General Electric’s Earnings Plunge Despite Restructuring Efforts

Q4 FY16 GAAP net earnings fell 45% Y-o-Y to $3.48 billion, or $0.39 per share

Multinational conglomerate General Electric Company (NYSE: GE) announced its Q4 FY16 and full-year FY16 financial results on January 20th, 2017. 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.

Q4 FY16 financial highlights

During Q4 FY16, General Electric’s total revenues fell 2% Y-o-Y to $33.1 billion, missing expectations of $34.1 billion compared to $33.9 billion in the year ago same period. While the Industrial segment revenue remained about flat Y-o-Y at $31.23 billion, GE Capital revenues improved 2% to $2.64 billion. Organic revenues for the Industrial segment decreased 1% to $27.29 billion. For the full year FY16, consolidated revenues were $1.23 billion compared to $11.73 billion in FY15.

General Electric’s margins during the reported quarter improved due to stringent cost-cutting and simplification initiatives. Industrial segment operating profit increased 6% Y-o-Y to $5.84 billion, with a rise in profits in Power (up 27%), Aviation (up 11%) and Healthcare (up 10%), partially offset by a significant fall in profits in Energy Connections & Lighting (down 63%) and Oil & Gas (down 43%). Total segment profit increased 55% Y-o-Y to $6.05 billion. Gross margin for the Industrial segment declined 10 bps to 28.7%, while non-GAAP operating margin decreased to 17.3% from 18.3% in the prior year comparable period.

Faced with a challenging macroeconomic environment and ongoing restructuring initiatives with a re-focus on core operations, General Electric’s Q4 FY16 GAAP net earnings fell 45% Y-o-Y to $3.48 billion, or $0.39 per share, compared to $6.28 billion, or $0.64 per share, in the year ago corresponding quarter. Including industrial and other verticals, operating earnings fell 12% Y-o-Y to $0.46 per share mainly due to divested businesses.

For the full year FY16, General Electric reported GAAP net income of $8.17 billion, or $0.89 per share, compared to a loss of $6.14 billion, or a loss of $0.61 per share, in the previous year. Including industrial and other verticals, operating earnings for FY16 were $1.49 per share compared to $1.31 per share for FY15.

Segmental highlights

During Q4 FY16, GE’s Power segment revenues jumped 20% to $8.47 billion, with strong revenues from core equipment along with increased Alstom orders, partially offset by distributed power resets. During the reporting quarter, the Power segment garnered eight HA turbine orders and had 32 orders in backlog. This segment secured a $900-million HA turbine order for Latin America’s largest gas power plant. It also bagged a $1.4 billion order from the Iraq Ministry of Electricity for gas-fired power and services agreements.

GE’s Renewable segment also witnessed strong growth in Q4 FY16, with a 29% jump in revenues to $2.50 billion due to new contract wins from Alstom. The GE-Alstom joint venture recently won over $3 billion in onshore wind orders, $1.9 billion of which are in the US. This segment also announced plans to acquire LM Wind Power for $1.65 billion during Q4 FY16.

During Q4 FY16, GE’s Healthcare segment reported a 3% revenue growth to $5.1 billion due to solid volume growth and cost productivity. While developing economies such as China have been aiding overall growth, GE still relies on the US, Japan and Europe for 75% of segment revenues. This segment announced collaborations with UCSF and Boston Children’s Hospital to apply analytics to radiology. It also closed two additional PPP agreements with the Turkey Ministry of Health to deliver $128 million in equipment and services over the next 25 years.

During Q4 FY16, GE’s Oil & Gas revenue fell 22% Y-o-Y to $3.4 billion. GE is one of the largest suppliers of oil and gas drilling machinery, and this business constitutes about 10% of the Company’s value. During Q4 FY16, GE signed a $180-million performance-based CSA with Transocean. On November 30th, 2016, the Organization of Petroleum Exporting Countries’ (OPEC) decided to cap combined oil production to 32.5 million barrels per day, which triggered a 22% price surge in global oil prices in the last quarter of 2016. This could help grow GE’s Oil & Gas revenue in Q1 FY17, and may help revive GE’s business going forward.

During Q4 FY16, GE’s revenues in the Transportation business fell 23% Y-o-Y to $1.24 billion on lower locomotive shipments. Revenues from Energy Connections & Lighting plunged 29% to $3.15 billion on softer oil & gas and Industrial Solutions markets.

During Q4 FY16, revenues from the Aviation segment jumped 7% Y-o-Y to $7.18 billion largely due to higher service revenue. This segment announced the acquisition of controlling interest of Arcam AB and Concept Laser for additive manufacturing; it also launched GE Additive and bagged about $480 million of LEAP engine orders with additive manufactured components driven by agreements with Lion Air and Donghai. This segment is also expected to benefit as global passenger air travel continues to see strong growth in both domestic and international markets. Reduced jet fuel costs and higher revenue passenger miles have increased the demand for new airplanes globally. Airplane manufacturers such as The Boeing Company (NYSE: BA) and Airbus Group hiked up their production, which is expected to bode well for GE.

