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General Electric (GE) Beats Q2 Earnings Estimates, Ups View

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General Electric Company GE reported better-than-expected results in second-quarter 2019, with a positive earnings surprise of 41.7%. This came in after the company recorded earnings beat of 55.56% in the first quarter of 2019.

The industrial conglomerate’s adjusted earnings in the reported quarter were 17 cents per share, surpassing the Zacks Consensus Estimate of 12 cents. However, the bottom line reflected a 5.6% decline from the year-ago figure of 18 cents due to weakness in revenue performance and a decline in margins.

Weakness in Healthcare and Power Affects Industrial Revenues

In the quarter under review, General Electric’s consolidated revenues totaled $28,831 million, reflecting a year-over-year decline of 1%. The performance was adversely impacted by weakness in Industrial and GE Capital’s revenues. Also, the company’s revenues lagged the Zacks Consensus Estimate of $28,870 million.

On a segmental basis, its Industrial revenues edged down 0.5% year over year to $27,071 million. The segment’s organic revenues grew 7% from the year-ago quarter to $27,688 million. Industrial orders grew 4% organically while backlog (at the end of the quarter) of $396.5 billion reflected growth of 11%.

GE Capital’s revenues in the reported quarter totaled $2,321 million, down 4% year over year.

Performance of the Industrial segment’s components businesses are discussed below:

Oil & Gas revenues increased 7% year over year to $5,953 million on 8% growth in orders. Organically, the segment’s sales increased 11% year over year on 11% growth in orders.

Aviation revenues grew 5% to $7,877 million while orders were down 10%. Organically, revenues expanded 6% on 9% growth in orders. Business for commercial engines was impressive while that for military suffered. Notably, second-quarter shipment of LEAP engines totaled 437 versus the year-ago figure of 250.

Healthcare revenues in the reported quarter totaled $4,934 million, down 1% year over year. The segment’s orders decreased 2%. On an organic basis, revenues increased 4% on 3% growth in orders. Healthcare Systems’ sales in the quarter were driven by growth in Europe business, partially offset by weakness in North America and China. Life Sciences revenues also improved in the quarter.

Renewable Energy revenues totaled $3,627 million, up 26% year over year. Its orders increased 35% in the reported quarter. Organically, the segment’s sales rose 33% year over year on 38% growth in orders. Notably, onshore orders were strong in North America.

The company also noted that it realigned Grid Solution’s services and equipment business with this segment.

Power segment’s revenues were down 25% year over year to $4,681 million. The segment’s orders declined 22%. On an organic basis, the segment’s sales were down just 5% while orders increased 2% on healthy orders in Gas Power, including four aero-derivative units and 16 gas turbines (heavy-duty). Notably, organic orders were weak for Power Portfolio mainly due to unfavorable project timing in Steam Power Systems.

Margins Suffer Y/Y

In the quarter under review, General Electric’s cost of sales increased 0.3% year over year to $21,817 million. It represented 75.7% of the quarter’s revenues versus 74.6% in the year-ago quarter. Selling, general and administrative expenses in the quarter decreased 3.7% year over year to $4,184 million. It was 14.5% of the quarter’s revenues versus 14.9% in the year-ago quarter.

The Industrial segment’s adjusted operating profit in the quarter decreased 26.4% year over year to $2,032 million while margins fell 260 basis points to 7.6%. On a reported basis, Industrial segment recorded loss of $362 million against profit of $1,239 million in the year-ago quarter. On a segmental basis, operating performance suffered from declines in Power (down 69%), Aviation (down 6%) and Renewable Energy (recorded loss in the reported quarter against profits in the year-ago quarter), partially offset by an improvement in profits in Oil & Gas (up 5%) and Healthcare (up 9%).

The GE Capital segment witnessed profits of $148 million in the quarter under review.

Balance Sheet and Cash Flow

Exiting the second quarter of 2019, General Electric had cash and cash equivalents of $71.4 billion, down from $73.2 billion recorded at the end of the previous quarter.

Adjusted free cash flow from GE Industrial totaled ($993) million against free cash flow of $316 million in the year-ago quarter.

Restructuring

In June 2018, General Electric communicated plans to transform itself into a high-tech industrial company — focused on Aviation, Power and Renewable Energy.

In sync with its plans, the company completed the sale of its transportation business to Wabtec Corporation WAB in the first quarter of 2019. Notably, General Electric lowered its stake in Wabtec from 25% to 12%, resulting in cash proceeds of $1.8 billion.

Further, General Electric announced that it agreed to divest the BioPharma business to Danaher Corporation DHR. Subject to the receipt of regulatory approvals and fulfillment of customary closing conditions, the divestment is anticipated to be completed in the fourth quarter of 2019.

Efforts are on track to shrink exposure to GE Capital business. Assets disposition has amounted to approximately $2 billion so far in 2019, including more than $500 million completed in the second quarter of 2019. The company believes that it is well positioned to dispose of assets worth roughly $10 billion in 2019. Also, it reduced debt (external) by $2 billion.

Outlook

In the quarters ahead, General Electric believes that it will gain from the digital business (Grid Solutions software has been shifted to digital business), efforts to reduce leverage and lowering exposure to the GE Capital business.

The company projects organic revenues in the Industrial segment to grow in a mid-single-digit range, at the higher end of the previously mentioned increase in a low to mid-single digit. The segment’s margins will likely expand, with adjusted margin remaining flat to increase 100 basis points.

Restructuring expenses related to the segment will likely be $1.7-$2 billion, down from the previously stated $2.4-$2.7 billion. Also, restructuring (Industrial) cash will be more than $1.5 billion versus in excess of $2 billion stated earlier.

The company informed that it is working toward improving operations and lowering costs for the Power segment. Also, it is diligently working to better manage its engine production for the Aviation segment.

The company noted further that the Renewable Energy segment will likely gain from solid product portfolio. In the first half of 2019, General Electric secured launch orders for Cypress (product to be used in onshore operations) while its Haliade-X (product to be used in offshore operations) is in the testing phase (blade testing).

The company’s adjusted earnings are predicted to be 55-65 cents per share in 2019, higher than the previously stated 50-60 cents. Adjusted industrial free cash flow is predicted to be ($1)-$1 billion, better than the previously mentioned ($2)-$0 billion.

General Electric Company Price, Consensus and EPS Surprise