| $ | (28 | ) |
| Non-U.S. corporate | 581 |
| (4 | ) | | 3,591 |
| (9 | ) |
| State and municipal | 125 |
| (2 | ) | | 270 |
| (47 | ) |
| Mortgage and asset-backed | 821 |
| (9 | ) | | 227 |
| (9 | ) |
| Government and agencies | 593 |
| (9 | ) | | 257 |
| (1 | ) |
| Equity | 3 |
| — |
| | — |
| — |
|
| Total | $ | 2,805 |
| $ | (41 | ) | | $ | 4,874 |
| $ | (95 | ) |
| | | | | | |
| December 31, 2016 | | | | | |
| Debt | | | | | |
| U.S. corporate | $ | 1,692 |
| $ | (55 | ) | | $ | 359 |
| $ | (30 | ) |
| Non-U.S. corporate | 5,352 |
| (26 | ) | | 14 |
| (1 | ) |
| State and municipal | 674 |
| (27 | ) | | 158 |
| (64 | ) |
| Mortgage and asset-backed | 822 |
| (21 | ) | | 132 |
| (16 | ) |
| Government and agencies | 549 |
| (26 | ) | | — |
| — |
|
| Equity | 9 |
| (1 | ) | | — |
| — |
|
| Total | $ | 9,098 |
| $ | (157 | ) | | $ | 663 |
| $ | (111 | ) |
The estimated fair value and gross unrealized losses of available-for-sale debt securities in a loss position for less than 12 months were $8,872 million and $(261) million and $3,093 million and $(23) million, respectively, at September 30, 2018 and December 31, 2017. The estimated fair value and gross unrealized losses of available-for-sale debt securities in a loss position for 12 months or more were $2,457 million and $(208) million and $4,949 million and $(91) million, respectively, at September 30, 2018 and December 31, 2017. Unrealized losses are not indicative of the amount of credit loss that would be recognized and at September 30, 20172018 are primarily due to increases in market yields subsequent to our purchase of the securities. We presently do not intend to sell the vast majority of our debt securities that are in an unrealized loss position and believe that it is not more likely than not that we will be required to sell the vast majority of these securities before anticipated recovery of our amortized cost. The methodologies and significant inputs used to measure the amount of credit loss for our investment securities during 2017 have not changed.
Total pre-tax, other-than-temporary impairments on investmentdebt securities recognized in earnings were an insignificant amount and $28 million for the three and nine months ended September 30, 20172018 and 2016, respectively.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | CONTRACTUAL MATURITIES OF INVESTMENT IN AVAILABLE-FOR-SALE DEBT SECURITIES | (EXCLUDING MORTGAGE AND ASSET-BACKED SECURITIES) | | | | |
| (In millions) | Amortized cost |
| Estimated fair value |
| Amortized cost |
| Estimated fair value |
|
| | | |
| Due | | |
| Within one year | $ | 5,342 |
| $ | 5,344 |
| $ | 942 |
| $ | 948 |
|
| After one year through five years | 3,577 |
| 3,796 |
| 2,659 |
| 2,740 |
|
| After five years through ten years | 5,639 |
| 6,171 |
| 6,169 |
| 6,580 |
|
| After ten years | 16,994 |
| 20,395 |
| 18,871 |
| 20,785 |
|
We expect actual maturities to differ from contractual maturities because borrowers have the right to call or prepay certain obligations.
Although we generally do not have the intent to sell any specific securities at the end of the period, in the ordinary course of managing our investment securities portfolio, we may sell securities prior to their maturities for a variety of reasons, including diversification, credit quality, yield and liquidity requirements and the funding of claims and obligations to policyholders. Gross realized gains on available-for-sale investmentdebt securities were $54$10 million and $7$32 million, and gross realized losses were $(5)$(32) million and $(12)$(3) million in the three months ended September 30, 20172018 and 2016,2017, respectively. Gross realized gains on available-for-sale investmentdebt securities were $197$32 million and $49$141 million, and gross realized losses were $(9)$(35) million and $(52)$(7) million in the nine months ended September 30, 2018 and 2017, and 2016, respectively.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Proceeds from investment securities sales and early redemptions by issuers totaled $6591,483 million and $416$659 million in the three months ended September 30, 2017 and 2016, respectively primarily from sales of U.S. Corporate and Mortgage and asset-backed securities$2,189 million and $2,433 million and $1,283 million in the nine months ended September 30, 2018 and 2017, and 2016, respectively primarily from sales of U.S. corporate securities and Government and agencies.respectively.
In addition to equity securities with readily determinable fair value, we hold $571 million of equity securities without readily determinable fair value at September 30, 2018 that are classified within "All other assets" in our consolidated Statement of Financial Position and are originally recorded at cost and adjusted for observable price changes for identical or similar instruments less any impairment. We recorded fair value increases of $6 million and $49 million to those securities based on observable transactions and impairments of$(22) million and $(37) millionfor the three and nine months ended September 30, 2018, respectively.
NOTE 4.CURRENT RECEIVABLES
| | | | Consolidated(a)(b) | | GE(c) | Consolidated(a)(b) | | GE(c) |
| (In millions) | September 30, 2017 |
| December 31, 2016 |
| | September 30, 2017 |
| December 31, 2016 |
| September 30, 2018 |
| December 31, 2017 |
| | September 30, 2018 |
| December 31, 2017 |
|
| | | | | | | |
| Current receivables | $ | 26,045 |
| $ | 24,935 |
| | $ | 15,733 |
| $ | 13,562 |
| $ | 21,351 |
| $ | 25,282 |
| | $ | 15,801 |
| $ | 15,693 |
|
| Allowance for losses | (1,019 | ) | (858 | ) | | (1,008 | ) | (847 | ) | (936 | ) | (1,073 | ) | | (925 | ) | (1,055 | ) |
| Total | $ | 25,026 |
| $ | 24,076 |
| | $ | 14,725 |
| $ | 12,715 |
| $ | 20,414 |
| $ | 24,209 |
| | $ | 14,877 |
| $ | 14,638 |
|
| |
| (a) | Included GE industrial customer receivables sold to a GE Capital affiliate and recorded on GE Capital’s balance sheet of $11,2246,404 million and $12,30410,370 million at September 30, 20172018 and December 31, 20162017, respectively. The consolidated total included a deferred purchase price receivable of $436417 million and $483388 million at September 30, 20172018 and December 31, 20162017, respectively, related to our Receivables Facility.Facility (described below). |
| |
| (b) | In order to manage the credit exposure, the Company sells additional current receivables to third parties outside the Receivables Facility, substantially all of which are serviced by the Company. The outstanding balance of these current receivables was $2,4603,865 million and $3,8212,541 million at September 30, 20172018 and December 31, 20162017, respectively. Of these balances, $1,2842,760 million and $2,5041,621 million was sold by GE to GE Capital prior to the sale to third parties at September 30, 20172018 and December 31, 20162017, respectively. At September 30, 20172018 and December 31, 20162017, our maximum exposure to loss under the limited recourse arrangements is $3417 million and $21590 million, respectively. |
| |
| (c) | GE current receivables balances at September 30, 20172018 and December 31, 20162017, before allowance for losses, included $9,91210,535 million and $8,92710,452 million, respectively, from sales of goods and services to customers. The remainder of the balances primarily relates to supplier advances, revenue sharing programs and other non-income based tax receivables. |
RECEIVABLES FACILITY
The Company has a $3,200$3,750 million revolving Receivables Facility under which receivables are sold directly to third-party purchasers. The third-party purchasers have no recourse to other assets of the Company in the event of non-payment by the debtors. Where the purchasing entity is a bank multi-seller commercial paper conduit, assets transferred by other parties to that entity form a majority of the entity’s assets. Upon sale of the receivables, we receive proceeds of cash and a deferred purchase price (DPP). The DPP is an interest in specified assets of the purchasers (the receivables sold by GE Capital) that entitles GE Capital to the residual cash flows of those specified assets.
During the nine months ended September 30, 2017,2018, GE Industrial sold current receivables of $15,057$16,705 million to GE Capital, which GE Capital sold immediately to third parties under the Receivables Facility. GE Capital continues to service the current receivables for the purchasers. The Company received total cash collections of $14,729$16,831 million on previously sold current receivables owed to the purchasing entities. The purchasing entities reinvested $12,681invested $16,452 million including $14,874 million of those collections to purchase newly originated current receivables from the Company. In addition, the purchase of additional receivables by the purchasing entities increased their DPP obligation to the Company by $152 million and they paid $461$123 million to reduce their DPP obligation to the Company.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
obligation. During the nine months ended September 30, 2017, GE Industrial recognized2018, the Company recorded a loss of $100$106 million resulting from a discount on the salesales of thesecurrent receivables to GE Capital. GE Capital recovered the majority of this loss on the sale of the receivables to third party purchasers.
At September 30, 2018 and December 31, 2017, GE Capital, under the Receivables Facility, serviced $2,903$3,096 million and $3,222 million of transferred receivables that remain outstanding.outstanding, respectively. During the nine months ended September 30, 2018, the purchasers paid GE Capital servicing fees of $25 million.
Given the short-term nature of the underlying receivables, discount rates and prepayments are not factors in determining the value of the DPP. Collections on the DPP are presented within Cash flows from operatinginvesting activities in the GE Capital and consolidated columncolumns in the Statement of Cash Flows. As the performance of the transferred current receivables is similar to the performance of our other current receivables, delinquencies are not expected to be significant.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 5. INVENTORIES
| | | (In millions) | September 30, 2017 |
| December 31, 2016 |
| September 30, 2018 |
| December 31, 2017 |
|
| | | |
| Raw materials and work in process | $ | 13,939 |
| $ | 12,636 |
| $ | 11,194 |
| $ | 10,131 |
|
| Finished goods | 10,856 |
| 8,798 |
| 9,231 |
| 8,847 |
|
| Unbilled shipments | 531 |
| 536 |
| 217 |
| 441 |
|
| | 25,327 |
| 21,971 |
| |
| Revaluation to LIFO | 521 |
| 383 |
| |
| Total inventories | $ | 25,848 |
| $ | 22,354 |
| |
| Total Inventories | | $ | 20,642 |
| $ | 19,419 |
|
NOTE 6. GE CAPITAL FINANCING RECEIVABLES AND ALLOWANCE FOR LOSSES ON FINANCING RECEIVABLES
| | FINANCING RECEIVABLES, NET | | (In millions) | September 30, 2017 |
| December 31, 2016 |
| September 30, 2018 |
| December 31, 2017 |
|
| | | |
| Loans, net of deferred income | $ | 20,039 |
| $ | 21,101 |
| $ | 12,764 |
| $ | 17,404 |
|
| Investment in financing leases, net of deferred income | 4,923 |
| 4,998 |
| 2,933 |
| 4,614 |
|
| | 24,962 |
| 26,099 |
| 15,697 |
| 22,018 |
|
| Allowance for losses | (62 | ) | (58 | ) | (34 | ) | (51 | ) |
| Financing receivables – net | $ | 24,900 |
| $ | 26,041 |
| $ | 15,663 |
| $ | 21,967 |
|
We manage our GE Capital financing receivables portfolio using delinquency and nonaccrual data as key performance indicators. At September 30, 2017, $718 million (2.9%), $165 million (0.7%)2018, 3.0% and $317 million (1.3%)2.1% of financing receivables were over 30 days past due, over 90 days past due and on nonaccrual, respectively. Ofrespectively, with the $317 millionvast majority of nonaccrual financing receivables at September 30, 2017, the vast majority are secured by collateral and $271 million are currently paying in accordance with the contractual terms.collateral. At December 31, 2016, $811 million (3.1%), $407 million (1.6%)2017, 0.6% and $322 million (1.2%)1.1% of financing receivables were over 30 days past due, over 90 days past due and on nonaccrual, respectively.
The GE Capital financing receivables portfolio includes $1,702 million and $4,148 million of current receivables at September 30, 2018 and December 31, 2017, respectively, which are purchased from GE with full or limited recourse. These receivables are classified within current receivables at a consolidated level and are excluded from the calculation of GE Capital delinquency and nonaccrual data. The portfolio also includes $1,071 million and $1,141 million of financing receivables that are guaranteed by GE, of which $249 million and $239 million of these loans are on nonaccrual at a GE consolidated level at September 30, 2018 and December 31, 2017, respectively. Additional allowance for loan losses of $160 million and $161 million are recorded investment in impairedat GE and on a consolidated level for these guaranteed nonaccrual loans at September 30, 20172018 and December 31, 2016 was $3522017, respectively.
In 2018, in connection with a strategic shift to make GE Capital smaller and more focused, we classified $1,646 million and $262 million, respectively.of Healthcare Equipment Finance financing receivables as held for sale. The method used to measure impairmentrelated held for these loans is primarily based on collateral value. Atsale balance at September 30, 2017, troubled debt restructurings included in impaired loans2018 is $1,628 million. Write-offs on financing receivables of $8 million were $137 million.recorded for the nine months ended September 30, 2018, to reduce the carrying value of these financing receivables to the lower of cost or fair value, less cost to sell.
NOTE 7. PROPERTY, PLANT AND EQUIPMENT
| | | (In millions) | September 30, 2017 |
| December 31, 2016 |
| September 30, 2018 |
| December 31, 2017 |
|
| | | |
| Original cost | $ | 91,421 |
| $ | 85,875 |
| $ | 87,516 |
| $ | 89,607 |
|
| Less accumulated depreciation and amortization | (37,321 | ) | (35,356 | ) | (36,878 | ) | (35,733 | ) |
| Property, plant and equipment – net | $ | 54,101 |
| $ | 50,518 |
| $ | 50,638 |
| $ | 53,874 |
|
Consolidated depreciation and amortization on property, plant and equipment was $1,397$1,527 million and $1,136$1,397 million in the three months ended September 30, 20172018 and 2016,2017, respectively and $3,715$4,222 million and $3,641$3,715 million in the nine months ended September 30, 2018 and 2017, and 2016, respectively.
20172018 3Q FORM 10-Q 8179
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 8. ACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
ACQUISITIONS
On October 11, 2016, we announced a plan to acquire LM Wind Power, the Danish maker of rotor blades for approximately $1,700 million. The transaction closed on April 20, 2017. The preliminary purchase price allocation resulted in goodwill of approximately $1,300 million and amortizable intangible assets of approximately $200 million. The allocation of the purchase price will be finalized upon completion of post-closing procedures.
In the first quarter of 2017, we acquired the remaining 96% of ServiceMax, a leader in cloud-based field service management solutions, for $867 million, net of cash acquired of $91 million. Upon gaining control, we fair valued the business including our previously held 4% equity interest. The preliminary purchase price allocation resulted in goodwill of approximately $670 million and amortizable intangible assets of approximately $280 million. The allocation of the purchase price will be finalized upon completion of post-closing procedures.
On September 14, 2016, we acquired the remaining 74% of the software developer Meridium Inc. for cash proceeds of $369 million. Upon gaining control, we fair valued the business including our previously held 26% equity interest. The purchase price allocation resulted in goodwill of approximately $360 million and amortizable intangible assets of approximately $150 million.
On May 10, 2016, we announced the pending acquisition of the heat recovery steam generator (HRSG) business from Doosan Engineering & Construction for $250 million. On August 16, 2016, we closed on 80% of the HRSG business for approximately $220 million. On May 23, 2017, we closed an additional 15% of the remaining HRSG business for approximately $35 million. The business is included in our Power Segment. The agreement to purchase the remaining 5% of the HRSG business was terminated on October 13, 2017. The purchase price allocation resulted in goodwill of approximately $160 million and amortizable intangible assets of approximately $36 million.
BAKER HUGHES
On July 3, 2017, GE completed the previously announced combination of GE’s Oil & Gas business (GE Oil & Gas) with Baker Hughes Incorporated (Baker Hughes). As part of the transaction, GE contributed GE Oil & Gas and $7,498 million in cash in exchange for an ownership interest of approximately 62.5% in the new combined company. The operating assets of the new combined company are held through a partnership named Baker Hughes, a GE company, LLC (BHGE LLC). GE holds an economic interest of approximately 62.5% in this partnership, and Baker Hughes’ former shareholders hold an ownership interest of approximately 37.5% through a newly NYSE listed corporation, Baker Hughes, a GE company (BHGE), which controls the partnership. In turn, GE holds a controlling, voting interest of approximately 62.5% in BHGE through Class B Common Stock, which grants voting rights but no economic rights. Baker Hughes’ former shareholders received one share of BHGE Class A Common Stock and a special one-time cash dividend of $17.50 per share at closing. Total consideration was $24,798 million, including the $7,498 million cash contribution.
The Baker Hughes acquisition has been accounted for as a business combination, using the acquisition method. The net assets of Baker Hughes’ contributed businesses were recorded at their estimated fair value, and GE Oil & Gas continues at its historical or carryover basis. We recorded noncontrolling interest of $16,470 million for the approximate 37.5% ownership interest in the combined company held by BHGE’s Class A shareholders. The noncontrolling interest is recorded at fair value for the portion attributable to Baker Hughes and at our historical cost for the portion attributable to GE Oil & Gas. The fair value of the noncontrolling interest associated with the acquired net assets was determined by the publicly traded share price of Baker Hughes at the close of the transaction. The impact of recognizing the noncontrolling interest in GE Oil & Gas resulted in an increase to additional paid in capital of $1,131 million.
The tables below present the preliminary fair value of the consideration exchanged and the preliminary allocation of purchase price to the major classes of assets and liabilities of the acquired Baker Hughes business and the associated fair value of preexisting noncontrolling interest related to the acquired net assets of Baker Hughes. The estimated values are not yet final and are subject to change, and the changes could be significant. We will finalize the amounts recognized as soon as possible as we obtain the information necessary to complete the analysis, but no later than one year from the acquisition date.
|
| | | |
| PRELIMINARY PURCHASE PRICE | |
| (In millions) | July 3, 2017 |
|
| | |
| Cash consideration | $ | 7,498 |
|
| Fair value of the Class A Shares in BHGE issued to Baker Hughes shareholders | 17,300 |
|
| Total consideration for Baker Hughes | $ | 24,798 |
|
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | |
| PRELIMINARY IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES ASSUMED | |
| (In millions) | July 3, 2017 |
|
| | |
| Cash and cash equivalents | $ | 4,133 |
|
| Accounts receivable | 2,378 |
|
| Inventories | 1,975 |
|
| Property, plant, and equipment - net | 4,048 |
|
| Other intangible assets - net (a) | 4,400 |
|
| All other assets | 1,314 |
|
| Accounts payable | (1,115 | ) |
| Borrowings | (3,373 | ) |
| Deferred taxes (b) | (825 | ) |
| All other liabilities | (2,267 | ) |
| Total identifiable net assets | 10,668 |
|
| Fair value of existing noncontrolling interest | (77 | ) |
| Goodwill (c) | 14,207 |
|
| Total allocated purchase price | $ | 24,798 |
|
| |
(a) | The estimated fair value of intangible assets and related useful lives in the preliminary purchase price allocation include: |
|
| | | | |
| (In millions) | Estimated fair value
|
| Estimated useful life (in years) |
| Trademarks - Baker Hughes | $ | 2,000 |
| Indefinite life |
| Customer-related | 1,300 |
| 15 |
| Patents and technology | 900 |
| 10 |
| Trademarks - Other | 200 |
| 10 |
| Total | $ | 4,400 |
| |
| |
(b) | Includes an increase of approximately $974 million primarily related to fair value adjustments to identifiable assets and liabilities (excluding goodwill).
|
| |
(c) | The above goodwill represents future economic benefits expected to be recognized from combining the operations of GE Oil & Gas and Baker Hughes, including expected future synergies and operating efficiencies. Goodwill resulting from the acquisition has been allocated to our Oil & Gas reporting units, of which $67 million is deductible for tax purposes. |
INCOME TAXES
BHGE LLC, will be treated as a disregarded entity for U.S. federal income tax purposes and, accordingly, will not incur any material current or deferred U.S. federal income taxes. BHGE LLC’s foreign subsidiaries, however, are expected to incur current and deferred foreign income taxes.
At closing, GE and BHGE, entered into a Tax Matters Agreement. The Tax Matters Agreement governs the administration and allocation between the parties of tax liabilities and benefits arising prior to, as a result of, and subsequent to the transaction. GE will be responsible for certain taxes related to the formation of the transaction undertaken by GE and Baker Hughes and their respective subsidiaries. We have assumed approximately $35 million of tax obligations of Baker Hughes related to the formation of the transaction.
The Tax Matters Agreement will also provide for the sharing of certain tax benefits arising from the transaction. GE will be entitled to 100% of these tax benefits to the extent that GE has borne certain taxes related to the formation of the transaction. Thereafter, these tax benefits will be shared by GE and BHGE in accordance with their ownership of the partnership, which will initially be approximately 62.5% and approximately 37.5%, respectively.
ACQUISITION COSTS
During the three and nine months ended September 30, 2017, acquisition costs of $159 million and $310 million, respectively, were expensed as incurred and were reported as selling, general and administrative expenses.
UNAUDITED ACTUAL AND PRO FORMA INFORMATION
Our consolidated "Revenues and other income", and "Earnings (loss) from continuing operations" from July 3, 2017 through September 30, 2017 includes $2,541 million and $(441) million, respectively, related to the Baker Hughes contributed business.
The following unaudited pro forma information has been presented as if the Baker Hughes transaction occurred on January 1, 2016. This information has been prepared by combining the historical results of the Company and historical results of Baker Hughes. The unaudited pro forma combined financial data for all periods presented were adjusted to give effect to proforma events that 1) are directly attributable to the aforementioned transaction, 2) factually supportable, and 3) expected to have a continuing impact on the consolidated results of operations.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
The unaudited combined pro forma results do not include any incremental cost savings that may result from the integration. The adjustments are based on information available to the Company at this time. Accordingly, the adjustments are subject to change and the impact of such changes may be material. The unaudited combined pro forma information is for informational purposes only.
The pro forma information is not necessarily indicative of what the combined company’s results actually would have been had the acquisition been completed as of the beginning of the periods as indicated. In addition, the unaudited pro forma information does not purport to project the future results of the combined company.
|
| | | | | | | | | | | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
| Revenues and other income | $ | 33,472 |
| $ | 31,617 |
| | $ | 95,353 |
| $ | 98,029 |
|
| Earnings (loss) from continuing operations | 1,960 |
| 1,603 |
| | 4,139 |
| 3,015 |
|
Significant adjustments to the pro forma information above include recognition of non-recurring direct incremental acquisition costs in the nine-month period ended September 30, 2016 and exclusion of those costs from all other periods presented; and the amortization associated with an estimate of the acquired intangible assets. A non-recurring contractually obligated termination fee of $3,500 million ($3,320 million net of related costs incurred) received by Baker Hughes due to an inability to obtain antitrust related approvals from a prior merger agreement is recognized in the nine months ended September 30, 2016.
GOODWILL
| | CHANGES IN GOODWILL BALANCES | | (In millions) | January 1, 2017 |
| Acquisitions |
| Dispositions,
currency
exchange
and other |
| Balance at
September 30, 2017 |
| Balance at
January 1, 2018 |
| Acquisitions |
| Impairments |
| Dispositions,
currency
exchange
and other |
| Balance at
September 30, 2018 |
|
| | | | | | | |
| Power | $ | 26,403 |
| $ | 55 |
| $ | (1,219 | ) | $ | 25,239 |
| $ | 25,269 |
| $ | — |
| $ | (21,147 | ) | $ | (2,255 | ) | $ | 1,868 |
|
| Renewable Energy | 2,507 |
| 1,503 |
| 230 |
| 4,240 |
| 4,093 |
| — |
| — |
| 13 |
| 4,106 |
|
| Aviation | | 10,008 |
| — |
| — |
| (38 | ) | 9,970 |
|
| Oil & Gas | 10,363 |
| 14,207 |
| 315 |
| 24,885 |
| 23,943 |
| 16 |
| — |
| 688 |
| 24,647 |
|
| Aviation | 9,455 |
| 17 |
| 606 |
| 10,077 |
| |
| Healthcare | 17,424 |
| 50 |
| 92 |
| 17,566 |
| 17,306 |
| — |
| — |
| (40 | ) | 17,266 |
|
| Transportation | 899 |
| — |
| 26 |
| 925 |
| 902 |
| — |
| — |
| (17 | ) | 885 |
|
Lighting | 281 |
| — |
| 10 |
| 291 |
| — |
| — |
| — |
| — |
| — |
|
| Capital | 2,368 |
| — |
| 2 |
| 2,370 |
| 984 |
| — |
| — |
| — |
| 984 |
|
| Corporate | 739 |
| 722 |
| 16 |
| 1,476 |
| 1,463 |
| — |
| (827 | ) | 15 |
| 651 |
|
| Total | $ | 70,438 |
| $ | 16,553 |
| $ | 78 |
| $ | 87,068 |
| $ | 83,968 |
| $ | 16 |
| $ | (21,973 | ) | $ | (1,634 | ) | $ | 60,377 |
|
| |
| (a) | Substantial majority of Lighting segment classified as held for sale in the fourth quarter of 2017. |
Goodwill balances increased by $16,630 million in 2017,decreased primarily as a result of impairments (discussed below), the Baker Hughes transaction,reclassification of the LM WindDistributed Power business within our Power segment to Assets of businesses held for sale and ServiceMax acquisitions and the currency exchange effects of a weakerstronger U.S. dollar, partially offset by adjustments to the reclassificationallocation of purchase price associated with our Industrial Solutions business to assetsacquisitions of businesses held for saleBaker Hughes and impairment of our Power Conversion reporting unit.LM Wind Power.
We test goodwill for impairment annually in the third quarter of each year using data as of July 1 of that year. The impairment test consists of two steps: in step one, the carrying value of the reporting unit is compared with its fair value; in step two, which is applied whenif the carrying value is more than its fair value, the amount of goodwill impairment, if any, is derived by deducting the fair value of the reporting unit’s assets and liabilities from the fair value of its equity, and comparing that amount with the carrying amount of goodwill. We determined fair values for each of the reporting units using the market approach, when available and appropriate, or the income approach, or a combination of both. We assess the valuation methodology based upon the relevance and availability of the data at the time we perform the valuation. If multiple valuation methodologies are used, the results are weighted appropriately.
Valuations using the market approach are derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services. A market approach is limited to reporting units for which there are publicly traded companies that have the characteristics similar to our businesses.
Under the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for each business. Actual results may differ from those assumed in our forecasts. We derive our discount rates using a capital asset pricing model and by analyzing published rates for industries relevant to our reporting units to estimate the cost of equity financing. We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. Discount rates used in our reporting unit valuations ranged from 10.0%9.5% to 18.0%17.0%.
Based on the results of our step one testing, the fair values of each of our reporting units exceeded their carrying values except for the Power Generation and Grid Solutions reporting units, within our Power segment. The majority of the goodwill in our Power segment was recognized as a result of the Alstom acquisition at which time approximately $15,800 million of goodwill was attributed to our Power Generation and Grid Solutions reporting units. As previously disclosed, the Power market as well as its operating environment continues to be challenging. Our outlook for Power has continued to deteriorate driven by the significant overcapacity in the industry, lower market penetration, uncertain timing of deal closures due to deal financing, and the complexities of working in emerging markets. In addition, our near-term earnings outlook has been negatively impacted by project execution and our own underlying operational challenges. Finally, market factors such as increasing energy efficiency and renewable energy penetration continue to impact our view of long-term demand. These conditions have resulted in downward revisions of our forecasts on current and future projected earnings and cash flows at these businesses.
Therefore, we conducted step two of the goodwill impairment test for the Power Generation and Grid Solutions reporting units. Step two requires that we allocate the fair value of the reporting unit to identifiable assets and liabilities of the reporting unit, including previously unrecognized intangible assets. Any residual fair value after this allocation is compared to the goodwill balance and any excess goodwill is charged to expense.
8480 20172018 3Q FORM 10-Q
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| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
DuringIn performing the second step, we identified significant unrecognized intangible assets primarily related to customer relationships, backlog, technology, and trade name. The value of these unrecognized intangible assets is driven by high customer retention rates in our Power business, our contractual backlog, the value of internally created technology, and the GE trade name. The combination of these unrecognized intangibles, adjustments to the carrying value of other assets and liabilities, and reduced reporting unit fair values calculated in step one, resulted in an implied fair value of goodwill substantially below the carrying value of goodwill for the Power Generation and Grid Solutions reporting units. Therefore, in the third quarter, we recorded our best estimate of 2017, we performed our annuala non-cash impairment testloss of $21,973 million. The impairment loss included $827 million of goodwill for allrecorded at Corporate associated with our Digital acquisitions that was previously allocated to our Power Generation and Grid Solutions reporting units. Based onWe recorded the resultsestimated impairment losses in the caption "Goodwill impairment" in our consolidated Statement of our step one testing, the fair values of each of the GE reporting units exceeded their carrying values except for our Power Conversion reporting unit, within our Power operating segment. The primary factors contributing to a reduction in fair value of this reporting unit were extended downturns in certain of its customer segments, most notably the marine and oil and gas markets, increased pricing and cost pressures in low margin renewable markets, and the delayed introduction of new technologies and products. Therefore, we performed a step two analysis.Earnings (Loss). As a result of ongoing updates to our long-range forecast and the complexity of valuing intangible assets in the second step of the impairment test, the Company has not yet completed its analysis. We will recognize any differences to this analysis,estimate in the fourth quarter when we recognized a non-cash goodwillfinalize the step two impairment loss of $947 million ($940 million after tax) during the third quarter to write down the carrying values of Power Conversion’s goodwill to its implied fair value of $191 million. The impairment loss was recorded on the Statement of Earnings to Other costs and expenses.test. After the impairment loss, the fair value ofthere is no remaining goodwill associated with our Power ConversionGeneration reporting unit was in excess of its carrying value by approximately 2%.
In addition, we identified one reporting unit for which the fair value was not substantially in excess of its carrying value. The Grid Solutions reporting unit within our Power operating segment was formed as a result of the Alstom acquisition in November 2015. Since fair value equaled carrying value at the time of acquisition, this caused the fair value of this reporting unit notand $1,653 million related to be significantly in excess of its carrying value. In the current annual impairment test, fair value of Grid Solutions was in excess of its carrying value by approximately 3% and, therefore, continues to be not substantially in excess of carrying value. While the goodwill of this reporting unit is not currently impaired, there could be an impairment in the future as a result of changes in certain assumptions. For example, the fair value could be adversely affected and result in an impairment of goodwill if expected synergies of the acquisition with Alstom are not realized or if the reporting unit was not able to execute on customer opportunities, the estimated cash flows are discounted at a higher risk-adjusted rate or market multiples decrease. The goodwill associated with our Grid Solutions reporting unit was $4,418 million, representing approximately 5% of our total goodwill at September 30, 2017.2018.
In the second quarter of 2018, we classified a significant portion of Healthcare Equipment Finance’s financing receivables as assets held for sale. Upon disposition of these assets, we expect to recognize a goodwill impairment for a substantial portion of the $111 million of goodwill in our Industrial Finance reporting unit. This charge will be offset against the expected gain on sale of the financing receivables.
As we have previously announced, we plan an orderly separation of our ownership interest in BHGE over time. While the fair valuesvalue of each of the reporting units in our Oil & Gas reporting unitssegment are in excess of their carrying values, our basis in BHGE’s shares currently exceeds its publicly traded share price. Depending on the Oilfield Equipmentform and Oilfield Servicestiming of our separation, as well as BHGE’s stock price at the time and the extent of our remaining interest in BHGE, if any, we may recognize a loss either in shareholders equity or the income statement, or both, and such amounts could be material.
In 2017, we recognized a total non-cash goodwill impairment loss in our Power Conversion reporting unit continues to experience declines in orders, project commencement delays and pricing pressures,of $1,164 million, of which reduced its fair value. To$947 million was recorded during the extent that conditions further deteriorate, the fair valuethird quarter of this reporting unit will continue to decline. We will continue to monitor the oil & gas industry and the impact it may have on this reporting unit. In addition, because of the Baker Hughes acquisition and related integration activities, the composition of our historical reporting units for the Oil & Gas operating segment may change. In the event that any of our reporting units change substantially, we will be required to re-test the reporting units as of the date of the reorganization, re-allocate goodwill based on the relative fair values of the new reporting units, and record any required impairment. Finally, the operating and reporting segments and associated reporting units for BHGE are different than GE’s, as BHGE is a subsidiary and performs its reporting unit assessment one level below its operating segments.
As of September 30, 2017, we believe no other goodwill impairment exists, apart from2017. After the impairment charge discussed above, and that the remainingloss, there was no goodwill is recoverable for all of thein our Power Conversion reporting units; however, there can be no assurances that additional goodwill will not be impaired in future periods.unit.
Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. It is reasonably possible that the judgments and estimates described above could change in future periods.
OTHER INTANGIBLE ASSETS
| | | OTHER INTANGIBLE ASSETS - NET | | |
| (In millions) | September 30, 2017 |
| December 31, 2016 |
| September 30, 2018 |
| December 31, 2017 |
|
| | | |
| Intangible assets subject to amortization | $ | 19,345 |
| $ | 16,336 |
| $ | 16,616 |
| $ | 18,056 |
|
| Indefinite-lived intangible assets(a) | 2,090 |
| 100 |
| 2,223 |
| 2,217 |
|
| Total | $ | 21,435 |
| $ | 16,436 |
| $ | 18,838 |
| $ | 20,273 |
|
| |
| (a) | Indefinite-lived intangible assets principally comprise trademarkstrademarks/trade names and in-process research and development. |
|
| | | | | | | | | | | | | | | | | | | |
| INTANGIBLE ASSETS SUBJECT TO AMORTIZATION |
| | September 30, 2018 | | December 31, 2017 |
| (In millions) | Gross carrying amount |
| Accumulated amortization |
| Net |
| | Gross carrying amount |
| Accumulated amortization |
| Net |
|
| | | | | | | | |
| Customer-related(a) | $ | 10,370 |
| $ | (3,648 | ) | $ | 6,724 |
| | $ | 10,614 |
| $ | (3,095 | ) | $ | 7,521 |
|
| Patents and technology | 10,651 |
| (4,515 | ) | 6,136 |
| | 10,271 |
| (3,899 | ) | 6,372 |
|
| Capitalized software | 8,189 |
| (5,271 | ) | 2,919 |
| | 8,064 |
| (4,974 | ) | 3,089 |
|
| Trademarks | 1,150 |
| (514 | ) | 636 |
| | 1,280 |
| (421 | ) | 859 |
|
| Lease valuations | 157 |
| (86 | ) | 70 |
| | 170 |
| (80 | ) | 89 |
|
| All other | 231 |
| (100 | ) | 132 |
| | 218 |
| (92 | ) | 125 |
|
| Total | $ | 30,748 |
| $ | (14,134 | ) | $ | 16,616 |
| | $ | 30,618 |
| $ | (12,561 | ) | $ | 18,056 |
|
| |
| (a) | Balance includes payments made to our customers, primarily within our Aviation business. |
20172018 3Q FORM 10-Q 8581
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| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Intangible assets subject to amortization decreased by $1,440 million in the nine months ended September 30, 2018, primarily as a result of amortization, impairments, currency effects of a stronger U.S. dollar and the reclassification of the Distributed Power business to Assets of businesses held for sale, partially offset by the acquisition of a technology intangible asset of $632 million at our Aviation business and the capitalization of new software across several business platforms. Due to the continued decline in the Power industry, we determined that certain intangible assets, primarily technology and customer relationships, were impaired. Therefore, included within amortization expense for the three and nine months ended September 30, 2018, was a $428 million non-cash impairment charge recorded by our Power Conversion business within our Power segment. This charge was recorded within the "Selling, general and administrative expense" caption in our consolidated Statement of Earnings (Loss).
