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General Electric (GE) Tops Q3 Earnings Estimates, Ups FCF View

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General Electric Company GE reported better-than-expected results in third-quarter 2019. Its earnings surpassed estimates by 25%, marking the third consecutive quarter of positive earnings beat.

The industrial conglomerate’s adjusted earnings in the reported quarter were 15 cents per share, surpassing the Zacks Consensus Estimate of 12 cents. Also, the bottom line grew 36.4% from the year-ago quarter figure of 11 cents on an improved margin profile.

Weakness in Power and GE Capital Affects Revenues

In the quarter under review, General Electric’s consolidated revenues totaled $23,360 million, reflecting a year-over-year decline of 0.1%. Healthy Industrial performance was offset by weakness in GE Capital. Also, the company’s revenues lagged the Zacks Consensus Estimate of $29,143 million by 19.8%.

On a segmental basis, its Industrial revenues grew 3.5% year over year to $21,383 million. The segment’s organic revenues rose 7.1% from the year-ago quarter to $21,510 million. Industrial orders declined 1% organically while backlog (at the end of the quarter) of $386 billion reflected growth of 14%.

Performance of the Industrial segment’s components business is discussed below:

Aviation revenues grew 8.4% to $8,109 million, while orders were down 4%. Organically, revenues expanded 10% on 2% growth in orders. Notably, third-quarter shipment of LEAP engines totaled 455 versus the year-ago figure of 152.

Healthcare revenues in the reported quarter totaled $4,923 million, up 4.6% year over year. The segment’s orders grew 1%. On an organic basis, revenues rose 5% on 2% growth in orders. Healthcare Systems’ sales in the quarter were driven by growth in Latin America and Japan businesses, partially offset by weakness in China and the Middle East. Life Sciences revenues also improved in the quarter.

Renewable Energy revenues totaled $4,425 million, up 12.9% year over year. Its orders grew 30% in the reported quarter. Organically, the segment’s sales rose 15% year over year on 32% growth in orders.

The Power segment’s revenues were down 13.9% year over year to $3,926 million due to 36.6% fall in Power Portfolio revenues, partially offset by a 2% increase in Gas Power revenues. The segment’s orders declined 30%. On an organic basis, the segment’s sales were down 3% while orders declined 20%.

Notably, General Electric lost its controlling shareholding in Baker Hughes and hence, has been classified as discontinued operations.

GE Capital’s revenues in the reported quarter totaled $2,097 million, down 15.2% year over year.

Margin Improves Y/Y

In the quarter under review, General Electric’s cost of sales declined 2.9% year over year to $17,328 million. It represented 74.2% of the quarter’s revenues versus 76.3% in the year-ago quarter. Selling, general and administrative expenses in the quarter declined 19.7% year over year to $3,293 million. It was 14.1% of the quarter’s revenues versus 17.5% in the year-ago quarter.

The Industrial segment’s adjusted operating profit in the quarter rose 19.2% year over year to $2,147 million while margins grew 150 basis points to 10%. On a reported basis, the Industrial segment recorded profit of $2,450 million, up 24.6% year over year. The Power segment recorded loss of $144 million versus $676 million loss in the year-ago quarter, while Renewable Energy’s loss was $98 million against profit of $116 million in third-quarter 2018. Aviation and Healthcare segments’ profit rose 3.2% and 13.1% year over year, respectively.

The GE Capital segment witnessed loss of $645 million against profit of $19 million in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the third quarter of 2019, General Electric had cash and cash equivalents of $76 billion, up from $71.4 billion recorded at the end of the previous quarter. Borrowings were $93.2 billion versus $105.8 billion at the end of the second quarter.

Adjusted free cash flow for GE Industrial totaled $650 million in the third quarter, down from $1,140 million in the year-ago quarter.
Restructuring

In June 2018, General Electric communicated plans to transform 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 reduce exposure to the GE Capital business. Asset disposition has amounted to approximately $3.6 billion so far in 2019, including roughly $2 billion completed in the third 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 $1 billion in the third quarter (or roughly $5 billion so far in 2019).

Outlook

In the quarters ahead, General Electric expects to gain from the 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. The segment’s adjusted margin will remain between flat and rise of 100 basis points. Restructuring expenses related to the segment will likely be $1.1-$1.4 billion, down from $1.7-$2 billion mentioned earlier. Also, restructuring (Industrial) cash costs will be more than $1.3 billion versus in excess of $1.5 billion stated earlier.

The company’s adjusted earnings are predicted to be 55-65 cents per share in 2019. Adjusted industrial free cash flow is expected to be $0-$2 billion versus the previously stated ($1)-$1 billion.

General Electric Company Price, Consensus and EPS Surprise