Conglomerate revamps itself to gain digital edge in volatile macroeconomic scenario
Multinational conglomerate General Electric Company (NYSE: GE) announced its Q2 FY16 financial results on July 22nd, 2016. The Medina, Minnesota-based company’s products and services range from aircraft engines, power generation and oil & gas production equipment to medical imaging, financing, and industrial products. The Company’s segments include Power, Renewable Energy, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation, Appliances & Lighting, and Capital. Read more about GE’s financial results below.
Q2 FY16 financial highlights
During Q2 FY16, General Electric’s total consolidated revenue jumped 15% to $33,494 million from $29,226 million in the year-ago quarter. While the Industrial segment’s revenue rose 7% Y-o-Y to $28,630 million, GE Capital’s revenues grew 3% to $2,771 million during the reporting quarter. Organic revenue growth for the Industrial segment declined 1% in Q2 FY16 due to slow growth and volatile macroeconomic environment.
In Q2 FY16, total orders for the Industrial segment decreased 2% to $26.6 billion, with significant order declines from the Transportation and Oil & Gas segments compared to the year-ago period. Total backlog of equipment and services was at a record high at $320 billion, up 17% Y-o-Y.
Owing to sluggish growth during Q2 FY16, General Electric recorded a decline in margins despite stringent cost-cutting and simplification initiatives. Industrial segment operating profit fell 5% (organic growth down 6%) Y-o-Y to $4,122 million, with a 57% fall in operating profits at Energy Connections. The Oil & Gas segment’s profits fell 48%, and Appliances & Lighting declined 42%, partially offset by an 11% rise in profits in Healthcare and a 9% growth in the Power segment’s operating profits. Gross margins for the Industrial segment improved 70bps to 27.3%, while non-GAAP operating margin remained flat at 14.2%.
Despite a challenging macroeconomic environment, General Electric’s sustained restructuring efforts enabled the Company to report strong Q2 FY16 operating earnings of $3,613 million, or $0.39 per share, compared with $2,127 million, or $0.21 per share, in the year-ago quarter. Including industrial and other verticals, operating earnings came in higher at $0.51 per share, a 65% jump year over year.
On a GAAP basis, General Electric’s Q2 FY16 net income from continuing operations shot up to $3,281 million, or $0.36 per share, compared to $1,679 million, or $0.17 per share, in the year-ago period. The remarkable improvement in reported earnings was primarily due to a reshuffle in the operating portfolio and divesture of GE Capital’s assets to reduce earnings volatility.
During Q2 FY16, General Electric’s Oil & Gas revenues fell 22% to $3,219 million due to macroeconomic headwinds and volatility in oil prices, while Energy Connections revenues jumped 55% to $2,734 million due to contribution from Alstom. Revenues from the Aviation segment were up 4% to $6,511 million mainly due to higher services revenues. Transportation revenues declined 13% Y-o-Y to $1,240 million on lower locomotive deliveries.
During Q2 FY16, General Electric’s Power segment revenues jumped 31% Y-o-Y to $6,639 million with strong project executions. The Appliances & Lighting segment’s revenues dived 25% to $1,667 million due to a partial quarter, while revenues from the Healthcare segment improved 4% to $4,525 million due to solid volume and cost productivity. Revenues from the Renewable Energy segment jumped 28% Y-o-Y to $2,094 million largely due to higher volume of turbine shipments by Alstom.
During Q2 FY16, General Electric’s GE Capital segment revenue rose 3% Y-o-Y to $2,771 million. During H1 FY16, GE Capital returned $11 billion in dividends to General Electric and remained on track to reach the tally of $18 billion in FY16. Ending net investment (ENI, excluding cash and cash equivalents) for GE Capital was $79.3 billion at the end of Q2 FY16, down 55.8% as compared to the year-ago period.
General Electric is restructuring itself into a leaner organization from being a conglomerate with diversified business interests in financial services, media, industrial and technology-based operations. The Company is trimming its operating portfolio to focus more on its core manufacturing businesses, while gaining a digital edge.
As part of the restructuring efforts, General Capital has inked sale agreements worth approximately $181 billion in ENI as of June 30th, 2016, of which it has already completed deals worth $158 billion. These transactions are aimed at emerging into a manufacturing-based entity with emphasis on high-value engineering such as aviation engines, drilling machines, generators, medical equipment, and scanners. By 2018, General Electric expects its industrial business to account for over 90% of its total operating earnings from 58% in 2014.
During Q2 FY16, General Electric divested its appliance business to China’s Haier Group, which enabled the Company to allocate more resources to its core industrial businesses. General Electric also divested GE Capital’s restaurant franchise financing assets in the U.S. These divestures include about $1.4 billion in ENI and are likely to yield $0.2 billion of capital to General Electric.
Also during Q2 FY16, General Electric ramped up its digital presence in Europe by opening a new digital office in Paris called Digital Foundry, through which GE Digital plans to incubate local startups, form client collaborations to develop new applications, and expand the community of industrial developers in Europe. Apart from helping General Electric gain a competitive edge in the market, the digital presence will help grow its customer base and expand its IT portfolio.
During Q2 FY16, General Electric’s cash from operating industrial activities (excluding dividends) totaled $33 million. Cash and marketable securities as of June 30th, 2016, was at $91.8 billion.
On July 15th, 2016, at the Farnborough Air Show in England, GE and CFM International, GE’s joint venture with France’s Safran Aircraft Engines, brought in $25 billion in new business. CFM bagged orders and commitments for more than 10,800 next-generation LEAP jet engines, valued at $151 billion (U.S. list price), and the company won deals for at least 393 more. CFM sold 565 engines valued at $8.2 billion, including its CFM56 engines.
During Q2 FY16, GE Power was awarded the Guinness World Record for power plant efficiency in a power station in Bouchain, France, featuring its latest 9HA gas turbine, which hit 62.2% efficiency.
On May 23rd, 2016, General Electric announced that it has committed to investments worth over $1.4 billion in Saudi Arabia to support the kingdom’s Vision 2030 plan. GE signed a letter of understanding with the Saudi Arabian Industrial Investments Company to co-invest $1 billion in strategic sectors such as water, aviation, and digital in 2017. General Electric, which has been operating in Saudi Arabia for 80 years now, will co-invest another $400 million with Saudi Aramco and another company to build a forging and casting manufacturing facility for the marine and energy industries in the kingdom.
During Q2 FY16, General Electric returned $18 billion to shareholders, including $13.7 billion through a share buyback and $3.7 billion through dividends. In addition, General Electric intends to return $26 billion to shareholders in FY16, including $8 billion in dividends and $18 billion in share repurchases.
Guidance for full year FY16
Despite soft macroeconomic conditions and expectations of weak global growth in 2016, General Electric reiterated its earlier guidance and anticipates operating earnings to be within the range of $1.45-$1.55 per share for full year FY16. Organic revenue growth in FY16 is expected to be in the range of 2%-4%. In addition, the Company expects to generate $30-$32 billion in cash flow from operations in FY16.
GE’s stock stood at $31.14, slipping 0.35%, at the close on Friday, July 29th, 2016, having vacillated between an intraday high of $31.43 and a low of $31.11 during the session. The stock’s trading volume was at 47,852,445 for the day. The Company’s market cap was at $287.36 billion as of Friday’s close.