GE amortization expense related to intangible assets subject to amortization was $944 million and $613 million in the three months ended September 30, 2018 and 2017, respectively and $2,085 million and $1,662 million for the nine months ended September 30, 2018 and 2017, respectively. GE Capital amortization expense related to intangible assets subject to amortization was $12 million and $16 million in the three months ended September 30, 2018 and 2017, respectively and $42 million and $50 million for the nine months ended September 30, 2018 and 2017, respectively.
NOTE 9. REVENUES
REVENUES FROM THE SALE OF EQUIPMENT
PERFORMANCE OBLIGATIONS SATISFIED OVER TIME
We recognize revenue on agreements for the sale of customized goods including power generation equipment, larger oil drilling equipment projects, military development contracts, locomotive units, and long-term construction projects on an over time basis. We recognize revenue using percentage of completion based on costs incurred relative to total expected costs. Our estimate of costs to be incurred to fulfill our promise to a customer is based on our history of manufacturing or constructing similar assets for customers and is updated routinely to reflect changes in quantity or pricing of the inputs. We recognize revenue as we customize the customer's equipment during the manufacturing or integration process and obtain right to payment for work performed. We provide for potential losses on any of these agreements when it is probable that we will incur the loss.
Our billing terms for these over-time contracts vary, but are generally based on achieving specified milestones. The differences between the timing of our revenue recognized (based on costs incurred) and customer billings (based on contractual terms) results in changes to our contract asset or contract liability positions (see Note 10 for further information).
PERFORMANCE OBLIGATIONS SATISFIED AT A POINT IN TIME
We recognize revenue on agreements for non-customized equipment including commercial aircraft engines, healthcare equipment, resource extraction equipment and other goods we manufacture on a standardized basis for sale to the market at a point in time. We recognize revenue at the point in time that the customer obtains control of the good, which is generally no earlier than when the customer has physical possession of the product. We use proof of delivery for certain large equipment with more complex logistics, whereas the delivery of other equipment is estimated based on historical averages of in-transit periods (i.e., time between shipment and delivery).
In situations where arrangements include customer acceptance provisions based on seller or customer-specified objective criteria, we recognize revenue when we have concluded that the customer has control of the goods and that acceptance is likely to occur. We generally do not provide for anticipated losses on point in time transactions prior to transferring control of the equipment to the customer.
Our billing terms for these point in time equipment contracts vary and generally coincide with delivery to the customer; however, within certain businesses, we receive progress payments from customers for large equipment purchases, which is generally to reserve production slots.
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| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
REVENUES FROM THE SALE OF SERVICES
Consistent with our discussion in the MD&A and the way we manage our businesses, we refer to sales under product services agreements and sales of both goods (such as spare parts and equipment upgrades) and related services (such as monitoring, maintenance and repairs) as sales of “services,” which is an important part of our operations.
PERFORMANCE OBLIGATIONS SATISFIED OVER TIME
We enter into long-term product service agreements with our customers primarily within our Aviation, Power, Oil & Gas and Transportation segments. These agreements require us to provide preventative maintenance, overhauls, and standby "warranty-type" services that include certain levels of assurance regarding asset performance and uptime throughout the contract periods, which generally range from 5 to 25 years. We account for items that are integral to the maintenance of the equipment as part of our service related performance obligation, unless the customer has a substantive right to make a separate purchasing decision (e.g., equipment upgrade). We recognize revenue as we perform under the arrangements using percentage of completion based on costs incurred relative to total expected costs. Throughout the life of a contract, this measure of progress captures the nature, timing and extent of our underlying performance activities as our stand-ready services often fluctuate between routine inspections and maintenance, unscheduled service events and major overhauls at pre-determined usage intervals. Contract modifications that extend or revise contract terms are not uncommon and generally result in our recognizing the impact of the revised terms prospectively over the remaining life of the modified contract (i.e., effectively like a new contract).
Our billing terms for these arrangements are generally based on the utilization of the asset (e.g., per hour of usage) or upon the occurrence of a major maintenance event within the contract, such as an overhaul. The differences between the timing of our revenue recognized (based on costs incurred) and customer billings (based on contractual terms) results in changes to our contract asset or contract liability positions (see Note 10 for further information).
Changes in customer utilization can influence the timing and extent of overhauls and other service events over the life of the contract. As a result, the revenue recognized each period is dependent on our estimate of how customers will utilize their assets over the term of the agreement. We generally use a combination of both historical utilization trends as well as forward-looking information such as market conditions and potential asset retirements in developing our revenue estimates. This estimate of customer utilization will impact both the total contract billings and costs to satisfy our obligation to maintain the equipment. In developing our cost estimates, we utilize a combination of our historical cost experience and expected cost improvements. Cost improvements are generally only included in future cost estimates after savings have been observed in actual results or proven to be effective through an extensive regulatory engineering approval process.
We also enter into long-term product services agreements in our Healthcare and Renewable Energy segments. Revenues are recognized for these arrangements on a straight line basis consistent with the nature, timing and extent of our services, which primarily relate to routine maintenance and as needed product repairs. Our billing terms for these contracts vary, but we generally invoice periodically as services are provided.
PERFORMANCE OBLIGATIONS SATISFIED AT A POINT IN TIME
We sell certain tangible products, largely spare equipment, through our services businesses. We recognize revenues and bill our customers for this equipment at the point in time that the customer obtains control of the good, which is at the point in time we deliver the spare part to the customer.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
DISAGGREGATED REVENUES
|
| | | | | | | | | | | | | | | | | | | |
| EQUIPMENT & SERVICES REVENUES(a) | | | | | | | |
| | | | | | | | |
| | Three months ended September 30 |
| (In millions) | 2018 | | 2017 |
| | Equipment Revenues | Services Revenues | Total Revenues | | Equipment Revenues | Services Revenues | Total Revenues |
| | | | | | | | |
| Power | $ | 2,299 |
| $ | 3,441 |
| $ | 5,739 |
| | $ | 4,468 |
| $ | 4,059 |
| $ | 8,527 |
|
| | | | | | | | |
| Renewable Energy | 2,448 |
| 425 |
| 2,873 |
| | 1,957 |
| 550 |
| 2,507 |
|
| | | | | | | | |
| Aviation | 2,834 |
| 4,646 |
| 7,480 |
| | 2,425 |
| 4,270 |
| 6,696 |
|
| | | | | | | | |
| Oil & Gas | 2,221 |
| 3,449 |
| 5,670 |
| | 2,168 |
| 3,143 |
| 5,311 |
|
| | | | | | | | |
| Healthcare | 2,700 |
| 2,006 |
| 4,707 |
| | 2,648 |
| 2,062 |
| 4,710 |
|
| | | | | | | | |
| Transportation | 249 |
| 682 |
| 932 |
| | 364 |
| 585 |
| 949 |
|
| | | | | | | | |
| Lighting | 367 |
| 18 |
| 385 |
| | 454 |
| 18 |
| 472 |
|
| | | | | | | | |
| Total Industrial Segment Revenues | $ | 13,117 |
| $ | 14,668 |
| $ | 27,785 |
| | $ | 14,484 |
| $ | 14,687 |
| $ | 29,171 |
|
|
| | | | | | | | | | | | | | | | | | | |
| EQUIPMENT & SERVICES REVENUES(a) | | | | | | | |
| | | | | | | | |
| | Nine months ended September 30 |
| (In millions) | 2018 | | 2017 |
| | Equipment Revenues | Services Revenues | Total Revenues | | Equipment Revenues | Services Revenues | Total Revenues |
| | | | | | | | |
| Power | $ | 9,336 |
| $ | 11,205 |
| $ | 20,540 |
| | $ | 13,282 |
| $ | 12,586 |
| $ | 25,868 |
|
| | | | | | | | |
| Renewable Energy | 4,754 |
| 1,418 |
| 6,172 |
| | 5,385 |
| 1,201 |
| 6,587 |
|
| | | | | | | | |
| Aviation | 8,281 |
| 13,830 |
| 22,111 |
| | 7,375 |
| 12,628 |
| 20,003 |
|
| | | | | | | | |
| Oil & Gas | 6,638 |
| 9,971 |
| 16,609 |
| | 4,732 |
| 6,662 |
| 11,394 |
|
| | | | | | | | |
| Healthcare | 8,119 |
| 6,268 |
| 14,387 |
| | 7,605 |
| 6,097 |
| 13,703 |
|
| | | | | | | | |
| Transportation | 820 |
| 1,925 |
| 2,746 |
| | 1,373 |
| 1,633 |
| 3,006 |
|
| | | | | | | | |
| Lighting | 1,227 |
| 45 |
| 1,272 |
| | 1,361 |
| 46 |
| 1,407 |
|
| | | | | | | | |
| Total Industrial Segment Revenues | $ | 39,175 |
| $ | 44,662 |
| $ | 83,837 |
| | $ | 41,112 |
| $ | 40,854 |
| $ | 81,967 |
|
| |
| (a) | Revenues classification consistent with our MD&A defined Services revenue |
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | | |
| INTANGIBLE ASSETS SUBJECT TO AMORTIZATION |
| | September 30, 2017 | | December 31, 2016 |
| (In millions) | Gross carrying amount |
| Accumulated amortization |
| Net |
| | Gross carrying amount |
| Accumulated amortization |
| Net |
|
| | | | | | | | |
| Customer-related | $ | 10,903 |
| $ | (2,909 | ) | $ | 7,994 |
| | $ | 9,172 |
| $ | (2,408 | ) | $ | 6,764 |
|
| Patents and technology | 10,548 |
| (3,646 | ) | 6,902 |
| | 8,693 |
| (3,325 | ) | 5,368 |
|
| Capitalized software | 8,268 |
| (5,064 | ) | 3,204 |
| | 7,652 |
| (4,538 | ) | 3,114 |
|
| Trademarks | 1,426 |
| (408 | ) | 1,018 |
| | 1,165 |
| (307 | ) | 858 |
|
| Lease valuations | 160 |
| (76 | ) | 84 |
| | 143 |
| (59 | ) | 84 |
|
| Present value of future profits(a) | 709 |
| (709 | ) | — |
| | 684 |
| (684 | ) | — |
|
| All other | 245 |
| (101 | ) | 144 |
| | 273 |
| (124 | ) | 149 |
|
| Total | $ | 32,258 |
| $ | (12,912 | ) | $ | 19,345 |
| | $ | 27,781 |
| $ | (11,444 | ) | $ | 16,336 |
|
|
| | | | | | | | | | | | | | | |
| SUB-SEGMENT REVENUES | | | | | | | |
| | | | | | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
|
| | | | | | | | |
| Power | | | | | | | |
| Gas Power Systems | $ | 961 |
| | $ | 1,965 |
| | $ | 3,897 |
| | $ | 6,175 |
|
| Power Services | 2,727 |
| | 2,901 |
| | 8,737 |
| | 9,101 |
|
| Steam Power Systems | 425 |
| | 577 |
| | 1,413 |
| | 1,504 |
|
| Energy Connections | 1,486 |
| | 2,386 |
| | 6,005 |
| | 7,072 |
|
| Other | 141 |
| | 697 |
| | 489 |
| | 2,015 |
|
| Power Revenues | $ | 5,739 |
| | $ | 8,527 |
| | $ | 20,540 |
| | $ | 25,868 |
|
| | | | | | | | |
| Renewable Energy | | | | | | | |
| Onshore Wind | $ | 2,558 |
| | $ | 2,187 |
| | $ | 5,153 |
| | $ | 5,794 |
|
| Hydro | 197 |
| | 258 |
| | 607 |
| | 641 |
|
| Offshore Wind | 118 |
| | 62 |
| | 412 |
| | 151 |
|
| Renewable Energy Revenues | $ | 2,873 |
| | $ | 2,507 |
| | $ | 6,172 |
| | $ | 6,587 |
|
| | | | | | | | |
| Aviation | | | | | | | |
| Commercial Engines & Services | $ | 5,636 |
| | $ | 4,848 |
| | $ | 16,443 |
| | $ | 14,737 |
|
| Military | 898 |
| | 1,023 |
| | 2,942 |
| | 2,891 |
|
| Systems & Other | 946 |
| | 824 |
| | 2,726 |
| | 2,375 |
|
| Aviation Revenues | $ | 7,480 |
| | $ | 6,696 |
| | $ | 22,111 |
| | $ | 20,003 |
|
| | | | | | | | |
| Oil & Gas | | | | | | | |
| Turbomachinery & Process Solutions (TPS) | $ | 1,393 |
| | $ | 1,422 |
| | $ | 4,231 |
| | $ | 4,657 |
|
| Oilfield Services (OFS) | 2,993 |
| | 2,661 |
| | 8,554 |
| | 3,101 |
|
| Oilfield Equipment (OFE) | 631 |
| | 613 |
| | 1,912 |
| | 2,011 |
|
| Digital Solutions | 653 |
| | 615 |
| | 1,912 |
| | 1,625 |
|
| Oil & Gas Revenues | $ | 5,670 |
| | $ | 5,311 |
| | $ | 16,609 |
| | $ | 11,394 |
|
| | | | | | | | |
| Healthcare | | | | | | | |
| Healthcare Systems | $ | 3,417 |
| | $ | 3,365 |
| | $ | 10,241 |
| | $ | 9,670 |
|
| Life Sciences | 1,140 |
| | 1,099 |
| | 3,509 |
| | 3,273 |
|
| Healthcare Digital | 149 |
| | 246 |
| | 636 |
| | 760 |
|
| Healthcare Revenues | $ | 4,707 |
| | $ | 4,710 |
| | $ | 14,387 |
| | $ | 13,703 |
|
| | | | | | | | |
| Transportation | | | | | | | |
| Locomotives | $ | 133 |
| | $ | 268 |
| | $ | 481 |
| | $ | 1,145 |
|
| Services | 564 |
| | 489 |
| | 1,600 |
| | 1,381 |
|
| Mining | 139 |
| | 106 |
| | 392 |
| | 242 |
|
| Other | 96 |
| | 86 |
| | 273 |
| | 239 |
|
| Transportation Revenues | $ | 932 |
| | $ | 949 |
| | $ | 2,746 |
| | $ | 3,006 |
|
| | | | | | | | |
| Lighting | | | | | | | |
| Current | $ | 213 |
| | $ | 259 |
| | $ | 697 |
| | $ | 745 |
|
| GE Lighting | 172 |
| | 213 |
| | 575 |
| | 662 |
|
| Lighting Revenues | $ | 385 |
| | $ | 472 |
| | $ | 1,272 |
| | $ | 1,407 |
|
| | | | | | | | |
| Total Industrial Segment Revenues | $ | 27,785 |
| | $ | 29,171 |
| | $ | 83,837 |
| | $ | 81,967 |
|
| Capital Revenues (a) | 2,473 |
| | 2,397 |
| | 7,075 |
| | 7,525 |
|
| Corporate items and eliminations | (685 | ) | | (907 | ) | | (2,575 | ) | | (2,851 | ) |
| Consolidated Revenues (a) | $ | 29,573 |
| | $ | 30,662 |
| | $ | 88,337 |
| | $ | 86,640 |
|
| |
| (a) | Includes $2,425 million and $2,342 million for the three months ended September 30, 2018 and 2017, respectively, and $6,903 million and $7,346 million for the nine months ended September 30, 2018 and 2017, respectively, of revenues at GE Capital outside of the scope of ASC 606. |
REMAINING PERFORMANCE OBLIGATION
As of September 30, 2018, the aggregate amount of the contracted revenues allocated to our unsatisfied (or partially unsatisfied) performance obligations was $249,154 million. We expect to recognize revenue as we satisfy our remaining performance obligations as follows:
Equipment - total remaining performance obligation of $51,553 million of which 52%,72% and 93% is expected to be satisfied within 1,2 and 5 years, respectively, and the remaining thereafter.
Service - total remaining performance obligation of $197,602 million of which 17%, 52%, 75% and 86% is expected to be recognized within 1, 5, 10 and 15 years, respectively, and the remaining thereafter.
Contract modifications could affect both the timing to complete as well as the amount to be received as we fulfill the related remaining performance obligations.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 10. CONTRACT & OTHER DEFERRED ASSETS AND PROGRESS COLLECTIONS & DEFERRED INCOME
|
| | | | | | | | | | | | | | | | | | | | | |
| September 30, 2018 (In millions) | Power | Aviation | Oil & Gas | Renewable Energy | Transportation | Other(a) | Total |
| | | | | | | | |
| GE | | | | | | | |
| Revenues in excess of billings | | | | | | | |
| Long-term product service agreements(b) | $ | 3,828 |
| $ | 2,295 |
| $ | 540 |
| $ | — |
| $ | 526 |
| $ | — |
| $ | 7,190 |
|
| Equipment contract revenues(c) | 4,276 |
| 444 |
| 1,124 |
| 297 |
| 207 |
| 543 |
| 6,890 |
|
| Total contract assets | 8,104 |
| 2,739 |
| 1,664 |
| 297 |
| 733 |
| 543 |
| 14,080 |
|
| | | | | | | | |
| Deferred inventory costs(d) | 905 |
| 698 |
| 251 |
| 1,277 |
| 39 |
| 345 |
| 3,515 |
|
| Nonrecurring engineering costs(e) | 108 |
| 1,896 |
| 15 |
| 24 |
| 101 |
| 34 |
| 2,179 |
|
| Customer advances and other | 1 |
| 1,127 |
| 2 |
| — |
| 1 |
| — |
| 1,132 |
|
| Contract and other deferred assets | $ | 9,118 |
| $ | 6,461 |
| $ | 1,933 |
| $ | 1,597 |
| $ | 874 |
| $ | 922 |
| $ | 20,905 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 (In millions) | Power | Aviation | Oil & Gas | Renewable Energy | Transportation | Other(a) | Total |
| | | | | | | | |
| GE | | | | | | | |
| Revenues in excess of billings | | | | | | | |
| Long-term product service agreements(b) | $ | 3,357 |
| $ | 2,614 |
| $ | 517 |
| $ | 1 |
| $ | 413 |
| $ | — |
| $ | 6,902 |
|
| Equipment contract revenues(c) | 4,757 |
| 280 |
| 1,095 |
| 295 |
| 76 |
| 371 |
| 6,874 |
|
| Total contract assets | 8,115 |
| 2,893 |
| 1,612 |
| 296 |
| 488 |
| 371 |
| 13,775 |
|
| | | | | | | | |
| Deferred inventory costs(d) | 1,304 |
| 564 |
| 358 |
| 950 |
| 43 |
| 359 |
| 3,579 |
|
| Nonrecurring engineering costs(e) | 122 |
| 1,696 |
| — |
| — |
| 87 |
| — |
| 1,905 |
|
| Customer advances and other | — |
| 1,098 |
| — |
| — |
| — |
| — |
| 1,098 |
|
| Contract and other deferred assets | $ | 9,539 |
| $ | 6,251 |
| $ | 1,971 |
| $ | 1,246 |
| $ | 619 |
| $ | 729 |
| $ | 20,356 |
|
| |
| (a) | Balances at September 30, 2017 and December 31, 2016 include adjustments of $221 million and $241 million, respectively, to the present value of future profits inPrimarily includes our run-off insurance activities to reflect the effects that would have been recognized had the related unrealized investment securities holding net gains actually been realized.Healthcare segment
|
Intangible assets subject to amortization increased by $3,009 million in the nine months ended September 30, 2017, primarily as a result of the Baker Hughes transaction, coupled with the LM Wind Power and ServiceMax acquisitions, partially offset by amortization.
GE amortization expense related to intangible assets subject to amortization was $522 million and $405 million in the three months ended September 30, 2017 and 2016, respectively, and $1,424 million and $1,268 million for the nine months ended September 30, 2017 and 2016, respectively. GE Capital amortization expense related to intangible assets subject to amortization was $16 million and $33 million in the three months ended September 30, 2017 and 2016, respectively, and $50 million and $103 million for the nine months ended September 30, 2017 and 2016, respectively.
NOTE 9. CONTRACT ASSETS
|
| | | | | | |
| (In millions) | September 30, 2017 |
| December 31, 2016 |
|
| | | |
| GE | | |
| Revenues in excess of billings | | |
| Long-term product service agreements(a) | $ | 15,358 |
| $ | 12,752 |
|
| Long-term equipment contract revenues(b) | 7,187 |
| 5,859 |
| Total revenues in excess of billings | 22,545 |
| 18,611 |
| | | |
| Deferred inventory costs(c) | 3,818 |
| 3,349 |
| Non-recurring engineering costs(d) | 2,345 |
| 2,185 |
| Other | 1,101 |
| 1,018 |
| Contract assets | $ | 29,809 |
| $ | 25,162 |
|
| |
(a)(b) | Long-term product service agreement balances are presented net of related billings in excess of revenues of $2,595$4,932 million and $3,750$5,498 million at September 30, 20172018 and December 31, 2016,2017, respectively. |
| |
(b) | Reflects revenues earned in excess of billings on our long-term contracts to construct technically complex equipment (such as gas power systems). |
| |
| (c) | Included in this balance are amounts due from customers for the sale of service upgrades, which we collect through higher fixed or usage-based fees from servicing the equipment under long-term product service agreements. Amounts due from these financing arrangements totaled $869 million and $748 million, as of September 30, 2018 and December 31, 2017, respectively. |
| |
| (d) | Represents cost deferral for shipped goods (such as components for wind turbine assembly within our Renewable Energy segment) and labor and overhead costs on time and material service contracts (primarily originating in Power and Aviation) and other costs for which the criteria for revenue recognition criteria has not yet been met. |
| |
(d)(e) | Includes costs incurred prior to production (such as(e.g., requisition engineering) for long-term equipment production contracts, primarily within our Aviation segment, which are allocated ratably to each unit produced. |
Revenues
Contract and other deferred assets increased $549 million in 2018, which was largely driven by a change in estimated profitability of $225 million within our long-term product service agreements, primarily due to an increase at Power ($211 million). In addition, revenue in excess of billings increased $2,606 million and $1,328 million foron our long-term product service agreements increased $63 million, driven by increases at Power ($261 million) and long-termTransportation ($62 million), partially offset by a decrease at Aviation ($259 million). Non-recurring engineering costs increased $274 million, primarily at Aviation ($200 million). Our equipment contracts, respectively. The increase in our long-term service agreements isrelated contract assets increased $16 million, primarily due to increases at Healthcare ($175 million), Aviation ($164 million), and Transportation ($131 million), partially offset by a $1,930 million cumulative catch up adjustment driven by lower forecasteddecrease at Power ($481 million). Deferred inventory costs to complete these contracts as well as increased forecasted revenue and $676decreased $64 million due to the timing of revenue recognized for work performed relative to billingsdecreases at Power ($399 million) and collections. Revenue in excess of billings for our long-term equipment contracts increased $1,328 million primarilyOil & Gas ($107 million), partially offset by increases at Renewable Energy ($327 million) and Aviation ($134 million), due to the timing of revenue recognized for work performed relative to the timing of billings and collections. The remaining increase in contract assetstitle transfer of $712 million is primarily due an increase in deferred inventory costs and non-recurring engineering costs.goods.
The change in estimated profitability within our long-term product service agreements |
| | | | | | | |
| PROGRESS COLLECTIONS & DEFERRED INCOME | | | |
| | | | |
| (In millions) | September 30, 2018 | | December 31, 2017 |
| | | | |
| GE Contract Liabilities | | | |
| | | | |
| Progress collections | $ | 17,036 |
| | $ | 18,310 |
|
| Deferred income | 3,811 |
| | 3,911 |
|
Total progress collections & deferred income
| $ | 20,847 |
| | $ | 22,221 |
|
Revenues recognized for balances that were included in our Power, Aviation, Transportation, and Oil & Gas segments resulted in an adjustmentcontract liabilities at the beginning of $649the period were $13,131 million and $588 million for the three months ended September 30, 2017 and 2016, respectively, and $1,930 million and $1,714$11,446 million for the nine months ended September 30, 2018 and 2017, and 2016, respectively driven primarily by cost execution and increased productivity..
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 10.11. BORROWINGS
| | | (In millions) | September 30, 2017 | December 31, 2016 | September 30, 2018 | December 31, 2017 |
| | | |
| Short-term borrowings | | |
| GE | | |
| Commercial paper | $ | 2,000 |
| $ | 1,500 |
| $ | 3,006 |
| $ | 3,000 |
|
Current portion of long-term borrowings(d) | 14,623 |
| 17,109 |
| 3,768 |
| 9,452 |
|
| Other | 2,125 |
| 1,874 |
| 1,921 |
| 2,095 |
|
Total GE short-term borrowings(a) | 18,748 |
| 20,482 |
| 8,694 |
| 14,548 |
|
| | | |
| GE Capital | | |
| U.S. Commercial paper | 5,021 |
| 5,002 |
| |
| Commercial paper | | 3,011 |
| 5,013 |
|
Current portion of long-term borrowings(b)(a) | 5,627 |
| 6,517 |
| 4,423 |
| 5,781 |
|
| Intercompany payable to GE(c) | 9,971 |
| 11,696 |
| 3,181 |
| 8,310 |
|
| Other | 561 |
| 229 |
| 607 |
| 497 |
|
| Total GE Capital short-term borrowings | 21,179 |
| 23,443 |
| 11,223 |
| 19,602 |
|
| | | |
Eliminations(c) | (11,800 | ) | (13,212 | ) | (4,711 | ) | (10,114 | ) |
| Total short-term borrowings | $ | 28,127 |
| $ | 30,714 |
| $ | 15,206 |
| $ | 24,036 |
|
| | | |
| Long-term borrowings | | |
| GE | | |
Senior notes(d)(b) | $ | 60,314 |
| $ | 54,396 |
| $ | 57,118 |
| $ | 62,724 |
|
| Subordinated notes | 2,938 |
| 2,768 |
| 2,893 |
| 2,913 |
|
| Subordinated debentures(f) | 382 |
| 719 |
| |
| Other | 1,463 |
| 928 |
| 853 |
| 1,403 |
|
| Total GE long-term borrowings(a) | 65,097 |
| 58,810 |
| |
| Total GE long-term borrowings | | 60,863 |
| 67,040 |
|
| | | |
| GE Capital | | |
| Senior notes | 41,467 |
| 44,131 |
| 35,152 |
| 40,754 |
|
| Subordinated notes | 214 |
| 236 |
| 161 |
| 208 |
|
| Intercompany payable to GE(e) | 32,623 |
| 47,084 |
| |
| Other(b) | 1,347 |
| 1,992 |
| |
| Intercompany payable to GE(c) | | 20,069 |
| 31,533 |
|
| Other(a) | | 946 |
| 1,118 |
|
| Total GE Capital long-term borrowings | 75,651 |
| 93,443 |
| 56,329 |
| 73,614 |
|
| | | |
| Eliminations(e) | (33,191 | ) | (47,173 | ) | |
| Eliminations(c) | | (20,132 | ) | (32,079 | ) |
| Total long-term borrowings | $ | 107,557 |
| $ | 105,080 |
| $ | 97,060 |
| $ | 108,575 |
|
| Non-recourse borrowings of consolidated securitization entities(g) | $ | 708 |
| $ | 417 |
| |
| Non-recourse borrowings of consolidated securitization entities(d) | | $ | 2,699 |
| $ | 1,980 |
|
| Total borrowings | $ | 136,392 |
| $ | 136,210 |
| $ | 114,966 |
| $ | 134,591 |
|
| |
| (a) | Excluding assumed debt of GE Capital, the total amount of GE borrowings was $41,252Included $189 million and $20,512$946 million of short- and long-term borrowings, respectively, at September 30, 2018 and $348 million and $1,118 million of short- and long-term borrowings, respectively, at December 31, 2017, of funding secured by aircraft and other collateral. Of this, $236 million and $458 million is non-recourse to GE Capital at September 30, 2018 and December 31, 2016,2017, respectively. |
| |
| (b) | Included $1,653$6,181 million and $2,665$6,206 million of funding secured by aircraft and other collateralBHGE senior notes at September 30, 20172018 and December 31, 2016, respectively, of which $4772017, respectively. Total BHGE borrowings were $6,357 million and $1,419$7,225 million is non-recourse to GE Capital at September 30, 20172018 and December 31, 2016,2017, respectively. |
| |
| (c) | IncludedIncluded a reduction of zero$480 million and $1,329 millionzero for short-term intercompany loans from GE Capital to GE at September 30, 20172018 and December 31, 2016,2017, respectively, whichand a reduction of $13,269 million and $7,271 million for long-term intercompany loans from GE Capital to GE at September 30, 2018 and December 31, 2017, respectively. These loans bear the right of offset against amounts owed under the assumed debt agreement.agreement and can be prepaid by GE at any time in whole or in part, without premium or penalty. Excluding intercompany loans, the total short-termshort- and long-term assumed debt was $9,971$3,661 million and $13,024$33,338 million at September 30, 20172018 and $8,310 million and $38,804 million at December 31, 2016,2017, respectively. The remaining short-term loan balance was paid in January 2017.
|
| |
| (d) | Current portion of long-term borrowings and senior notes at September 30, 2017 included $202Included $424 million and $2,923 million, respectively, of borrowings issued by BHGE. |
| |
(e) | Included a reduction of $7,271 million and zero for long-term intercompany loans from GE Capital to GE at September 30, 2017 and December 31, 2016, respectively, which bear the right of offset against amounts owed under the assumed debt agreement. Excluding intercompany loans, total long-term assumed debt was $39,893 million and $47,084 million at September 30, 2017 and December 31, 2016, respectively. The $7,271 million of intercompany loans collectively have a weighted average interest rate of 3.5% and term of approximately 15 years. |
| |
(f) | Comprises subordinated debentures which constitute the sole assets of trusts that have issued trust preferred securities and where GE owns 100% of the common securities of the trusts. Obligations associated with these trusts are unconditionally guaranteed by GE. |
| |
(g) | Included $222 million and $320$621 million of current portion of long-term borrowings at September 30, 20172018 and December 31, 2016,2017, respectively. See Note 17.17 for further information. |
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
During the second quarter of 2017, GE completed issuances of €8,000 million senior unsecured debt, composed of €1,750 million of 0.375% Notes due 2022, €2,000 million of 0.875% Notes due 2025, €2,250 million of 1.50% Notes due 2029 and €2,000 million of 2.125% Notes due 2037.
On April 10, 2015, GE provided a full and unconditional guarantee on the payment of the principal and interest on all tradable senior and subordinated outstanding long-term debt securities and all commercial paper issued or guaranteed by GE Capital. $92,537 million of such debt was assumed by GE on December 2, 2015 upon its merger with GE Capital resulting in an intercompany payable to GE. At September 30, 20172018, the Guarantee applies to $44,52637,948 million of GE Capital debt.
See Notes 16 and 21Note 17 for additionalfurther information about borrowings and associated interest rate swaps.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 11.12. INVESTMENT CONTRACTS, INSURANCE LIABILITIES AND INSURANCE ANNUITY BENEFITS
Insurance and investment contract liabilities comprise mainly obligations to policyholders and annuitants in our run-off insurance activities.
| | | (In millions) | September 30, 2017 |
| December 31, 2016 |
| September 30, 2018 |
| December 31, 2017 |
|
| | | |
Future policy benefit reserves(a) | | |
Life insurance and other contracts
| $ | 10,125 |
| $ | 10,053 |
| |
Long-term care insurance contracts
| 9,031 |
| 8,688 |
| $ | 16,119 |
| $ | 16,522 |
|
| Structured settlement annuities with life contingencies and other contracts | | 9,450 |
| 9,448 |
|
| Shadow adjustments(a) | | 2,409 |
| 4,582 |
|
| 19,156 |
| 18,741 |
| 27,978 |
| 30,552 |
|
| Investment contracts | 2,606 |
| 2,813 |
| 2,433 |
| 2,569 |
|
| Claim reserves(b) | 4,927 |
| 4,606 |
| 5,277 |
| 5,094 |
|
| Unearned premiums and other | 416 |
| 386 |
| 382 |
| 372 |
|
| | 27,105 |
| 26,546 |
| 36,070 |
| 38,587 |
|
| Eliminations | (508 | ) | (460 | ) | (495 | ) | (451 | ) |
| Total | $ | 26,597 |
| $ | 26,086 |
| $ | 35,575 |
| $ | 38,136 |
|
| |
| (a) | FutureTo the extent that unrealized gains on debt securities supporting our insurance contracts would result in a premium deficiency should those gains be realized, an increase in future policy benefit reserves are accounted for mainly by a net-level premium method using estimated yields generally ranging from 3.0% to 8.5%is recorded, with an offsetting amount recorded in both 2017 and 2016.Other comprehensive income, net of taxes. |
| |
| (b) | Includes $3,431$3,816 million and $3,129$3,590 million related to long term-carelong-term care insurance contracts and $368 million and $364 million related to short-duration contracts, net of eliminations, at September 30, 20172018 and December 31, 2016,2017, respectively. |
Future policy benefit reserves represent the present value of such benefits less the present value of future net premiums and are based on actuarial assumptions established at the time the policies were issued or acquired. These assumptions include, but are not limitedDuring 2017, in response to interest rates, health care experience (including type and cost of care), mortality, and the length of time a policy will remain in force. Our annual premium deficiency testing assesses the adequacy of future policy benefit reserves, net of capitalized acquisition costs using current assumptions. Should the net liability for future policy benefits plus the present value of expected future premiums be insufficient to provide for the present value of expected future policy benefits and expenses, we would be required to reduce remaining capitalized acquisition costs and, to the extent a shortfall still exists, increase our existing future policy benefit reserves. We have recently experienced elevated claim experience for a portion of our long-term care insurance contracts and are conductingthat was most pronounced for policyholders with higher attained ages, we initiated a comprehensive review of premium deficiency assumptions across all insurance contracts, including a reassessment ofproducts, which included reconstructing our future claim projectionscost assumptions for long-term care contracts thatutilizing trends observed in our emerging experience for older claimant ages and later duration policies. Certain of our long-term care policyholders only recently started to reach the prime claim paying period and our new claim cost assumptions considered the emerging credibility of this claim data. In addition to the adverse impact from the increased expected future claim cost assumptions over a long-term horizon, our premium deficiency assumptions considered mortality, length of time a policy will be incorporated within our annual testremain in force and both near-term and longer-term investment return expectations. Future investment yields estimated in 2017 were lower than in previous premium deficiency tests, primarily due to the effect of near-term yields on approximately $14.5 billion of future policy benefit reserves forexpected capital contributions. The indicated premium deficienciesdeficiency resulted in a $9,481 million pre-tax charge to earnings in the fourth quarter of 2017. We would record a charge
In response to earnings for anythe premium deficienciesdeficiency, our future policy benefit reserves at December 31, 2017 were unlocked and updated to reflect our most recent assumptions. Our future policy benefit reserves are subject to premium deficiency testing at least annually, which we expect to complete in the fourth quarter of 2017 upon completion2018. Any future adverse changes in our assumptions could result in an increase to future policy benefit reserves and additional contributions of this review.capital over and above the $11 billion noted below. Any favorable changes to these assumptions could result in additional margin in our premium deficiency test and higher income over the remaining duration of the portfolio, including higher investment income.