GE’s advanced analytical tools along with its new Predix platform are also propelling growth. The company signed its first enterprise-wide software agreement with Exelon to deploy Predix across power generation fleet. GE’s Predix had 22K+ developers and 400+ partners at end of 2016.

During Q4 FY16, revenues from the GE Capital segment grew 2% Y-o-Y to $2.64 billion. During 2016, GE Capital returned $20.1 billion in dividends to parent General Electric. Ending net investment or ENI (excluding cash and cash equivalents) for GE Capital was $92.8 billion at the end of Q4 FY16, down 44.2% Y-o-Y.

Other highlights

GE seals deal to combine oil-and-gas business with Baker Hughes: On October 31st, 2016, GE announced that it has entered into an agreement to merge its oil and gas business with oilfield services provider Baker Hughes Inc. (NYSE: BHI), to create a world-leading oilfield technology provider with a unique mix of service and equipment capabilities. After the impending merger, the new Baker Hughes will be a leading equipment, technology, and services provider in the oil and gas industry with $32 billion of combined revenue and operations in more than 120 countries. The new company will benefit from GE’s technology expertise and Baker Hughes’ capabilities in oilfield services, to provide best-in-class physical and digital technology solutions for customer productivity.

Under terms of the agreement, which has been approved by the boards of directors of both companies, at the closing of the transaction, Baker Hughes’ shareholders will receive a special one-time cash dividend of $17.50 per share. GE will own 62.5% of the company and existing Baker Hughes shareholders will have a 37.5% interest through a newly listed corporation on the New York Stock Exchange. The $7.4 billion contributed by GE to the new partnership will be used to fund the cash dividend to existing Baker Hughes shareholders. The transaction is expected to close in mid-2017 and would add about $0.04 to GE’s EPS in 2018, $0.08 by 2020.

From GE’s full-stream oil and gas manufacturing and technology solutions spanning across subsea & drilling, rotating equipment, imaging and sensing to the Baker Hughes portfolio in Drilling & Evaluation and Completion & Production, the merged company would offer oil and gas productivity solutions. The companies expect to generate total run-rate synergies of $1.6 billion by 2020.

Centerview Partners is serving as financial advisor to GE on the transaction. Morgan Stanley is also acting as financial advisor. Shearman & Sterling is acting as legal advisor to GE. Goldman Sachs & Co. is serving as financial advisor to Baker Hughes. Davis Polk is acting as legal advisor to Baker Hughes.

Order book position: During Q4 FY16, total orders for the Industrial segment grew 4% Y-o-Y to $33.9 billion, with significant order improvements from the Renewable Energy and Energy Connections & Lighting segments, partially offset by considerable declines from Transportation. Total backlog of equipment and services at the end of Q4 FY16 was $321 billion, up 2% Y-o-Y.

Cash position: Cash generated from operating industrial activities (excluding deal taxes and pension funding) for FY16 fell to $11.61 billion compared to $12.23 billion in FY15. Cash and marketable securities at the end of Q4 FY16 were at $92.4 billion, while free cash flow was $27.28 billion.

Acquisitions: On January 10th, 2017, GE Digital acquired ServiceMax, a cloud-based field service management solutions provider, for $915 million. The transaction will enable General Electric to automate and digitize the servicing of heavy-duty machinery as it aims to focus on core manufacturing businesses with a digital edge. The acquisition of ServiceMax is likely to accelerate the commercialization of the Predix software of General Electric. Predix is designed to add intelligence to the Internet of Things applications. The combination of machine connectivity with a data lifecycle management platform powered by engineering simulation will help diverse firms to design their products for the Industrial Internet in the best way possible.

Restructuring initiatives: General Electric underwent massive restructuring initiatives in order to create a simpler and nimbler firm. From a diversified conglomerate with business interests in financial services, media, industrial and technology-based operations, the company pruned its operating portfolio to focus on core manufacturing businesses with a digital edge.

Since April 2015 till the end of 2016, GE Capital inked sale agreements worth approximately $197 billion in ENI, of which it has already completed deals worth $190 billion. The Company has more or less completed its GE Capital exit plan about one year ahead of schedule. With these restructuring initiatives, General Electric expects operating earnings from the industrial business to comprise over 90% of its total operating earnings by 2018, from 58% in 2014.

Shareholder returns: In FY16, GE returned $30.5 billion to investors through dividends and buyback, of which $20.1 billion of dividends was given in FY16, including $4 billion in 4Q 2016.

Guidance for FY17

General Electric anticipates operating earnings in 2017 to be in the range of $1.60 and $1.70, with organic growth of 3% to 5%. It intends to return $19 billion to $21 billion to shareholders in 2017, including $8 billion in dividends and $11 billion to $13 billion in share repurchases. In addition, the Company expects to generate $18 billion to $21 billion in cash flow from industrial operations in 2017.

Stock Performance

General Electric’s stock finished the day at $30.53, falling 2.18%, at the close on Friday, January 20th, 2017, having vacillated between an intraday high of $30.90 and a low of $30.30 during the session. The stock’s trading volume was at 83,257,129 for the day. The Company’s market cap was at $276.10 billion as of Friday’s close.

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