General Electric’s Q3 Revenue Driven by Aviation, Power Segments

Power segment revenues jumped 37% driven by increased Alstom orders

Source: GE
Source: GE

Multinational conglomerate General Electric Company (NYSE: GE) announced its Q3 FY16 financial results on October 21st, 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.

Q3 FY16 financial highlights

During Q3 FY16, General Electric’s total revenues grew 4% Y-o-Y to $29.3 billion, which was below expectations of $29.6 billion. Of concern is the fact that on an organic basis (excluding the effects of acquisitions and divestitures), revenues inched up just 1% during the reporting quarter. Meanwhile, organic orders fell 6%. As expected, the Power, Aviation, Healthcare, and Renewable Energy segments were the major growth drivers. On the other hand, the Oil & Gas segment, which continues to face pressure from low energy prices amid sluggish global growth, and Transportation, weighed on Q3 FY16 revenue and operating profits.

Source: GE
Source: GE

In all, GE’s Q3 FY16 earnings fell 12% to $2.1 billion, or $0.22 per share, from $2.5 billion, or $0.25 per share, in the same quarter a year ago. On an adjusted basis, EPS came in at higher at $0.32 versus $0.29 in the year-ago quarter, thus beating expectations by $0.02 per share.

Segmental highlights

During Q3 FY16, GE’s Power segment revenues jumped 37% driven by aero and gas turbines along with increased Alstom’s orders, partially offset by distributed power resets. Both orders and backlog for Power were up 34% and 56%, respectively, due to the strong performance of the GE-Alstom joint venture in Q3 FY16. GE’s overall Power revenues are estimated to grow more than 25% for the full year FY16.

GE’s Renewable segment also witnessed strong growth in Q3 FY16, with a 66% increase in revenues due to new contract wins from Alstom. The GE-Alstom joint venture is likely to gain more ground in the coming quarter as it recently won a large offshore wind project in Germany, worth over $1 billion.

During Q3 FY16, GE’s Healthcare segment witnessed a 5% decrease in revenue, but was up 2% on a constant currency basis. On an organic basis, this segment saw a 3% rise in orders during the reporting quarter. While developing economies such as China has been aiding the overall segment growth, GE still relies on the U.S., Japan, and Europe for 75% of the segment revenues. About 20% of GE’s Healthcare revenues come from Asia/Pacific and its public tender activity in Q3 FY16 went up by 20% in China, a very significant market for GE in the region.

g3During Q3 FY16, GE’s Oil & Gas revenue was down 16% while profits came in 11% lower. 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 Q3 FY16, orders at GE’s oil and gas segment fell 32% organically, as energy companies slashed their investment in new equipment and machinery, given the falling crude oil prices. This is likely to remain the case in the near-term until oil prices recover. However, during the reporting quarter, the Organization of Petroleum Exporting Countries (OPEC) decided to cap their combined oil production between 32.5 and 33 million barrels per day, which triggered about 22% price surge in global oil prices. This could help grow GE’s Oil & Gas revenue in Q4 FY16, and may help revive GE’s business going forward.

During Q3 FY16, GE’s revenues in the Transportation and Energy Connections businesses both declined by 22% due to the continued weakness in mining activities, subdued crude oil prices, and decline in the non-LED lighting market.

g4During Q3 FY16, GE’s Aviation segment showed robust growth with revenue growing 5% due to newly acquired businesses and some new customers, while profits grew 7%. This segment was bolstered by low oil prices and strong service volume. With the overall industry performing well and travel demand growing 6.6% in the first eight months of 2015, the Aviation segment is expected to continue contributing to GE’s revenue going forward. This segment is also expected to benefit as global passenger air travel continues to see strong growth in both domestic and international markets. Additionally, GE aviation services saw its service orders go up by 10% and growth market orders by 21% during Q3 FY16.

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. Software orders are growing, with customer wins including Gairdow, NEC, Aramco, Haier, and CN in Q3 FY16. GE’s Predix now has about 243 partners and is on track for 20,000 developers by end of 2016.

Other highlights

GE seals deal to combine oil-and-gas business with Baker Hughes:

g5On 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 (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 the 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 is expected to add approximately $.04 to GE EPS in 2018, $.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.

Acquisitions:

In Q3 FY16, GE announced the acquisitions of SLM, Arcam, Meridium, and LM Wind Power in the field of additive manufacturing equipment, asset performance management and wind power, respectively. These are likely to pay off in 2018 and will ensure sustainable growth, improved margins and growth in emerging markets.

GE Capital exit plan:

GE continued its GE Capital exit plan with asset sales of $16 billion in Q3 FY16, bringing the total closed transactions through the end of the quarter to $173 billion. GE Capital’s revenue jumped 33% to $466 million in Q3 FY16, driven by lower impairments in Energy Finance.

Returns to shareholders:

Additionally, in FY16, GE returned $24.6 billion to investors through dividends and buyback, which will be at least $30 billion for the full year FY16.

Source: GE
Source: GE

Secures $900-million turnkey order from Brazil’s CELSE:

On October 27th, 2016, GE announced that it has secured a more than $900 million turnkey order with Centrais Elétricas de Sergipe S.A. (CELSE) for Brazil’s Porto de Sergipe combined-cycle power plant. With a generating capacity of 1,516 MW, the facility will be the largest gas power plant in Latin America and can deliver an efficiency rate of over 62%.

The plant will feature three of GE’s world-record-setting HA gas turbines and a steam turbine as well as a heat recovery steam generator (HRSG) and other related equipment added to the GE portfolio through the Alstom acquisition. The contract also includes a robust transmission system provided on a turnkey basis by GE Energy Connections. This system incorporates a high voltage step up substation at the power plant, transmission lines and a bay at an existing substation. Once complete, the combined-cycle plant, located at Barra dos Coqueiros, will account for an estimated 15% of Northeast energy demand in Brazil.

Guidance for 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 per share to $1.55 per share for full year FY16. Organic revenue growth in FY16 is expected to be in the range of 2% to 4%. In addition, the Company expects to generate $30 billion to $32 billion in cash flow from operations in FY16.

Stock Performance

g7General Electric’s stock finished the day at $29.10, falling 0.41%, at the close on Monday, October 31st, 2016, having vacillated between an intraday high of $29.65 and a low of $29.09 during the session. The stock’s trading volume was at 43,534,930 for the day. The Company’s market cap was at $258.78 billion as of Monday’s close.

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