Claim reserves are established whenincluded incurred claims of $1,641 million and $1,482 million for the nine months ended September 30, 2018 and 2017, of which $1 million and $60 million related to the recognition of adjustments to prior year claim reserves arising from our periodic reserve evaluation, in the nine months ended September 30, 2018 and 2017, respectively. Paid claims were $1,499 million and $1,260 million in the nine months ended September 30, 2018 and 2017, respectively. The vast majority of paid claims relate to prior year insured events primarily as a claim is incurred or is estimated to have been incurred and represents our best estimateresult of the ultimate obligations for future claim payments and claim adjustment expenses. Key inputs include actual known facts about the claims, such as the benefits available and causelength of disability of the claimant, as well as assumptions derived from our actual historical experience and expected future changes in experience factors. Claim reserves are evaluated periodically for potential changes in loss
estimates with the support of qualified actuaries and any changes are recorded in the period in which they are determined.time long-term care policyholders remain on claim.
When insurance affiliatescompanies cede insurance risk to third parties, such as reinsurers, they are not relieved of their primary obligation to policyholders.policyholders and cedents. When losses on ceded risks give rise to claims for recovery, we establish allowances for probable losses on such receivables from reinsurers as required. Reinsurance recoverables, net are included in the caption “Other GE Capital receivables” on our Consolidatedconsolidated Statement of Financial Position, and amounted to $2,182$2,217 million and $2,038included $749 million related to ceded claim reserves at September 30, 20172018. Reinsurance recoverables amounted to $2,458 million and included $715 million related to ceded claim reserves at December 31, 2017. The vast majority of our remaining net reinsurance recoverables are secured by assets held in a trust for which we are the beneficiary.
We recognize reinsurance recoveries as a reduction of the caption “Investment contracts, insurance losses and insurance annuity benefits" in our consolidated Statement of Earnings (Loss). Reinsurance recoveries were $89 million and December 31, 2016,$104 million for the three months ended September 30, 2018 and 2017, respectively, and $206 million and $339 million for the nine months ended September 30, 2018 and 2017, respectively.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
We recognize reinsurance recoveries as a reduction of the Consolidated Statement of Earnings caption “Investment contracts,Our run-off insurance losses and insurance annuity benefits.” Reinsurance recoveries were $104 million and $339 million for the three and nine months ended September 30, 2017, respectively, and $78 million and $225 million for the three and nine months ended September 30, 2016, respectively.
See Note 1subsidiaries are required to the consolidatedprepare statutory financial statements in accordance with statutory accounting practices that differ in certain respects from GAAP. Statutory accounting practices are set forth by the National Association of Insurance Commissioners as well as state laws, regulation and general administrative rules. In the fourth quarter of 2017 we recorded a premium deficiency pre-tax charge to earnings of $9,481 million on a GAAP basis. For statutory accounting purposes, the Kansas Insurance Department approved our Annual Report on Form 10-Krequest for a permitted statutory accounting practice to recognize the year ended December 31, 2016 for further information.reserve increase over a seven-year period. As a result, GE Capital contributed capital to its insurance subsidiaries of $3.5 billion in the first quarter of 2018 and expects to contribute approximately an additional $11 billion through 2024 subject to ongoing monitoring by the Kansas Insurance Department. GE is required to maintain specified capital levels at these insurance subsidiaries under capital maintenance agreements.
NOTE 12.13. POSTRETIREMENT BENEFIT PLANS
We sponsor a number of pension and retiree health and life insurance benefit plans. Principal pension plans are the GE Pension Plan and the GE Supplementary Pension Plan. Principal retiree benefit plans provide health and life insurance benefits to certain eligible participants and these participants share in the cost of the healthcare benefits. Other pension plans include the U.S. and non-U.S. pension plans with pension assets or obligations greater than $50 million. Smaller pension plans and other retiree benefit plans are not material individually or in the aggregate.
|
| | | | | | | | | | | | | | | | |
| EFFECT ON OPERATIONS OF PENSION PLANS |
| | Principal pension plans |
| | Three months ended September 30 | | Nine months ended September 30 | |
| (In millions) | 2017 |
| | 2016 |
| | 2017 |
| | 2016 |
| |
| | | | | | | | | |
| Service cost for benefits earned | $ | 267 |
| | $ | 307 |
| | $ | 810 |
| | $ | 913 |
| |
| Prior service cost amortization | 73 |
| | 76 |
| | 218 |
| | 228 |
| |
| Expected return on plan assets | (847 | ) | | (837 | ) | | (2,545 | ) | | (2,507 | ) | |
| Interest cost on benefit obligations | 715 |
| | 736 |
| | 2,144 |
| | 2,205 |
| |
| Net actuarial loss amortization | 702 |
| | 612 |
| | 2,109 |
| | 1,836 |
| |
| Curtailment loss (gain) | — |
| | — |
| | 43 |
| (a) | (1 | ) | |
| Pension plans cost | $ | 910 |
| | $ | 894 |
| | $ | 2,779 |
| | $ | 2,674 |
| |
| |
(a) | Curtailment loss resulting from our intent to sell the Industrial Solutions business within our Power segment. |
| | | EFFECT ON OPERATIONS OF PENSION PLANS | | | | | | | | | |
| | Other pension plans | Principal pension plans |
| | Three months ended September 30 | | Nine months ended September 30 | | Three months ended September 30 | | | Nine months ended September 30 | |
| (In millions) | 2017 |
| | 2016 |
| | 2017 |
| | 2016 |
| | 2018 |
| | 2017 |
| | | 2018 |
| | 2017 |
| |
| | | | | | | | | | | | | | | | | |
| Service cost for benefits earned | $ | 156 |
| | $ | 106 |
| | $ | 430 |
| | $ | 337 |
| | $ | 232 |
| | $ | 267 |
| | $ | 667 |
| | $ | 810 |
| |
| Prior service credit amortization | (2 | ) | | — |
| | (4 | ) | | (1 | ) | | |
| Prior service cost amortization | | 36 |
| | 73 |
| | 108 |
| | 218 |
| |
| Expected return on plan assets | (324 | ) | | (264 | ) | | (919 | ) | | (786 | ) | | (803 | ) | | (847 | ) | | (2,443 | ) | | (2,545 | ) | |
| Interest cost on benefit obligations | 158 |
| | 172 |
| | 445 |
| | 512 |
| | 666 |
| | 715 |
| | 1,999 |
| | 2,144 |
| |
| Net actuarial loss amortization | 110 |
| | 68 |
| | 320 |
| | 197 |
| | 947 |
| | 702 |
| | 2,841 |
| | 2,109 |
| |
| Curtailment loss | 11 |
| | — |
| | 11 |
| (a) | — |
| | 46 |
| (a) | — |
| | 46 |
| (a) | 43 |
| (b) |
| Pension plans cost | $ | 109 |
| | $ | 82 |
| | $ | 283 |
| | $ | 259 |
| | $ | 1,124 |
| | $ | 910 |
| | $ | 3,218 |
| | $ | 2,779 |
| |
| |
| (a) | Curtailment loss resulting from a Canadian manufacturing plant closure.BHGE decision to no longer participate in the GE Pension Plan after December 31, 2018. |
| |
| (b) | Curtailment loss resulting from the sale of Industrial Solutions business within our Power segment. |
| | | EFFECT ON OPERATIONS OF PRINCIPAL RETIREE BENEFIT PLANS | |
| | Principal retiree benefit plans | Other pension plans |
| | Three months ended September 30 | | Nine months ended September 30 | | Three months ended September 30 | | Nine months ended September 30 | |
| (In millions) | 2017 |
| | 2016 |
| | 2017 |
| | 2016 |
| | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
| |
| | | | | | | | | | | | | | | | | |
| Service cost for benefits earned | $ | 25 |
| | $ | 32 |
| | $ | 77 |
| | $ | 84 |
| | $ | 85 |
| | $ | 156 |
| | $ | 279 |
| | $ | 430 |
| |
| Prior service credit amortization | (42 | ) | | (41 | ) | | (128 | ) | | (123 | ) | | (2 | ) | | (2 | ) | | (4 | ) | | (4 | ) | |
| Expected return on plan assets | (9 | ) | | (11 | ) | | (27 | ) | | (33 | ) | | (342 | ) | | (324 | ) | | (1,059 | ) | | (919 | ) | |
| Interest cost on benefit obligations | 55 |
| | 62 |
| | 168 |
| | 188 |
| | 150 |
| | 158 |
| | 462 |
| | 445 |
| |
| Net actuarial gain amortization | (20 | ) | | (12 | ) | | (61 | ) | | (39 | ) | | |
| Net actuarial loss amortization | | 78 |
| | 110 |
| | 243 |
| | 320 |
| |
| Settlement gain | | — |
| | — |
| | (6 | ) | (a) | — |
| |
| Curtailment loss | — |
| | — |
| | 3 |
| (a) | — |
| | — |
| | 11 |
| (b) | | — |
| | 11 |
| (b) |
| Retiree benefit plans cost | $ | 9 |
| | $ | 30 |
| | $ | 32 |
| | $ | 77 |
| | |
| Pension plans cost (income) | | $ | (31 | ) | | $ | 109 |
| | $ | (85 | ) | | $ | 283 |
| |
| |
| (a) | Curtailment lossSettlement gain resulting from our intent to sellthe sale of the Industrial Solutions business within our Power segment. |
| |
| (b) | Curtailment loss resulting from a Canadian manufacturing plant closure. |
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | |
| EFFECT ON OPERATIONS OF PRINCIPAL RETIREE BENEFIT PLANS |
| | Principal retiree benefit plans |
| | Three months ended September 30 | | | Nine months ended September 30 | |
| (In millions) | 2018 |
| | 2017 |
| | | 2018 |
| | 2017 |
| |
| | | | | | | | | | |
| Service cost for benefits earned | $ | 19 |
| | $ | 25 |
| | | $ | 48 |
| | $ | 77 |
| |
| Prior service credit amortization | (58 | ) | | (42 | ) | | | (172 | ) | | (128 | ) | |
| Expected return on plan assets | (8 | ) | | (9 | ) | | | (22 | ) | | (27 | ) | |
| Interest cost on benefit obligations | 49 |
| | 55 |
| | | 147 |
| | 168 |
| |
| Net actuarial gain amortization | (19 | ) | | (20 | ) | | | (59 | ) | | (61 | ) | |
| Curtailment loss | — |
| | — |
| | | — |
|
| 3 |
| (a) |
| Retiree benefit plans cost (income) | $ | (17 | ) | | $ | 9 |
| | | $ | (58 | ) | | $ | 32 |
| |
| |
| (a) | Curtailment loss resulting from the sale of the Industrial Solutions business within our Power segment. |
The components of net periodic benefit costs other than the service cost component are included in the caption "Non-operating benefit costs" in our consolidated Statement of Earnings (Loss).
NOTE 13.14. INCOME TAXES
Our consolidated effective income tax rates were (7.9)(3.2)% and 4.9%(38.1)% during the nine months ended September 30, 2018 and 2017, respectively. The negative rate for 2018 reflects a tax expense on a pretax loss whereas the negative rate for 2017 reflects a tax benefit on pretax income. The rate for 2018 differs from the U.S. statutory rate primarily due to the non-deductible impairment of goodwill associated with the Power business and 2016, respectively.international tax expenses in excess of benefits from global activities. International tax expenses were impacted by the increase in valuation allowances on the deferred tax assets of our non-U.S. operations as a result of lower forecasted operating earnings in our Power business and the decision to execute an internal restructuring to separate the Healthcare business and the cost of the newly enacted base erosion and global intangible income provisions. This was partially offset by U.S. business credits and an adjustment to decrease the 2018 nine-month tax rate to be in line with the lower expected full-year rate. The rate for 2017 benefited from the tax difference on global activities, the tax rate on the disposition of the Water business and U.S. business credits and for 2016 from a deductible stock loss and U.S. business credits. Inpartially offset by an adjustment to increase the nine months ended 2017 these decreases were partially offsetnine-month tax rate to be in line with the higher expected full-year rate and by the non-deductible impairment of goodwill associated with the Power Conversion businessbusiness.
On December 22, 2017, the U.S. enacted legislation commonly known as the Tax Cuts and by an adjustment to bringJobs Act (“U.S. tax reform”) that lowered the nine-monthstatutory tax rate on U.S. earnings to 21%, taxes historic foreign earnings at a reduced rate of tax, establishes a territorial tax system and enacts new taxes associated with global operations.
The impact of enactment of U.S. tax reform has been recorded on a provisional basis as the legislation provides for additional guidance to be issued by the U.S. Department of the Treasury on several provisions including the computation of the transition tax. Guidance during 2018 could impact the information required for and the calculation of the transition tax charge and could affect decisions that affect the tax on various U.S. and foreign items, which would further impact the final amounts included in linethe transition charge and impact the revaluation of deferred taxes. In addition, analysis performed and conclusions reached as part of the tax return filing process and additional guidance on accounting for U.S. tax reform could affect the provisional amount.
Additionally, as part of tax reform, the U.S. has enacted a minimum tax on foreign earnings (“global intangible low tax income”). We have not made an accounting policy election on the deferred tax treatment and, consequently, we have not made an accrual for the deferred tax aspects of this provision.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
With the enactment of U.S. tax reform, we recorded, for the period ending December 31, 2017, tax expense of $4,512 million to reflect our provisional estimate of both the transition tax on historic foreign earnings ($1,155 million including $2,925 million at GE and $(1,770) million at GE Capital) and the revaluation of deferred taxes ($3,357 million including $1,980 million at GE and $1,377 million at GE Capital). We have not significantly adjusted our provisional estimate of the enactment of U.S. tax reform during the third quarter of 2018 as we continue to analyze information related to our operations as well as new guidance and other aspects of the enacted provisions. Based on our on-going analysis of the currently issued guidance on the transition tax on historic foreign earnings and related foreign tax credit impacts through the third quarter, including advice from outside advisors, we believe the provisional estimate of the impact of enactment, as recorded in the fourth quarter of 2017 and adjusted during 2018 remains a reasonable estimate of the effects of enactment including the impact of items in the 2018 tax filings. We will update the impact of enactment during the fourth quarter of 2018 based on available government guidance and additional analysis of our information. However, there were discrete changes in the provisional estimate identified, primarily at Baker Hughes in connection with the higher expected full-year rate. Inmeasurement period adjustments to purchase price allocation and the associated impact of the change in tax rate on deferred taxes that reduced the provisional amounts recorded by $79 million in the first nine months ended 2016,of 2018. Of this benefit, $134 million relates to non-consolidated operations and did not affect net earnings attributable to the company as there was a further decreaseis an offsetting adjustment in income from noncontrolling interests. The net remaining cost of $55 million also relates primarily to bring the nine-month tax rate in line withrevaluation of deferred taxes corresponding to measurement period adjustments to the lower expected full-year rate.purchase price allocation for the Baker Hughes acquisition.
InTax laws are complex and subject to different interpretations by the ordinary course of business, theretaxpayer and respective governmental taxing authorities. Significant judgment is inherent uncertaintyrequired in quantifyingdetermining our incometax expense and in evaluating our tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date.
| | | UNRECOGNIZED TAX BENEFITS | | |
| (In millions) | September 30, 2017 |
| December 31, 2016 |
| September 30, 2018 |
| December 31, 2017 |
|
| | | |
| Unrecognized tax benefits | $ | 5,281 |
| $ | 4,692 |
| $ | 4,908 |
| $ | 5,449 |
|
| Portion that, if recognized, would reduce tax expense and effective tax rate(a) | 3,224 |
| 2,886 |
| 3,771 |
| 3,626 |
|
| Accrued interest on unrecognized tax benefits | 789 |
| 615 |
| 886 |
| 810 |
|
| Accrued penalties on unrecognized tax benefits | 157 |
| 118 |
| 188 |
| 158 |
|
| Reasonably possible reduction to the balance of unrecognized tax benefits | | |
| in succeeding 12 months | 0-800 |
| 0-600 |
| 0-1,300 |
| 0-1,100 |
|
| Portion that, if recognized, would reduce tax expense and effective tax rate(a) | 0-700 |
| 0-500 |
| 0-1,200 |
| 0-900 |
|
| |
| (a) | Some portion of such reduction may be reported as discontinued operations. |
The increases for the period ended September 30, 2017 primarily relate to preliminary estimates of uncertain taxes for entities consolidated as part of the Baker Hughes transaction.
The Internal Revenue Service (IRS) is currently auditing our consolidated U.S. income tax returns for 2012-2013 and has begun the audit for 2014-2015. In addition, certain other U.S. tax deficiency issues and refund claims for previous years are still unresolved. It is reasonably possible that a portion of the unresolved items could be resolved during the next 12 months, which could result in a decrease in our balance of "unrecognized tax benefits" - that is, the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements. The United Kingdom tax authorities have indicated an intent to disallow interest deductions claimed by GE Capital for the years 2004-2015 that could result in a potential impact of approximately $1 billion, which includes a possible assessment of tax and reduction of deferred tax assets, not including interest and penalties. If assessed, we intend to contest the disallowance. We comply with all applicable tax laws and judicial doctrines of the United Kingdom and believe that the entire benefit is more likely than not to be sustained on its technical merit. We believe that there are no other jurisdictions in which the outcome of unresolved issues or claims is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties.
90 20172018 3Q FORM 10-Q91
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 14.15. SHAREOWNERS’ EQUITY
|
| | | | | | | | | | | | |
| ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) | | |
| | Three months ended September 30 | Nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| | | | | |
| Investment securities | | | | |
| Beginning balance | $ | 866 |
| $ | 1,077 |
| $ | 674 |
| $ | 460 |
|
| Other comprehensive income (loss) (OCI) before reclassifications – net of deferred taxes of $45, $48, $204 and $352 | 54 |
| 97 |
| 363 |
| 675 |
|
| Reclassifications from OCI – net of deferred taxes of $(17), $5, $(78) and $36 | (32 | ) | 1 |
| (150 | ) | 40 |
|
| Other comprehensive income (loss)(a) | 21 |
| 97 |
| 213 |
| 715 |
|
| Less OCI attributable to noncontrolling interests | 1 |
| (2 | ) | 1 |
| (1 | ) |
| Ending balance | $ | 887 |
| $ | 1,176 |
| $ | 887 |
| $ | 1,176 |
|
| | | | | |
| Currency translation adjustments (CTA) | | | | |
| Beginning balance | $ | (5,481 | ) | $ | (5,448 | ) | $ | (6,816 | ) | $ | (5,499 | ) |
| OCI before reclassifications – net of deferred taxes of $(407), $5, $(648) and $222 | 710 |
| (280 | ) | 1,463 |
| (138 | ) |
| Reclassifications from OCI – net of deferred taxes of $2, $(6), $(538) and $74 | (196 | ) | 85 |
| 391 |
| 1 |
|
| Other comprehensive income (loss)(a) | 513 |
| (194 | ) | 1,854 |
| (138 | ) |
| Less OCI attributable to noncontrolling interests | 125 |
| 0 |
| 131 |
| 6 |
|
| Ending balance | $ | (5,092 | ) | $ | (5,643 | ) | $ | (5,092 | ) | $ | (5,643 | ) |
| | | | | |
| Cash flow hedges | | | | |
| Beginning balance | $ | 22 |
| $ | (51 | ) | $ | 12 |
| $ | (80 | ) |
| OCI before reclassifications – net of deferred taxes of $55, $(12), $53 and $(17) | 175 |
| (21 | ) | 239 |
| (61 | ) |
| Reclassifications from OCI – net of deferred taxes of $(28), $6, $(37) and $7 | (75 | ) | 52 |
| (129 | ) | 121 |
|
| Other comprehensive income (loss)(a) | 100 |
| 30 |
| 109 |
| 60 |
|
| Less OCI attributable to noncontrolling interests | 3 |
| — |
| 3 |
| — |
|
| Ending balance | $ | 119 |
| $ | (21 | ) | $ | 119 |
| $ | (21 | ) |
| | | | | |
| Benefit plans | | | | |
| Beginning balance | $ | (10,860 | ) | $ | (10,476 | ) | $ | (12,469 | ) | $ | (11,410 | ) |
| Prior service credit (costs) - net of deferred taxes of $0, $0, $0 and $5 | — |
| — |
| — |
| 23 |
|
| Net actuarial gain (loss) – net of deferred taxes of $(49), $49, $84 and $6 | (132 | ) | 83 |
| 367 |
| 71 |
|
| Net curtailment/settlement - net of deferred taxes of $3, $0, $19 and $0 | 8 |
| — |
| 38 |
| (1 | ) |
| Prior service cost amortization – net of deferred taxes of $17, $22, $55 and $63 | 13 |
| 12 |
| 34 |
| 45 |
|
| Net actuarial loss amortization – net of deferred taxes of $255, $216, $759 and $649 | 536 |
| 453 |
| 1,595 |
| 1,343 |
|
| Other comprehensive income (loss)(a) | 423 |
| 548 |
| 2,032 |
| 1,481 |
|
| Less OCI attributable to noncontrolling interests | (1 | ) | 6 |
| (1 | ) | 5 |
|
| Ending balance | $ | (10,436 | ) | $ | (9,934 | ) | $ | (10,436 | ) | $ | (9,934 | ) |
| | | | | |
| Accumulated other comprehensive income (loss) at September 30 | $ | (14,523 | ) | $ | (14,422 | ) | $ | (14,523 | ) | $ | (14,422 | ) |
|
| | | | | | | | | | | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Preferred stock issued | $ | 6 |
| $ | 6 |
| | $ | 6 |
| $ | 6 |
|
| Common stock issued | $ | 702 |
| $ | 702 |
| | $ | 702 |
| $ | 702 |
|
| Accumulated other comprehensive income (loss) | | | | | |
| Beginning balance | $ | (13,432 | ) | $ | (15,457 | ) | | $ | (14,404 | ) | $ | (18,588 | ) |
| Other comprehensive income (loss) before reclassifications | | | | | |
| Investment securities - net of deferred taxes of $(22), $45, $26 and $204(a) | (74 | ) | 54 |
| | 67 |
| 363 |
|
| Currency translation adjustments (CTA) - net of deferred taxes of $(24), $(407), $17 and $(648) | (639 | ) | 697 |
| | (1,856 | ) | 1,437 |
|
| Cash flow hedges - net of deferred taxes of $2, $55, $(6) and $53 | (8 | ) | 175 |
| | (35 | ) | 239 |
|
| Benefit plans - net of deferred taxes of $16, $(49), $71 and $84 | 73 |
| (132 | ) | | 199 |
| 368 |
|
| Total | $ | (648 | ) | $ | 793 |
| | $ | (1,625 | ) | $ | 2,407 |
|
| Reclassifications from other comprehensive income | | | | | |
| Investment securities - net of deferred taxes of $5, $(17), $3 and $(78)(b) | 17 |
| (32 | ) | | 1 |
| (150 | ) |
| Currency translation on dispositions - net of deferred taxes of $(1), $2, $(1) and $(538)(b) | 7 |
| (196 | ) | | 385 |
| 392 |
|
| Cash flow hedges - net of deferred taxes of $2, $(28), $9 and $(37)(c) | (1 | ) | (75 | ) | | — |
| (129 | ) |
| Benefit plans - net of deferred taxes of $230, $275 $666 and $833(d) | 789 |
| 556 |
| | 2,322 |
| 1,667 |
|
| Total | $ | 812 |
| $ | 253 |
| | $ | 2,708 |
| $ | 1,780 |
|
| Other comprehensive income (loss) | 164 |
| 1,046 |
| | 1,082 |
| 4,184 |
|
| Less other comprehensive income (loss) attributable to noncontrolling interests | (39 | ) | 124 |
| | (92 | ) | 131 |
|
| Other comprehensive income (loss), net, attributable to GE | 203 |
| 922 |
| | 1,174 |
| 4,053 |
|
| Ending Balance | $ | (13,229 | ) | $ | (14,535 | ) | | $ | (13,229 | ) | $ | (14,535 | ) |
| Other capital | | | | | |
| Beginning balance | 37,352 |
| 37,468 |
| | 37,384 |
| 37,224 |
|
| Gains (losses) on treasury stock dispositions and other | (41 | ) | 1,169 |
| | (73 | ) | 1,413 |
|
| Ending Balance | $ | 37,311 |
| $ | 38,637 |
| | $ | 37,311 |
| $ | 38,637 |
|
| Retained earnings | | | | | |
| Beginning balance(e) | 114,913 |
| 130,271 |
| | 117,245 |
| 133,856 |
|
| Net earnings (loss) attributable to the Company | (22,769 | ) | 1,360 |
| | (23,116 | ) | 2,334 |
|
| Dividends and other transactions with shareowners | (1,086 | ) | (2,121 | ) | | (3,395 | ) | (6,514 | ) |
| Redemption value adjustment on redeemable noncontrolling interests(f) | (191 | ) | (70 | ) | | (367 | ) | (236 | ) |
| Other changes(g) | — |
| — |
| | 500 |
| — |
|
| Ending Balance | $ | 90,867 |
| $ | 129,440 |
| | $ | 90,867 |
| $ | 129,440 |
|
| Common stock held in treasury | | | | | |
| Beginning balance | (84,471 | ) | (85,617 | ) | | (84,902 | ) | (83,038 | ) |
| Purchases | (55 | ) | (108 | ) | | (198 | ) | (3,728 | ) |
| Dispositions | 324 |
| 526 |
| | 897 |
| 1,567 |
|
| Ending Balance | $ | (84,202 | ) | $ | (85,199 | ) | | $ | (84,202 | ) | $ | (85,199 | ) |
| Total equity | | | | | |
| GE shareowners' equity balance | 31,454 |
| 69,051 |
| | 31,454 |
| 69,051 |
|
| Noncontrolling interests balance | 16,383 |
| 17,701 |
| | 16,383 |
| 17,701 |
|
| Total equity balance at September 30 | $ | 47,837 |
| $ | 86,751 |
| | $ | 47,837 |
| $ | 86,751 |
|
| |
| (a) | Total other comprehensive income (loss) was $1,058Included adjustments of $234 million and $481$9 million infor the three months ended September 30, 2018 and 2017 and 2016, respectively, and $4,209$1,705 million and $2,117$(180) million infor the nine months ended September 30, 2018 and 2017, respectively, to investment contracts, insurance liabilities and 2016 respectively.annuity benefits in our run-off insurance operations to reflect the effects that would have been recognized had the related unrealized investment securities holding gains been realized. See Note 12 for further information. |
| |
| (b) | Primarily recorded in "GE Capital Revenues from Services" and "Other income" and income taxes in "Benefit (provision) for income taxes" in our consolidated Statement of Earnings (Loss). Currency translation gains and losses on dispositions included zero for the three and nine months ended September 30, 2018, and zero and $510 million for the three and nine months ended September 30, 2017, respectively, in earnings (loss) from discontinued operations, net of taxes. |
| |
| (c) | Cash flow hedges primarily includes impact of foreign exchange contracts and gains and losses on interest rate derivatives, primarily recorded in GE Capital revenue from services, interest and other financial charges and other costs and expenses. See Note 17 for further information. |
| |
| (d) | Primarily includes amortization of actuarial gains and losses, amortization of prior service cost and curtailment gain and loss. These components are included in the computation of net periodic pension cost. See Note 13 for further information. |
| |
| (e) | January 1, 2018 amount has been adjusted to reflect retrospective adoption of ASC 606 $(8,061) million and preferable accounting change from LIFO to FIFO $(377) million. |
| |
| (f) | Amount of redemption value adjustment on redeemable noncontrolling interest shown net of deferred taxes. |
| |
| (g) | On January 1, 2018, we adopted several new accounting standards on a modified retrospective basis. Cumulative impact of these changes was recorded in the opening retained earnings and it increased our retained earnings by $500 million, primarily due to an increase of $464 million related to ASU 2016-16. See Note 1 for further information. |
201792 2018 3Q FORM 10-Q91
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | |
| RECLASSIFICATION OUT OF AOCI | | | | | | |
| | Three months ended | | Nine months ended | |
| | September 30 | | September 30 | |
| (In millions) | 2017 |
| 2016 |
| | 2017 |
| 2016 |
| Statement of Earnings caption |
| | | | | | | |
| Available-for-sale securities | | | | | | |
| Gains (losses) on securities | $ | 49 |
| $ | (6 | ) | | $ | 228 |
| $ | (76 | ) | Total revenues and other income(a) |
| Income taxes | (17 | ) | 5 |
| | (78 | ) | 36 |
| Benefit (provision) for income taxes(b) |
| Net of tax | $ | 32 |
| $ | (1 | ) | | $ | 150 |
| $ | (40 | ) | |
| Currency translation adjustments | | | | | | |
| Gains (losses) on dispositions | $ | 194 |
| $ | (79 | ) | | $ | 147 |
| $ | (74 | ) | Total revenues and other income(c) |
| Income taxes | 2 |
| (6 | ) | | (538 | ) | 74 |
| Benefit (provision) for income taxes(d) |
| Net of tax | $ | 196 |
| $ | (85 | ) | | $ | (391 | ) | $ | (1 | ) | |
| Cash flow hedges | | | | | | |
| Gains (losses) on interest rate derivatives | $ | (6 | ) | $ | (12 | ) | | $ | (21 | ) | $ | (67 | ) | Interest and other financial charges |
| Foreign exchange contracts | 98 |
| (43 | ) | | 176 |
| (47 | ) | (e) |
| Other | 12 |
| (3 | ) | | 13 |
| (14 | ) | (f) |
| Total before tax | 104 |
| (57 | ) | | 167 |
| (128 | ) | |
| Income taxes | (28 | ) | 6 |
| | (37 | ) | 7 |
| Benefit (provision) for income taxes |
| Net of tax | $ | 75 |
| $ | (52 | ) | | $ | 129 |
| $ | (121 | ) | |
| Benefit plan items | | | | | | |
| Curtailment gain (loss) | $ | (11 | ) | $ | — |
| | $ | (57 | ) | $ | 1 |
| (g) |
| Amortization of prior service cost | (30 | ) | (34 | ) | | (89 | ) | (108 | ) | (g) |
| Amortization of actuarial gains (losses) | (791 | ) | (669 | ) | | (2,354 | ) | (1,992 | ) | (g) |
| Total before tax | (832 | ) | (703 | ) | | (2,500 | ) | (2,099 | ) | |
| Income taxes | 275 |
| 238 |
| | 833 |
| 712 |
| Benefit (provision) for income taxes |
| Net of tax | $ | (557 | ) | $ | (465 | ) | | $ | (1,667 | ) | $ | (1,387 | ) | |
| | | | | | | |
| Total reclassification adjustments (net of tax) | $ | (254 | ) | $ | (602 | ) | | $ | (1,779 | ) | $ | (1,548 | ) | (h) |
| |
(a) | Included insignificant amounts for the three months ended September 30, 2017 and 2016, and an insignificant amount and $(72) million for the nine months ended September 30, 2017 and 2016, respectively in earnings (loss) from discontinued operations, net of taxes.
|
| |
(b) | Included an insignificant amount and $3 million for the three months ended September 30, 2017 and 2016, and an insignificant amount and $34 million for the nine months ended September 30, 2017 and 2016 respectively in earnings (loss) from discontinued operations, net of taxes.
|
| |
(c) | Included zero and $(79) million for the three months ended September 30, 2017 and 2016, and $32 million and $(8) million for the nine months ended September 30, 2017 and 2016 respectively in earnings (loss) from discontinued operations, net of taxes.
|
| |
(d) | Included zero and $(7) million for the three months ended September 30, 2017 and 2016, and $(541) million and $73 million for the nine months ended September 30, 2017 and 2016 respectively in earnings (loss) from discontinued operations, net of taxes
|
| |
(e) | Primarily includes $105 million and $(30) million in GE Capital revenues from services and $(8) million and $(13) million in interest and other financial charges in the three months ended September 30, 2017 and 2016, respectively and $206 million and $1 million in GE Capital revenues from services and $(30) million and $(48) million in interest and other financial charges in the nine months ended September 30, 2017 and 2016, respectively.
|
| |
(f) | Primarily recorded in costs and expenses. |
| |
(g) | Curtailment gain (loss), amortization of prior service cost and actuarial gains and losses out of AOCI are included in the computation of net periodic pension costs. See Note 12 for further information. |
| |
(h) | Included $146 million after-tax reclassification of AOCI to additional paid in capital as a result of recognition of noncontrolling interest in GE Oil & Gas as part of Baker Hughes transaction for the three and nine months ended September 30, 2017. |
SHARES OF GE PREFERRED STOCK
On January 20, 2016, we issued $5,694 million of GE Series D preferred stock following an exchange offer for existing GE series A, B and C. The Series D preferred stock are callable on January 21, 2021 and bear a fixed interest rate of 5.00% through January 21, 2021 and floating rate equal to three-month LIBOR plus 3.33% thereafter. Following the exchange offer, $250 million of GE Series A, B and C preferred stock still remain outstanding with an initial average fixed dividend rate of 4.07%. The total carrying value of GE preferred stock at September 30, 2018 was $5,537 million and will increase to $5,944 million through periodic accretion. Dividends on GE preferred stock are payable semi-annually, in June and December and accretion is recorded on a quarterly basis. Dividends on GE preferred stock totaled $39 million and $36 million in the three months ended September 30, 2018 and 2017, respectively and $260 million, including cash dividends of $147 million, and $252 million, including cash dividends of $147 million, in the nine months ending September 30, 2018 and 2017, respectively.
92In conjunction with the 2016 exchange of the GE Capital preferred stock into GE preferred stock and the exchange of Series A, B and C preferred stock into Series D preferred stock, GE Capital issued preferred stock to GE for which the amount and terms mirrored the GE preferred stock held by external investors. On July 1, 2018, GE Capital and GE exchanged the existing Series D preferred stock issued to GE for new Series D preferred stock which is mandatorily convertible into GE Capital common stock on January 21, 2021. 2017 3Q FORM 10-QThe new Series D preferred stock has a carrying value of $5,496 million at September 30, 2018 and will no longer be subject to periodic accretion. The cash dividend on the new GE Capital preferred stock will equal the cash dividend and accretion on the GE Series D preferred stock through January 21, 2021, at which time the GE Capital preferred stock will convert to GE Capital common stock. The exchange of GE Capital Series D preferred stock has no impact on the GE Series D preferred stock, which remains callable for $5,694 million on January 21, 2021 or thereafter on dividend payment dates. Additionally, there were no changes to the existing Series A, B or C preferred stock issued to GE.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NONCONTROLLING INTERESTS
Noncontrolling interests in equity of consolidated affiliates include common shares in consolidated affiliates and preferred stock issued by our affiliates.
| | | CHANGES TO NONCONTROLLING INTERESTS | CHANGES TO NONCONTROLLING INTERESTS | | | CHANGES TO NONCONTROLLING INTERESTS | | |
| | Three months ended September 30 | | Nine months ended September 30 | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
| | 2017 |
| 2016 |
| 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Beginning balance | $ | 1,634 |
| $ | 1,693 |
| | $ | 1,663 |
| $ | 1,864 |
| $ | 16,685 |
| $ | 1,634 |
| | $ | 17,468 |
| $ | 1,663 |
|
| Net earnings (loss) | (93 | ) | 6 |
| | (73 | ) | (62 | ) | 54 |
| (114 | ) | | 105 |
| (94 | ) |
| Dividends | (99 | ) | (25 | ) | | (130 | ) | (47 | ) | (96 | ) | (99 | ) | | (260 | ) | (130 | ) |
| Dispositions | (77 | ) | (53 | ) | | (85 | ) | (94 | ) | |
| Other (including AOCI)(a)(b)(c) | 16,582 |
| 42 |
| | 16,572 |
| 1 |
| |
| Ending balance at September 30 | $ | 17,947 |
| $ | 1,663 |
| | $ | 17,947 |
| $ | 1,663 |
| |
| Other(a) | | (260 | ) | 16,279 |
| | (930 | ) | 16,261 |
|
| Ending balance at September 30(b) | | $ | 16,383 |
| $ | 17,701 |
| | $ | 16,383 |
| $ | 17,701 |
|
| |
| (a) | Includes research & development partner funding arrangementsIncluded impact of AOCI, acquisitions, dispositions and acquisitions.
BHGE stock repurchases. |
| |
| (b) | 2016 included $(123)Included $15,192 million for deconsolidation of investment funds managed by GE Asset Management (GEAM) upon the adoption of ASU 2015-02, Amendments and $16,158 million attributable to the Consolidation Analysis, BHGE Class A Shareholders at September 30, 2018 and prior to the July 1, 2016 sale of GEAM.
|
| |
(c) | 2017, includes $16,470 million related to Baker Hughes transaction. See Note 8 for further information.respectively. |
REDEEMABLE NONCONTROLLING INTERESTS
Redeemable noncontrolling interests presented in our Statement of Financial Position include common shares issued by our affiliates that are redeemable at the option of the holder of those interests.
As part of the Alstom acquisition in 2015, we formed three joint ventures with Alstom in grid technology, renewable energy, and global nuclear and French steam power. Noncontrolling interests in these joint ventures hold certain redemption rights. These joint ventures and the associated redemption rights are discussed in Note 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Our retained earnings is adjusted for subsequent changes in the redemption value of the noncontrolling interest in these entities to the extent that the redemption value exceeds the carrying amount of the noncontrolling interest.
Alstom had redemption rights with respect to its interest in the grid technology and renewable energy joint ventures, which, if exercised, would require us to purchase all of their interest during September 2018 or September 2019. Alstom also had similar redemption rights for the global nuclear and French steam power joint venture that are exercisable during the first quarter of 2021 or the first quarter of 2022. The redemption price would generally be equal to Alstom's initial investment plus annual accretion of 3% for the grid technology and renewable energy joint ventures and plus annual accretion of 2% for the nuclear and French steam power joint venture, with potential upside sharing based on an EBITDA multiple. Alstom also had additional redemption rights in other limited circumstances as well as a call option to require GE to sell all of its interests in the renewable energy joint venture at the higher of fair value or Alstom's initial investment plus annual accretion of 3% during the month of May in the years 2017 through 2019 and also upon a decision to IPO the joint venture.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
GE had a call option on Alstom's interest in the global nuclear and French steam power joint venture at the same amount as Alstom's redemption price in the event that Alstom exercises its put option in the grid technology or renewable energy joint ventures. GE also had call options on Alstom's interest in the three joint ventures in other limited circumstances. In addition, the French Government holds a preferred interest in the global nuclear and French steam power joint venture, giving it certain protective rights.
In January 2018, Alstom informed us that they intend to exercise their redemption rights with respect to the grid technology and renewable energy joint ventures in September 2018. Pursuant to an agreement signed between Alstom and GE in May 2018, if Alstom exercised its redemption rights in September 2018 with respect to the grid technology and renewable energy joint ventures, GE would be deemed to have exercised its option to acquire Alstom’s interest in the nuclear and French steam power joint venture. On September 5, 2018, Alstom exercised its redemption rights related to grid technology and renewable energy, and accordingly GE also exercised its call option to acquire Alstom’s interest in the nuclear and French steam power joint venture. Accordingly, redeemable noncontrolling interest balance was reclassified to GE current liabilities in the third quarter of 2018, and was settled on October 2, 2018, in accordance with the contractual payment terms. The price GE paid was €1,832 million for the grid technology joint venture, €638 million for the renewable energy joint venture and €125 million for the nuclear and French steam power joint venture.
| | | CHANGES TO REDEEMABLE NONCONTROLLING INTERESTS | CHANGES TO REDEEMABLE NONCONTROLLING INTERESTS | | | | CHANGES TO REDEEMABLE NONCONTROLLING INTERESTS | | | |
| | Three months ended September 30 | | Nine months ended September 30 | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
| | 2017 |
| 2016 |
| 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | | | | |
| Beginning balance | $ | 3,193 |
| $ | 3,070 |
| | $ | 3,025 |
| $ | 2,972 |
| $ | 3,376 |
| $ | 3,185 |
| | $ | 3,391 |
| $ | 3,017 |
|
| Net earnings (loss) | (49 | ) | (82 | ) | | (158 | ) | (221 | ) | (144 | ) | (56 | ) | | (293 | ) | (218 | ) |
| Dividends | (12 | ) | (8 | ) | | (22 | ) | (17 | ) | — |
| (12 | ) | | (19 | ) | (22 | ) |
| Redemption value adjustment | 63 |
| 68 |
| | 177 |
| 178 |
| 203 |
| 70 |
| | 401 |
| 236 |
|
Other | 248 |
| 3 |
| | 419 |
| 138 |
| (3,049 | ) | 246 |
| | (3,094 | ) | 420 |
|
| Ending balance at September 30(a) | $ | 3,441 |
| $ | 3,051 |
| | $ | 3,441 |
| $ | 3,051 |
| |
| Balance at September 30 | | $ | 386 |
| $ | 3,433 |
| | $ | 386 |
| $ | 3,433 |
|
| |
| (a) | IncludedIn 2018, included $3,106(3,028) million and $2,942 millionreclassified to GE current liabilities related to the Alstom joint ventures at September 30, 2017 and 2016, respectively. ventures.
|
OTHER
Dividends fromGE Capital paid no common dividends to GE in the three and nine months ended September 30, 2018, respectively. Common dividends paid by GE Capital to GE totaledwere zero and $5,050 million in the three months ended September 30, 2017 and 2016, respectively and $4,105 million including(including cash dividends of $4,016 million, and $16,050 millionmillion) in the three and nine months ended September 30, 2017, and 2016, respectively. Dividends on GE preferred stock totaled $36 million and $33 million in the three months ended September 30, 2017 and 2016, respectively, and $252 million, including cash dividends of $147 million and $474 million, including cash dividends of $184 million in the nine months ended September 30, 2017 and 2016, respectively. Dividends on GE preferred stock are payable semi-annually, in June and December, and accretion is recorded on a quarterly basis.
201794 2018 3Q FORM 10-Q93
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 15.16. EARNINGS PER SHARE INFORMATION
| | | | Three months ended September 30 | Three months ended September 30 |
| | 2017 | | 2016 | 2018 | | 2017 |
| (In millions; per-share amounts in dollars) | Diluted |
| Basic |
| | Diluted |
| Basic |
| Diluted |
| Basic |
| | Diluted |
| Basic |
|
| | | | | | | |
| Amounts attributable to the Company: | | | | | | |
| Consolidated | | | | | | |
Earnings from continuing operations for per-share calculation(a)(b) | $ | 1,935 |
| $ | 1,935 |
| | $ | 2,127 |
| $ | 2,127 |
| $ | (22,812 | ) | $ | (22,812 | ) | | $ | 1,459 |
| $ | 1,459 |
|
| Preferred stock dividends | (36 | ) | (36 | ) | | (33 | ) | (33 | ) | (39 | ) | (39 | ) | | (36 | ) | (36 | ) |
Earnings from continuing operations attributable to common shareowners for per-share calculation(a)(b) | $ | 1,899 |
| $ | 1,899 |
| | $ | 2,094 |
| $ | 2,094 |
| $ | (22,851 | ) | $ | (22,851 | ) | | $ | 1,423 |
| $ | 1,423 |
|
Loss from discontinued operations for per-share calculation(a)(b) | (109 | ) | (109 | ) | | (100 | ) | (100 | ) | 36 |
| 36 |
| | (109 | ) | (109 | ) |
Net earnings attributable to GE common shareowners for per-share calculation(a)(b) | $ | 1,794 |
| $ | 1,794 |
| | $ | 1,991 |
| $ | 1,991 |
| $ | (22,812 | ) | $ | (22,812 | ) | | $ | 1,318 |
| $ | 1,318 |
|
| | | | | | | |
| Average equivalent shares | | | | | | |
| Shares of GE common stock outstanding | 8,665 |
| 8,665 |
| | 8,904 |
| 8,904 |
| 8,694 |
| 8,694 |
| | 8,665 |
| 8,665 |
|
| Employee compensation-related shares (including stock options) | 67 |
| — |
| | 112 |
| — |
| — |
| — |
| | 67 |
| — |
|
| Total average equivalent shares | 8,732 |
| 8,665 |
| | 9,016 |
| 8,904 |
| 8,694 |
| 8,694 |
| | 8,732 |
| 8,665 |
|
| | | | | | | |
| Per-share amounts | | | | | | |
| Earnings from continuing operations | $ | 0.22 |
| $ | 0.22 |
| | $ | 0.23 |
| $ | 0.24 |
| $ | (2.63 | ) | $ | (2.63 | ) | | $ | 0.16 |
| $ | 0.16 |
|
| Loss from discontinued operations | (0.01 | ) | (0.01 | ) | | (0.01 | ) | (0.01 | ) | — |
| — |
| | (0.01 | ) | (0.01 | ) |
| Net earnings | 0.21 |
| 0.21 |
| | 0.22 |
| 0.22 |
| (2.62 | ) | (2.62 | ) | | 0.15 |
| 0.15 |
|
| | | | | | | | | |
| | Nine months ended September 30 | Nine months ended September 30 |
| | 2017 | | 2016 | 2018 | | 2017 |
| (In millions; per-share amounts in dollars) | Diluted |
| Basic |
| | Diluted |
| Basic |
| Diluted |
| Basic |
| | Diluted |
| Basic |
|
| | | | | | | |
| Amounts attributable to the Company: | | | | | | |
| Consolidated | | | | | | |
Earnings from continuing operations for per-share calculation(a)(b) | $ | 4,336 |
| $ | 4,336 |
| | $ | 6,110 |
| $ | 6,110 |
| $ | (21,489 | ) | $ | (21,489 | ) | | $ | 2,815 |
| $ | 2,815 |
|
| Preferred stock dividends | (252 | ) | (252 | ) | | (474 | ) | (474 | ) | (260 | ) | (260 | ) | | (252 | ) | (252 | ) |
Earnings from continuing operations attributable to common shareowners for per-share calculation(a)(b) | $ | 4,084 |
| $ | 4,084 |
| | $ | 5,636 |
| $ | 5,636 |
| $ | (21,749 | ) | $ | (21,749 | ) | | $ | 2,563 |
| $ | 2,563 |
|
Loss from discontinued operations for per-share calculation(a)(b) | (507 | ) | (507 | ) | | (956 | ) | (956 | ) | (1,642 | ) | (1,642 | ) | | (507 | ) | (507 | ) |
Net earnings attributable to GE common shareowners for per-share calculation(a)(b) | $ | 3,588 |
| $ | 3,587 |
| | $ | 4,680 |
| $ | 4,680 |
| $ | (23,383 | ) | $ | (23,383 | ) | | $ | 2,066 |
| $ | 2,066 |
|
| | | | | | | |
| Average equivalent shares | | | | | | |
| Shares of GE common stock outstanding | 8,689 |
| 8,689 |
| | 9,096 |
| 9,096 |
| 8,689 |
| 8,689 |
| | 8,689 |
| 8,689 |
|
| Employee compensation-related shares (including stock options) | 85 |
| — |
| | 105 |
| — |
| — |
| — |
| | 85 |
| — |
|
| Total average equivalent shares | 8,774 |
| 8,689 |
| | 9,201 |
| 9,096 |
| 8,689 |
| 8,689 |
| | 8,774 |
| 8,689 |
|
| | | | | | | |
| Per-share amounts | | | | | | |
| Earnings from continuing operations | $ | 0.47 |
| $ | 0.47 |
| | $ | 0.61 |
| $ | 0.62 |
| $ | (2.50 | ) | $ | (2.50 | ) | | $ | 0.29 |
| $ | 0.30 |
|
| Loss from discontinued operations | (0.06 | ) | (0.06 | ) | | (0.10 | ) | (0.11 | ) | (0.19 | ) | (0.19 | ) | | (0.06 | ) | (0.06 | ) |
| Net earnings | 0.41 |
| 0.41 |
| | 0.51 |
| 0.51 |
| (2.69 | ) | (2.69 | ) | | 0.24 |
| 0.24 |
|
| |
| (a) | Our unvested restricted stock unit awards that contain non-forfeitable rights to dividends or dividend equivalents are considered participating securities. For the three and nine months ended September 30, 2018 and 2017, pursuant to the two-class method, as a result of excess dividends in respect to the current period earnings, losses were not allocated to the participating securities. For the three months ended September 30, 2016, participating securities are included in the computation of earnings per share pursuant to the two-class method and the application of this treatment had an insignificant effect. For the ninemonths ended September 30, 2017 and 2016, pursuant to the two-class method, as a result of excess dividends in respect to the current period earnings, losses were not allocated to the participating securities. |
| |
| (b) | Included an insignificant amount of dividend equivalents in each of the periods presented. |
94 20172018 3Q FORM 10-Q95
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
For the three months ended September 30, 20172018 and 2016,2017, approximately 82424 million and 1582 million of outstanding stock awards were not included in the computation of diluted earnings per share because their effect was antidilutive. ForFor the nine months ended September 30, 20172018 and 2016,2017, approximately 48410 million and 2448 million of outstanding stock awards were not included in the computation of diluted earnings per share because their effect was antidilutive.
Earnings per share amounts are computed independently for earnings from continuing operations, loss from discontinued operations and net earnings. As a result, the sum of per-share amounts from continuing operations and discontinued operations may not equal the total per-share amounts for net earnings.
NOTE 16.17. FINANCIAL INSTRUMENTS AND NON-RECURRING FAIR VALUE MEASUREMENTS
The following table provides information about assets and liabilities not carried at fair value. The table excludes finance leases, equity investments without readily determinable fair value and non-financial assets and liabilities. Substantially all of the assets discussed below are considered to be Level 3. The vast majority of our liabilities’ fair value can be determined based on significant observable inputs and thus considered Level 2. Few of the instruments are actively traded and their fair values must often be determined using financial models. Realization of the fair value of these instruments depends upon market forces beyond our control, including marketplace liquidity.
| |
| September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| (In millions) | Carrying
amount
(net) |
| Estimated
fair value |
| | Carrying
amount
(net) |
| Estimated
fair value |
| Carrying
amount
(net) |
| Estimated
fair value |
| | Carrying
amount
(net) |
| Estimated
fair value |
|
|
| |
|
| |
|
| GE |
| |
|
| |
|
| Assets |
| |
|
| |
|
| Investments and notes receivable | $ | 1,337 |
| $ | 1,404 |
| | $ | 1,526 |
| $ | 1,595 |
| |
| Notes receivable | | $ | 680 |
| $ | 674 |
| | $ | 700 |
| $ | 700 |
|
| Liabilities |
| |
|
| |
|
| Borrowings(a)(b) | 33,982 |
| 35,180 |
| | 19,184 |
| 19,923 |
| 32,558 |
| 31,809 |
| | 34,473 |
| 35,416 |
|
| Borrowings (debt assumed)(a)(c) | 49,864 |
| 56,894 |
| | 60,109 |
| 66,998 |
| 37,000 |
| 40,300 |
| | 47,114 |
| 53,502 |
|
|
| |
|
| |
|
| GE Capital |
| |
|
| |
|
| Assets |
| |
|
| |
|
| Loans | 19,994 |
| 20,069 |
| | 21,060 |
| 20,830 |
| 12,744 |
| 12,737 |
| | 17,363 |
| 17,331 |
|
| Other commercial mortgages | 1,490 |
| 1,576 |
| | 1,410 |
| 1,472 |
| 1,783 |
| 1,811 |
| | 1,489 |
| 1,566 |
|
| Loans held for sale | 1,063 |
| 1,063 |
| | 473 |
| 473 |
| 1,326 |
| 1,328 |
| | 3,274 |
| 3,274 |
|
| Other financial instruments(d) | 115 |
| 161 |
| | 121 |
| 150 |
| |
| Liabilities |
| |
|
| |
|
| Borrowings(a)(e)(f)(g) | 54,945 |
| 59,327 |
| | 58,523 |
| 62,024 |
| |
| Borrowings(a)(d)(e)(f) | | 47,000 |
| 49,460 |
| | 55,353 |
| 60,415 |
|
| Investment contracts | 2,606 |
| 3,057 |
| | 2,813 |
| 3,277 |
| 2,434 |
| 2,712 |
| | 2,569 |
| 2,996 |
|
| |
| (b) | Included $230194 million and $115217 million of accrued interest in estimated fair value at September 30, 20172018 and December 31, 20162017, respectively. |
| |
| (c) | Included $575397 million and $803$696 million of accrued interest in estimated fair value at September 30, 20172018 and December 31, 20162017, respectively. |
| |
| (d) | Principally comprises cost method investments.
|
| |
(e) | Fair values exclude interest rate and currency derivatives designated as hedges of borrowings. Had they been included, the fair value of borrowings at September 30, 20172018 and December 31, 20162017 would have been reduced by $2,6041,016 million and $2,3971,754 million, respectively. |
| |
(f)(e) | Included $764670 million and $775$731 million of accrued interest in estimated fair value at September 30, 20172018 and December 31, 20162017, respectively. |
| |
(g)(f) | Excluded $42,59323,250 million and $58,78039,844 million of net intercompany payable to GE at September 30, 20172018 and December 31, 20162017, respectively. |
| | | NOTIONAL AMOUNTS OF LOAN COMMITMENTS | | |
| | | |
| (In millions) | September 30, 2017 |
| December 31, 2016 |
| September 30, 2018 |
| December 31, 2017 |
|
| | | |
| Ordinary course of business lending commitments(a) | $ | 1,729 |
| $ | 687 |
| $ | 724 |
| $ | 1,105 |
|
| Unused revolving credit lines | 232 |
| 238 |
| 50 |
| 198 |
|
| |
| (a) | Excluded investment commitments of $4511,415 million and $522677 million at September 30, 20172018 and December 31, 20162017, respectively. |
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NON-RECURRING FAIR VALUE MEASUREMENTS
The following table represents non-recurring fair value amounts (as measured at the time of the adjustment) for those assets remeasured to fair value on a non-recurring basis during the fiscal year and still held at September 30, 2017 and December 31, 2016.
|
| | | | | | | | | | | | |
| | Remeasured during
the nine months ended
September 30, 2017 | Remeasured during
the year ended
December 31, 2016 |
| (In millions) | Level 2 | Level 3 | Level 2 | Level 3 |
| | | | | |
| Financing receivables | $ | — |
| $ | 10 |
| $ | — |
| $ | 30 |
|
| Cost and equity method investments | — |
| 60 |
| — |
| 103 |
|
| Long-lived assets | 277 |
| 743 |
| 17 |
| 1,055 |
|
| Goodwill | $ | — |
| $ | 191 |
| $ | — |
| $ | — |
|
| Total | $ | 277 |
| $ | 1,004 |
| $ | 17 |
| $ | 1,189 |
|
The following table represents the fair value adjustments to assets measured at fair value on a non-recurring basis and still held at September 30, 2017 and 2016.
|
| | | | | | | | | | | | | |
| | Three months ended September 30 | Nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
| | | | | | |
| Financing receivables | $ | (1 | ) | $ | — |
| | $ | (1 | ) | $ | (14 | ) |
| Cost and equity method investments | (58 | ) | (2 | ) | | (89 | ) | (95 | ) |
| Long-lived assets | (671 | ) | (21 | ) | | (712 | ) | (161 | ) |
| Goodwill | $ | (947 | ) | $ | — |
| | $ | (947 | ) | $ | — |
|
| Total | $ | (1,676 | ) | $ | (24 | ) | | $ | (1,748 | ) | $ | (270 | ) |
|
| | | | | | |
| LEVEL 3 MEASUREMENTS - SIGNIFICANT UNOBSERVABLE INPUTS | |
| (Dollars in millions) | Fair value | Valuation technique | Unobservable inputs | Range
(weighted-average) |
| | | | | |
| September 30, 2017 | | | | |
| | | | | |
| Non-recurring fair value measurements | | | | |
| Cost and equity method investments | $ | 51 |
| Income approach | Discount rate(a) | 9.0%-40.0%(13.9)%
|
| | | | | |
| Long-lived assets | 508 |
| Income approach | Discount rate(a) | 2.7%-17.0% (7.2%) |
| | | | | |
| | | | | |
| December 31, 2016 | | | | |
| | | | | |
| Non-recurring fair value measurements | | | | |
| Financing receivables | $ | 30 |
| Income approach | Discount rate(a) | 2.5%-30.0% (20.3%) |
| | | | | |
| Cost and equity method investments | 94 |
| Income approach, | Discount rate(a) | 9.0%-30.0% (11.8%) |
| | | | | |
| Long-lived assets | 683 |
| Income approach | Discount rate(a) | 2.5%-20.0% (10.4%) |
Discount rates are determined based on inputs that market participants would use when pricing investments, including credit and liquidity risk. An increase in the discount rate would result in a decrease in the fair value.
At September 30, 2017 and December 31, 2016, non-recurring measurements of $252 million and $379 million, respectively, are valued using non-binding broker quotes or other third-party sources. At September 30, 2017 and December 31, 2016, non-recurring fair value measurements were individually insignificant and utilize a number of different unobservable inputs not subject to meaningful aggregation.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
DERIVATIVES AND HEDGING
FORMS OF HEDGING
In this section we explain the hedging methods we use and their effects on our financial statements.
Cash flow hedges – We use cash flow hedging primarily to reduce or eliminate the effects of foreign exchange rate changes on purchase and sale contracts in our industrial businesses and to convert foreign currency debt that we have issued in our financial services business back to our functional currency.
As part of our ongoing effort to reduce borrowings, we may repurchase debt that was in a cash flow hedge accounting relationship. At the time of determining that the debt cash flows are probable of not occurring any related OCI will be released to earnings.
|
| | | | | | | | | | | | | |
| FINANCIAL STATEMENT EFFECTS - CASH FLOW HEDGES |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
| | | | | | |
| Balance sheet changes | | | | | |
| Fair value of derivatives increase (decrease) | $ | 225 |
| $ | 2 |
| | $ | 281 |
| $ | (43 | ) |
| Shareowners' equity (increase) decrease | (225 | ) | (2 | ) | | (281 | ) | 43 |
|
| | | | | | |
| Earnings (loss) related to ineffectiveness | — |
| — |
| | — |
| — |
|
| Earnings (loss) effect of derivatives(a) | 104 |
| (57 | ) | | 167 |
| (128 | ) |
| |
(a) | Offsets earnings effect of the hedged forecasted transaction |
Fair value hedges– These derivatives are used to hedge the effects of interest rate and currency exchange rate changes on debt that we have issued. |
| | | | | | | | | | | | |
| FINANCIAL STATEMENT EFFECTS - FAIR VALUE HEDGES | | | | |
| | | | | |
| | Three months ended September 30 | Nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| | | | | |
| Balance sheet changes | | | | |
| Fair value of derivative increase (decrease) | $ | (148 | ) | $ | (116 | ) | $ | (430 | ) | $ | 2,494 |
|
| Adjustment to carrying amount of hedged debt (increase) decrease | 103 |
| 37 |
| 267 |
| (2,651 | ) |
| | | | | |
| Earnings (loss) related to hedge ineffectiveness | (45 | ) | (79 | ) | (162 | ) | (156 | ) |
Net investment hedges – We invest in foreign operations that conduct their financial services activities in currencies other than the USU.S. dollar. We hedge the currency risk associated with those investments primarily using short-term currency exchange contracts under which we receive US dollars and pay foreign currency and non-derivative instruments such as debt denominated in a foreign currency and short-term currency exchange contracts under which we receive U.S. dollars and pay foreign currency.
|
| | | | | | | | | | | | |
| FINANCIAL STATEMENT EFFECTS - NET INVESTMENT HEDGES |
| | Three months ended September 30 | Nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| | | | | |
| Balance sheet changes | | | | |
| Fair value of derivatives increase (decrease) | $ | (111 | ) | $ | 107 |
| $ | (302 | ) | $ | 154 |
|
| Fair value of non-derivative instruments (increase) decrease | (905 | ) | 475 |
| (1,764 | ) | 425 |
|
| Shareowners' equity (increase) decrease | 1,020 |
| (552 | ) | 2,082 |
| (513 | ) |
| | | | | |
| Earnings (loss) related to | | | | |
| spot-forward differences and ineffectiveness | 4 |
| 30 |
| 17 |
| 67 |
|
| Earnings (loss) related to | | | | |
| reclassification upon sale or liquidation(a) | 18 |
| 47 |
| 78 |
| (1,025 | ) |
| |
(a) | Included zero and $47 million recorded in discontinued operations in the three months ended September 30, 2017 and 2016 and $59 million and $(1,026) million recorded in discontinued operations in the nine months ended September 30, 2017 and 2016, respectively. |
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Economic Hedgeshedges- – These derivatives are not designated as hedges from an accounting standpoint (and therefore we do not apply hedge accounting to the relationship) but otherwise serve the same economic purpose as other hedging arrangements. We use economic hedges when we have exposures to currency exchange risk for which we are unable to meet the requirements for hedge accounting or when changes in the carrying amount of the hedged item are already recorded in earnings in the same period as the derivative making hedge accounting unnecessary. Even though the derivative is an effective economic hedge, there may be a net effect on earnings in each period due to differences in the timing of earnings recognition between the derivative and the hedged item.
|
| | | | | | | | | | | | |
| FINANCIAL STATEMENT EFFECTS - ECONOMIC HEDGES | | | | |
| | Three months ended September 30 | Nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| | | | | |
| Balance sheet changes | | | | |
| Change in fair value of economic hedge increase (decrease) | $ | 663 |
| $ | (686 | ) | $ | 1,304 |
| $ | (808 | ) |
| Change in carrying amount of item being hedged increase (decrease) | (920 | ) | 380 |
| (1,876 | ) | 182 |
|
| | | | | |
| Earnings (loss) effect of economic hedges(a) | (257 | ) | (306 | ) | (572 | ) | (626 | ) |
| |
(a) | Offset by the future earnings effects of economically hedged item. |
NOTIONAL AMOUNT OF DERIVATIVES
The notional amount of a derivative is the number of units of the underlying (for example, the notional principal amount of the debt in an interest rate swap). The notional amount is used to compute interest or other payment streams to be made under the contract and is a measure of our level of activity. We generally disclose derivative notional amounts on a gross basis. The majority of the outstanding notional amount of $185$134 billion at September 30, 20172018 is related to managing interest rate and currency risk between financial assets and liabilities in our financial services business. The remaining derivative notional amount primarily relates to hedges of anticipated sales and purchases in foreign currency, commodity purchases and contractual terms in contracts that are considered embedded derivatives.
The table below provides additional information about how derivatives are reflected in our financial statements.
|
| | | | | | |
| CARRYING AMOUNTS RELATED TO DERIVATIVES | | |
| (In millions) | September 30, 2017 | December 31, 2016 |
| | | |
| Derivative assets | $ | 4,601 |
| $ | 5,467 |
|
| Derivative liabilities | (2,453 | ) | (4,883) |
| Accrued interest | 490 |
| 792 |
| Cash collateral & credit valuation adjustment | (1,816 | ) | (672) |
| Net Derivatives | 822 |
| 703 |
| Securities held as collateral | (437 | ) | (442) |
| Net amount | $ | 385 |
| $ | 262 |
|
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | |
| FAIR VALUE OF DERIVATIVES | |
| | | | | | |
| | September 30, 2018 | | December 31, 2017 |
| (In millions) | Assets |
| Liabilities |
| | Assets |
| Liabilities |
|
| | | | | | |
| Derivatives accounted for as hedges | | | | | |
| Interest rate contracts | $ | 1,278 |
| $ | 350 |
| | $ | 1,862 |
| $ | 148 |
|
| Currency exchange contracts | 177 |
| 118 |
| | 160 |
| 70 |
|
| | 1,455 |
| 468 |
| | 2,021 |
| 218 |
|
| | | | | | |
| Derivatives not accounted for as hedges | | | | | |
| Interest rate contracts | 32 |
| (1 | ) | | 93 |
| 8 |
|
| Currency exchange contracts | 674 |
| 1,283 |
| | 1,111 |
| 2,043 |
|
| Other contracts | 80 |
| 135 |
| | 139 |
| 91 |
|
| | 787 |
| 1,418 |
| | 1,343 |
| 2,143 |
|
| | | | | | |
| Gross derivatives recognized in statement of financial position | | | | | |
| Gross derivatives | 2,242 |
| 1,885 |
| | 3,364 |
| 2,361 |
|
| Gross accrued interest | 228 |
| (31 | ) | | 469 |
| (38 | ) |
| | 2,471 |
| 1,855 |
| | 3,833 |
| 2,323 |
|
| | | | | | |
| Amounts offset in statement of financial position | | | | | |
| Netting adjustments(a) | (978 | ) | (977 | ) | | (1,457 | ) | (1,456 | ) |
| Cash collateral(b) | (1,152 | ) | (338 | ) | | (1,529 | ) | (578 | ) |
| | (2,129 | ) | (1,315 | ) | | (2,986 | ) | (2,034 | ) |
| | | | | | |
| Net derivatives recognized in statement of financial position | | | | | |
| Net derivatives | 342 |
| 540 |
| | 847 |
| 289 |
|
| | | | | | |
| Amounts not offset in statement of financial position | | | | | |
| Securities held as collateral(c) | (144 | ) | — |
| | (405 | ) | — |
|
| | | | | | |
| Net amount | $ | 198 |
| $ | 540 |
| | $ | 441 |
| $ | 289 |
|
Derivatives are classified in the captions "All other assets" and "All other liabilities" and the related accrued interest is classified in "Other GE Capital receivables" and "All other liabilities" in our Statement of Financial Position.
| |
| (a) | The netting of derivative receivables and payables is permitted when a legally enforceable master netting agreement exists. Amounts include fair value adjustments related to our own and counterparty non-performance risk. At September 30, 2018 and December 31, 2017, the cumulative adjustment for non-performance risk was zero and $(1) million, respectively. |
| |
| (b) | Excluded excess cash collateral received and posted of $50 million and $420 million at September 30, 2018, respectively, and $10 million and $255 million at December 31, 2017, respectively. Excess cash collateral posted includes initial margin for cleared trades. |
| |
| (c) | Excluded excess securities collateral received of zero and $16 million at September 30, 2018 and December 31, 2017, respectively. |
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
EFFECTS OF DERIVATIVES ON EARNINGS
All derivatives are marked to fair value on our balance sheet, whether they are designated in a hedging relationship for accounting purposes or are used as economic hedges.
| | | | Three months ended September 30 | Nine months ended September 30 | Three months ended September 30 | Nine months ended September 30 |
| (In millions) | Effect on hedging instrument | Effect on underlying | Effect on earnings | Effect on hedging instrument | Effect on underlying | Effect on earnings | Effect on hedging instrument | Effect on underlying | Effect on earnings (a) | Effect on hedging instrument | Effect on underlying | Effect on earnings |
| | | |
| 2018 | | |
| Cash flow hedges | | $ | (6 | ) | $ | 7 |
| $ | 1 |
| $ | (25 | ) | $ | 27 |
| $ | 2 |
|
| Fair value hedges | | (362 | ) | 333 |
| (29 | ) | (1,285 | ) | 1,200 |
| (85 | ) |
| Net investment hedges(b) | | (56 | ) | 62 |
| 6 |
| 157 |
| (144 | ) | 14 |
|
| Economic hedges(c) | | (677 | ) | 456 |
| (221 | ) | (1,460 | ) | 1,126 |
| (334 | ) |
| Total | |
| $ | (243 | ) |
| $ | (403 | ) |
| | | |
| 2017 | | |
| Cash flow hedges | $ | 225 |
| $ | (225 | ) | $ | — |
| $ | 281 |
| $ | (281 | ) | $ | — |
| $ | 225 |
| $ | (225 | ) | $ | — |
| $ | 281 |
| $ | (281 | ) | $ | — |
|
| Fair value hedges | (148 | ) | 103 |
| (45 | ) | (430 | ) | 267 |
| (162 | ) | (148 | ) | 103 |
| (45 | ) | (430 | ) | 267 |
| (162 | ) |
| Net investment hedges(a) | (1,016 | ) | 1,020 |
| 4 |
| (2,065 | ) | 2,082 |
| 17 |
| |
| Economic hedges(b) | 663 |
| (920 | ) | (257 | ) | 1,304 |
| (1,876 | ) | (572 | ) | |
| Net investment hedges(b) | | (1,016 | ) | 1,020 |
| 4 |
| (2,065 | ) | 2,082 |
| 17 |
|
| Economic hedges(c) | | 663 |
| (920 | ) | (257 | ) | 1,304 |
| (1,876 | ) | (572 | ) |
| Total |
| $ | (298 | ) |
| $ | (717 | ) |
| $ | (298 | ) |
| $ | (717 | ) |
| | | |
| 2016 | | |
| Cash flow hedges | $ | 2 |
| $ | (2 | ) | $ | — |
| $ | (43 | ) | $ | 43 |
| $ | — |
| |
| Fair value hedges | (116 | ) | 37 |
| (79 | ) | 2,494 |
| (2,651 | ) | (156 | ) | |
| Net investment hedges(a) | 582 |
| (552 | ) | 30 |
| 580 |
| (513 | ) | 67 |
| |
| Economic hedges(b) | (686 | ) | 380 |
| (306 | ) | (808 | ) | 182 |
| (626 | ) | |
| Total |
| $ | (355 | ) |
| $ | (715 | ) | |
The amounts in the table above generally do not include associated derivative accruals in income or expense.
| |
| (a) | Both derivativesFor cash flow and non-derivatives hedging instruments are included.fair value hedges, the effect on earnings is primarily related to ineffectiveness. For net investment hedges, the effect on earnings is related to ineffectiveness and spot-forward differences. |
| |
| (b) | Both non-derivatives and derivatives hedging instruments are included. The carrying value of non-derivative instruments designated as net investment hedges was $(12,894) million and $(13,213) million at September 30, 2018 and 2017, respectively. Total pre-tax reclassifications from CTA to gain (loss) was $(7) million and $78 million at September 30, 2018 and 2017, respectively. Total pre-tax reclassifications from CTA to gain (loss) included zero and $78 million recorded in discontinued operations at September 30, 2018 and 2017, respectively. |
| |
| (c) | Net effect is substantially offset by the change in fair value of the hedged item that will affect earnings in future periods. |
See NoteChanges in the fair value of cash flow hedges are recorded in a separate component of equity (referred to below as Accumulated Other Comprehensive Income, or AOCI) and are recorded in earnings in the period in which the hedged transaction occurs. The table below summarizes this activity by hedging instrument.
|
| | | | | | | | | | | | | | | | | | | |
| CASH FLOW HEDGE ACTIVITY |
|
| |
|
|
| |
| Gain (loss) recognized in AOCI |
| Gain (loss) reclassified
from AOCI into earnings |
| for the three months ended September 30 |
| for the three months ended September 30 |
| (In millions) | 2018 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2016 |
|
|
|
| |
|
|
|
| |
| Interest rate contracts | $ | (4 | ) | $ | 1 |
| $ | 1 |
|
| $ | (4 | ) | $ | (6 | ) | $ | (12 | ) |
| Currency exchange contracts | (3 | ) | 224 |
| — |
|
| 2 |
| 110 |
| (46 | ) |
| Commodity contracts | — |
| — |
| 1 |
|
| — |
| — |
| — |
|
| Total(a) | $ | (7 | ) | $ | 225 |
| $ | 2 |
|
| $ | (2 | ) | $ | 104 |
| $ | (57 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| CASH FLOW HEDGE ACTIVITY | | | | | | | |
| | Gain (loss) recognized in AOCI | Gain (loss) reclassified
from AOCI into earnings |
| | for the nine months ended September 30 | | for the nine months ended September 30 |
| (In millions) | 2018 |
| 2017 |
| 2016 |
| | 2018 |
| 2017 |
| 2016 |
|
| | | | | | | | |
| Interest rate contracts | $ | (11 | ) | $ | 3 |
| $ | 32 |
| | $ | (10 | ) | $ | (21 | ) | $ | (67 | ) |
| Currency exchange contracts | (16 | ) | 278 |
| (76) | | 1 |
| 189 |
| (59 | ) |
| Commodity contracts | — |
| — |
| 1 |
| | — |
| — |
| (3 | ) |
| Total(a) | $ | (27 | ) | $ | 281 |
| $ | (43 | ) | | $ | (9 | ) | $ | 167 |
| $ | (128 | ) |
| |
| (a) | Gain (loss) is recorded in "GE Capital revenues from services", "Interest and other financial charges", "Sales of goods", "Cost of goods sold" and "Other costs and expenses" in our Statement of Earnings when reclassified. |
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
The total pre-tax amount in AOCI related to cash flow hedges of forecasted transactions was a $75 million gain at September 30, 2018. We expect to transfer $56 million loss to earnings as an expense in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions. In the nine months ended September 30, 2018, 2017 and 2016, we recognized insignificant gains and losses related to hedged forecasted transactions and firm commitments that did not occur by the end of the originally specified period. At September 30, 2018, 2017 and 2016, the maximum term of derivative instruments that hedge forecasted transactions was 14 for additional information aboutyears, 15 years and 16 years, respectively.
For cash flow hedges, the amount of ineffectiveness in the hedging relationship and amount of the changes in shareowners' equityfair value of the derivatives that are not included in the measurement of ineffectiveness were insignificant for each reporting period.
COUNTERPARTY CREDIT RISK
Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our agreements) on an individual counterparty basis. Where we have agreed to netting of derivative exposures with a counterparty, we net our exposures with that counterparty and apply the value of collateral posted to us to determine the exposure. We actively monitor these net exposures against defined limits and take appropriate actions in response, including requiring additional collateral.
As discussed above, we have provisions in certain of our master agreements that require counterparties to post collateral (typically, cash or U.S. Treasury securities) when our receivables due from the counterparties, measured at current market value, exceeds specified limits. The fair value of such collateral was $1,295 million at September 30, 2018, of which $1,152 million was cash and $144 million was in the form of securities held by a custodian for our benefit. Under certain of these same agreements, we post collateral to our counterparties for our derivative obligations, the fair value of cash collateral posted was $338 million at September 30, 2018. At September 30, 2018, our exposures to counterparties (including accrued interest), net of collateral we hold, was $106 million. This excludes exposures related to hedging and amounts released to earnings.embedded derivatives.
See Note 21 forAdditionally, our master agreements typically contain mutual downgrade provisions that provide the ability of each party to require termination if the credit rating of the counterparty were to fall below specified ratings levels agreed upon with the counterparty, primarily BBB/Baa2. Our master agreements also typically contain provisions that provide termination rights upon the occurrence of certain other supplemental information about derivativesevents, such as a bankruptcy or events of default by one of the parties. If an agreement was terminated under any of these circumstances, the termination amount payable would be determined on a net basis and hedging.could also take into account any collateral posted. The net amount of our derivative liability subject to such termination provisions, after consideration of collateral posted by us and outstanding interest payments was $510 million at September 30, 2018. This excludes exposure related to embedded derivatives.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NON-RECURRING FAIR VALUE MEASUREMENTS
The following table represents non-recurring fair value amounts (as measured at the time of the adjustment) for those assets remeasured to fair value on a non-recurring basis during the fiscal year and still held at September 30, 2018 and December 31, 2017.
|
| | | | | | | | | | | | |
| | Remeasured during
the three months ended
September 30, 2018 | Remeasured during
the year ended
December 31, 2017 |
| (In millions) | Level 2 | Level 3 | Level 2 | Level 3 |
| | | | | |
| Financing receivables | $ | — |
| $ | 8 |
| $ | — |
| $ | 1,541 |
|
| Equity securities without readily determinable fair value and equity method investments | 479 |
| 1,212 |
| — |
| 2,076 |
|
| Long-lived assets | — |
| 413 |
| 177 |
| 591 |
|
| Goodwill | $ | — |
| $ | 1,653 |
| $ | — |
| $ | — |
|
| Total | $ | 479 |
| $ | 3,286 |
| $ | 177 |
| $ | 4,208 |
|
The following table represents the fair value adjustments to assets measured at fair value on a non-recurring basis and still held at September 30, 2018 and 2017.
|
| | | | | | | | | | | | | |
| | Three months ended September 30 | Nine months ended September 30 |
| (In millions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Financing receivables | $ | — |
| $ | (1 | ) | | $ | (2 | ) | $ | (1 | ) |
| Equity securities without readily determinable fair value and equity method investments | (240 | ) | (58 | ) | | (441 | ) | (89 | ) |
| Long-lived assets | (865 | ) | (671 | ) | | (975 | ) | (712 | ) |
| Goodwill | (21,973 | ) | $ | (947 | ) | | $ | (21,973 | ) | $ | (947 | ) |
| Total | $ | (23,079 | ) | $ | (1,676 | ) | | $ | (23,391 | ) | $ | (1,748 | ) |
|
| | | | | | |
| LEVEL 3 MEASUREMENTS - SIGNIFICANT UNOBSERVABLE INPUTS | |
| (Dollars in millions) | Fair value | Valuation technique | Unobservable inputs | Range
(weighted-average) |
| | | | | |
| September 30, 2018 | | | | |
| | | | | |
| Non-recurring fair value measurements | | | | |
| Equity securities without readily determinable fair value and equity method investments | $ | 769 |
| Income approach, market comparables | Discount rate(a) | 6.5%-50%(8.9)% |
| | | | | |
| Long-lived assets | 352 |
| Income approach | Discount rate(a) | 2.9%-40%(22.3)% |
| | | | | |
| | | | | |
| December 31, 2017 | | | | |
| | | | | |
| Non-recurring fair value measurements | | | | |
| Financing receivables | $ | 1,532 |
| Income approach | Discount rate(a) | 3.2%-16.5% (10%) |
| | | | | |
| Equity securities without readily determinable fair value and equity method investments | 2,037 |
| Income approach | Discount rate(a) | 5.0%-50.0% (7.7%) |
| | | | | |
| Long-lived assets | 554 |
| Income approach | Discount rate(a) | 2.7%-18.0% (7.3%) |
| |
| (a) | Discount rates are determined based on inputs that market participants would use when pricing investments, including credit and liquidity risk. An increase in the discount rate would result in a decrease in the fair value. |
At September 30, 2018 and December 31, 2017, non-recurring measurements of $409 million and $83 million, respectively, are valued using non-binding broker quotes or other third-party sources. At September 30, 2018 and December 31, 2017, other non-recurring fair value measurements were $103 million and insignificant, respectively. Other Level 3 fair value measurements utilize a number of different unobservable inputs not subject to meaningful aggregation.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 17.18. VARIABLE INTEREST ENTITIES
A VIE is an entity that has one of three characteristics: (1) it is controlled by someone other than its shareowners or partners, (2) its shareowners or partners are not economically exposed to the entity's earnings (for example, they are protected against losses), or (3) it was thinly capitalized when it was formed.
In the normal course of business we become involved with VIEs either because we help create them or we invest in them. Our VIEs either provide goods and services to customers or provide financing to third parties for the purchase of GE goods and services. If we control the VIE, we consolidate it and provide disclosure below. However, if the VIE is a business and use of its assets is not limited to settling its liabilities, ongoing disclosures are not required.
CONSOLIDATED VARIABLE INTEREST ENTITIES
Our most significant consolidated VIEs are fourVIE is a joint ventures used to complete acquisitions. The newest of these,venture, BHGE LLC, which was formed as part of the Baker Hughes transaction. BHGE LLC owns the operating assets of GE Oil & Gas and Baker Hughes. BHGE LLC is a VIE as we hold an economic interest of approximately 62.5% in the partnership, but we hold no voting or participating rights through our direct economic ownership. BHGE LLC is a SEC Registrant with separate filing requirements with the SEC and its separate financial information can be obtained from www.sec.gov.
The remainingPreviously we reported three joint ventures which were formed as part of the Alstom acquisition.acquisition as consolidated VIEs. These joint ventures include grid technology, renewable energy, and global nuclear and French steam power and have combined assets, liabilities and redeemable non-controlling interest as of September 30, 2017 and December 31, 2016 of $16,282 million, $11,414 million and $3,106 million and $14,460 million, $9,922 million and $2,709 million, respectively. These joint ventures arewere considered VIEs because the equity held by Alstom doesdid not participate fully in the earnings of the ventures due to contractual features allowing Alstom to sell their interests back to GE.GE
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
We consolidateconsolidated these joint ventures because we controlcontrolled all their significant activities. These joint ventures arewere in all other repectsrespects regular businesses and arewere therefore exempt from ongoing disclosure requirements for consolidated VIEs provided below. These joint ventures ceased to be VIEs on September 5, 2018 when Alstom exercised their put and are now wholly-owned consolidated voting interest entities
(see Note 15 for further information)
The table below provides information about consolidated VIEs that are subject to ongoing disclosure requirements. Substantially all of these entities were created to help our customers finance the purchase of GE goods and services or to purchase GE customer notes receivable arising from sales of GE goods and services. These entities have no features that could expose us to losses that could significantly exceed the difference between the consolidated assets and liabilities.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | ASSETS AND LIABILITIES OF CONSOLIDATED VIEs | | | | GE Capital | | | GE Capital | |
| (In millions) | GE | Customer Notes receivables(a) | Other | Total | GE | Customer Notes receivables(a) | Trade receivables(b) | Other(c) | Total |
| | | |
| September 30, 2017 | | |
| September 30, 2018 | | |
| Assets | | |
| Financing receivables, net | | $ | — |
| $ | — |
| $ | 1,540 |
| $ | 951 |
| $ | 2,491 |
|
| Current receivables | | 83 |
| 457 |
| — |
| — |
| 540 |
|
| Other assets | | 455 |
| 862 |
| 138 |
| 1,086 |
| 2,540 |
|
| Total | | $ | 538 |
| $ | 1,318 |
| $ | 1,678 |
| $ | 2,037 |
| $ | 5,570 |
|
| | | |
| Liabilities | | |
| Borrowings | | $ | 46 |
| $ | — |
| — |
| $ | 938 |
| $ | 984 |
|
| Non-recourse borrowings | | — |
| 585 |
| 1,037 |
| — |
| 1,622 |
|
| Other liabilities | | 212 |
| 644 |
| 575 |
| 584 |
| 2,015 |
|
| Total | | $ | 257 |
| $ | 1,229 |
| 1,612 |
| $ | 1,522 |
| $ | 4,620 |
|
| | | |
| December 31, 2017 | | |
| Assets | | |
| Financing receivables, net | $ | — |
| $ | — |
| $ | 919 |
| $ | 919 |
| $ | — |
| $ | — |
| — |
| $ | 792 |
| $ | 792 |
|
| Current receivables | 49 |
| 557 |
| — |
| 606 |
| 59 |
| 570 |
| — |
| — |
| 630 |
|
| Investment securities | — |
| — |
| 965 |
| 965 |
| — |
| — |
| — |
| 918 |
| 918 |
|
| Other assets | 541 |
| 1,273 |
| 1,895 |
| 3,709 |
| 586 |
| 1,182 |
| — |
| 1,920 |
| 3,688 |
|
| Total | $ | 590 |
| $ | 1,830 |
| $ | 3,779 |
| $ | 6,199 |
| $ | 646 |
| $ | 1,752 |
| — |
| $ | 3,630 |
| $ | 6,028 |
|
| | | |
| Liabilities | | |
| Borrowings | $ | 71 |
| $ | — |
| $ | 1,078 |
| $ | 1,149 |
| $ | 39 |
| $ | — |
| — |
| $ | 1,027 |
| $ | 1,066 |
|
| Non-recourse borrowings | — |
| 693 |
| 16 |
| 709 |
| — |
| 669 |
| — |
| 16 |
| 685 |
|
| Other liabilities | 411 |
| 1,053 |
| 1,546 |
| 3,010 |
| 345 |
| 1,021 |
| — |
| 1,525 |
| 2,891 |
|
| Total | $ | 482 |
| $ | 1,746 |
| $ | 2,640 |
| $ | 4,868 |
| $ | 384 |
| $ | 1,690 |
| — |
| $ | 2,568 |
| $ | 4,642 |
|
| | | |
| December 31, 2016 | | |
| Assets | | |
| Financing receivables, net | $ | — |
| $ | — |
| $ | 1,035 |
| $ | 1,035 |
| |
| Current receivables | 57 |
| 670 |
| — |
| 727 |
| |
| Investment securities | — |
| — |
| 982 |
| 982 |
| |
| Other assets | 492 |
| 1,122 |
| 1,747 |
| 3,361 |
| |
| Total | $ | 549 |
| $ | 1,792 |
| $ | 3,764 |
| $ | 6,105 |
| |
| | | |
| Liabilities | | |
| Borrowings | $ | 1 |
| $ | — |
| $ | 818 |
| $ | 819 |
| |
| Non-recourse borrowings | — |
| 401 |
| 16 |
| 417 |
| |
| Other liabilities | 457 |
| 1,378 |
| 1,482 |
| 3,317 |
| |
| Total | $ | 458 |
| $ | 1,779 |
| $ | 2,316 |
| $ | 4,553 |
| |
| |
| (a) | Two funding vehicles established to purchase customer notes receivable from GE, one of which is partially funded by third-party debt. |
| |
| (b) | In the third quarter of 2018, a funding vehicle was established to provide alternative funding for trade receivables. |
| |
| (c) | In January 2018, ownership of the equity shares of Electric Insurance Company ("EIC") were distributed to GE Capital by a bankruptcy. trustee. We have previously reported EIC as a VIE because we received a 100% beneficial interest in the assets, liabilities and operations of EIC, related to an interim distribution in 2001. As EIC is now a consolidated voting interest entity we removed EIC from our VIE disclosure. In 2017, $1,470 million of assets and $959 million of liabilities were included related to EIC. |
Total revenues from our consolidated VIEs were $293$141 million and $211$293 million for the three months ended September 30, 2018 and 2017 and 2016, respectively$479 million and $801 million and $881 million infor the nine months ended September 30, 20172018 and 2016,2017, respectively. Related expenses consisted primarily of cost of goods and services of $78$41 million and $112$78 million for the three months ended September 30, 2018 and 2017 and 2016, respectively$174 million and $256 million and $610 million infor the nine months ended September 30, 20172018 and 2016,2017, respectively.
Where we provide servicing for third-party investors, we are contractually permitted to commingle cash collected from customers on financing receivables sold to third-party investors with our own cash prior to payment to third-party investors, provided our short-term credit rating does not fall below A-1/P1.A-2/P2. These third-party investors also owe us amounts for purchased financial assets and scheduled interest and principal payments,payments. At September 30, 20172018 and December 31, 2016,2017, the amounts of commingled cash owed to the third-party investors were $1,216$21 million and $1,117$60 million, respectively, and the amounts owed to us by third-party investors were zero and $5 million, respectively.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
UNCONSOLIDATED VARIABLE INTEREST ENTITIES
We become involved with unconsolidated VIEs primarily through assisting in the formation and financing of the entity. We do not consolidate these entities because we do not have power over decisions that significantly affect their economic performance. Our investments in unconsolidated VIEs, at September 30, 20172018 and December 31, 20162017 were $6,382$4,387 million and $6,346$5,833 million, respectively. Substantially all of these investments are held by Energy Financial Services.Services of which $217 million and zero are assets held for sale as of September 30, 2018 and December 31, 2017, respectively. Obligations to make additional investments in these entities are not significant.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 18.19. COMMITMENTS, GUARANTEES, PRODUCT WARRANTIES AND OTHER LOSS CONTINGENCIES
COMMITMENTSCOUNTERPARTY CREDIT RISK
Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our agreements) on an individual counterparty basis. Where we have agreed to netting of derivative exposures with a counterparty, we net our exposures with that counterparty and apply the value of collateral posted to us to determine the exposure. We actively monitor these net exposures against defined limits and take appropriate actions in response, including requiring additional collateral.
As discussed above, we have provisions in certain of our master agreements that require counterparties to post collateral (typically, cash or U.S. Treasury securities) when our receivables due from the counterparties, measured at current market value, exceeds specified limits. The GE Capital Aviation Services (GECAS) business in GE Capital had placed multiple-year orders for various Boeing, Airbus and other aircraft manufacturers with list prices approximating $38,669 million and secondary orders with airlines for used aircraftfair value of approximately $2,077such collateral was $1,295 million at September 30, 2017. In our Aviation segment, we had committed to provide financing assistance2018, of $1,875which $1,152 million of future customer acquisitions of aircraft equipped with our engines.
GUARANTEES
Our guarantees are providedwas cash and $144 million was in the ordinary courseform of business. We underwritesecurities held by a custodian for our benefit. Under certain of these guarantees considering economic, liquidity and credit risk ofsame agreements, we post collateral to our counterparties for our derivative obligations, the counterparty. We believe that the likelihood is remote that any such arrangements could have a significant adverse effect on our financial position, results of operations or liquidity. We record liabilities for guarantees at estimated fair value generally the amount of the premium received, or if we do not receive a premium, the amount based on appraisal, observed market values or discounted cash flows. Any associated expected recoveries from third parties are recorded as other receivables, not netted against the liabilities.
At September 30, 2017, we were committed under the following guarantee arrangements beyond those provided on behalf of VIEs. See Note 17.
Credit Support. We have provided $1,855 million of credit support on behalf of certain customers or associated companies, predominantly joint ventures and partnerships, using arrangements such as standby letters of credit and performance guarantees. These arrangements enable these customers and associated companies to execute transactions or obtain desired financing arrangements with third parties. Should the customer or associated company fail to perform under the terms of the transaction or financing arrangement, we would be required to perform on their behalf. Under most such arrangements, our guarantee is secured, usually by the asset being purchased or financed, or possibly by certain other assets of the customer or associated company. The length of these credit support arrangements parallels the length of the related financing arrangements or transactions. The liability for such credit supportcollateral posted was $47$338 million at September 30, 2017.2018. At September 30, 2018, our exposures to counterparties (including accrued interest), net of collateral we hold, was $106 million. This excludes exposures related to embedded derivatives.
Indemnification Agreements – Continuing Operations. We haveAdditionally, our master agreements typically contain mutual downgrade provisions that provide the ability of each party to require termination if the credit rating of the counterparty were to fall below specified ratings levels agreed upon with the counterparty, primarily BBB/Baa2. Our master agreements also typically contain provisions that provide termination rights upon the occurrence of certain other events, such as a bankruptcy or events of default by one of the parties. If an agreement was terminated under any of these circumstances, the termination amount payable would be determined on a net basis and could also take into account any collateral posted. The net amount of our derivative liability subject to such termination provisions, after consideration of collateral posted by us to fund up to $190and outstanding interest payments was $510 million at September 30, 2017 under residual value guarantees on a variety of leased equipment. Under most of our residual value guarantees, our commitment is secured by the leased asset. The liability for these indemnification agreements was $7 million at September 30, 2017.
At September 30, 2017, we also had $1,688 million of other indemnification commitments, substantially all of which relate to representations and warranties in sales of businesses or assets. The liability for these indemnification commitments was $277 million at September 30, 2017.
Indemnification Agreements – Discontinued Operations. At September 30, 2017, we provided specific indemnifications to buyers of GE Capital’s assets that amounted to $2,714 million, for which we have recognized related liabilities of $320 million. In addition, in connection with the 2015 public offering and sale of our North American Retail Finance business, Synchrony Financial, GE Capital indemnified Synchrony Financial and its directors, officers, and employees against the liabilities of GECC's businesses other than historical liabilities of the businesses that are part of Synchrony Financial's ongoing operations.
Contingent Consideration. These are agreements to provide additional consideration to a buyer or seller in a business combination if contractually specified conditions2018. This excludes exposure related to the acquisition or disposition are achieved. Amount of contingent consideration was insignificant at September 30, 2017.embedded derivatives.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
PRODUCT WARRANTIES
We provide for estimated product warranty expenses when we sell the related products. Because warranty estimates are forecasts that are based on the best available information – mostly historical claims experience – claims costs may differ from amounts provided. An analysis of changes in the liability for product warranties follows.
|
| | | | | | |
| | Nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
|
| | | |
| Balance at January 1 | $ | 1,920 |
| $ | 1,723 |
|
| Current-year provisions | 615 |
| 539 |
|
| Expenditures | (601 | ) | (539 | ) |
| Other changes(a) | 255 |
| 166 |
|
| Balance as of September 30 | $ | 2,189 |
| $ | 1,889 |
|
(a) Primarily includes effect of currency exchange and acquisitions.
OTHER LOSS CONTINGENCIES
LEGAL MATTERS
WMC. During the fourth quarter of 2007, we completed the sale of WMC, our U.S. mortgage business. WMC substantially discontinued all new loan originations by the second quarter of 2007, and is not a loan servicer. In connection with the sale, WMC retained certain representation and warranty obligations related to loans sold to third parties prior to the disposal of the business and contractual obligations to repurchase previously sold loans that had an early payment default. All claims received by WMC for early payment default have either been resolved or are no longer being pursued.
The remaining active claims have been brought by securitization trustees or administrators seeking recovery from WMC for alleged breaches of representations and warranties on mortgage loans that serve as collateral for residential mortgage-backed securities (RMBS). At September 30, 2017, such claims consisted of $1,019 million of individual claims generally submitted before the filing of a lawsuit (compared to $1,060 million at December 31, 2016) and $5,435 million of additional claims asserted against WMC in litigation without making a prior claim (Litigation Claims) (compared to $5,456 million at December 31, 2016). The total amount of these claims, $6,454 million, reflects the purchase price or unpaid principal balances of the loans at the time of purchase and does not give effect to pay downs or potential recoveries based upon the underlying collateral, which in many cases are substantial, nor to accrued interest or fees. WMC believes that repurchase claims brought based upon representations and warranties made more than six years before WMC was notified of the claim would be disallowed in legal proceedings under applicable law and the June 11, 2015 decision of the New York Court of Appeals in ACE Securities Corp. v. DB Structured Products, Inc., on the statute of limitations period governing such claims. Giving effect to the settlements and subsequent dismissals of lawsuits on five securitizations discussed in Legal Proceedings, active claims at October 26, 2017 consisted of $462 million of individual claims generally submitted before the filing of a lawsuit and $3,198 million of Litigation Claims, as defined above.
Reserves related to repurchase claims made against WMC were $647 million at September 30, 2017, reflecting a net increase to reserves in the nine months ended September 30, 2017 of $21 million. The reserve estimate takes into account recent settlement activity and is based upon WMC’s evaluation of the remaining exposures as a percentage of estimated lifetime mortgage loan losses within the pool of loans supporting each securitization for which timely claims have been asserted in litigation against WMC. Settlements in prior periods reduced WMC’s exposure on claims asserted in certain securitizations and the claim amounts reported above give effect to these settlements.
|
| | | | | | | | | | | | | | | |
| ROLLFORWARD OF THE RESERVE | | | | | | | |
| | | | | | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2017 |
| | 2016 |
| | 2017 |
| | 2016 |
|
| | | | | | | | |
| Balance, beginning of period | $ | 636 |
| | $ | 860 |
| | $ | 626 |
| | $ | 875 |
|
| Provision | 11 |
| | — |
| | 21 |
| | 84 |
|
| Claim resolutions / rescissions | — |
| | (195 | ) | | — |
| | (294 | ) |
| Balance, end of period | $ | 647 |
| | $ | 665 |
| | $ | 647 |
| | $ | 665 |
|
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Given the significant litigation activity and WMC’s continuing efforts to resolve the lawsuits involving claims made against WMC, it is difficult to assess whether future losses will be consistent with WMC’s past experience. Adverse changes to WMC’s assumptions supporting the reserve may result in an increase to these reserves. WMC estimates a range of reasonably possible loss from $0 to approximately $500 million over its recorded reserve at September 30, 2017. This estimate involves significant judgment and may not reflect the range of uncertainties and unpredictable outcomes inherent in litigation, including the matters discussed in Legal Proceedings and potential changes in WMC’s legal strategy. This estimate excludes any possible loss associated with an adverse court decision on the applicable statute of limitations or an adverse outcome in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) investigation discussed in Legal Proceedings, as WMC is unable at this time to develop such a meaningful estimate. With respect to the FIRREA investigation, this inability to develop a meaningful estimate of the range of reasonably possible loss reflects, among other factors, the range of penalties and other sanctions incurred by various financial institutions in proceedings and settlements involving claims made under FIRREA by the U.S. Department of Justice.
At September 30, 2017, there were 10 lawsuits involving claims made against WMC arising from alleged breaches of representations and warranties on mortgage loans included in 11 securitizations. The adverse parties in these cases are securitization trustees or parties claiming to act on their behalf. As discussed in Legal Proceedings, five of these lawsuits have been dismissed following the conclusion of settlement agreements, and one of the lawsuits is subject of a settlement agreement approved by a Minnesota state court. One of the lawsuits involves claims made on two securitizations, and these claims are the subject of settlement agreements to which objections have been filed in California state court. Two of the three remaining lawsuits have been stayed pending the outcome of ongoing settlement negotiations. The sole remaining active lawsuit against WMC is the TMI case, discussed in Legal Proceedings, which was recently scheduled for trial on January 16, 2018. Settlement discussions to date have been unsuccessful, and if this case proceeds to trial and WMC is found liable, it is likely damages would be in an amount exceeding the total value of WMC’s assets.
Although the alleged claims for relief vary from case to case, the complaints and counterclaims in these actions generally assert claims for breach of contract, indemnification, and/or declaratory judgment, and seek specific performance (repurchase of defective mortgage loan) and/or money damages. Adverse court decisions, including in cases not involving WMC, could result in new claims and lawsuits on additional loans. However, WMC continues to believe that it has defenses to the claims asserted in litigation, including, for example, based on causation and materiality requirements and applicable statutes of limitations. It is not possible to predict the outcome or impact of these defenses and other factors, any of which could materially affect the amount of any loss ultimately incurred by WMC on these claims.
WMC has also received indemnification demands, nearly all of which are unspecified, from depositors/underwriters/sponsors of RMBS or securitization trustees in connection with actual or potential claims concerning alleged misrepresentations in the securitization offering documents to which WMC is not a party, mortgage loan repurchase claims made against RMBS sponsors or other claims involving alleged defects in loans sold by WMC. WMC believes that it has defenses to these demands.
To the extent WMC is required to repurchase loans, WMC’s loss also would be affected by several factors, including pay downs, accrued interest and fees, and the value of the underlying collateral. The reserve and estimate of possible loss reflect judgment, based on currently available information, and a number of assumptions, including economic conditions, claim and settlement activity, pending and threatened litigation, court decisions regarding WMC’s legal defenses, indemnification demands, government activity, and other variables in the mortgage industry. Actual losses arising from claims against WMC could exceed these amounts and additional claims and lawsuits could result if actual claim rates, governmental actions, litigation and indemnification activity, adverse court decisions, actual settlement rates or losses WMC incurs on repurchased loans differ from its assumptions.
Alstom legacy matters. On November 2, 2015, we acquired the Thermal, Renewables and Grid businesses from Alstom. Prior to the acquisition, the seller was the subject of two significant cases involving anti-competitive activities and improper payments: (1) in January 2007, Alstom was fined €65 million by the European Commission for participating in a gas insulated switchgear cartel that operated from 1988 to 2004 (that fine was later reduced to €59 million), and (2) in December 2014, Alstom pled guilty in the United States to multiple violations of the Foreign Corrupt Practices Act and paid a criminal penalty of $772 million. As part of GE’s accounting for the acquisition, we established a reserve amounting to $858 million for legal and compliance matters related to the legacy business practices that were the subject of these and related cases in various jurisdictions.
Regardless of jurisdiction, the allegations relate to claimed anti-competitive conduct or improper payments in the pre-acquisition period as the source of legal violations and/or damages. Given the significant litigation and compliance activity related to these matters and our ongoing efforts to resolve them, it is difficult to assess whether the disbursements will ultimately be consistent with the reserve established. The estimation of this reserve involved significant judgment and may not reflect the full range of uncertainties and unpredictable outcomes inherent in litigation and investigations of this nature. Damages sought may include disgorgement of profits on the underlying business transactions, fines and/or penalties, interest, or other forms of resolution. Factors that can affect the ultimate amount of losses associated with these matters include the way cooperation is assessed and valued, prosecutorial discretion in the determination of damages, formulas for determining fines and penalties, the duration and amount of legal and investigative resources applied, and political and social influences within each jurisdiction, among other considerations. Actual losses arising from claims in these matters could exceed the amount provided. At this time, we are unable to develop a meaningful estimate of the range of reasonably possible additional losses for this exposure.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
ENVIRONMENTAL MATTERS
Our operations, like operations of other companies engaged in similar businesses, involve the use, disposal and cleanup of substances regulated under environmental protection laws. We are involved in numerous remediation actions to clean up hazardous wastes as required by federal and state laws. Liabilities for remediation costs exclude possible insurance recoveries and, when dates and amounts of such costs are not known, are not discounted. When there appears to be a range of possible costs with equal likelihood, liabilities are based on the low end of such range. It is reasonably possible that our environmental remediation exposure will exceed amounts accrued. However, due to uncertainties about the status of laws, regulations, technology and information related to individual sites, such amounts are not reasonably estimable. For further information, see our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
NOTE 19. INTERCOMPANY TRANSACTIONS
Transactions between related companies are made on an arms-length basis and are reported in the respective GE and GE Capital columns of our financial statements, but are eliminated in deriving our consolidated financial statements. These transactions include, but are not limited to, the following:
GE Capital dividends to GE,
GE Capital working capital solutions to optimize GE cash management,
GE Capital enabled GE industrial orders, including related GE guarantees to GE Capital, and
Aircraft engines, power equipment, renewable energy equipment and healthcare equipment manufactured by GE that are installed on GE Capital investments, including leased equipment.
In addition to the above transactions that primarily enable growth for the GE businesses, there are routine related party transactions, which include, but are not limited to, the following:
Expenses related to parent-subsidiary pension plans,
Buildings and equipment leased between GE and GE Capital, including sale-leaseback transactions,
Information technology (IT) and other services sold to GE Capital by GE
Settlements of tax liabilities, and
Various investments, loans and allocations of GE corporate overhead costs.
Presented below is a walk of intercompany eliminations from the combined GE and GE Capital totals to the consolidated cash flows from continuing operations.
|
| | | | | | |
| | Nine months ended September 30, 2017 |
| (In millions) | 2017 |
| 2016 |
|
| | | |
| Cash from (used for) operating activities-continuing operations | | |
| Combined | $ | 6,103 |
| $ | 20,245 |
|
| GE current receivables sold to GE Capital | 1,402 |
| 675 |
|
| GE Capital dividends to GE | (4,016 | ) | (16,050 | ) |
| Other reclassifications and eliminations(a) | 519 |
| (1,024 | ) |
| Total cash from (used for) operating activities-continuing operations | $ | 4,008 |
| $ | 3,846 |
|
| Cash from (used for) investing activities-continuing operations | | |
| Combined | $ | 752 |
| $ | 47,548 |
|
| GE current receivables sold to GE Capital | (1,653 | ) | (622 | ) |
| GE debt effected through GE Capital | 5,942 |
| 5,002 |
|
| Other reclassifications and eliminations(a) | (349 | ) | 1,631 |
|
| Total cash from (used for) investing activities-continuing operations | $ | 4,692 |
| $ | 53,559 |
|
| Cash from (used for) financing activities-continuing operations | | |
| Combined | $ | (16,383 | ) | $ | (85,578 | ) |
| GE current receivables sold to GE Capital | 251 |
| (54 | ) |
| GE Capital dividends to GE | 4,016 |
| 16,050 |
|
| GE debt effected through GE Capital | (5,942 | ) | (5,002 | ) |
| Other reclassifications and eliminations(a) | (170 | ) | (604 | ) |
| Total cash from (used for) financing activities-continuing operations | $ | (18,228 | ) | $ | (75,188 | ) |
| |
(a) | Includes eliminations of other cash flows activities including those related to GE Capital enabled GE industrial orders, various investments, loans and allocations of GE corporate overhead costs. |
104 20172018 3Q FORM 10-Q
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 20. GUARANTOR FINANCIAL INFORMATIONNON-RECURRING FAIR VALUE MEASUREMENTS
GUARANTOR AND NON-GUARANTOR CONDENSED CONSOLIDATING FINANCIAL INFORMATION
On October 26, 2015, GE Capital International Funding Company Unlimited Company, formerly GE Capital International Funding Company (the Issuer), then a finance subsidiary of General Electric Capital Corporation, settled its previously announced private offers to exchange (the Exchange Offers)The following table represents non-recurring fair value amounts (as measured at the Issuer’s new senior unsecured notes for certain outstanding debt securities of General Electric Capital Corporation.
The new notes that were issued were fully and unconditionally, jointly and severally guaranteed by both the Company and GE Capital International Holdings Limited (GECIHL) (each a Guarantor, and together, the Guarantors).
Under the terms of a registration rights agreement entered into in connection with the Exchange Offers, the Issuer and the Company agreed to file a registration statement with the U.S. Securities and Exchange Commission (SEC) for an offer to exchange new senior notestime of the Issuer registered withadjustment) for those assets remeasured to fair value on a non-recurring basis during the SECfiscal year and guaranteed by the Guarantors for certain of the Issuer’s outstanding unregistered senior notes. This exchange was completed in July 2016.
PRESENTATION
In connection with the registration of the senior notes, the Company is required to provide certain financial information regarding the Issuer and the Guarantors of the registered securities. Included are the Condensed Consolidating Statements of Earnings and Comprehensive Income for the three months endedstill held at September 30, 2017 and 2016 and nine months ended September 30, 2017 and 2016, Condensed Consolidating Statements of Financial Position as of September 30, 20172018 and December 31, 20162017.
|
| | | | | | | | | | | | |
| | Remeasured during
the three months ended
September 30, 2018 | Remeasured during
the year ended
December 31, 2017 |
| (In millions) | Level 2 | Level 3 | Level 2 | Level 3 |
| | | | | |
| Financing receivables | $ | — |
| $ | 8 |
| $ | — |
| $ | 1,541 |
|
| Equity securities without readily determinable fair value and equity method investments | 479 |
| 1,212 |
| — |
| 2,076 |
|
| Long-lived assets | — |
| 413 |
| 177 |
| 591 |
|
| Goodwill | $ | — |
| $ | 1,653 |
| $ | — |
| $ | — |
|
| Total | $ | 479 |
| $ | 3,286 |
| $ | 177 |
| $ | 4,208 |
|
The following table represents the fair value adjustments to assets measured at fair value on a non-recurring basis and Condensed Consolidating Statements of Cash Flows for the nine months endedstill held at September 30, 2018 and 2017.
|
| | | | | | | | | | | | | |
| | Three months ended September 30 | Nine months ended September 30 |
| (In millions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Financing receivables | $ | — |
| $ | (1 | ) | | $ | (2 | ) | $ | (1 | ) |
| Equity securities without readily determinable fair value and equity method investments | (240 | ) | (58 | ) | | (441 | ) | (89 | ) |
| Long-lived assets | (865 | ) | (671 | ) | | (975 | ) | (712 | ) |
| Goodwill | (21,973 | ) | $ | (947 | ) | | $ | (21,973 | ) | $ | (947 | ) |
| Total | $ | (23,079 | ) | $ | (1,676 | ) | | $ | (23,391 | ) | $ | (1,748 | ) |
|
| | | | | | |
| LEVEL 3 MEASUREMENTS - SIGNIFICANT UNOBSERVABLE INPUTS | |
| (Dollars in millions) | Fair value | Valuation technique | Unobservable inputs | Range
(weighted-average) |
| | | | | |
| September 30, 2018 | | | | |
| | | | | |
| Non-recurring fair value measurements | | | | |
| Equity securities without readily determinable fair value and equity method investments | $ | 769 |
| Income approach, market comparables | Discount rate(a) | 6.5%-50%(8.9)% |
| | | | | |
| Long-lived assets | 352 |
| Income approach | Discount rate(a) | 2.9%-40%(22.3)% |
| | | | | |
| | | | | |
| December 31, 2017 | | | | |
| | | | | |
| Non-recurring fair value measurements | | | | |
| Financing receivables | $ | 1,532 |
| Income approach | Discount rate(a) | 3.2%-16.5% (10%) |
| | | | | |
| Equity securities without readily determinable fair value and equity method investments | 2,037 |
| Income approach | Discount rate(a) | 5.0%-50.0% (7.7%) |
| | | | | |
| Long-lived assets | 554 |
| Income approach | Discount rate(a) | 2.7%-18.0% (7.3%) |
| |
| (a) | Discount rates are determined based on inputs that market participants would use when pricing investments, including credit and liquidity risk. An increase in the discount rate would result in a decrease in the fair value. |
At September 30, 2018 and December 31, 2017, non-recurring measurements of $409 millionand 2016 for:$83 million, respectively, are valued using non-binding broker quotes or other third-party sources. At September 30, 2018 and December 31, 2017, other non-recurring fair value measurements were $103 million and insignificant, respectively. Other Level 3 fair value measurements utilize a number of different unobservable inputs not subject to meaningful aggregation.
General Electric Company (the Parent Company Guarantor) - prepared with investments in subsidiaries accounted for under the equity method of accounting and excluding any inter-segment eliminations;
GE Capital International Funding Company Unlimited Company (the Subsidiary Issuer) – finance subsidiary for debt;
GE Capital International Holdings Limited (GECIHL)(the Subsidiary Guarantor)- prepared with investments in non-guarantor subsidiaries accounted for under the equity method of accounting;
Non-Guarantor Subsidiaries- prepared on an aggregated basis excluding any elimination or consolidation adjustments and includes predominantly all non-cash adjustments for cash flows;
Consolidating Adjustments - adjusting entries necessary to consolidate the Parent Company Guarantor with the Subsidiary Issuer, the Subsidiary Guarantor and Non-Guarantor Subsidiaries; and
Consolidated - prepared on a consolidated basis.
20172018 3Q FORM 10-Q 105101
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS) |
| FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED) |
| |
| (in millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Revenues and other income | | | | | | |
| Sales of goods and services | $ | 8,025 |
| $ | — |
| $ | — |
| $ | 40,741 |
| $ | (19,338 | ) | $ | 29,428 |
|
| Other income (loss) | (1,152 | ) | — |
| — |
| 25,159 |
| (21,861 | ) | 2,146 |
|
| Equity in earnings (loss) of affiliates | 5,672 |
| — |
| 1,019 |
| 21,123 |
| (27,813 | ) | — |
|
| GE Capital revenues from services | — |
| 176 |
| 209 |
| 2,785 |
| (1,272 | ) | 1,898 |
|
| Total revenues and other income (loss) | 12,545 |
| 176 |
| 1,228 |
| 89,808 |
| (70,284 | ) | 33,472 |
|
| | | | | | | |
| Costs and expenses | | | | | | |
| Interest and other financial charges | 1,671 |
| 168 |
| 542 |
| 1,279 |
| (2,428 | ) | 1,232 |
|
| Other costs and expenses | 9,382 |
| — |
| — |
| 40,253 |
| (18,861 | ) | 30,774 |
|
| Total costs and expenses | 11,053 |
| 168 |
| 542 |
| 41,533 |
| (21,290 | ) | 32,006 |
|
| Earnings (loss) from continuing operations before income taxes | 1,491 |
| 7 |
| 686 |
| 48,275 |
| (48,994 | ) | 1,466 |
|
| Benefit (provision) for income taxes | 457 |
| (1 | ) | — |
| (59 | ) | (63 | ) | 334 |
|
| Earnings (loss) from continuing operations | 1,948 |
| 6 |
| 686 |
| 48,216 |
| (49,058 | ) | 1,800 |
|
| Earnings (loss) from discontinued operations, net of taxes | (113 | ) | — |
| (562 | ) | 4 |
| 565 |
| (106 | ) |
| Net earnings (loss) | 1,836 |
| 6 |
| 125 |
| 48,220 |
| (48,493 | ) | 1,694 |
|
| Less net earnings (loss) attributable to noncontrolling interests | — |
| — |
| — |
| (21 | ) | (121 | ) | (142 | ) |
| Net earnings (loss) attributable to the Company | 1,836 |
| 6 |
| 125 |
| 48,241 |
| (48,372 | ) | 1,836 |
|
| Other comprehensive income (loss) | 931 |
| — |
| (187 | ) | 19,935 |
| (19,749 | ) | 931 |
|
| Comprehensive income (loss) attributable to the Company | $ | 2,766 |
| $ | 6 |
| $ | (62 | ) | $ | 68,176 |
| $ | (68,121 | ) | $ | 2,766 |
|
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS) |
| FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED) |
| |
| (in millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Revenues and other income | | | | | | |
| Sales of goods and services | $ | 8,194 |
| $ | — |
| $ | — |
| $ | 36,082 |
| $ | (17,462 | ) | $ | 26,814 |
|
| Other income (loss) | 883 |
| — |
| — |
| 35,578 |
| (36,234 | ) | 227 |
|
| Equity in earnings (loss) of affiliates | 1,788 |
| — |
| 428 |
| 29,804 |
| (32,019 | ) | — |
|
| GE Capital revenues from services | — |
| 166 |
| 243 |
| 2,838 |
| (1,023 | ) | 2,224 |
|
| Total revenues and other income (loss) | 10,865 |
| 166 |
| 671 |
| 104,302 |
| (86,738 | ) | 29,266 |
|
| | | | | | | |
| Costs and expenses | | | | | | |
| Interest and other financial charges | 1,166 |
| 138 |
| 525 |
| 856 |
| (1,724 | ) | 961 |
|
| Other costs and expenses | 8,498 |
| — |
| 16 |
| 36,101 |
| (18,385 | ) | 26,230 |
|
| Total costs and expenses | 9,664 |
| 138 |
| 541 |
| 36,957 |
| (20,109 | ) | 27,191 |
|
| Earnings (loss) from continuing operations before income taxes | 1,201 |
| 28 |
| 130 |
| 67,345 |
| (66,630 | ) | 2,074 |
|
| Benefit (provision) for income taxes | 932 |
| (3 | ) | (11 | ) | (951 | ) | 16 |
| (18 | ) |
| Earnings (loss) from continuing operations | 2,132 |
| 24 |
| 119 |
| 66,395 |
| (66,614 | ) | 2,056 |
|
| Earnings (loss) from discontinued operations, net of taxes | (105 | ) | — |
| (552 | ) | 224 |
| 328 |
| (105 | ) |
| Net earnings (loss) | 2,027 |
| 24 |
| (433 | ) | 66,619 |
| (66,286 | ) | 1,951 |
|
| Less net earnings (loss) attributable to noncontrolling interests | — |
| — |
| — |
| (51 | ) | (25 | ) | (76 | ) |
| Net earnings (loss) attributable to the Company | 2,027 |
| 24 |
| (433 | ) | 66,670 |
| (66,262 | ) | 2,027 |
|
| Other comprehensive income (loss) | 477 |
| — |
| 51 |
| (711 | ) | 661 |
| 477 |
|
| Comprehensive income (loss) attributable to the Company | $ | 2,504 |
| $ | 24 |
| $ | (382 | ) | $ | 65,959 |
| $ | (65,601 | ) | $ | 2,504 |
|
A VIE is an entity that has one of three characteristics: (1) it is controlled by someone other than its shareowners or partners, (2) its shareowners or partners are not economically exposed to the entity's earnings (for example, they are protected against losses), or (3) it was thinly capitalized when it was formed.
In the normal course of business we become involved with VIEs either because we help create them or we invest in them. Our VIEs either provide goods and services to customers or provide financing to third parties for the purchase of GE goods and services. If we control the VIE, we consolidate it and provide disclosure below. However, if the VIE is a business and use of its assets is not limited to settling its liabilities, ongoing disclosures are not required.
CONSOLIDATED VARIABLE INTEREST ENTITIES
Our most significant consolidated VIE is a joint venture, BHGE LLC, which was formed as part of the Baker Hughes transaction. BHGE LLC owns the operating assets of GE Oil & Gas and Baker Hughes. BHGE LLC is a VIE as we hold an economic interest of approximately 62.5% in the partnership, but we hold no voting or participating rights through our direct economic ownership. BHGE LLC is a SEC Registrant with separate filing requirements with the SEC and its separate financial information can be obtained from www.sec.gov.
Previously we reported three joint ventures which were formed as part of the Alstom acquisition as consolidated VIEs. These joint ventures were considered VIEs because equity held by Alstom did not participate fully in the earnings of the ventures due to contractual features allowing Alstom to sell their interests back to GE . We consolidated these joint ventures because we controlled all their significant activities. These joint ventures were in all other respects regular businesses and were therefore exempt from ongoing disclosure requirements for consolidated VIEs provided below. These joint ventures ceased to be VIEs on September 5, 2018 when Alstom exercised their put and are now wholly-owned consolidated voting interest entities (see Note 15 for further information)
The table below provides information about consolidated VIEs that are subject to ongoing disclosure requirements. Substantially all of these entities were created to help our customers finance the purchase of GE goods and services or to purchase GE customer notes receivable arising from sales of GE goods and services. These entities have no features that could expose us to losses that could significantly exceed the difference between the consolidated assets and liabilities.
106102 20172018 3Q FORM 10-Q
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS) |
| FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED) |
| |
| (in millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Revenues and other income | | | | | | |
| Sales of goods and services | $ | 24,897 |
| $ | — |
| $ | — |
| $ | 114,446 |
| $ | (57,448 | ) | $ | 81,895 |
|
| Other income (loss) | (1,041 | ) | — |
| — |
| 57,784 |
| (54,132 | ) | 2,611 |
|
| Equity in earnings (loss) of affiliates | 10,444 |
| — |
| 1,711 |
| 71,787 |
| (83,942 | ) | — |
|
| GE Capital revenues from services | — |
| 505 |
| 583 |
| 7,644 |
| (2,548 | ) | 6,184 |
|
| Total revenues and other income (loss) | 34,301 |
| 505 |
| 2,294 |
| 251,661 |
| (198,070 | ) | 90,691 |
|
| | | | | | | |
| Costs and expenses | | | | | | |
| Interest and other financial charges | 3,348 |
| 477 |
| 1,485 |
| 3,582 |
| (5,348 | ) | 3,545 |
|
| Other costs and expenses | 27,567 |
| — |
| 22 |
| 113,764 |
| (58,020 | ) | 83,334 |
|
| Total costs and expenses | 30,916 |
| 478 |
| 1,507 |
| 117,346 |
| (63,368 | ) | 86,879 |
|
| Earnings (loss) from continuing operations before income taxes | 3,385 |
| 27 |
| 787 |
| 134,315 |
| (134,702 | ) | 3,812 |
|
| Benefit (provision) for income taxes | 971 |
| (3 | ) | 115 |
| (758 | ) | (22 | ) | 303 |
|
| Earnings (loss) from continuing operations | 4,356 |
| 24 |
| 902 |
| 133,557 |
| (134,724 | ) | 4,115 |
|
| Earnings (loss) from discontinued operations, net of taxes | (501 | ) | — |
| (284 | ) | 7 |
| 287 |
| (490 | ) |
| Net earnings (loss) | 3,856 |
| 24 |
| 618 |
| 133,564 |
| (134,437 | ) | 3,624 |
|
| Less net earnings (loss) attributable to noncontrolling interests | — |
| — |
| — |
| (53 | ) | (178 | ) | (231 | ) |
| Net earnings (loss) attributable to the Company | 3,856 |
| 24 |
| 618 |
| 133,617 |
| (134,259 | ) | 3,856 |
|
| Other comprehensive income (loss) | 4,075 |
| — |
| 463 |
| (7,059 | ) | 6,596 |
| 4,075 |
|
| Comprehensive income (loss) attributable to the Company | $ | 7,931 |
| $ | 24 |
| $ | 1,081 |
| $ | 126,559 |
| $ | (127,663 | ) | $ | 7,931 |
|
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS) |
| FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED) |
| |
| (in millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Revenues and other income | | | | | | |
| Sales of goods and services | $ | 28,870 |
| $ | — |
| $ | — |
| $ | 108,043 |
| $ | (56,757 | ) | $ | 80,156 |
|
| Other income (loss) | 845 |
| — |
| — |
| 55,062 |
| (52,522 | ) | 3,385 |
|
| Equity in earnings (loss) of affiliates | 7,923 |
| — |
| 1,093 |
| 58,732 |
| (67,747 | ) | — |
|
| GE Capital revenues from services | — |
| 762 |
| 1,262 |
| 9,182 |
| (4,144 | ) | 7,063 |
|
| Total revenues and other income (loss) | 37,638 |
| 762 |
| 2,355 |
| 231,019 |
| (181,170 | ) | 90,604 |
|
| | | | | | | |
| Costs and expenses | | | | | | |
| Interest and other financial charges | 2,828 |
| 685 |
| 2,133 |
| 4,027 |
| (5,651 | ) | 4,023 |
|
| Other costs and expenses | 30,555 |
| — |
| 71 |
| 110,725 |
| (60,906 | ) | 80,445 |
|
| Total costs and expenses | 33,383 |
| 686 |
| 2,204 |
| 114,752 |
| (66,558 | ) | 84,467 |
|
| Earnings (loss) from continuing operations before income taxes | 4,255 |
| 76 |
| 150 |
| 116,267 |
| (114,612 | ) | 6,137 |
|
| Benefit (provision) for income taxes | 1,862 |
| (10 | ) | (58 | ) | (1,908 | ) | (189 | ) | (302 | ) |
| Earnings (loss) from continuing operations | 6,118 |
| 67 |
| 93 |
| 114,359 |
| (114,801 | ) | 5,835 |
|
| Earnings (loss) from discontinued operations, net of taxes | (954 | ) | — |
| (1,547 | ) | 398 |
| 1,149 |
| (954 | ) |
| Net earnings (loss) | 5,164 |
| 67 |
| (1,455 | ) | 114,757 |
| (113,652 | ) | 4,881 |
|
| Less net earnings (loss) attributable to noncontrolling interests | — |
| — |
| — |
| (143 | ) | (140 | ) | (283 | ) |
| Net earnings (loss) attributable to the Company | 5,164 |
| 67 |
| (1,455 | ) | 114,900 |
| (113,512 | ) | 5,164 |
|
| Other comprehensive income (loss) | 2,107 |
| (12 | ) | 114 |
| 136 |
| (238 | ) | 2,107 |
|
| Comprehensive income (loss) attributable to the Company | $ | 7,271 |
| $ | 55 |
| $ | (1,341 | ) | $ | 115,036 |
| $ | (113,750 | ) | $ | 7,271 |
|
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION |
| SEPTEMBER 30, 2017 (UNAUDITED) |
| |
| (In millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Assets | | | | | | |
| Cash and equivalents | $ | 737 |
| $ | — |
| $ | 3 |
| $ | 39,623 |
| $ | (509 | ) | $ | 39,854 |
|
| Investment securities | 1 |
| — |
| — |
| 40,298 |
| (1,603 | ) | 38,696 |
|
| Receivables - net | 51,669 |
| 17,452 |
| 31,245 |
| 87,077 |
| (144,082 | ) | 43,362 |
|
| Inventories | 5,264 |
| — |
| — |
| 24,695 |
| (4,112 | ) | 25,848 |
|
| Property, plant and equipment - net | 5,645 |
| — |
| — |
| 49,754 |
| (1,299 | ) | 54,101 |
|
| Investment in subsidiaries(a) | 297,324 |
| — |
| 80,506 |
| 695,869 |
| (1,073,699 | ) | — |
|
| Goodwill and intangible assets | 6,812 |
| — |
| — |
| 84,760 |
| 16,932 |
| 108,503 |
|
| All other assets | 27,636 |
| 44 |
| 387 |
| 214,163 |
| (181,348 | ) | 60,882 |
|
| Assets of discontinued operations | — |
| — |
| — |
| — |
| 6,791 |
| 6,791 |
|
| Total assets | $ | 395,089 |
| $ | 17,497 |
| $ | 112,142 |
| $ | 1,236,239 |
| $ | (1,382,929 | ) | $ | 378,038 |
|
| | | | | | | |
| Liabilities and equity | | | | | | |
| Short-term borrowings | $ | 183,427 |
| $ | — |
| $ | 46,537 |
| $ | 23,793 |
| $ | (225,630 | ) | $ | 28,127 |
|
| Accounts payable | 9,672 |
| — |
| — |
| 66,041 |
| (60,807 | ) | 14,907 |
|
| Other current liabilities | 11,479 |
| 33 |
| 3 |
| 24,418 |
| 550 |
| 36,483 |
|
| Long-term and non-recourse borrowings | 72,193 |
| 16,724 |
| 34,810 |
| 53,517 |
| (68,979 | ) | 108,265 |
|
| All other liabilities | 42,212 |
| 544 |
| 137 |
| 55,881 |
| (7,003 | ) | 91,772 |
|
| Liabilities of discontinued operations | — |
| — |
| — |
| — |
| 990 |
| 990 |
|
| Total Liabilities | 318,984 |
| 17,302 |
| 81,488 |
| 223,650 |
| (360,879 | ) | 280,544 |
|
| | | | | | | |
| Redeemable noncontrolling interests | — |
| — |
| — |
| 2,713 |
| 727 |
| 3,441 |
|
| | | | | | | |
| GE shareowners' equity | 76,105 |
| 195 |
| 30,654 |
| 1,008,330 |
| (1,039,179 | ) | 76,105 |
|
| Noncontrolling interests | — |
| — |
| — |
| 1,545 |
| 16,402 |
| 17,947 |
|
| Total equity | 76,105 |
| 195 |
| 30,654 |
| 1,009,876 |
| (1,022,777 | ) | 94,052 |
|
| Total liabilities, redeemable noncontrolling interests and equity | $ | 395,089 |
| $ | 17,497 |
| $ | 112,142 |
| $ | 1,236,239 |
| $ | (1,382,929 | ) | $ | 378,038 |
|
|
| | | | | | | | | | | | | | | |
| ASSETS AND LIABILITIES OF CONSOLIDATED VIEs |
| | | GE Capital | |
| (In millions) | GE | Customer Notes receivables(a) | Trade receivables(b) | Other(c) | Total |
| | | | | | |
| September 30, 2018 | | | | | |
| Assets | | | | | |
| Financing receivables, net | $ | — |
| $ | — |
| $ | 1,540 |
| $ | 951 |
| $ | 2,491 |
|
| Current receivables | 83 |
| 457 |
| — |
| — |
| 540 |
|
| Other assets | 455 |
| 862 |
| 138 |
| 1,086 |
| 2,540 |
|
| Total | $ | 538 |
| $ | 1,318 |
| $ | 1,678 |
| $ | 2,037 |
| $ | 5,570 |
|
| | | | | | |
| Liabilities | | | | | |
| Borrowings | $ | 46 |
| $ | — |
| — |
| $ | 938 |
| $ | 984 |
|
| Non-recourse borrowings | — |
| 585 |
| 1,037 |
| — |
| 1,622 |
|
| Other liabilities | 212 |
| 644 |
| 575 |
| 584 |
| 2,015 |
|
| Total | $ | 257 |
| $ | 1,229 |
| 1,612 |
| $ | 1,522 |
| $ | 4,620 |
|
| | | | | | |
| December 31, 2017 | | | | | |
| Assets | | | | | |
| Financing receivables, net | $ | — |
| $ | — |
| — |
| $ | 792 |
| $ | 792 |
|
| Current receivables | 59 |
| 570 |
| — |
| — |
| 630 |
|
| Investment securities | — |
| — |
| — |
| 918 |
| 918 |
|
| Other assets | 586 |
| 1,182 |
| — |
| 1,920 |
| 3,688 |
|
| Total | $ | 646 |
| $ | 1,752 |
| — |
| $ | 3,630 |
| $ | 6,028 |
|
| | | | | | |
| Liabilities | | | | | |
| Borrowings | $ | 39 |
| $ | — |
| — |
| $ | 1,027 |
| $ | 1,066 |
|
| Non-recourse borrowings | — |
| 669 |
| — |
| 16 |
| 685 |
|
| Other liabilities | 345 |
| 1,021 |
| — |
| 1,525 |
| 2,891 |
|
| Total | $ | 384 |
| $ | 1,690 |
| — |
| $ | 2,568 |
| $ | 4,642 |
|
| |
| (a) | Included within the subsidiariesTwo funding vehicles established to purchase customer notes receivable from GE, one of the Subsidiary Guarantor are cash and cash equivalent balances of $19,301 million and net assets of discontinued operations of $3,776 million.which is partially funded by third-party debt. |
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION |
| DECEMBER 31, 2016 |
| |
| (In millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Assets | | | | | | |
| Cash and equivalents | $ | 2,558 |
| $ | — |
| $ | 3 |
| $ | 46,994 |
| $ | (1,426 | ) | $ | 48,129 |
|
| Investment securities | 1 |
| — |
| — |
| 47,394 |
| (3,082 | ) | 44,313 |
|
| Receivables - net | 63,620 |
| 17,157 |
| 30,470 |
| 79,401 |
| (148,385 | ) | 42,263 |
|
| Inventories | 4,654 |
| — |
| — |
| 21,076 |
| (3,377 | ) | 22,354 |
|
| Property, plant and equipment - net | 5,768 |
| — |
| — |
| 46,366 |
| (1,615 | ) | 50,518 |
|
| Investment in subsidiaries(a) | 272,685 |
| — |
| 80,481 |
| 492,674 |
| (845,840 | ) | — |
|
| Goodwill and intangible assets | 8,128 |
| — |
| — |
| 42,074 |
| 36,673 |
| 86,875 |
|
| All other assets | 14,692 |
| 44 |
| 39 |
| 201,276 |
| (160,134 | ) | 55,917 |
|
| Assets of discontinued operations | — |
| — |
| — |
| — |
| 14,815 |
| 14,815 |
|
| Total assets | $ | 372,107 |
| $ | 17,202 |
| $ | 110,992 |
| $ | 977,255 |
| $ | (1,112,372 | ) | $ | 365,183 |
|
| | | | | | | |
| Liabilities and equity | | | | | | |
| Short-term borrowings | $ | 167,089 |
| $ | 1 |
| $ | 46,432 |
| $ | 25,919 |
| $ | (208,727 | ) | $ | 30,714 |
|
| Accounts payable | 5,412 |
| — |
| — |
| 47,366 |
| (38,343 | ) | 14,435 |
|
| Other current liabilities | 11,072 |
| 33 |
| 117 |
| 25,095 |
| 114 |
| 36,431 |
|
| Long-term and non-recourse borrowings | 68,983 |
| 16,486 |
| 34,389 |
| 68,912 |
| (83,273 | ) | 105,496 |
|
| All other liabilities | 43,722 |
| 511 |
| 481 |
| 58,376 |
| (9,656 | ) | 93,434 |
|
| Liabilities of discontinued operations | — |
| — |
| — |
| — |
| 4,158 |
| 4,158 |
|
| Total Liabilities | 296,279 |
| 17,030 |
| 81,419 |
| 225,667 |
| (335,727 | ) | 284,668 |
|
| | | | | | | |
| Redeemable noncontrolling interests | — |
| — |
| — |
| 2,223 |
| 802 |
| 3,025 |
|
| | | | | | | |
| GE shareowners' equity | 75,828 |
| 171 |
| 29,573 |
| 747,719 |
| (777,463 | ) | 75,828 |
|
| Noncontrolling interests | — |
| — |
| — |
| 1,647 |
| 16 |
| 1,663 |
|
| Total equity | 75,828 |
| 171 |
| 29,573 |
| 749,366 |
| (777,447 | ) | 77,491 |
|
| Total liabilities, redeemable noncontrolling interests and equity | $ | 372,107 |
| $ | 17,202 |
| $ | 110,992 |
| $ | 977,255 |
| $ | (1,112,372 | ) | $ | 365,183 |
|
| |
(a)(b) | Included withinIn the subsidiariesthird quarter of 2018, a funding vehicle was established to provide alternative funding for trade receivables. |
| |
| (c) | In January 2018, ownership of the Subsidiary Guarantor are cashequity shares of Electric Insurance Company ("EIC") were distributed to GE Capital by a bankruptcy. trustee. We have previously reported EIC as a VIE because we received a 100% beneficial interest in the assets, liabilities and cash equivalent balances of $28,516 million and net assets of discontinued operations of $6,012 million.EIC, related to an interim distribution in 2001. As EIC is now a consolidated voting interest entity we removed EIC from our VIE disclosure. In 2017, $1,470 million of assets and $959 million of liabilities were included related to EIC. |
Total revenues from our consolidated VIEs were $141 million and $293 million for the three months ended September 30, 2018 and 2017 and $479 million and $801 million for the nine months ended September 30, 2018 and 2017, respectively. Related expenses consisted primarily of cost of goods and services of $41 million and $78 million for the three months ended September 30, 2018 and 2017 and $174 million and $256 million for the nine months ended September 30, 2018 and 2017, respectively.
Where we provide servicing for third-party investors, we are contractually permitted to commingle cash collected from customers on financing receivables sold to third-party investors with our own cash prior to payment to third-party investors, provided our short-term credit rating does not fall below A-2/P2. These third-party investors also owe us amounts for purchased financial assets and scheduled interest and principal payments. At September 30, 2018 and December 31, 2017, the amounts of commingled cash owed to the third-party investors were $21 million and $60 million, respectively.
UNCONSOLIDATED VARIABLE INTEREST ENTITIES
We become involved with unconsolidated VIEs primarily through assisting in the formation and financing of the entity. We do not consolidate these entities because we do not have power over decisions that significantly affect their economic performance. Our investments in unconsolidated VIEs, at September 30, 2018 and December 31, 2017 were $4,387 million and $5,833 million, respectively. Substantially all of these investments are held by Energy Financial Services of which $217 million and zero are assets held for sale as of September 30, 2018 and December 31, 2017, respectively. Obligations to make additional investments in these entities are not significant.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
| NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED) |
| | | | | | | |
| (In millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Cash flows – operating activities | | | | | | |
| Cash from (used for) operating activities - continuing operations | $ | (25,937 | ) | $ | 39 |
| $ | (81 | ) | $ | 193,403 |
| $ | (163,416 | ) | $ | 4,008 |
|
| Cash from (used for) operating activities - discontinued operations | (501 | ) | — |
| — |
| 8 |
| 3 |
| (490 | ) |
| Cash from (used for) operating activities | (26,437 | ) | 39 |
| (81 | ) | 193,411 |
| (163,413 | ) | 3,518 |
|
| | | | | | | |
| Cash flows – investing activities | | | | | | |
| Cash from (used for) investing activities – continuing operations | (1,723 | ) | (39 | ) | 345 |
| (257,130 | ) | 263,239 |
| 4,692 |
|
| Cash from (used for) investing activities – discontinued operations | — |
| — |
| — |
| (2,349 | ) | — |
| (2,349 | ) |
| Cash from (used for) investing activities | (1,723 | ) | (39 | ) | 345 |
| (259,479 | ) | 263,239 |
| 2,343 |
|
| | | | | | | |
| Cash flows – financing activities | | | | | | |
| Cash from (used for) financing activities – continuing operations | 26,339 |
| — |
| (265 | ) | 104,160 |
| (148,463 | ) | (18,228 | ) |
| Cash from (used for) financing activities – discontinued operations | — |
| — |
| — |
| 1,905 |
| — |
| 1,905 |
|
| Cash from (used for) financing activities | 26,339 |
| — |
| (265 | ) | 106,065 |
| (148,463 | ) | (16,323 | ) |
| Effect of currency exchange rate changes on cash and equivalents | — |
| — |
| — |
| 1,253 |
| — |
| 1,253 |
|
| Increase (decrease) in cash and equivalents | (1,821 | ) | — |
| — |
| 41,251 |
| (48,638 | ) | (9,208 | ) |
| Cash and equivalents at beginning of year | 2,558 |
| — |
| 3 |
| (1,132 | ) | 48,129 |
| 49,558 |
|
| Cash and equivalents at September 30 | 737 |
| — |
| 3 |
| 40,119 |
| (509 | ) | 40,350 |
|
| Less cash and equivalents of discontinued operations at September 30 | — |
| — |
| — |
| 496 |
| — |
| 496 |
|
| Cash and equivalents of continuing operations at September 30 | $ | 737 |
| $ | — |
| $ | 3 |
| $ | 39,623 |
| $ | (509 | ) | $ | 39,854 |
|
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
| NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED) |
| | | | | | | |
| (In millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Cash flows – operating activities | | | | | | |
| Cash from (used for) operating activities - continuing operations | $ | (14,847 | ) | $ | 175 |
| $ | (121 | ) | $ | 83,404 |
| $ | (64,766 | ) | $ | 3,846 |
|
| Cash from (used for) operating activities - discontinued operations | (954 | ) | — |
| — |
| (4,366 | ) | (399 | ) | (5,719 | ) |
| Cash from (used for) operating activities | (15,801 | ) | 175 |
| (121 | ) | 79,038 |
| (65,165 | ) | (1,873 | ) |
| | | | | | | |
| Cash flows – investing activities | | | | | | |
| Cash from (used for) investing activities – continuing operations | 20,902 |
| 16,080 |
| 36,317 |
| 32,000 |
| (51,740 | ) | 53,559 |
|
| Cash from (used for) investing activities – discontinued operations | — |
| — |
| — |
| (12,056 | ) | — |
| (12,056 | ) |
| Cash from (used for) investing activities | 20,902 |
| 16,080 |
| 36,317 |
| 19,944 |
| (51,740 | ) | 41,503 |
|
| | | | | | | |
| Cash flows – financing activities | | | | | | |
| Cash from (used for) financing activities – continuing operations | (6,894 | ) | (16,255 | ) | (36,194 | ) | (150,446 | ) | 134,601 |
| (75,188 | ) |
| Cash from (used for) financing activities – discontinued operations | — |
| — |
| — |
| 295 |
| — |
| 295 |
|
| Cash from (used for) financing activities | (6,894 | ) | (16,255 | ) | (36,194 | ) | (150,151 | ) | 134,601 |
| (74,893 | ) |
| Effect of currency exchange rate changes on cash and equivalents | — |
| — |
| — |
| (169 | ) | — |
| (169 | ) |
| Increase (decrease) in cash and equivalents | (1,792 | ) | — |
| 3 |
| (51,339 | ) | 17,696 |
| (35,432 | ) |
| Cash and equivalents at beginning of year | 4,137 |
| — |
| — |
| 107,350 |
| (20,609 | ) | 90,878 |
|
| Cash and equivalents at September 30 | 2,344 |
| — |
| 3 |
| 56,011 |
| (2,913 | ) | 55,445 |
|
| Less cash and equivalents of discontinued operations at September 30 | — |
| — |
| — |
| 2,915 |
| — |
| 2,915 |
|
| Cash and equivalents of continuing operations at September 30 | $ | 2,344 |
| $ | — |
| $ | 3 |
| $ | 53,095 |
| $ | (2,913 | ) | $ | 52,530 |
|
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 21. SUPPLEMENTAL INFORMATION19. COMMITMENTS, GUARANTEES, PRODUCT WARRANTIES AND OTHER LOSS CONTINGENCIES
CASH FLOWS INFORMATION
Amounts reported in the "All other operating activities" line in the Statement of Cash Flows reflect cash sources and uses as well as non-cash adjustments to net income including those related to taxes, interest, pension, contract assets and gains (losses) on principal business dispositions. Certain supplemental information related to our cash flows is shown below.
|
| | | | | | |
| | Nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
|
| | | |
| GE | | |
| All other operating activities | | |
| (Gains) losses on purchases and sales of business interests(a) | $ | (1,968 | ) | $ | (3,471 | ) |
| Contract assets (net)(b) | (4,009 | ) | (3,035 | ) |
| Income taxes(c) | (1,107 | ) | (1,318 | ) |
| Interest charges(d) | 327 |
| 323 |
|
| Principal pension plans(e) | 1,179 |
| 2,520 |
|
| Other(f) | 1,636 |
| 169 |
|
| | $ | (3,942 | ) | $ | (4,812 | ) |
| Net dispositions (purchases) of GE shares for treasury | | |
| Open market purchases under share repurchase program | $ | (3,394 | ) | $ | (18,708 | ) |
| Other purchases | (58 | ) | (430 | ) |
| Dispositions | 831 |
| 1,168 |
|
| | $ | (2,620 | ) | $ | (17,969 | ) |
| |
(a) | Included pre-tax gains on sales of businesses reclassified to Proceeds from principal business dispositions within Cash flows from investing activities of $(1,897) million for Water in the nine months ended September 30, 2017, and $(3,130) million for Appliances and $(398) million for GE Asset Management in the nine months ended September 30, 2016. |
| |
(b) | Contract assets are presented net of related billings in excess of revenues on our long-term product service agreements. See Note 9. |
| |
(c) | Reflected the effects of current tax expense (benefit) of $699 million and $953 million and net cash paid during the year for income taxes of $(1,806) million and $(2,271) million for the nine months ended September 30, 2017 and 2016, respectively. Cash flows effects of deferred tax provisions (benefits) are shown separately within cash flows from operating activities. |
| |
(d) | Reflected the effects of interest expense of $1,918 million and $1,490 million and cash paid for interest of $(1,591) million and $(1,167) million for the nine months ended September 30, 2017 and 2016, respectively. |
| |
(e) | Reflected the effects of pension costs of $2,779 million and $2,674 million and employer contributions of $(1,600) million and $(154) million for the nine months ended September 30, 2017 and 2016, respectively. See Note 12. |
| |
(f) | Included a $512 million correction of investing cash flows used for the settlement of derivative instruments classified as operating during the the six months ended June 30, 2017. Therefore, operating cash flows were understated and investing cash flows were overstated during the the six months ended June 30, 2017. |
DERIVATIVES AND HEDGING
See Note 16 for the primary information related to our derivatives and hedging activity. This section provides certain supplemental information about this topic.
Changes in the fair value of derivatives are recorded in a separate component of equity (referred to below as Accumulated Other Comprehensive Income, or AOCI) and are recorded in earnings in the period in which the hedged transaction occurs. The table below summarizes this activity by hedging instrument.
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | |
| FAIR VALUE OF DERIVATIVES | |
| | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (In millions) | Assets |
| Liabilities |
| | Assets |
| Liabilities |
|
| | | | | | |
| Derivatives accounted for as hedges | | | | | |
| Interest rate contracts | $ | 2,663 |
| $ | 108 |
| | $ | 3,106 |
| $ | 210 |
|
| Currency exchange contracts | 233 |
| 105 |
| | 402 |
| 624 |
|
| Other contracts | — |
| — |
| | — |
| — |
|
| | 2,895 |
| 213 |
| | 3,508 |
| 834 |
|
| | | | | | |
| Derivatives not accounted for as hedges | | | | | |
| Interest rate contracts | 74 |
| 6 |
| | 62 |
| 20 |
|
| Currency exchange contracts | 1,499 |
| 2,187 |
| | 1,778 |
| 4,011 |
|
| Other contracts | 132 |
| 46 |
| | 119 |
| 17 |
|
| | 1,705 |
| 2,240 |
| | 1,958 |
| 4,048 |
|
| | | | | | |
| Gross derivatives recognized in statement of financial position | | | | | |
| Gross derivatives | 4,601 |
| 2,453 |
| | 5,467 |
| 4,883 |
|
| Gross accrued interest | 491 |
| — |
| | 768 |
| (24 | ) |
| | 5,091 |
| 2,454 |
| | 6,234 |
| 4,859 |
|
| | | | | | |
| Amounts offset in statement of financial position | | | | | |
| Netting adjustments(a) | (1,802 | ) | (1,802 | ) | | (3,097 | ) | (3,094 | ) |
| Cash collateral(b) | (2,091 | ) | (276 | ) | | (2,025 | ) | (1,355 | ) |
| | (3,893 | ) | (2,078 | ) | | (5,121 | ) | (4,449 | ) |
| | | | | | |
| Net derivatives recognized in statement of financial position | | | | | |
| Net derivatives | 1,198 |
| 376 |
| | 1,113 |
| 410 |
|
| | | | | | |
| Amounts not offset in statement of financial position | | | | | |
| Securities held as collateral(c) | (437 | ) | — |
| | (442 | ) | — |
|
| | | | | | |
| Net amount | $ | 761 |
| $ | 376 |
| | $ | 671 |
| $ | 410 |
|
Derivatives are classified in the captions "All other assets" and "All other liabilities" and the related accrued interest is classified in "Other GE Capital receivables" and "All other liabilities" in our Statement of Financial Position.
| |
(a) | The netting of derivative receivables and payables is permitted when a legally enforceable master netting agreement exists. Amounts include fair value adjustments related to our own and counterparty non-performance risk. At September 30, 2017 and December 31, 2016, the cumulative adjustment for non-performance risk was insignificant and $(3) million, respectively. |
| |
(b) | Excluded excess cash collateral received and posted of $90 million and $151 million at September 30, 2017, respectively, and $6 million and $177 million at December 31, 2016, respectively. |
| |
(c) | Excluded excess securities collateral received of $42 million and zero at September 30, 2017 and December 31, 2016, respectively. |
|
| | |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | |
| CASH FLOW HEDGE ACTIVITY | | | | | |
| | Gain (loss) recognized in AOCI | | Gain (loss) reclassified
from AOCI into earnings |
| | for the three months ended September 30 | | for the three months ended September 30 |
| (In millions) | 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
| | | | | | |
| Interest rate contracts | $ | 1 |
| $ | 1 |
| | $ | (6 | ) | $ | (12 | ) |
| Currency exchange contracts | 224 |
| — |
| | 110 |
| (46 | ) |
| Commodity contracts | — |
| 1 |
| | — |
| — |
|
| Total(a) | $ | 225 |
| $ | 2 |
| | $ | 104 |
| $ | (57 | ) |
|
| | | | | | | | | | | | | |
| | | | | | |
| CASH FLOW HEDGE ACTIVITY | | | | | |
| | Gain (loss) recognized in AOCI | | Gain (loss) reclassified
from AOCI into earnings |
| | for the nine months ended September 30 | | for the nine months ended September 30 |
| (In millions) | 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
| | | | | | |
| Interest rate contracts | $ | 3 |
| $ | 32 |
| | $ | (21 | ) | $ | (67 | ) |
| Currency exchange contracts | 278 |
| (76 | ) | | 189 |
| (59 | ) |
| Commodity contracts | — |
| 1 |
| | — |
| (3 | ) |
| Total(a) | $ | 281 |
| $ | (43 | ) | | $ | 167 |
| $ | (128 | ) |
| |
(a) | Gain (loss) is recorded in "GE Capital revenues from services", "Interest and other financial charges", and "Other costs and expenses" in our Statement of Earnings when reclassified. |
The total pre-tax amount in AOCI related to cash flow hedges of forecasted transactions was a $160 million gain at September 30, 2017. We expect to transfer $39 million gain to earnings as an expense in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions. In both the six months ended 2017 and 2016, we recognized insignificant gains and losses related to hedged forecasted transactions and firm commitments that did not occur by the end of the originally specified period. At September 30, 2017 and 2016, the maximum term of derivative instruments that hedge forecasted transactions was 15 years and 16 years, respectively. See Note 14 for additional information about reclassifications out of AOCI.
For cash flow hedges, the amount of ineffectiveness in the hedging relationship and amount of the changes in fair value of the derivatives that are not included in the measurement of ineffectiveness were insignificant for each reporting period.
COUNTERPARTY CREDIT RISK
Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our agreements) on an individual counterparty basis. Where we have agreed to netting of derivative exposures with a counterparty, we net our exposures with that counterparty and apply the value of collateral posted to us to determine the exposure. We actively monitor these net exposures against defined limits and take appropriate actions in response, including requiring additional collateral.
As discussed above, we have provisions in certain of our master agreements that require counterparties to post collateral (typically, cash or U.S. Treasury securities) when our receivablereceivables due from the counterparties, measured at current market value, exceeds a specified limit.limits. The fair value of such collateral was $2,529$1,295 million at September 30, 2017,2018, of which $2,091$1,152 million was cash and $437$144 million was in the form of securities held by a custodian for our benefit. Under certain of these same agreements, we post collateral to our counterparties for our derivative obligations, the fair value of cash collateral posted was $276$338 million at September 30, 2017.2018. At September 30, 2017,2018, our exposureexposures to counterparties (including accrued interest), net of collateral we hold, was $681$106 million. This excludes exposureexposures related to embedded derivatives.
Additionally, our master agreements typically contain mutual downgrade provisions that provide the ability of each party to require termination if the long-term credit rating of the counterparty were to fall below A-/A3 or otherspecified ratings levels agreed upon with the counterparty. In certain of these master agreements, each party also has the ability to require termination if the short-term rating of the counterparty, were to fall below A-1/P-1.primarily BBB/Baa2. Our master agreements also typically contain provisions that provide termination rights upon the occurrence of certain other events, such as a bankruptcy or events of default by one of the parties. If an agreement was terminated under any of these circumstances, the termination amount payable would be determined on a net basis and could also take into account any collateral posted. The net amount of our derivative liability subject to such termination provisions, after consideration of collateral posted by us and outstanding interest payments was $271$510 million at September 30, 2017.2018. This excludes exposure related to embedded derivatives.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NON-RECURRING FAIR VALUE MEASUREMENTS
The following table represents non-recurring fair value amounts (as measured at the time of the adjustment) for those assets remeasured to fair value on a non-recurring basis during the fiscal year and still held at September 30, 2018 and December 31, 2017.
|
| | | | | | | | | | | | |
| | Remeasured during
the three months ended
September 30, 2018 | Remeasured during
the year ended
December 31, 2017 |
| (In millions) | Level 2 | Level 3 | Level 2 | Level 3 |
| | | | | |
| Financing receivables | $ | — |
| $ | 8 |
| $ | — |
| $ | 1,541 |
|
| Equity securities without readily determinable fair value and equity method investments | 479 |
| 1,212 |
| — |
| 2,076 |
|
| Long-lived assets | — |
| 413 |
| 177 |
| 591 |
|
| Goodwill | $ | — |
| $ | 1,653 |
| $ | — |
| $ | — |
|
| Total | $ | 479 |
| $ | 3,286 |
| $ | 177 |
| $ | 4,208 |
|
The following table represents the fair value adjustments to assets measured at fair value on a non-recurring basis and still held at September 30, 2018 and 2017.
|
| | | | | | | | | | | | | |
| | Three months ended September 30 | Nine months ended September 30 |
| (In millions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Financing receivables | $ | — |
| $ | (1 | ) | | $ | (2 | ) | $ | (1 | ) |
| Equity securities without readily determinable fair value and equity method investments | (240 | ) | (58 | ) | | (441 | ) | (89 | ) |
| Long-lived assets | (865 | ) | (671 | ) | | (975 | ) | (712 | ) |
| Goodwill | (21,973 | ) | $ | (947 | ) | | $ | (21,973 | ) | $ | (947 | ) |
| Total | $ | (23,079 | ) | $ | (1,676 | ) | | $ | (23,391 | ) | $ | (1,748 | ) |
|
| | | | | | |
| LEVEL 3 MEASUREMENTS - SIGNIFICANT UNOBSERVABLE INPUTS | |
| (Dollars in millions) | Fair value | Valuation technique | Unobservable inputs | Range
(weighted-average) |
| | | | | |
| September 30, 2018 | | | | |
| | | | | |
| Non-recurring fair value measurements | | | | |
| Equity securities without readily determinable fair value and equity method investments | $ | 769 |
| Income approach, market comparables | Discount rate(a) | 6.5%-50%(8.9)% |
| | | | | |
| Long-lived assets | 352 |
| Income approach | Discount rate(a) | 2.9%-40%(22.3)% |
| | | | | |
| | | | | |
| December 31, 2017 | | | | |
| | | | | |
| Non-recurring fair value measurements | | | | |
| Financing receivables | $ | 1,532 |
| Income approach | Discount rate(a) | 3.2%-16.5% (10%) |
| | | | | |
| Equity securities without readily determinable fair value and equity method investments | 2,037 |
| Income approach | Discount rate(a) | 5.0%-50.0% (7.7%) |
| | | | | |
| Long-lived assets | 554 |
| Income approach | Discount rate(a) | 2.7%-18.0% (7.3%) |
| |
| (a) | Discount rates are determined based on inputs that market participants would use when pricing investments, including credit and liquidity risk. An increase in the discount rate would result in a decrease in the fair value. |
At September 30, 2018 and December 31, 2017, non-recurring measurements of $409 million and $83 million, respectively, are valued using non-binding broker quotes or other third-party sources. At September 30, 2018 and December 31, 2017, other non-recurring fair value measurements were $103 million and insignificant, respectively. Other Level 3 fair value measurements utilize a number of different unobservable inputs not subject to meaningful aggregation.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 18. VARIABLE INTEREST ENTITIES
A VIE is an entity that has one of three characteristics: (1) it is controlled by someone other than its shareowners or partners, (2) its shareowners or partners are not economically exposed to the entity's earnings (for example, they are protected against losses), or (3) it was thinly capitalized when it was formed.
In the normal course of business we become involved with VIEs either because we help create them or we invest in them. Our VIEs either provide goods and services to customers or provide financing to third parties for the purchase of GE goods and services. If we control the VIE, we consolidate it and provide disclosure below. However, if the VIE is a business and use of its assets is not limited to settling its liabilities, ongoing disclosures are not required.
CONSOLIDATED VARIABLE INTEREST ENTITIES
Our most significant consolidated VIE is a joint venture, BHGE LLC, which was formed as part of the Baker Hughes transaction. BHGE LLC owns the operating assets of GE Oil & Gas and Baker Hughes. BHGE LLC is a VIE as we hold an economic interest of approximately 62.5% in the partnership, but we hold no voting or participating rights through our direct economic ownership. BHGE LLC is a SEC Registrant with separate filing requirements with the SEC and its separate financial information can be obtained from www.sec.gov.
Previously we reported three joint ventures which were formed as part of the Alstom acquisition as consolidated VIEs. These joint ventures were considered VIEs because equity held by Alstom did not participate fully in the earnings of the ventures due to contractual features allowing Alstom to sell their interests back to GE . We consolidated these joint ventures because we controlled all their significant activities. These joint ventures were in all other respects regular businesses and were therefore exempt from ongoing disclosure requirements for consolidated VIEs provided below. These joint ventures ceased to be VIEs on September 5, 2018 when Alstom exercised their put and are now wholly-owned consolidated voting interest entities (see Note 15 for further information)
The table below provides information about consolidated VIEs that are subject to ongoing disclosure requirements. Substantially all of these entities were created to help our customers finance the purchase of GE goods and services or to purchase GE customer notes receivable arising from sales of GE goods and services. These entities have no features that could expose us to losses that could significantly exceed the difference between the consolidated assets and liabilities.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | |
| ASSETS AND LIABILITIES OF CONSOLIDATED VIEs |
| | | GE Capital | |
| (In millions) | GE | Customer Notes receivables(a) | Trade receivables(b) | Other(c) | Total |
| | | | | | |
| September 30, 2018 | | | | | |
| Assets | | | | | |
| Financing receivables, net | $ | — |
| $ | — |
| $ | 1,540 |
| $ | 951 |
| $ | 2,491 |
|
| Current receivables | 83 |
| 457 |
| — |
| — |
| 540 |
|
| Other assets | 455 |
| 862 |
| 138 |
| 1,086 |
| 2,540 |
|
| Total | $ | 538 |
| $ | 1,318 |
| $ | 1,678 |
| $ | 2,037 |
| $ | 5,570 |
|
| | | | | | |
| Liabilities | | | | | |
| Borrowings | $ | 46 |
| $ | — |
| — |
| $ | 938 |
| $ | 984 |
|
| Non-recourse borrowings | — |
| 585 |
| 1,037 |
| — |
| 1,622 |
|
| Other liabilities | 212 |
| 644 |
| 575 |
| 584 |
| 2,015 |
|
| Total | $ | 257 |
| $ | 1,229 |
| 1,612 |
| $ | 1,522 |
| $ | 4,620 |
|
| | | | | | |
| December 31, 2017 | | | | | |
| Assets | | | | | |
| Financing receivables, net | $ | — |
| $ | — |
| — |
| $ | 792 |
| $ | 792 |
|
| Current receivables | 59 |
| 570 |
| — |
| — |
| 630 |
|
| Investment securities | — |
| — |
| — |
| 918 |
| 918 |
|
| Other assets | 586 |
| 1,182 |
| — |
| 1,920 |
| 3,688 |
|
| Total | $ | 646 |
| $ | 1,752 |
| — |
| $ | 3,630 |
| $ | 6,028 |
|
| | | | | | |
| Liabilities | | | | | |
| Borrowings | $ | 39 |
| $ | — |
| — |
| $ | 1,027 |
| $ | 1,066 |
|
| Non-recourse borrowings | — |
| 669 |
| — |
| 16 |
| 685 |
|
| Other liabilities | 345 |
| 1,021 |
| — |
| 1,525 |
| 2,891 |
|
| Total | $ | 384 |
| $ | 1,690 |
| — |
| $ | 2,568 |
| $ | 4,642 |
|
| |
| (a) | Two funding vehicles established to purchase customer notes receivable from GE, one of which is partially funded by third-party debt. |
| |
| (b) | In the third quarter of 2018, a funding vehicle was established to provide alternative funding for trade receivables. |
| |
| (c) | In January 2018, ownership of the equity shares of Electric Insurance Company ("EIC") were distributed to GE Capital by a bankruptcy. trustee. We have previously reported EIC as a VIE because we received a 100% beneficial interest in the assets, liabilities and operations of EIC, related to an interim distribution in 2001. As EIC is now a consolidated voting interest entity we removed EIC from our VIE disclosure. In 2017, $1,470 million of assets and $959 million of liabilities were included related to EIC. |
Total revenues from our consolidated VIEs were $141 million and $293 million for the three months ended September 30, 2018 and 2017 and $479 million and $801 million for the nine months ended September 30, 2018 and 2017, respectively. Related expenses consisted primarily of cost of goods and services of $41 million and $78 million for the three months ended September 30, 2018 and 2017 and $174 million and $256 million for the nine months ended September 30, 2018 and 2017, respectively.
Where we provide servicing for third-party investors, we are contractually permitted to commingle cash collected from customers on financing receivables sold to third-party investors with our own cash prior to payment to third-party investors, provided our short-term credit rating does not fall below A-2/P2. These third-party investors also owe us amounts for purchased financial assets and scheduled interest and principal payments. At September 30, 2018 and December 31, 2017, the amounts of commingled cash owed to the third-party investors were $21 million and $60 million, respectively.
UNCONSOLIDATED VARIABLE INTEREST ENTITIES
We become involved with unconsolidated VIEs primarily through assisting in the formation and financing of the entity. We do not consolidate these entities because we do not have power over decisions that significantly affect their economic performance. Our investments in unconsolidated VIEs, at September 30, 2018 and December 31, 2017 were $4,387 million and $5,833 million, respectively. Substantially all of these investments are held by Energy Financial Services of which $217 million and zero are assets held for sale as of September 30, 2018 and December 31, 2017, respectively. Obligations to make additional investments in these entities are not significant.
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| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 19. COMMITMENTS, GUARANTEES, PRODUCT WARRANTIES AND OTHER LOSS CONTINGENCIES
COMMITMENTS
The GE Capital Aviation Services (GECAS) business in GE Capital has placed multiple-year orders for various Boeing, Airbus and other aircraft manufacturers with list prices approximating $35,412 million and secondary orders with airlines for used aircraft of approximately $2,643 million at September 30, 2018. In our Aviation segment, we have committed to provide financing assistance of $2,902 million of future customer acquisitions of aircraft equipped with our engines.
GUARANTEES
Our guarantees are provided in the ordinary course of business. We underwrite these guarantees considering economic, liquidity and credit risk of the counterparty. We believe that the likelihood is remote that any such arrangements could have a significant adverse effect on our financial position, results of operations or liquidity. We record liabilities for guarantees at estimated fair value, generally the amount of the premium received, or if we do not receive a premium, the amount based on appraisal, observed market values or discounted cash flows. Any associated expected recoveries from third parties are recorded as other receivables, not netted against the liabilities.
At September 30, 2018, we were committed under the following guarantee arrangements beyond those provided on behalf of VIEs. See Note 18.
Credit Support. We have provided $1,544 million of credit support on behalf of certain customers or associated companies, predominantly joint ventures and partnerships, using arrangements such as standby letters of credit and performance guarantees. These arrangements enable these customers and associated companies to execute transactions or obtain desired financing arrangements with third parties. Should the customer or associated company fail to perform under the terms of the transaction or financing arrangement, we would be required to perform on their behalf. Under most such arrangements, our guarantee is secured, usually by the asset being purchased or financed, or possibly by certain other assets of the customer or associated company. The length of these credit support arrangements parallels the length of the related financing arrangements or transactions. The liability for such credit support was $80 million at September 30, 2018.
Indemnification Agreements – Continuing Operations. We have agreements that require us to fund up to $222 million at September 30, 2018 under residual value guarantees on a variety of leased equipment. Under most of our residual value guarantees, our commitment is secured by the leased asset. The liability for these indemnification agreements was $6 million at September 30, 2018.
At September 30, 2018, we also had $1,953 million of other indemnification commitments, primarily related to representations and warranties in sales of businesses or assets. The liability for these indemnification commitments was $259 million at September 30, 2018.
Indemnification Agreements – Discontinued Operations. At September 30, 2018, we provided specific indemnifications to buyers of GE Capital’s assets that, in the aggregate, represent substantially all of the maximum potential claim of $2,286 million.The majority of these indemnifications relate to the sale of businesses and assets under the GE Capital Exit Plan. We have recorded related liabilities of $264 million, which incorporates our evaluation of risk and the likelihood of making payments under the indemnities. The recognized liabilities represent the estimated fair value of the indemnities when issued as adjusted for any subsequent probable and estimable losses. In addition, in connection with the 2015 public offering and sale of Synchrony Financial, GE Capital indemnified Synchrony Financial and its directors, officers, and employees against the liabilities of GECC's businesses other than historical liabilities of the businesses that are part of Synchrony Financial's ongoing operations.
Contingent Consideration. These are agreements to provide additional consideration to a buyer or seller in a business combination if contractually specified conditions related to the acquisition or disposition are achieved. Amount of contingent consideration was insignificant at September 30, 2018.
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| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
PRODUCT WARRANTIES
We provide for estimated product warranty expenses when we sell the related products. Because warranty estimates are forecasts that are based on the best available information – mostly historical claims experience – claims costs may differ from amounts provided. An analysis of changes in the liability for product warranties follows.
|
| | | | | | |
| | Nine months ended September 30 |
| (In millions) | 2018 |
| 2017 |
|
| | | |
| Balance at January 1 | $ | 2,348 |
| $ | 1,929 |
|
| Current-year provisions | 788 |
| 606 |
|
| Expenditures | (735 | ) | (598 | ) |
| Other changes(a) | 134 |
| 255 |
|
| Balance as of September 30 | $ | 2,534 |
| $ | 2,191 |
|
(a) Primarily includes effect of currency exchange and acquisitions.
OTHER LOSS CONTINGENCIES
LEGAL MATTERS
WMC.During the fourth quarter of 2007, we completed the sale of WMC, our U.S. mortgage business. WMC substantially discontinued all new loan originations by the second quarter of 2007, and was never a loan servicer. In connection with the sale, WMC retained certain representation and warranty obligations related to loans sold to third parties prior to the disposal of the business and contractual obligations to repurchase previously sold loans that had an early payment default. All claims received by WMC for early payment default have either been resolved or are no longer being pursued.
The remaining active claims have been brought by securitization trustees or administrators seeking recovery from WMC for alleged breaches of representations and warranties on mortgage loans that serve as collateral for residential mortgage-backed securities (RMBS). At September 30, 2018, such claims consisted of $144 million of individual claims generally submitted before the filing of a lawsuit (compared to $462 million at December 31, 2017) and $826 million of additional claims asserted against WMC in litigation without making a prior claim (Litigation Claims) (compared to $3,198 million at December 31, 2017). The total amount of these claims, $970 million, reflects the purchase price or unpaid principal balances of the loans at the time of purchase and does not give effect to pay downs or potential recoveries based upon the underlying collateral, which in many cases are substantial, nor to accrued interest or fees. WMC believes that repurchase claims brought based upon representations and warranties made more than six years before WMC was notified of the claim would be disallowed in legal proceedings under applicable law and the decisions of the New York Court of Appeals in ACE Securities Corp. v. DB Structured Products, Inc. (June 11, 2015) and Deutsche Bank National Trust Company v. Flagstar Capital Markets Corporation (October 16, 2018), on the statute of limitations period governing such claims.
Reserves related to repurchase claims made against WMC were $245 million at September 30, 2018, reflecting a net decrease to reserves in the nine months ended September 30, 2018 of $171 million due to settlements. The reserve estimate takes into account recent settlement activity and is based upon WMC’s evaluation of the remaining exposures as a percentage of estimated lifetime mortgage loan losses within the pool of loans supporting each securitization for which timely claims have been asserted in litigation against WMC. Settlements in prior periods reduced WMC’s exposure on claims asserted in certain securitizations and the claim amounts reported above give effect to these settlements. During the first quarter of 2018, we also recorded a reserve of $1,500 million in connection with the U.S. Department of Justice's (DOJ) ongoing investigation regarding potential violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) by WMC and GE Capital discussed in Legal Proceedings. This charge was recorded in the first quarter based upon our estimate of the loss contingency at that time, including the status of our settlement discussions with the DOJ in the first quarter and an assessment of prior settlements reached in similar matters. There have been no changes to this estimate since that time. |
| | | | | | | | | | | | | |
ROLLFORWARD OF THE RESERVE RELATED TO REPURCHASE CLAIMS
|
| | | | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| (In millions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | |
| Balance, beginning of period | $ | 294 |
| $ | 636 |
| | $ | 416 |
| $ | 626 |
|
| Provision | (9 | ) | 11 |
| | (4 | ) | 21 |
|
| Claim resolutions / rescissions | (40 | ) | — |
| | (167 | ) | — |
|
| Balance, end of period | $ | 245 |
| $ | 647 |
| | $ | 245 |
| $ | 647 |
|
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Given the significant litigation activity and WMC’s continuing efforts to resolve the lawsuits involving claims made against WMC, it is difficult to assess whether future losses will be consistent with WMC’s past experience. Adverse changes to WMC’s assumptions supporting the reserve may result in an increase to these reserves. WMC estimates a range of reasonably possible loss from $0 to approximately $500 million over its recorded reserve at September 30, 2018. This estimate involves significant judgment and may not reflect the range of uncertainties and unpredictable outcomes inherent in litigation, including the matters discussed in Legal Proceedings and potential changes in WMC’s legal strategy. This estimated range of reasonably possible loss excludes any additional loss beyond the amount of our current reserve for the FIRREA investigation, as we are unable at this time to develop such a meaningful estimate. With respect to the FIRREA investigation, this inability to develop a meaningful estimate of any additional loss beyond the amount of our current reserve reflects, among other factors, the wide variety and broad range of penalties and other sanctions incurred by various financial institutions in proceedings and settlements involving claims made under FIRREA by the DOJ, and the possibility WMC will file for bankruptcy. In the event of a WMC bankruptcy, GE Capital would be required to reassess its WMC consolidation analysis depending upon the specific facts and circumstances at that time, which might result in GE Capital no longer consolidating WMC’s assets and liabilities in its financial statements. In that circumstance, GE and GE Capital at that time would have to assess their direct exposure, if any, for purposes of determining their respective WMC-related loss contingencies. It is possible, however, that the ultimate liability of GE Capital and/or WMC could be higher than our current reserve if a negotiated settlement of the FIRREA investigation cannot be reached at a level commensurate with the reserve, or if we face adverse litigation outcomes if a negotiated settlement cannot be reached.
Adverse court decisions, including in cases not involving WMC, could result in new claims and lawsuits on additional loans. However, WMC continues to believe that it has defenses to the claims asserted in litigation, including, for example, based on causation and materiality requirements and applicable statutes of limitations. It is not possible to predict the outcome or impact of these defenses and other factors, any of which could materially affect the amount of any loss ultimately incurred by WMC on these claims.
WMC has also received indemnification demands, nearly all of which are unspecified, from depositors/underwriters/sponsors of RMBS in connection with lawsuits brought by RMBS investors concerning alleged misrepresentations in the securitization offering documents to which WMC is not a party, or, in two cases, involving mortgage loan repurchase claims made against RMBS sponsors. WMC believes that it has defenses to these demands.
To the extent WMC is required to repurchase loans, WMC’s loss also would be affected by several factors, including pay downs, accrued interest and fees, and the value of the underlying collateral. The reserve and estimate of possible loss reflect judgment, based on currently available information, and a number of assumptions, including economic conditions, claim and settlement activity, pending and threatened litigation, court decisions regarding WMC’s legal defenses, indemnification demands, government activity, and other variables in the mortgage industry. Actual losses arising from claims against WMC could exceed these amounts and additional claims and lawsuits could result if actual claim rates, governmental actions, litigation and indemnification activity, adverse court decisions, actual settlement rates or losses WMC incurs on repurchased loans differ from its assumptions. Adverse developments under any of these scenarios, or a finding of liability in the TMI case discussed above, could be in an amount exceeding the total value of WMC's assets and could result in WMC filing for bankruptcy.
Alstom legacy matters. On November 2, 2015, we acquired the Thermal, Renewables and Grid businesses from Alstom. Prior to the acquisition, the seller was the subject of two significant cases involving anti-competitive activities and improper payments: (1) in January 2007, Alstom was fined €65 million by the European Commission for participating in a gas insulated switchgear cartel that operated from 1988 to 2004 (that fine was later reduced to €59 million), and (2) in December 2014, Alstom pled guilty in the United States to multiple violations of the Foreign Corrupt Practices Act and paid a criminal penalty of $772 million. As part of GE’s accounting for the acquisition, we established a reserve amounting to $858 million for legal and compliance matters related to the legacy business practices that were the subject of these and related cases in various jurisdictions. At September 30, 2018, this reserve balance was $913 million. The increase is primarily driven by foreign currency movements.
Regardless of jurisdiction, the allegations relate to claimed anti-competitive conduct or improper payments in the pre-acquisition period as the source of legal violations and/or damages. Given the significant litigation and compliance activity related to these matters and our ongoing efforts to resolve them, it is difficult to assess whether the disbursements will ultimately be consistent with the reserve established. The estimation of this reserve involved significant judgment and may not reflect the full range of uncertainties and unpredictable outcomes inherent in litigation and investigations of this nature. Damages sought may include disgorgement of profits on the underlying business transactions, fines and/or penalties, interest, or other forms of resolution. Factors that can affect the ultimate amount of losses associated with these matters include the way cooperation is assessed and valued, prosecutorial discretion in the determination of damages, formulas for determining fines and penalties, the duration and amount of legal and investigative resources applied, and political and social influences within each jurisdiction, among other considerations. Actual losses arising from claims in these matters could exceed the amount provided. At this time, we are unable to develop a meaningful estimate of the range of reasonably possible additional losses for this exposure.
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| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
ENVIRONMENTAL MATTERS
Our operations, like operations of other companies engaged in similar businesses, involve the use, disposal and cleanup of substances regulated under environmental protection laws. We are involved in numerous remediation actions to clean up hazardous wastes as required by federal and state laws. Liabilities for remediation costs exclude possible insurance recoveries and, when dates and amounts of such costs are not known, are not discounted. When there appears to be a range of possible costs with equal likelihood, liabilities are based on the low end of such range. It is reasonably possible that our environmental remediation exposure will exceed amounts accrued. However, due to uncertainties about the status of laws, regulations, technology and information related to individual sites, such amounts are not reasonably estimable. For further information, see our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
NOTE 20. CASH FLOWS INFORMATION
Changes in operating assets and liabilities are net of acquisitions and dispositions of principal businesses.
Amounts reported in the “Proceeds from sales of discontinued operations” and “Proceeds from principal business dispositions” lines in the Statement of Cash Flows are net of cash transferred and include certain deal-related costs. Amounts reported in the “Net cash from (payments for) principal businesses purchased” line are net of cash acquired and include certain deal-related costs and debt assumed and immediately repaid in acquisitions. Amounts reported in the “All other operating activities” line in the Statement of Cash Flows reflect cash sources and uses as well as non-cash adjustments to net income including those related to taxes, pension, gains (losses) on principal business dispositions, and restructuring and other charges. Certain supplemental information related to our cash flows is shown below.
GE
|
| | | | | | |
| | Nine months ended September 30 |
| (In millions) | 2018 |
| 2017 |
|
| | | |
| All other operating activities | | |
| (Gains) losses on purchases and sales of business interests(a) | $ | (476 | ) | $ | (1,955 | ) |
| Other gains on investing activities | (436 | ) | (68 | ) |
| Income taxes(b) | (803 | ) | (897 | ) |
| Principal pension plans(c) | (2,968 | ) | 1,179 |
|
| Other postretirement benefit plans(d) | (916 | ) | (543 | ) |
| Restructuring and other charges(e) | 878 |
| 1,429 |
|
| Change in accruals for contract related costs | (792 | ) | (59 | ) |
| Other(f) | (802 | ) | (1,245 | ) |
| | $ | (6,315 | ) | $ | (2,160 | ) |
| All other investing activities | | |
| Derivative settlements (net) | $ | (436 | ) | $ | (1,420 | ) |
| Investments in intangible assets (net) | (472 | ) | (376 | ) |
| Other | 154 |
| (159 | ) |
| | $ | (754 | ) | $ | (1,955 | ) |
| Net dispositions (purchases) of GE shares for treasury | | |
| Open market purchases under share repurchase program | $ | (180 | ) | $ | (3,394 | ) |
| Other purchases | (18 | ) | (58 | ) |
| Dispositions | 192 |
| 831 |
|
| | $ | (6 | ) | $ | (2,620 | ) |
| |
| (a) | Included pre-tax gains on sales of businesses reclassified to "Proceeds from principal business dispositions" within Cash flows from investing activities of $(681) million for Value-Based Care and $(298) million for Industrial Solutions, partially offset by pre-tax losses of $511 million on planned business disposals in the nine months ended September 30, 2018, and included pre-tax gains on sales of businesses of $(1,885) million for Water in the nine months ended September 30, 2017. See Note 2. |
| |
| (b) | Reflected the effects of current tax expense of $479 million and $909 million and net cash paid during the year for income taxes of $(1,283) million and $(1,806) million for the nine months ended September 30, 2018 and 2017, respectively. Cash flows effects of deferred tax provisions (benefits) are shown separately within Cash flows from operating activities in the Statement of Cash Flows. |
| |
| (c) | Reflected the effects of pension costs of $3,218 million and $2,779 million and employer contributions of $(6,186) million and $(1,600) million for the nine months ended September 30, 2018 and 2017, respectively. See Note 13. |
| |
| (d) | Reflected the effects of other postretirement plans costs (income) of $(143) million and $315 million and employer contributions of $(773) million and $(858) million for the nine months ended September 30, 2018 and 2017, respectively. See Note 13. |
| |
| (e) | Reflected the effects of restructuring and other charges of $2,211 million and $3,017 million and restructuring and other cash expenditures of $(1,333) million and $(1,588) million for the nine months ended September 30, 2018 and 2017, respectively. Excludes non-cash adjustments reflected as "Depreciation and amortization of property, plant and equipment" or "Amortization of intangible assets" in the Statement of Cash Flows. |
| |
| (f) | Included other adjustments to net income, such as write-downs of assets, the impacts of acquisition accounting and changes in other assets and other liabilities classified as operating activities, such as the timing of payments of employee-related liabilities and customer allowances. |
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 21. INTERCOMPANY TRANSACTIONS
Transactions between related companies are made on arm's length terms and are reported in the respective GE and GE Capital columns of our financial statements, but are eliminated in deriving our consolidated financial statements. These transactions include, but are not limited to, the following:
GE Capital dividends to GE,
GE Capital working capital solutions to optimize GE cash management,
GE Capital enabled GE industrial orders, including related GE guarantees to GE Capital,
GE Capital financing of GE long-term receivables, and
Aircraft engines, power equipment, renewable energy equipment and healthcare equipment manufactured by GE that are installed on GE Capital investments, including leased equipment.
In addition to the above transactions that primarily enable growth for the GE businesses, there are routine related party transactions, which include, but are not limited to, the following:
Expenses related to parent-subsidiary pension plans,
Buildings and equipment leased between GE and GE Capital, including sale-leaseback transactions,
Information technology (IT) and other services sold to GE Capital by GE
Settlements of tax liabilities, and
Various investments, loans and allocations of GE corporate overhead costs.
Presented below is a walk of intercompany eliminations from the combined GE and GE Capital totals to the consolidated cash flows from continuing operations.
|
| | | | | | |
| Nine months ended September 30 |
| (In millions) | 2018 |
| 2017 |
|
|
|
|
|
|
| Cash from (used for) operating activities-continuing operations |
|
|
|
|
| Combined | $ | (3,631 | ) | $ | 6,104 |
|
| GE current receivables sold to GE Capital | 3,792 |
| 941 |
|
| GE Capital common dividends to GE | — |
| (4,016 | ) |
| Other reclassifications and eliminations(a) | (494 | ) | 353 |
|
| Total cash from (used for) operating activities-continuing operations | $ | (333 | ) | $ | 3,381 |
|
| Cash from (used for) investing activities-continuing operations |
|
|
| Combined | $ | 6,931 |
| $ | 858 |
|
| GE current receivables sold to GE Capital | (5,085 | ) | (1,358 | ) |
| GE Capital long-term loans to GE | 5,999 |
| 7,271 |
|
| GE Capital short-term loans to GE | 480 |
| (1,329 | ) |
| Other reclassifications and eliminations(a) | (260 | ) | (183 | ) |
| Total cash from (used for) investing activities-continuing operations | $ | 8,064 |
| $ | 5,259 |
|
| Cash from (used for) financing activities-continuing operations |
|
|
| Combined | $ | (19,895 | ) | $ | (16,549 | ) |
| GE current receivables sold to GE Capital | 1,293 |
| 417 |
|
| GE Capital common dividends to GE | — |
| 4,016 |
|
| GE Capital long-term loans to GE | (5,999 | ) | (7,271 | ) |
| GE Capital short-term loans to GE | (480 | ) | 1,329 |
|
| Other reclassifications and eliminations(a) | 754 |
| (170 | ) |
| Total cash from (used for) financing activities-continuing operations | $ | (24,326 | ) | $ | (18,228 | ) |
| |
| (a) | Includes eliminations of other cash flows activities, including financing of long-term receivables of $851 million and $(432) million in the nine months ended September 30, 2018 and 2017 respectively, and various investments, loans and allocations of GE corporate overhead costs. |
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 22. GUARANTOR FINANCIAL INFORMATION
GUARANTOR AND NON-GUARANTOR CONDENSED CONSOLIDATING FINANCIAL INFORMATION
On October 26, 2015, GE Capital International Funding Company Unlimited Company, formerly GE Capital International Funding Company (the Issuer), then a finance subsidiary of General Electric Capital Corporation, settled its previously announced private offers to exchange (the Exchange Offers) the Issuer’s new senior unsecured notes for certain outstanding debt securities of General Electric Capital Corporation.
The new notes that were issued were fully and unconditionally, jointly and severally guaranteed by both the Company and GE Capital International Holdings Limited (GECIHL) (each a Guarantor, and together, the Guarantors).
Under the terms of a registration rights agreement entered into in connection with the Exchange Offers, the Issuer and the Company agreed to file a registration statement with the U.S. Securities and Exchange Commission (SEC) for an offer to exchange new senior notes of the Issuer registered with the SEC and guaranteed by the Guarantors for certain of the Issuer’s outstanding unregistered senior notes. This exchange was completed in July 2016.
PRESENTATION
In connection with the registration of the senior notes, the Company is required to provide certain financial information regarding the Issuer and the Guarantors of the registered securities. Included are the Condensed Consolidating Statements of Earnings and Comprehensive Income for the three and nine months ended September 30, 2018 and 2017, Condensed Consolidating Statements of Financial Position as of September 30, 2018 and December 31, 2017 and Condensed Consolidating Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 for:
General Electric Company (the Parent Company Guarantor) - prepared with investments in subsidiaries accounted for under the equity method of accounting and excluding any inter-segment eliminations;
GE Capital International Funding Company Unlimited Company (the Subsidiary Issuer) – finance subsidiary for debt;
GE Capital International Holdings Limited (GECIHL)(the Subsidiary Guarantor)- prepared with investments in non-guarantor subsidiaries accounted for under the equity method of accounting;
Non-Guarantor Subsidiaries- prepared on an aggregated basis excluding any elimination or consolidation adjustments and includes predominantly all non-cash adjustments for cash flows;
Consolidating Adjustments - adjusting entries necessary to consolidate the Parent Company Guarantor with the Subsidiary Issuer, the Subsidiary Guarantor and Non-Guarantor Subsidiaries and in the comparative periods, this category includes the impact of new accounting policies adopted as described in Note 1 ; and
Consolidated - prepared on a consolidated basis.
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS) |
| FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2018 (UNAUDITED) |
| |
| (in millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Revenues | | | | | | |
| Sales of goods and services | $ | 8,382 |
| $ | — |
| $ | — |
| $ | 39,401 |
| $ | (20,319 | ) | $ | 27,465 |
|
| GE Capital revenues from services | — |
| 237 |
| 300 |
| 2,804 |
| (1,233 | ) | 2,109 |
|
| Total revenues | 8,382 |
| 237 |
| 300 |
| 42,205 |
| (21,552 | ) | 29,573 |
|
| | | | | | | |
| Costs and expenses | | | | | | |
| Interest and other financial charges | 1,796 |
| 236 |
| 725 |
| 1,168 |
| (2,697 | ) | 1,227 |
|
| Other costs and expenses | 9,655 |
| — |
| — |
| 40,331 |
| 1,302 |
| 51,288 |
|
| Total costs and expenses | 11,451 |
| 236 |
| 725 |
| 41,498 |
| (1,395 | ) | 52,515 |
|
| Other income (loss) | 1,705 |
| — |
| — |
| 7,503 |
| (9,002 | ) | 205 |
|
| Equity in earnings (loss) of affiliates | (21,669 | ) | — |
| 705 |
| 16,288 |
| 4,675 |
| — |
|
| Earnings (loss) from continuing operations before income taxes | (23,032 | ) | 2 |
| 281 |
| 24,499 |
| (24,485 | ) | (22,736 | ) |
| Benefit (provision) for income taxes | 224 |
| — |
| — |
| (536 | ) | 149 |
| (162 | ) |
| Earnings (loss) from continuing operations | (22,808 | ) | 1 |
| 281 |
| 23,963 |
| (24,335 | ) | (22,899 | ) |
| Earnings (loss) from discontinued operations, net of taxes | 39 |
| — |
| 18 |
| — |
| (17 | ) | 39 |
|
| Net earnings (loss) | (22,769 | ) | 1 |
| 298 |
| 23,963 |
| (24,353 | ) | (22,859 | ) |
| Less net earnings (loss) attributable to noncontrolling interests | — |
| — |
| — |
| (81 | ) | (9 | ) | (90 | ) |
| Net earnings (loss) attributable to the Company | (22,769 | ) | 1 |
| 298 |
| 24,044 |
| (24,343 | ) | (22,769 | ) |
| Other comprehensive income (loss) | 203 |
| — |
| 12 |
| (751 | ) | 739 |
| 203 |
|
| Comprehensive income (loss) attributable to the Company | $ | (22,566 | ) | $ | 1 |
| $ | 310 |
| $ | 23,293 |
| $ | (23,604 | ) | $ | (22,566 | ) |
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS) |
| FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED) |
| |
| (in millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Revenues | | | | | | |
| Sales of goods and services | $ | 8,025 |
| $ | — |
| $ | — |
| $ | 40,741 |
| $ | (20,001 | ) | $ | 28,764 |
|
| GE Capital revenues from services | — |
| 176 |
| 209 |
| 2,785 |
| (1,272 | ) | 1,898 |
|
| Total revenues | 8,025 |
| 176 |
| 209 |
| 43,526 |
| (21,274 | ) | 30,662 |
|
| | | | | | | |
| Costs and expenses | | | | | | |
| Interest and other financial charges | 1,671 |
| 168 |
| 542 |
| 1,279 |
| (2,428 | ) | 1,232 |
|
| Other costs and expenses | 9,418 |
| — |
| — |
| 40,253 |
| (18,822 | ) | 30,850 |
|
| Total costs and expenses | 11,089 |
| 168 |
| 542 |
| 41,533 |
| (21,250 | ) | 32,082 |
|
| Other income (loss) | (1,152 | ) | — |
| — |
| 25,159 |
| (21,842 | ) | 2,165 |
|
| Equity in earnings (loss) of affiliates | 5,219 |
| — |
| 1,019 |
| 21,123 |
| (27,361 | ) | — |
|
| Earnings (loss) from continuing operations before income taxes | 1,003 |
| 7 |
| 686 |
| 48,275 |
| (49,226 | ) | 746 |
|
| Benefit (provision) for income taxes | 470 |
| (1 | ) | — |
| (59 | ) | 141 |
| 551 |
|
| Earnings (loss) from continuing operations | 1,473 |
| 6 |
| 686 |
| 48,216 |
| (49,085 | ) | 1,297 |
|
| Earnings (loss) from discontinued operations, net of taxes | (113 | ) | — |
| (562 | ) | 4 |
| 565 |
| (106 | ) |
| Net earnings (loss) | 1,360 |
| 6 |
| 125 |
| 48,220 |
| (48,521 | ) | 1,191 |
|
| Less net earnings (loss) attributable to noncontrolling interests | — |
| — |
| — |
| (21 | ) | (148 | ) | (169 | ) |
| Net earnings (loss) attributable to the Company | 1,360 |
| 6 |
| 125 |
| 48,241 |
| (48,372 | ) | 1,360 |
|
| Other comprehensive income (loss) | 922 |
| — |
| (187 | ) | 19,935 |
| (19,749 | ) | 922 |
|
| Comprehensive income (loss) attributable to the Company | $ | 2,282 |
| $ | 6 |
| $ | (62 | ) | $ | 68,176 |
| $ | (68,121 | ) | $ | 2,282 |
|
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS) |
| FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 (UNAUDITED) |
| |
| (in millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Revenues | | | | | | |
| Sales of goods and services | $ | 24,033 |
| $ | — |
| $ | — |
| $ | 118,381 |
| $ | (59,983 | ) | $ | 82,432 |
|
| GE Capital revenues from services | — |
| 678 |
| 852 |
| 6,955 |
| (2,579 | ) | 5,905 |
|
| Total revenues and other income (loss) | 24,033 |
| 678 |
| 852 |
| 125,336 |
| (62,562 | ) | 88,337 |
|
| | | | | | | |
| Costs and expenses | | | | | | |
| Interest and other financial charges | 5,043 |
| 671 |
| 1,889 |
| 3,812 |
| (7,609 | ) | 3,807 |
|
| Other costs and expenses | 29,484 |
| — |
| — |
| 116,846 |
| (39,533 | ) | 106,797 |
|
| Total costs and expenses | 34,528 |
| 672 |
| 1,889 |
| 120,658 |
| (47,142 | ) | 110,604 |
|
| Other income (loss) | 3,600 |
| — |
| — |
| 8,600 |
| (10,926 | ) | 1,275 |
|
| Equity in earnings (loss) of affiliates | (14,635 | ) | — |
| 1,199 |
| 28,378 |
| (14,942 | ) | — |
|
| Earnings (loss) from continuing operations before income taxes | (21,529 | ) | 7 |
| 161 |
| 41,657 |
| (41,289 | ) | (20,992 | ) |
| Benefit (provision) for income taxes | 47 |
| (1 | ) | — |
| (1,098 | ) | 374 |
| (677 | ) |
| Earnings (loss) from continuing operations | (21,482 | ) | 6 |
| 161 |
| 40,559 |
| (40,914 | ) | (21,670 | ) |
| Earnings (loss) from discontinued operations, net of taxes | (1,634 | ) | — |
| (63 | ) | 1 |
| 62 |
| (1,634 | ) |
| Net earnings (loss) | (23,116 | ) | 6 |
| 98 |
| 40,560 |
| (40,852 | ) | (23,304 | ) |
| Less net earnings (loss) attributable to noncontrolling interests | — |
| — |
| — |
| (202 | ) | 14 |
| (188 | ) |
| Net earnings (loss) attributable to the Company | (23,116 | ) | 6 |
| 98 |
| 40,762 |
| (40,866 | ) | (23,116 | ) |
| Other comprehensive income (loss) | 1,174 |
| — |
| (42 | ) | (2,382 | ) | 2,425 |
| 1,174 |
|
| Comprehensive income (loss) attributable to the Company | $ | (21,941 | ) | $ | 6 |
| $ | 56 |
| $ | 38,380 |
| $ | (38,442 | ) | $ | (21,941 | ) |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS) |
| FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED) |
| |
| (in millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Revenues | | | | | | |
| Sales of goods and services | $ | 24,897 |
| $ | — |
| $ | — |
| $ | 114,446 |
| $ | (58,887 | ) | $ | 80,456 |
|
| GE Capital revenues from services | — |
| 505 |
| 583 |
| 7,644 |
| (2,548 | ) | 6,184 |
|
| Total revenues and other income (loss) | 24,897 |
| 505 |
| 583 |
| 122,090 |
| (61,435 | ) | 86,640 |
|
| | | | | | | |
| Costs and expenses | | | | | | |
| Interest and other financial charges | 3,348 |
| 477 |
| 1,485 |
| 3,582 |
| (5,348 | ) | 3,545 |
|
| Other costs and expenses | 27,618 |
| — |
| 22 |
| 113,764 |
| (57,436 | ) | 83,968 |
|
| Total costs and expenses | 30,966 |
| 478 |
| 1,507 |
| 117,346 |
| (62,784 | ) | 87,512 |
|
| Other income (loss) | (1,041 | ) | — |
| — |
| 57,784 |
| (54,051 | ) | 2,692 |
|
| Equity in earnings (loss) of affiliates | 8,956 |
| — |
| 1,711 |
| 71,787 |
| (82,454 | ) | — |
|
| Earnings (loss) from continuing operations before income taxes | 1,846 |
| 27 |
| 787 |
| 134,315 |
| (135,155 | ) | 1,820 |
|
| Benefit (provision) for income taxes | 989 |
| (3 | ) | 115 |
| (758 | ) | 351 |
| 693 |
|
| Earnings (loss) from continuing operations | 2,835 |
| 24 |
| 902 |
| 133,557 |
| (134,804 | ) | 2,513 |
|
| Earnings (loss) from discontinued operations, net of taxes | (501 | ) | — |
| (284 | ) | 7 |
| 287 |
| (490 | ) |
| Net earnings (loss) | 2,334 |
| 24 |
| 618 |
| 133,564 |
| (134,517 | ) | 2,023 |
|
| Less net earnings (loss) attributable to noncontrolling interests | — |
| — |
| — |
| (53 | ) | (258 | ) | (312 | ) |
| Net earnings (loss) attributable to the Company | 2,334 |
| 24 |
| 618 |
| 133,618 |
| (134,259 | ) | 2,334 |
|
| Other comprehensive income (loss) | 4,053 |
| — |
| 463 |
| (7,059 | ) | 6,596 |
| 4,053 |
|
| Comprehensive income (loss) attributable to the Company | $ | 6,387 |
| $ | 24 |
| $ | 1,081 |
| $ | 126,559 |
| $ | (127,663 | ) | $ | 6,387 |
|
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION |
| SEPTEMBER 30, 2018 (UNAUDITED) |
| |
| (In millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Assets | | | | | | |
| Cash, cash equivalents and restricted cash | $ | 2,289 |
| $ | — |
| $ | 15 |
| $ | 25,048 |
| $ | (420 | ) | $ | 26,932 |
|
| Investment securities | — |
| — |
| — |
| 35,388 |
| (627 | ) | 34,761 |
|
| Receivables - net | 32,989 |
| 17,585 |
| 33,060 |
| 75,611 |
| (124,797 | ) | 34,448 |
|
| Inventories | 4,938 |
| — |
| — |
| 21,020 |
| (5,316 | ) | 20,642 |
|
| Property, plant and equipment - net | 5,724 |
| — |
| — |
| 46,676 |
| (1,763 | ) | 50,638 |
|
| Investment in subsidiaries(a) | 265,584 |
| — |
| 78,891 |
| 726,516 |
| (1,070,991 | ) | — |
|
| Goodwill and intangible assets | 8,700 |
| — |
| — |
| 85,898 |
| (15,383 | ) | 79,216 |
|
| All other assets | 8,955 |
| 16 |
| — |
| 227,348 |
| (175,980 | ) | 60,339 |
|
| Assets of discontinued operations | — |
| — |
| — |
| — |
| 4,716 |
| 4,716 |
|
| Total assets | $ | 329,180 |
| $ | 17,601 |
| $ | 111,965 |
| $ | 1,243,505 |
| $ | (1,390,561 | ) | $ | 311,691 |
|
| | | | | | | |
| Liabilities and equity | | | | | | |
| Short-term borrowings | $ | 177,698 |
| $ | — |
| $ | 47,649 |
| $ | 12,830 |
| $ | (222,971 | ) | $ | 15,206 |
|
| Accounts payable | 7,760 |
| — |
| — |
| 54,412 |
| (46,424 | ) | 15,748 |
|
| Other current liabilities | 14,858 |
| 9 |
| 3 |
| 31,540 |
| (6,847 | ) | 39,562 |
|
| Long-term and non-recourse borrowings | 61,253 |
| 15,894 |
| 35,223 |
| 42,668 |
| (55,279 | ) | 99,760 |
|
| All other liabilities | 36,157 |
| 675 |
| 153 |
| 60,444 |
| (6,239 | ) | 91,190 |
|
| Liabilities of discontinued operations | — |
| — |
| — |
| — |
| 2,002 |
| 2,002 |
|
| Total Liabilities | 297,726 |
| 16,579 |
| 83,027 |
| 201,893 |
| (335,757 | ) | 263,468 |
|
| | | | | | | |
| Redeemable noncontrolling interests | — |
| — |
| — |
| 288 |
| 98 |
| 386 |
|
| | | | | | | |
| GE shareowners' equity | 31,454 |
| 1,022 |
| 28,938 |
| 1,040,130 |
| (1,070,090 | ) | 31,454 |
|
| Noncontrolling interests | — |
| — |
| — |
| 1,195 |
| 15,188 |
| 16,383 |
|
| Total equity | 31,454 |
| 1,022 |
| 28,938 |
| 1,041,324 |
| (1,054,902 | ) | 47,837 |
|
| Total liabilities, redeemable noncontrolling interests and equity | $ | 329,180 |
| $ | 17,601 |
| $ | 111,965 |
| $ | 1,243,505 |
| $ | (1,390,561 | ) | $ | 311,691 |
|
| |
| (a) | Included within the subsidiaries of the Subsidiary Guarantor are cash and cash equivalent balances of $7,462 million and net assets of discontinued operations of $3,229 million. |
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION |
| DECEMBER 31, 2017 |
| |
| (In millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Assets | | | | | | |
| Cash, cash equivalents and restricted cash | $ | 3,472 |
| $ | — |
| $ | 3 |
| $ | 41,236 |
| $ | (743 | ) | $ | 43,967 |
|
| Investment securities | 1 |
| — |
| — |
| 39,809 |
| (1,113 | ) | 38,696 |
|
| Receivables - net | 50,923 |
| 17,316 |
| 32,381 |
| 87,776 |
| (147,551 | ) | 40,846 |
|
| Inventories | 4,587 |
| — |
| — |
| 22,215 |
| (7,383 | ) | 19,419 |
|
| Property, plant and equipment - net | 5,808 |
| — |
| — |
| 48,516 |
| (450 | ) | 53,874 |
|
| Investment in subsidiaries(a) | 277,929 |
| — |
| 77,488 |
| 715,936 |
| (1,071,353 | ) | — |
|
| Goodwill and intangible assets | 8,014 |
| — |
| — |
| 90,226 |
| 6,002 |
| 104,242 |
|
| All other assets | 30,737 |
| 16 |
| 32 |
| 236,771 |
| (205,269 | ) | 62,288 |
|
| Assets of discontinued operations | — |
| — |
| — |
| — |
| 5,912 |
| 5,912 |
|
| Total assets | $ | 381,472 |
| $ | 17,332 |
| $ | 109,904 |
| $ | 1,282,485 |
| $ | (1,421,948 | ) | $ | 369,245 |
|
| | | | | | | |
| Liabilities and equity | | | | | | |
| Short-term borrowings | $ | 191,807 |
| $ | — |
| $ | 46,033 |
| $ | 22,603 |
| $ | (236,407 | ) | $ | 24,036 |
|
| Accounts payable | 8,126 |
| — |
| — |
| 77,509 |
| (70,462 | ) | 15,172 |
|
| Other current liabilities | 11,892 |
| 8 |
| 3 |
| 28,218 |
| (34 | ) | 40,088 |
|
| Long-term and non-recourse borrowings | 71,023 |
| 16,632 |
| 34,730 |
| 55,367 |
| (67,197 | ) | 110,556 |
|
| All other liabilities | 42,594 |
| 475 |
| 128 |
| 66,293 |
| (7,694 | ) | 101,797 |
|
| Liabilities of discontinued operations | — |
| — |
| — |
| — |
| 706 |
| 706 |
|
| Total Liabilities | 325,442 |
| 17,116 |
| 80,894 |
| 249,991 |
| (381,088 | ) | 292,355 |
|
| | | | | | | |
| Redeemable noncontrolling interests | — |
| — |
| — |
| 2,627 |
| 764 |
| 3,391 |
|
| | | | | | | |
| GE shareowners' equity | 56,030 |
| 216 |
| 29,010 |
| 1,028,311 |
| (1,057,537 | ) | 56,030 |
|
| Noncontrolling interests | — |
| — |
| — |
| 1,556 |
| 15,912 |
| 17,468 |
|
| Total equity | 56,030 |
| 216 |
| 29,010 |
| 1,029,867 |
| (1,041,625 | ) | 73,498 |
|
| Total liabilities, redeemable noncontrolling interests and equity | $ | 381,472 |
| $ | 17,332 |
| $ | 109,904 |
| $ | 1,282,485 |
| $ | (1,421,948 | ) | $ | 369,245 |
|
| |
| (a) | Included within the subsidiaries of the Subsidiary Guarantor are cash and cash equivalent balances of $15,225 million and net assets of discontinued operations of $4,318 million. |
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
| NINE MONTHS ENDED SEPTEMBER 30, 2018 (UNAUDITED) |
| | | | | | | |
| (In millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Cash flows – operating activities | | | | | | |
| Cash from (used for) operating activities - continuing operations | $ | 12,877 |
| $ | (118 | ) | $ | (381 | ) | $ | 43,530 |
| $ | (56,241 | ) | $ | (333 | ) |
| Cash from (used for) operating activities - discontinued operations | (1,634 | ) | — |
| — |
| 1,533 |
| (1 | ) | (102 | ) |
| Cash from (used for) operating activities | 11,243 |
| (118 | ) | (381 | ) | 45,063 |
| (56,242 | ) | (435 | ) |
| | | | | | | |
| Cash flows – investing activities | | | | | | |
| Cash from (used for) investing activities – continuing operations | (415 | ) | 189 |
| (1,052 | ) | (33,458 | ) | 42,800 |
| 8,064 |
|
| Cash from (used for) investing activities – discontinued operations | — |
| — |
| — |
| (224 | ) | — |
| (224 | ) |
| Cash from (used for) investing activities | (415 | ) | 189 |
| (1,052 | ) | (33,681 | ) | 42,800 |
| 7,840 |
|
| | | | | | | |
| Cash flows – financing activities | | | | | | |
| Cash from (used for) financing activities – continuing operations | (12,011 | ) | (70 | ) | 1,445 |
| (27,456 | ) | 13,765 |
| (24,326 | ) |
| Cash from (used for) financing activities – discontinued operations | — |
| — |
| — |
| — |
| — |
| — |
|
| Cash from (used for) financing activities | (12,011 | ) | (70 | ) | 1,445 |
| (27,456 | ) | 13,765 |
| (24,326 | ) |
| Effect of currency exchange rate changes on cash, cash equivalents and restricted cash | — |
| — |
| — |
| (440 | ) | — |
| (440 | ) |
| Increase (decrease) in cash, cash equivalents and restricted cash | (1,183 | ) | — |
| 12 |
| (16,513 | ) | 324 |
| (17,361 | ) |
| Cash, cash equivalents and restricted cash at beginning of year | 3,472 |
| — |
| 3 |
| 41,993 |
| (743 | ) | 44,724 |
|
| Cash, cash equivalents and restricted cash at September 30 | 2,289 |
| — |
| 15 |
| 25,479 |
| (420 | ) | 27,364 |
|
| Less cash, cash equivalents and restricted cash of discontinued operations at September 30 | — |
| — |
| — |
| 432 |
| — |
| 432 |
|
| Cash, cash equivalents and restricted cash of continuing operations at September 30 | $ | 2,289 |
| $ | — |
| $ | 15 |
| $ | 25,048 |
| $ | (420 | ) | $ | 26,932 |
|
|
| | |
| FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
| NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED) |
| | | | | | | |
| (In millions) | Parent Company Guarantor |
| Subsidiary Issuer |
| Subsidiary Guarantor |
| Non- Guarantor Subsidiaries |
| Consolidating Adjustments |
| Consolidated |
|
| | | | | | | |
| Cash flows – operating activities | | | | | | |
| Cash from (used for) operating activities - continuing operations | $ | (26,107 | ) | $ | 39 |
| $ | (81 | ) | $ | 184,255 |
| $ | (154,725 | ) | $ | 3,381 |
|
| Cash from (used for) operating activities - discontinued operations | (501 | ) | — |
| — |
| 8 |
| 3 |
| (490 | ) |
| Cash from (used for) operating activities | (26,608 | ) | 39 |
| (81 | ) | 184,264 |
| (154,722 | ) | 2,892 |
|
| | | | | | | |
| Cash flows – investing activities | | | | | | |
| Cash from (used for) investing activities – continuing operations | (1,723 | ) | (39 | ) | 348 |
| (297,453 | ) | 304,126 |
| 5,259 |
|
| Cash from (used for) investing activities – discontinued operations | — |
| — |
| — |
| (2,515 | ) | — |
| (2,515 | ) |
| Cash from (used for) investing activities | (1,723 | ) | (39 | ) | 348 |
| (299,968 | ) | 304,126 |
| 2,744 |
|
| | | | | | | |
| Cash flows – financing activities | | | | | | |
| Cash from (used for) financing activities – continuing operations | 26,340 |
| — |
| (265 | ) | 104,015 |
| (148,319 | ) | (18,228 | ) |
| Cash from (used for) financing activities – discontinued operations | — |
| — |
| — |
| 1,905 |
| — |
| 1,905 |
|
| Cash from (used for) financing activities | 26,340 |
| — |
| (265 | ) | 105,920 |
| (148,319 | ) | (16,323 | ) |
| Effect of currency exchange rate changes on cash, cash equivalents and restricted cash | — |
| — |
| — |
| 1,253 |
| — |
| 1,253 |
|
| Increase (decrease) in cash, cash equivalents and restricted cash | (1,991 | ) | — |
| 4 |
| (8,531 | ) | 1,084 |
| (9,434 | ) |
| Cash, cash equivalents and restricted cash at beginning of year | 2,729 |
| — |
| 41 |
| 49,204 |
| (1,590 | ) | 50,384 |
|
| Cash, cash equivalents and restricted cash at September 30 | 738 |
| — |
| 45 |
| 40,673 |
| (506 | ) | 40,950 |
|
| Less cash, cash equivalents and restricted cash of discontinued operations at September 30 | — |
| — |
| — |
| 501 |
| — |
| 501 |
|
| Cash, cash equivalents and restricted cash of continuing operations at September 30 | $ | 738 |
| $ | — |
| $ | 45 |
| $ | 40,172 |
| $ | (506 | ) | $ | 40,449 |
|
EXHIBITS
|
| | |
| GE 2007 Long-Term Incentive Plan (as amended and restated April 26, 2017) (Incorporated by reference to Exhibit 99.1 to GE’s Registration Statement on Form S-8, dated July 28, 2017, File number 333-219566 (Commission file number 001-00035)). |
| Computation of Per Share Earnings.*
Computation of Ratio of Earnings to Fixed Charges. Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. |
| |
| Certification Pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as Amended. |
| |
| Certification Pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as Amended. |
| |
| Certification Pursuant to 18 U.S.C. Section 1350. |
| |
| Exhibit 101 | The following materials from General Electric Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,2018, formatted in XBRL (eXtensible Business Reporting Language); (i) Statement of Earnings (Loss) for the three and nine months ended September 30, 20172018 and 2016,2017, (ii) Consolidated Statement of Comprehensive Income (Loss) for the three and nine months ended September 30, 2018 and 2017, and 2016, (iii) Consolidated Statement of Changes in Shareowners’ Equity for the nine months ended September 30, 2017 and 2016, (iv) Statement of Financial Position at September 30, 20172018 and December 31, 2016,2017, (v) Statement of Cash Flows for the nine months ended September 30, 2018 and 2017, and 2016, and (vi)(iv) Notes to Consolidated Financial Statements. |
| | | |
| | * | Data required by Financial Accounting Standards Board Accounting Standards Codification 260, Earnings Per Share, is provided in Note 1516 to the Consolidated Financial Statements in this Report. |
114116 20172018 3Q FORM 10-Q
FORM 10-Q CROSS REFERENCE INDEX
|
| | | | |
| Item Number | | Page(s) |
| Part I – FINANCIAL INFORMATION |
| Item 1. | | Financial Statements | | 66-11361-115 |
| | | | | |
| Item 2. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 4-594-55 |
| | | | | |
| Item 3. | | Quantitative and Qualitative Disclosures About Market Risk | | Not applicable(a) |
| | | | | |
| Item 4. | | Controls and Procedures | | 6056 |
| | | | | |
Part II – OTHER INFORMATION |
| Item 1. | | Legal Proceedings | | 62-6359-60 |
| | | | | |
| Item 1A. | | Risk Factors | | Not applicable(b)58 |
| | | | | |
| Item 2. | | Unregistered Sales of Equity Securities and Use of Proceeds | | 6157 |
| | | | | |
| Item 3. | | Defaults Upon Senior Securities | | Not applicable |
| | | | | |
| Item 4. | | Mine Safety Disclosures | | 5149 |
| | | | | |
| Item 5. | | Other Information | | Not applicable |
| | | | | |
| Item 6. | | Exhibits | | 114116 |
| | | | | |
| Signatures | | | 116118 |
| |
| (a) | There have been no significant changes to our market risk since December 31, 2016.2017. For a discussion of our exposure to market risk, refer to our Annual Report on Form 10-K for the year ended December 31, 2016. |
| |
(b) | There have been no significant changes to our risk factors since December 31, 2016. For a discussion of our risk factors, refer to our Annual Report on Form 10-K for the year ended December 31, 2016.2017. |
20172018 3Q FORM 10-Q 115117
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | |
| | | General Electric Company
(Registrant)
|
October 30, 20172018 | | /s/ Jan R. HauserJamie S. Miller |
| Date | | Jan R. HauserJamie S. Miller
Senior Vice President and Chief Financial Officer Principal Financial Officer |
|
| | |
| October 30, 2018 | | /s/ Thomas S. Timko |
| Date | | Thomas S. Timko Vice President, Chief Accounting Officer and Controller Duly Authorized Officer and Principal Accounting Officer
|
116118 20172018 3Q FORM 10-Q
